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1. ORGANIZATION
Ares Commercial Real Estate Corporation (together with its consolidated subsidiaries, the "Company" and "ACRE") is a specialty finance company that is primarily focused on directly originating, managing and servicing a diversified portfolio of commercial real estate ("CRE") debt-related investments for the Company's own account. The Company's target investments include senior loans, bridge loans, subordinated mortgages and B-Notes, preferred equity and other CRE-related investments. Through Ares Commercial Real Estate Management LLC ("ACREM" or the Company's "Manager"), a Securities and Exchange Commission ("SEC") registered investment adviser and a wholly owned subsidiary of Ares Management LLC, or "Ares Management," a global alternative asset manager and also a SEC registered investment adviser, it has investment professionals strategically located across the nation who directly source new loan opportunities for the Company with owners, operators and sponsors of CRE properties. The Company generally holds its loans for investment and earns interest and interest-related income. This is the Company's primary business segment, referred to as the principal lending business.
The Company is also engaged in the mortgage banking business through its wholly owned subsidiary, ACRE Capital LLC ("ACRE Capital"), which the Company believes is complementary to its principal lending business. In this business segment, the Company directly originates long-term senior loans collateralized by multifamily and senior-living properties and sells them to third parties pursuant to government and government-sponsored entity ("GSE") programs. While the Company earns little interest income from these activities as it generally only holds loans for short periods, the Company receives origination fees when it closes loans and sale premiums when it sells loans. The Company also retains the rights to service the loans, which are known as mortgage servicing rights ("MSRs") and receive fees for providing such service during the life of the loans which generally last ten years or more.
Because the Company operates both as a principal lender and a mortgage banker (with respect to loans collateralized by multifamily and senior-living properties), the Company can offer a wider array of financing solutions to its customers, including (i) short and long-term loans ranging from one to ten (or more) years, (ii) bridge and permanent loans, (iii) floating and fixed rate loans, and (iv) loans collateralized by development, value-add (or transitional) and stabilized properties. The Company also has the flexibility to provide a combination of solutions to its customers, including instances where the Company's principal lending business provides a short-term, bridge loan to an owner of multifamily properties while the Company's mortgage banking business seeks long-term permanent financing for the same customer. This provides the Company the opportunity to offer a customer an efficient "one stop" financial product and at the same time earn revenues at multiple times in the relationship with the customer. First, the Company earns interest and interest-related income while holding the short term bridge loan. Second, the Company earns origination fees and sale premiums when the Company provides permanent financing and sells the loans under GSE programs. And, third, the Company earns servicing fees from MSRs that the Company retains on the permanent loans.
The Company was formed and commenced operations in late 2011. The Company is a Maryland corporation and completed its initial public offering (the "IPO") in May 2012. The Company is externally managed by its Manager, a wholly owned subsidiary of Ares Management, a global alternative asset manager and a SEC registered investment adviser, pursuant to the terms of a management agreement.
From the commencement of the Company's operations, it has been focused on its principal lending business. The Company's loans, referred to as its "principal lending target investments," are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial, lodging, senior living and other commercial real estate properties, or by ownership interests therein and include: (a) "transitional senior" mortgage loans, (b) "stretch senior" mortgage loans, (c) "bridge financing" mortgage loans that provide short-term financing to borrowers ranging from six to 24 months in term. Bridge loans may be used to provide financing to borrowers seeking GSE permanent loans while they work through the application process or in the event the underlying properties need additional time to stabilize before locking in long-term debt, (d) subordinated real estate loans such as B-Notes, mezzanine loans, certain rated tranches of securitizations and (e) other select CRE debt and preferred equity investments. "Transitional senior" mortgage loans provide strategic, flexible, short-term financing solutions for owners of transitional CRE middle-market assets that are the subject of a business plan that is expected to enhance the value of the property. "Stretch senior" mortgage loans provide flexible "one stop" financing for owners of CRE middle-market assets that are typically stabilized or near-stabilized properties with healthy balance sheets and steady cash flows. These mortgage loans typically have higher leverage (and thus higher loan-to-value ratios) than conventional mortgage loans provided by banks, insurance companies and other CRE lenders and are generally non-recourse to the borrower (as compared to conventional mortgage loans, which are often with partial or full recourse to the borrower).
On August 30, 2013, the Company commenced its complementary mortgage banking business by acquiring all of the outstanding common units of EF&A Funding, L.L.C., d/b/a Alliant Capital LLC ("Alliant"), a Michigan limited liability company (the "Acquisition"), which the Company renamed ACRE Capital LLC ("ACRE Capital") at closing. The Company paid approximately $53.4 million in cash, subject to adjustment, and issued 588,235 shares of its common stock in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") as consideration for the Acquisition. The transaction was accounted for as a business combination under Financial Accounting Standards Board ("FASB") Accounting Standard Codification "(ASC") Topic 805, Business Combinations ("ASC 805"). In the mortgage banking business segment, the Company directly originates and sells loans with a focus on lending for multifamily and senior-living properties under GSE programs while retaining MSRs.
The Company has elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2012. The Company generally will not be subject to U.S. federal income taxes on its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, to the extent that it annually distributes all of its REIT taxable income to stockholders and complies with various other requirements as a REIT.
In connection with the Acquisition, the Company created a wholly owned subsidiary, ACRE Capital Holdings LLC ("TRS Holdings"), to hold the common units of ACRE Capital. An entity classification election to be taxed as a corporation and a taxable REIT subsidiary ("TRS") election were made with respect to TRS Holdings. In addition, in December 2013, the Company formed a new wholly owned subsidiary, ACRC Lender W TRS LLC ("ACRC TRS"), for which an entity classification election to be taxed as a corporation and a TRS election were made, in order to issue and hold certain loans intended for sale. A TRS is an entity taxed as a corporation other than a REIT in which a REIT directly or indirectly holds equity, and that has made a joint election with such REIT to be treated as a TRS. Other than some activities relating to lodging and health care facilities, a TRS generally may engage in any business, including investing in assets and engaging in activities that could not be held or conducted directly by the Company without jeopardizing its qualification as a REIT. A TRS is subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRS that are not conducted on an arm's-length basis.
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2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles ("GAAP") and include the accounts of the Company, the consolidated variable interest entity ("VIE") for which the Company controls and is the primary beneficiary, and its wholly owned subsidiaries, including the results of operations of ACRE Capital from September 1, 2013 (the "Accounting Effective Date") to December 31, 2013. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company's results of operations and financial condition as of and for the periods presented. All significant intercompany balances and transactions have been eliminated.
Variable Interest Entities
The Company evaluates all of its interests in VIEs for consolidation. When the Company's interests are determined to be variable interests, the Company assesses whether it is deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. FASB ASC Topic 810, Consolidation ("ASC 810"), defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. The Company considers its variable interests as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary and it consolidates the VIE. Where either one of these factors is not present, the Company is not the primary beneficiary and it does not consolidate the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE's economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE's capital structure; and the reasons why the interests are held by the Company.
The Company issued a commercial mortgage backed security ("CMBS") which is a rated security issued by a CMBS trust and it retained the subordinated portion of the trust. The CMBS trust is treated for U.S. federal income tax purposes as a real estate mortgage investment conduit. A related party of the Company has the role of special servicer. In the related party's role as special servicer, the Company has the power to direct activities of the trust during the loan workout process on defaulted and delinquent loans, as permitted by the underlying contractual agreements. In exchange for these services, the related party of the Company receives a fee. These rights give the Company the ability to direct activities that could significantly impact the CMBS trust's economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove the special servicer, the Company does not have the power to direct activities that most significantly impact the CMBS trust's economic performance. The Company evaluated its positions in such investments for consolidation.
For VIEs in which the Company is determined to be the primary beneficiary, all of the underlying assets, liabilities, equity, revenue and expenses of the structures are consolidated into the Company's consolidated financial statements.
The Company performs an ongoing reassessment of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding our involvement with a VIE causes the Company's consolidation conclusion regarding the VIE to change.
Segment Reporting
Prior to the Acquisition, the Company focused primarily on originating, investing in and managing middle-market CRE loans and other CRE-related investments and operated in one reportable business segment. As a result of the Acquisition, the Company now has two reportable business segments: principal lending, and through ACRE Capital, mortgage banking of multifamily CRE loans. ACRE Capital is included in the consolidated financial statements for the period from September 1, 2013 to December 31, 2013. See Note 19 for further discussion of the Company's reportable business segments.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. Deferred financing costs and accrued interest receivable have been reclassified into other assets in the consolidated balance sheets. Derivative liability and accounts payable and accrued expenses have been reclassified into other liabilities in the consolidated balance sheets. Interest receivable and refundable deposits have been reclassified into other assets in the consolidated statements of cash flows. The unrealized loss on the 2015 Convertible Notes has been reclassified into changes in fair value of derivatives in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include funds on deposit with financial institutions, including demand deposits with financial institutions.
Restricted Cash
Restricted cash includes escrow deposits for taxes, insurance, leasing outlays, capital expenditures, tenant security deposits and payments required under certain loan agreements. These escrow deposits are held on behalf of the respective borrowers and are offset by escrow liabilities included in "Other liabilities" in the consolidated balance sheets. As of December 31, 2013, ACRE Capital's restricted cash consisted of reserves that are a requirement of the Delegated Underwriting and Servicing ("DUS") program and borrower deposits, which represent funds that were collected for the processing of the borrowers loan applications and loan commitments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, loans held for investment, mortgage servicing rights ("MSR"), loans held for sale, interest receivable, derivative financial instruments and allowance for loss sharing. The Company places its cash and cash equivalents with financial institutions and, at times, cash held may exceed the FDIC-insured limit. The Company has exposure to credit risk on its loans held for investment and through its subsidiary ACRE Capital, the Company has exposure on credit risk on loans held for sale and the servicing portfolio whereby ACRE Capital shares in the risk of loss (see Note 7). The Company's Manager will seek to manage credit risk by performing credit fundamental analysis of potential collateral assets.
Loans Held for Investment
The Company originates CRE debt and related instruments generally to be held for investment and to maturity. Loans that are held for investment are carried at cost, net of unamortized loan fees and origination costs, unless the loans are deemed impaired.
Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, the Company will record an allowance to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan's contractual effective rate.
Each loan classified as held for investment is evaluated for impairment on a periodic basis. Loans are collateralized by real estate and as a result, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower could impact the expected amounts received and as a result are regularly evaluated. The Company monitors performance of its investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower's ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral, (i.e. leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service as well as the residual loan balance at maturity); (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower's exit plan, among other factors.
In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of December 31, 2013, 2012 and for the period from September 1, 2011 (Inception) to December 31, 2011, there are no impairments on the Company's loan portfolio.
Loans held for sale
Through its subsidiaries, ACRE Capital and ACRC TRS, the Company originates multifamily mortgage loans, which are recorded at fair value. The holding period for loans made by ACRE Capital is approximately 30 days. The carrying value of the mortgage loans sold is reduced by the value allocated to the associated retained MSRs based on relative fair value at the time of the sale. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the adjusted value of the related mortgage loans sold.
Although the Company generally holds its target investments as long-term investments within its principal lending business, the Company may occasionally classify some of its investments as held for sale. Investments held for sale will be carried at fair value within loans held for sale, at fair value in the Company's consolidated balance sheets, with changes in fair value recorded through earnings. The fees received are deferred and recognized as part of the gain or loss on sale. As of December 31, 2013, the Company had one loan held for sale in its principal lending business of $84.8 million, net of deferred fees, included in the $89.2 million of loans held for sale in the consolidated balance sheets.
Mortgage Servicing Rights
When a mortgage loan is sold, ACRE Capital retains the right to service the loan and recognizes the MSR at fair value. The initial fair value represents expected net cash flows from servicing, as well as borrower prepayment penalties, interest earnings on escrows and interim cash balances, delinquency rates, late charges along with ancillary fees that are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the underlying loan. After initial recognition, changes in the MSR fair value are included within change in fair value of mortgage servicing rights in the Company's consolidated statements of operations for the period in which the change occurs.
Intangible Assets
Intangible assets consist of ACRE Capital's licenses permitting it to participate in programs offered by the Federal National Mortgage Association ("Fannie Mae") and the Government National Mortgage Association ("Ginnie Mae") and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, "HUD"). These licenses are intangible assets with indefinite lives and were acquired in connection with the Acquisition. As of the date of the Acquisition, these assets are recorded at fair value. The Company evaluates identified intangibles for impairment annually or if other events or circumstances indicate that the carrying value may be impaired.
Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the terms of the respective debt instrument.
Derivative Financial Instruments
The Company does not hold or issue derivative instruments for trading purposes. The Company recognizes derivatives on its balance sheet, measures them at their estimated fair value and recognizes changes in their estimated fair value in the Company's results of operations for the period in which the change occurs.
On December 19, 2012, the Company issued $69.0 million aggregate principal amount of unsecured 7.000% Convertible Senior Notes due 2015 (the "2015 Convertible Notes"). The conversion features of the 2015 Convertible Notes were deemed to be an embedded derivative under FASB ASC Topic 815, Derivatives and Hedging ("ASC 815"). In accordance with ASC 815, the Company was required to bifurcate the embedded derivative related to the conversion features of the 2015 Convertible Notes. Prior to June 26, 2013, the Company recognized the embedded derivative as a liability on its balance sheet, measured at its estimated fair value and recognized changes in its estimated fair value within changes in fair value of derivatives in the Company's consolidated statements of operations for the period in which the change occurs. See Note 6 for information on the derivative liability reclassification.
Through its subsidiary, ACRE Capital, the Company enters into loan commitments with borrowers on loan originations whereby the interest rate on the prospective loan is determined prior to funding. In general, ACRE Capital simultaneously enters into forward sale commitments with investors in order to hedge against the interest rate exposure on loan commitments. The forward sale commitment with the investor locks in an interest rate and price for the sale of the loan. The terms of the loan commitment with the borrower and the forward sale commitment with the investor are matched with the objective of hedging interest rate risk. Loan commitments and forward sale commitments are considered undesignated derivative instruments. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value, with changes in fair value recorded in earnings.
Fair Value Measurements
The Company determines the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The financial instruments recorded at fair value on a recurring basis in the Company's consolidated financial statements are derivative financial instruments, MSRs and loans held for sale. The Company has not elected the fair value option for certain other financial instruments, including loans held for investment, secured funding agreements and other debt instruments. Such financial instruments are carried at cost. Fair value is separately disclosed (see Note 14). The three levels of inputs that may be used to measure fair value are as follows:
Level I—Quoted prices in active markets for identical assets or liabilities.
Level II—Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III—Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
Allowance for loss sharing
When a loan is sold under the Fannie Mae DUS program, ACRE Capital undertakes an obligation to partially guarantee the performance of the loan. The date ACRE Capital commits to make a loan to a borrower, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized. Subsequent to the initial commitment date, the Company monitors the performance of each loan for events or circumstances which may signal a liability to be recognized if there is a probable and estimable loss. The initial fair value of the guarantee is estimated by examining historical loss share experienced in the ACRE Capital portfolio since inception. The initial fair value of the guarantee is included within provision for loss sharing in the Company's consolidated statements of operations. These historical loss shares serve as a basis to derive a loss share rate which is then applied to the current ACRE Capital portfolio (net of specifically identified impaired loans that are subject to a separate loss share reserve analysis).
Servicing fee payable
ACRE Capital provides additional payments to certain personnel by providing them with a percentage of the servicing fee revenue that is earned by ACRE Capital, which is initially recorded as a liability when the MSR is obtained and expensed as the servicing fee is earned over the life of the related mortgage loan ("servicing fee payable"). ACRE Capital incurs an expense over the life of each loan as long as the related loan is performing. If a particular loan is not performing, the recipient will not receive the additional compensation on that loan, and if a loss sharing event is triggered, the recipient will not receive a portion of the additional compensation on other loans. The servicing fee payable is included within other liabilities in the consolidated balance sheets and the related expense is included within servicing fee revenue on a net basis in the consolidated statements of operations.
Revenue Recognition
Interest income from loans held for investment is accrued based on the outstanding principal amount and the contractual terms of each loan. For loans held for investment, origination fees, contractual exit fees and direct loan origination costs are also recognized in interest income from loans held for investment over the initial loan term as a yield adjustment using the effective interest method. Fees earned on loans held for sale are included within gains from mortgage banking activities below.
Servicing fees are earned for servicing mortgage loans, including all activities related to servicing the loans, and are recognized as services are provided over the life of the related mortgage loan. Also included in servicing fees are the fees earned on borrower prepayment penalties and interest earned on borrowers' escrow payments and interim cash balances, along with other ancillary fees.
Gains from mortgage banking activities includes the initial fair value of MSRs, loan origination fees, gain on the sale of loans, interest income on loans held for sale and changes to the fair value of derivative financial instruments, attributable to the loan commitments and forward sale commitments. The initial fair value of MSRs, loan origination fees, gain on the sale of loans, and certain direct loan origination costs for loans held for sale are recognized when ACRE Capital commits to make a loan to a borrower. When the Company enters into a sale agreement and transfers the mortgage loan to the seller, the Company recognizes a MSR asset equal to the present value of the expected net cash flows associated with the servicing of loans sold.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation, which is included within general and administrative expenses in the consolidated statements of operations. The fair value of the time vested restricted stock or restricted stock units granted is recorded to expense on a straight-line basis over the vesting period for the award, with an offsetting increase in stockholders' equity. For grants to directors, officers and employees, the fair value is determined based upon the market price of the stock on the grant date.
Underwriting Commissions and Offering Costs
Underwriting commissions and offering costs incurred in connection with common stock offerings are reflected as a reduction of additional paid-in capital. Costs incurred that are not directly associated with the completion of a common stock offering are expensed when incurred. Underwriting commissions that are the responsibility of and paid by a related party, such as the Company's Manager, are reflected as a contribution of additional paid-in capital from a sponsor in the consolidated financial statements.
Income Taxes
The Company has elected and qualified for taxation as a REIT commencing with its taxable year ended December 31, 2012. As a result of the Company's REIT qualification and its distribution policy, the Company does not generally pay U.S. federal corporate level income taxes. Many of the REIT requirements, however, are highly technical and complex. To continue to qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute annually at least 90% of the Company's REIT taxable income to the Company's stockholders. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company's four subsequent taxable years. Even though the Company currently qualifies for taxation as a REIT, the Company may be subject to certain U.S. federal, state, local and foreign taxes on the Company's income and property and to U.S. federal income and excise taxes on the Company's undistributed REIT taxable income.
The Company currently owns 100% of the equity of TRS Holdings and ACRC TRS, each of which is a TRS. A TRS is subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRS that are not conducted on an arm's-length basis. For financial reporting purposes, a provision for current and deferred taxes has been established for the portion of the Company's GAAP consolidated earnings recognized by TRS Holdings and ACRC TRS.
FASB ASC Topic 740, Income Taxes, ("ASC 740") prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. As of December 31, 2013 and 2012, based on the Company's evaluation, there is no reserve for any uncertain income tax positions. TRS Holdings and ACRC TRS recognize interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statements of operations. Accrued interest and penalties are included within other liabilities in the consolidated balance sheets.
Comprehensive Income
For the years ended December 31, 2013 and 2012 and the period from September 1, 2011 (inception) to December 31, 2011, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.
Earnings per Share
The Company calculates basic earnings (loss) per share by dividing net income (loss) allocable to common stockholders for the period by the weighted-average shares of common stock outstanding for that period after consideration of the earnings (loss) allocated to the Company's restricted stock and restricted stock units, which are participating securities as defined in GAAP. Diluted earnings (loss) per share takes into effect any dilutive instruments, such as restricted stock, restricted stock units and convertible debt, except when doing so would be anti-dilutive. With respect to the 2015 Convertible Notes (as defined above), the Company has the ability and intention to settle the principal in cash and to settle any amount above par in shares of the Company's common stock if the conversion options were exercised. As such, the Company is applying the treasury stock method when determining the dilutive impact on earnings per share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The Company recognizes identifiable assets acquired and liabilities (both specific and contingent) assumed at their fair values at the acquisition date. Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. The excess of the assets acquired, identifiable intangible assets and liabilities assumed over the purchase price is recognized as a gain on acquisition. During the measurement period, the Company records adjustments to the assets acquired and liabilities assumed with corresponding adjustments to the gain on acquisition. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded through earnings.
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3. LOANS HELD FOR INVESTMENT
As of December 31, 2013, the Company had originated or co-originated 33 loans secured by CRE middle-market properties, excluding three loans that were repaid during the year ended December 31, 2013. The aggregate originated commitment under these loans at closing was approximately $1.1 billion and outstanding principal was $965.4 million as of December 31, 2013. During the year ended December 31, 2013, the Company funded approximately $675.6 million and received repayments of $66.9 million on its net $965.4 million of outstanding principal as described in more detail in the tables below. Such investments are referred to herein as the Company's investment portfolio. References to LIBOR or "L" are to 30-day LIBOR (unless otherwise specifically stated).
The Company's investments in mortgages and loans held for investment are accounted for at amortized cost. The following tables present an overview of the investment portfolio in the Company's principal lending business as of December 31, 2013 and 2012:
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December 31, 2013 | |||||||||||||||
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$ in thousands |
Carrying Amount(1) |
Outstanding Principal(1) |
Weighted Average Interest Rate |
Weighted Average Unleveraged Effective Yield |
Weighted Average Remaining Life (Years) |
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|
Senior mortgage loans |
$ | 867,578 | $ | 873,781 | 5.1 | % | 5.6 | % | 2.4 | |||||||
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Subordinated and mezzanine loans |
90,917 | 91,655 | 9.8 | % | 10.2 | % | 3.6 | |||||||||
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Total |
$ | 958,495 | $ | 965,436 | 5.5 | % | 6.0 | % | 2.5 | |||||||
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December 31, 2012 | |||||||||||||||
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|
$ in thousands |
Carrying Amount(1) |
Outstanding Principal(1) |
Weighted Average Interest Rate |
Weighted Average Unleveraged Effective Yield |
Weighted Average Remaining Life (Years) |
|||||||||||
|
Senior mortgage loans |
$ | 312,883 | $ | 315,750 | 5.9 | % | 6.8 | % | 2.8 | |||||||
|
Subordinated and mezzanine loans |
40,617 | 41,000 | 9.9 | % | 11.4 | % | 2.4 | |||||||||
| | | | | | | | | | | | | | | | | |
|
Total |
$ | 353,500 | $ | 356,750 | 6.4 | % | 7.4 | % | 2.8 | |||||||
| | | | | | | | | | | | | | | | | |
A more detailed listing of the Company's current investment portfolio, based on information available as of December 31, 2013 is as follows:
(amounts in millions, except percentages)
|
Loan Type |
Location | Total Commitment (at closing) |
Outstanding Principal(1) |
Carrying Amount(1) |
Interest Rate |
LIBOR Floor |
Unleveraged Effective Yield(2) |
Maturity Date(3) |
Payment Terms(4) |
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Transitional Senior Mortgage Loans: |
|||||||||||||||||||||||||||
|
Retail |
Chicago, IL | 75.9 | $ | 70.0 | $ | 69.3 | L+4.25% | 0.3 | % | 4.9 | % | Aug 2017 | I/O | ||||||||||||||
|
Office |
Orange County, CA | 75.0 | 75.0 | 74.3 | L+3.75% | 0.2 | % | 4.2 | % | Aug 2017 | I/O | ||||||||||||||||
|
Apartment |
Brandon, FL | 49.6 | 47.8 | 47.5 | L+4.80% | 0.5 | % | 5.9 | % | Jan 2016 | I/O | ||||||||||||||||
|
Apartment |
McKinney, TX | 45.3 | 40.3 | 40.0 | L+3.75% | — | 4.5 | % | Jul 2016 | I/O | |||||||||||||||||
|
Office |
Dallas, TX | 105.8 | 44.2 | 43.1 | L+5.00% | 0.3 | % | 6.0 | % | Jan 2017 | I/O | ||||||||||||||||
|
Office |
Austin, TX | 38.0 | 33.0 | 32.8 | L+5.75%- L+5.25% |
(5) |
1.0 | % | 7.6 | % | Mar 2015 | I/O | |||||||||||||||
|
Industrial |
Kansas City, MO | 38.0 | 38.0 | 37.6 | L+4.30% | 0.3 | % | 5.1 | % | Jan 2017 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 38.4 | (6) | 37.4 | 37.1 | L+5.00% | 0.8 | % | 6.1 | % | Oct 2017 | I/O | |||||||||||||||
|
Apartment |
Houston, TX | 35.5 | 32.9 | 32.6 | L+3.75% | — | 4.5 | % | Jul 2016 | I/O | |||||||||||||||||
|
Office |
Cincinnati, OH | 35.5 | 28.5 | 28.4 | L+5.35%- L+5.00% |
(7) |
0.3 | % | 6.0 | % | Nov 2015 | I/O | |||||||||||||||
|
Apartment |
New York, NY | 26.3 | 25.5 | 25.4 | L+5.75%- L+5.00% |
(8) |
0.2 | % | 6.5 | % | Dec 2015 | I/O | |||||||||||||||
|
Office |
Overland Park, KS | 25.5 | 25.4 | 25.2 | L+5.00% | 0.3 | % | 5.8 | % | Mar 2016 | I/O | ||||||||||||||||
|
Apartment |
Richmond, TX | 28.2 | 25.1 | 24.9 | L+3.65% | — | 4.4 | % | Jan 2017 | I/O | |||||||||||||||||
|
Apartment |
Fort Worth, TX | 25.4 | 23.0 | 22.9 | L+3.65% | — | 4.4 | % | Jan 2017 | I/O | |||||||||||||||||
|
Apartment |
Avondale, AZ | 22.1 | 21.4 | 21.3 | L+4.25% | 1.0 | % | 5.9 | % | Sep 2015 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 21.9 | 20.3 | 20.1 | L+5.75%- L+5.00% |
(8) |
0.2 | % | 6.5 | % | Dec 2015 | I/O | |||||||||||||||
|
Apartment |
New York, NY | 21.8 | 20.1 | 20.0 | L+5.75%- L+5.00% |
(8) |
0.2 | % | 6.5 | % | Dec 2015 | I/O | |||||||||||||||
|
Flex/Warehouse |
Springfield, VA | 19.7 | 19.0 | 18.8 | L+5.25% | 0.3 | % | 6.4 | % | Dec 2015 | I/O | ||||||||||||||||
|
Office |
San Diego, CA | 17.1 | 14.9 | 14.7 | L+3.75% | 0.3 | % | 4.5 | % | Jul 2016 | I/O | ||||||||||||||||
|
Office |
Irvine, CA | 15.2 | 14.7 | 14.6 | L+4.50% | 0.3 | % | 5.3 | % | Jul 2016 | I/O | ||||||||||||||||
|
Office |
Denver, CO | 11.0 | 10.5 | 10.5 | L+5.50% | 1.0 | % | 7.8 | % | Jan 2015 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 16.5 | 14.3 | 14.1 | L+4.50% | 0.2 | % | 5.2 | % | Dec 2016 | I/O | ||||||||||||||||
|
Apartment |
Decatur, GA | 23.5 | (9) | 21.9 | 21.9 | L+4.95% | (9) | 0.5 | % | 5.7 | % | Apr 2016 | I/O | ||||||||||||||
|
Apartment |
Alpharetta, GA | 38.6 | (9) | 36.1 | 36.1 | L+4.95% | (9) | 0.5 | % | 5.7 | % | Apr 2016 | I/O | ||||||||||||||
|
Apartment |
Chamblee, GA | 46.0 | (9) | 42.6 | 42.6 | L+4.95% | (9) | 0.5 | % | 5.7 | % | Apr 2016 | I/O | ||||||||||||||
|
Office |
Fort Lauderdale, FL | 37.0 | (10) | 30.3 | 30.3 | L+5.25% | (10) | 0.8 | % | 6.3 | % | Feb 2015 | I/O | ||||||||||||||
|
Stretch Senior Mortgage Loans: |
|||||||||||||||||||||||||||
|
Office |
Miami, FL | 47.0 | 47.0 | (11) | 47.0 | L+5.25% | 1.0 | % | 6.5 | % | Apr 2014 | I/O | |||||||||||||||
|
Office |
Mountain View, CA | 15.0 | 14.5 | 14.4 | L+4.75% | 0.5 | % | 5.7 | % | Feb 2016 | I/O | ||||||||||||||||
|
Subordinated Debt Investments: |
|||||||||||||||||||||||||||
|
Office |
Chicago, IL | 37.0 | 37.0 | 36.7 | 8.75% | — | 9.1 | % | Aug 2016 | I/O | |||||||||||||||||
|
Apartment |
Long Island, NY | 15.3 | 7.1 | 6.9 | 11.50% | (12) | — | 11.9 | % | Nov 2016 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 31.3 | 28.4 | 28.3 | L+9.90% | (13) | 0.2 | % | 10.4 | % | Jan 2019 | I/O | |||||||||||||||
|
Office |
Atlanta, GA | 14.3 | 14.3 | 14.3 | 10.50% | (14) | — | 11.0 | % | Aug 2017 | I/O | ||||||||||||||||
|
Apartment |
Houston, TX | 4.9 | 4.9 | 4.8 | L+11.00% | (15) | — | 11.6 | % | Oct 2016 | I/O | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Total/Average |
$ | 1,097.6 | $ | 965.4 | $ | 958.5 | 6.0 | % | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2013, the aggregate outstanding principal for the Company's loans held for investment and loans held for sale in its principal lending business was approximately $1.1 billion and the outstanding principal under the Company's loans held for investment was $965.4 million. A summary of the difference between outstanding principal on loans originated and held for sale is as follows (in thousands):
| |
As of December 31, 2013 | |||
|---|---|---|---|---|
|
Loans held for investment |
$ | 965,436 | ||
|
Loans held for sale |
85,238 | (1) | ||
| | | | | |
|
Total outstanding principal |
$ | 1,050,674 | ||
| | | | | |
| | | | | |
For the years ended December 31, 2013 and 2012, the activity in the Company's loan portfolio was as follows ($ in thousands):
|
Balance as December 31, 2011 |
$ | 4,945 | ||
|
Initial funding |
347,779 | |||
|
Receipt of origination fee, net of costs |
(3,540 | ) | ||
|
Additional funding |
4,096 | |||
|
Amortizing payments |
(180 | ) | ||
|
Origination fee accretion |
400 | |||
| | | | | |
|
Balance at December 31, 2012 |
$ | 353,500 | ||
| | | | | |
| | | | | |
|
Initial funding |
640,384 | |||
|
Receipt of origination fee, net of costs |
(6,058 | ) | ||
|
Additional funding |
35,223 | |||
|
Amortizing payments |
(150 | ) | ||
|
Origination fee accretion |
2,366 | |||
|
Loan payoffs(1) |
(66,770 | ) | ||
| | | | | |
|
Balance at December 31, 2013 |
$ | 958,495 | ||
| | | | | |
| | | | | |
No impairment charges have been recognized as of December 31, 2013 and 2012.
|
|||
4. MORTGAGE SERVICING RIGHTS
MSRs represent servicing rights retained by ACRE Capital for loans it originates and sells. The servicing fees are collected from the monthly payments made by the borrowers. ACRE Capital generally receives other remuneration including rights to various loan fees such as late charges, collateral re-conveyance charges, loan prepayment penalties, and other ancillary fees. In addition, ACRE Capital is also generally entitled to retain the interest earned on funds held pending remittance related to its collection of loan principal and escrow balances. The initial fair value of MSRs purchased in the Acquisition was $61.2 million.
As of December 31, 2013, the carrying value of MSRs was approximately $59.6 million.
Activity related to MSRs for the year ended December 31, 2013 was as follows (in thousands):
| |
For the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
MSRs acquired in the ACRE Capital acquisition (See Note 18) |
$ | 61,236 | ||
|
Additions, following sale of loan |
2,385 | |||
|
Changes in fair value |
(2,697 | ) | ||
|
Prepayments and write-offs |
(1,284 | ) | ||
| | | | | |
|
Ending balance, as of December 31, 2013 |
$ | 59,640 | ||
| | | | | |
| | | | | |
As discussed in Note 2, the Company determines the fair values of the MSRs based on discounted cash flow models that calculate the present value of estimated future net servicing income. The fair values of ACRE Capital's MSR portfolio is subject to changes in interest rates. For example, a 100 basis point increase or decrease in the weighted average discount rate would decrease or increase, respectively, the fair value of ACRE Capital's MSRs outstanding as of December 31, 2013 by approximately $1.8 million.
|
|||
5. INTANGIBLE ASSETS
As of December 31, 2013, the carrying values of the Company's intangible assets were $5.0 million, which are included within other assets in the Company's consolidated balance sheets. The identified intangible assets have indefinite lives and are not subject to amortization. The Company performs an annual assessment of impairment of its intangible assets in the fourth quarter of each year or whenever events or circumstances make it more likely than not that impairment may have occurred. As of December 31, 2013, there has been no impairment charges recognized.
|
|||
6. DEBT
Funding Agreements
The Company borrows funds under the Wells Fargo Facility, the Citibank Facility, the Capital One Facility, the ASAP Line of Credit and the BAML Line of Credit (collectively, the "Funding Agreements").
| |
As of December 31, 2013 | As of December 31, 2012 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$ in thousands |
Outstanding Balances |
Total Commitment |
Outstanding Balances |
Total Commitment |
|||||||||
|
Wells Fargo Facility |
$ | 166,934 | $ | 225,000 | $ | 98,196 | $ | 172,500 | |||||
|
Citibank Facility |
97,485 | 125,000 | 13,900 | 86,225 | |||||||||
|
Capital One Facility |
— | 100,000 | 32,160 | 50,000 | |||||||||
|
ASAP Line of Credit |
— | 105,000 | — | — | |||||||||
|
BAML Line of Credit |
— | 80,000 | — | — | |||||||||
| | | | | | | | | | | | | | |
|
Total |
$ | 264,419 | $ | 635,000 | $ | 144,256 | $ | 308,725 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The secured funding agreements are generally collateralized by assignments of specific loans held for investment or loans held for sale owned by the Company. The secured funding agreements are guaranteed by the Company. Generally, the Company partially offsets interest rate risk by matching the interest index of loans held for investment with the secured funding agreement used to fund them.
Wells Fargo Facility
On December 14, 2011, the Company entered into a $75.0 million secured revolving funding facility arranged by Wells Fargo Bank, National Association (the "Wells Fargo Facility"), pursuant to which the Company borrows funds to finance qualifying senior commercial mortgage loans, A-Notes, pari passu participations in commercial mortgage loans and mezzanine loans, subject to available collateral. From May 22, 2012 to June 26, 2013, the total commitment under the Wells Fargo Facility was $172.5 million. Prior to June 27, 2013, advances under the Wells Fargo Facility accrued interest at a per annum rate equal to the sum of (i) 30 day LIBOR plus (ii) a pricing margin range of 2.50%-2.75%. Since June 27, 2013, the total commitment under the Wells Fargo Facility was $225.0 million. On June 27, 2013, the pricing was reduced such that advances under the Wells Fargo Facility accrue interest at a per annum rate equal to the sum of (i) 30 day LIBOR plus (ii) a pricing margin range of 2.00%-2.50%. On May 15, 2012, the Company started to incur a non-utilization fee of 25 basis points on the average available balance of the Wells Fargo Facility. For the years ended December 31, 2013 and 2012, the Company incurred a non-utilization fee of $218 thousand and $222 thousand, respectively. The initial maturity date of the Wells Fargo Facility is December 14, 2014 and, provided that certain conditions are met and applicable extension fees are paid, is subject to two 12-month extension options. As of December 31, 2013 and 2012, the outstanding balance on the Wells Fargo Facility was $166.9 million and $98.2 million, respectively.
The Wells Fargo Facility contains various affirmative and negative covenants applicable to the Company and certain of the Company's subsidiaries, including the following: (a) limitations on the incurrence of additional indebtedness or liens, (b) limitations on how borrowed funds may be used, (c) limitations on certain distributions and dividend payments in excess of the minimum amount necessary to continue to qualify as a REIT and avoid the payment of income and excise taxes, (d) maintenance of adequate capital, (e) limitations on change of control, (f) maintaining a ratio of total debt to total assets of not more than 75%, (g) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding 12 month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, (h) maintaining a tangible net worth of at least the sum of (1) 80% of the Company's tangible net worth as of May 22, 2012, plus (2) 80% of the net proceeds raised in all future equity issuances by the Company, and (i) if certain specific debt yield, loan to value or other credit based tests are not met with respect to assets on the Wells Fargo Facility, the Company may be required to repay certain amounts under the Wells Fargo Facility. On November 8, 2013, the Wells Fargo Facility was modified to allow for pari passu senior participations in mortgage loans as eligible collateral, among other things. On December 20, 2013, the Wells Fargo Facility was modified to allow for mezzanine loan collateral, under certain circumstances among other things.
As of December 31, 2013, the Company was in compliance in all material respects with the terms of the Wells Fargo Facility.
Citibank Facility
On December 8, 2011, the Company entered into a $50.0 million secured revolving funding facility arranged by Citibank, N.A. (the "Citibank Facility") pursuant to which the Company borrows funds to finance qualifying senior commercial mortgage loans and A-Notes, subject to available collateral. From May 1, 2012 to July 11, 2013, the total commitment under the Citibank Facility was $86.2 million and from December 8, 2011 to April 16, 2012 the total commitment under the Citibank Facility was $50.0 million. Since July 12, 2013, the total commitment under the Citibank Facility was $125.0 million. Under the Citibank Facility, the Company borrows funds on a revolving basis in the form of individual loans. Each individual loan is secured by an underlying loan originated by the Company. Advances under the Citibank Facility accrue interest at a per annum rate based on 30 day LIBOR. From December 8, 2011 to July 11, 2013, the margin varied between 2.50% and 3.50% over the greater of 30 day LIBOR and 0.5%, based on the debt yield of the assets contributed into ACRC Lender C LLC, one of the Company's wholly owned subsidiaries and the borrower under the Citibank Facility. Since July 12, 2013, amounts outstanding under each individual loan accrue interest at a per annum rate equal to 30 day LIBOR plus a pricing margin of 2.25% to 2.75% over the greater of 30 day LIBOR and 0.5%, based on the debt yield of the assets contributed into ACRC Lender C LLC.
On March 3, 2012, the Company started to incur a non-utilization fee of 25 basis points on the average available balance of the Citibank Facility. For the years ended December 31, 2013 and 2012, the Company incurred a non-utilization fee of $164 thousand and $133 thousand, respectively. The Company extended the funding period that ended on December 8, 2013 for an additional 12 months, subject to payment of an extension fee of $216 thousand. On July 12, 2013, the agreements governing the Citibank Facility were amended, among other things, to change the final repayment date from the latest date on which a payment of principal is contractually obligated to be made in respect of each mortgage loan pledged under the Citibank Facility to the earlier of that date or July 2, 2018. As of December 31, 2013 and 2012, the outstanding balance on the Citibank Facility was $97.5 million and $13.9 million, respectively.
The Citibank Facility contains various affirmative and negative covenants applicable to the Company and certain of the Company's subsidiaries, including the following: (a) maintaining tangible net worth of at least the sum of (1) 80% of the Company's tangible net worth as of May 1, 2012, plus (2) 80% of the total net capital raised in all future equity issuances by the Company, (b) maintaining liquidity in an amount not less than the greater of (1) $5.0 million or (2) 5% of the Company's recourse indebtedness, not to exceed $10.0 million (provided that in the event the Company's total liquidity equals or exceeds $5.0 million, the Company may satisfy the difference between the minimum total liquidity requirement and the Company's total liquidity with available borrowing capacity), (c) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA (net income before net interest expense, income tax expense, depreciation and amortization), as defined, to fixed charges) for the immediately preceding twelve month period ending on the last date of the applicable reporting period to be at least 1.25 to 1.00, and (d) if the Company's average debt yield across the portfolio of assets that are financed with the Citibank Facility falls below certain thresholds, the Company may be required to repay certain amounts under the Citibank Facility. The Citibank Facility also prohibits the Company from amending the management agreement with its Manager in a material respect without the prior consent of the lender. As of December 31, 2013, the Company was in compliance in all material respects with the terms of the Citibank Facility.
Capital One Facility
On May 18, 2012, the Company entered into a $50.0 million secured revolving funding facility with Capital One, National Association (the "Capital One Facility"), pursuant to which the Company borrows funds to finance qualifying senior commercial mortgage loans, subject to available collateral. On July 26, 2013, the agreements governing the Capital One Facility were amended to, among other things, increase the size of the Capital One Facility from $50.0 million to $100.0 million.
Under the Capital One Facility, the Company borrows funds on a revolving basis in the form of individual loans evidenced by individual notes. Each individual loan is secured by an underlying loan originated by the Company. From May 18, 2012 to July 25, 2013, amounts outstanding under each individual loan accrued interest at a per annum rate equal to the sum of (i) 30 day LIBOR, (ii) plus a pricing margin of 2.50% to 4.00%. Since July 26, 2013, amounts outstanding under each individual loan accrue interest at a per annum rate equal to the sum of (i) 30 day LIBOR, (ii) plus a pricing margin of 2.00% to 3.50%. The Company may request individual loans under the Capital One Facility through and including May 18, 2015, subject to successive 12-month extension options at the lender's discretion. The maturity date of each individual loan is the same as the maturity date of the underlying loan that secures such individual loan. As of December 31, 2012, the outstanding balance on the Capital One Facility was $32.2 million. As of December 31, 2013, there was no outstanding balance under the Capital One Facility. The Company does not incur a non-utilization fee under the terms of the Capital One Facility.
The Capital One Facility contains various affirmative and negative covenants applicable to the Company and certain of the Company's subsidiaries, including the following: (a) maintaining a ratio of debt to tangible net worth of not more than 3.0 to 1, (b) maintaining a tangible net worth of at least the sum of (1) 80% of the Company's tangible net worth as of May 1, 2012, plus (2) 80% of the net proceeds received from all future equity issuances by the Company, and (c) maintaining a fixed charge coverage ratio (expressed as the ratio of EBITDA, as defined, to fixed charges) for the immediately preceding 12 month period ending on the last date of the applicable reporting period to be at least 1.25 to 1. Effective September 27, 2012, the agreements governing the Capital One Facility were amended to provide that the required minimum fixed charge coverage ratio with respect to the Company as guarantor will start to be tested upon the earlier to occur of (a) the calendar quarter ending on June 30, 2013 and (b) the first full calendar quarter following the calendar quarter in which the Company reports "Loans held for investment" in excess of $200.0 million on the Company's quarterly consolidated balance sheet. As of December 31, 2012, the Company reported "Loans held for investment" in excess of $200.0 million. As a result, the Company tested the minimum fixed charge coverage ratio beginning with the three months ended March 31, 2013. As of December 31, 2013, the Company was in compliance in all material respects with the terms of the Capital One Facility.
Warehouse Lines of Credit
ASAP Line of Credit
On August 25, 2009, ACRE Capital entered into a multifamily as soon as pooled ("ASAP") sale agreement with Fannie Mae, which was assumed as part of the Acquisition. As of December 31, 2013, the Fannie Mae ASAP Line of Credit (the "ASAP Line of Credit") had a borrowing capacity of $105.0 million with no expiration date. Fannie Mae advances payment to ACRE Capital in two separate installments according to the terms as set forth in the ASAP sale agreement. The first installment is considered an advance to ACRE Capital from Fannie Mae and not a sale until the second advance and settlement is made. Installments received by ACRE Capital from Fannie Mae are financed on the ASAP Line of Credit, which charges interest at a floating daily rate of 30-day LIBOR+1.40% with a floor of 1.75% and is secured by the underlying originated loan. As of December 31, 2013, there was no outstanding balance under the ASAP Line of Credit.
BAML Line of Credit
As of December 31, 2013, ACRE Capital maintained a line of credit with Bank of America, N.A. (the "BAML Line of Credit") of $80.0 million with a stated interest rate of Bank of America LIBOR Daily Floating Rate plus 1.60%. The BAML Line of Credit, which was assumed as part of the Acquisition, was amended in January 2014 to extend the maturity date to April 1, 2014. See Note 21 for a subsequent event related to the BAML Line of Credit. For the year ended December 31, 2013, the Company incurred a non-utilization fee of $26 thousand. As of December 31, 2013, there was no outstanding balance under the BAML Line of Credit.
The BAML Line of Credit is collateralized by a first lien on ACRE Capital's interest in the mortgage loans that it originates. Advances from the BAML Line of Credit cannot exceed 100% of the principal amounts of the mortgage loans originated by ACRE Capital and must be repaid at the earlier of the sale or other disposition of the mortgage loans or at the expiration date of the warehouse line of credit. The terms of the BAML Line of Credit require ACRE Capital to comply with various covenants, including a minimum tangible net worth requirement. As of December 31, 2013, ACRE Capital was in compliance in all material respects with the terms of the BAML Line of Credit.
2015 Convertible Notes
On December 19, 2012, the Company issued $69.0 million aggregate principal amount of the 2015 Convertible Notes. Of this aggregate principal amount, $60.5 million aggregate principal amount of the 2015 Convertible Notes was sold to the initial purchasers (including $9.0 million pursuant to the initial purchasers' exercise in full of their overallotment option) and $8.5 million aggregate principal amount of the 2015 Convertible Notes was sold directly to certain directors, officers and affiliates of the Company in a private placement. The 2015 Convertible Notes were issued pursuant to an Indenture, dated December 19, 2012 (the "Indenture"), between the Company and U.S. Bank National Association, as trustee. The sale of the 2015 Convertible Notes generated net proceeds of approximately $66.2 million. Aggregate estimated offering expenses in connection with the transaction, including the initial purchasers' discount of approximately $2.1 million, were approximately $2.8 million. As of December 31, 2013 and 2012, the carrying value of the 2015 Convertible Notes was $67.8 million and $67.3 million, respectively.
The 2015 Convertible Notes bear interest at a rate of 7.000% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2013. The estimated effective interest rate of the 2015 Convertible Notes, which is equal to the stated rate of 7.000% plus the accretion of the original issue discount and associated costs, was 9.4% for the years ended December 31, 2013 and 2012. For the years ended December 31, 2013 and 2012, the interest expense incurred on this indebtedness was $6.2 million and $216 thousand, respectively. The 2015 Convertible Notes will mature on December 15, 2015 (the "Maturity Date"), unless previously converted or repurchased in accordance with their terms. The 2015 Convertible Notes are the Company's senior unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the 2015 Convertible Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries, financing vehicles or similar facilities.
Prior to the close of business on the business day immediately preceding June 15, 2015, holders may convert their 2015 Convertible Notes only under certain circumstances as set forth in the Indenture. On or after June 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their 2015 Convertible Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at its election, cash, shares of its common stock or a combination of cash and shares of its common stock. The conversion rate is initially 53.6107 shares of common stock per $1,000 principal amount of 2015 Convertible Notes (equivalent to an initial conversion price of approximately $18.65 per share of common stock). The conversion rate will be subject to adjustment in some events, including for regular quarterly dividends in excess of $0.35 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased but will in no event exceed 61.6523 shares of common stock per $1,000 principal amount of 2015 Convertible Notes.
Prior to June 26, 2013, the Company could not elect to issue shares of common stock upon conversion of the 2015 Convertible Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the 2015 Convertible Notes until the Company received stockholder approval for issuances above this threshold. Until such stockholder approval was obtained, the Company could not share-settle the full conversion option. As a result, the embedded conversion option did not qualify for equity classification and instead was separately valued and accounted for as a derivative liability. The initial value allocated to the derivative liability was $1.7 million, which represented a discount to the debt cost to be amortized through other interest expense using the effective interest method through the maturity of the 2015 Convertible Notes. The effective interest rate used to amortize the debt discount on the 2015 Convertible Notes was 9.4%. During each reporting period, the derivative liability was marked to fair value through earnings.
On June 26, 2013, stockholder approval was obtained for the issuance of shares in excess of 20% of the Company's common stock outstanding to satisfy any conversions of the 2015 Convertible Notes. As a result, the Company has the ability to fully settle in shares the conversion option and the embedded conversion option is no longer required to be separately valued and accounted for as a derivative liability on a prospective basis. As of June 26, 2013, the conversion option's cumulative value of $86 thousand was reclassified to additional paid in capital and will no longer be marked-to-market through earnings. The remaining debt discount of $1.5 million as of June 26, 2013, which arose at the date of debt issuance from the original bifurcation, will continue to be amortized through other interest expense. As of December 31, 2013 and 2012, the derivative liability had a fair value of $0 and $1.8 million, respectively.
The Company does not have the right to redeem the 2015 Convertible Notes prior to the Maturity Date, except to the extent necessary to preserve its qualification as a REIT for U.S. federal income tax purposes. No sinking fund is provided for the 2015 Convertible Notes. In addition, if the Company undergoes certain corporate events that constitute a "fundamental change," the holders of the 2015 Convertible Notes may require the Company to repurchase for cash all or part of their 2015 Convertible Notes at a repurchase price equal to 100% of the principal amount of the 2015 Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
At December 31, 2013, approximate principal maturities of the Company's Funding Agreements and the 2015 Convertible Notes are as follows ($ in thousands):
| |
Wells Fargo Facility |
Citibank Facility |
Capital One Facility |
2015 Convertible Notes |
ASAP Line of Credit |
BAML Line of Credit |
Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 |
$ | 166,934 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 166,934 | ||||||||
|
2015 |
— | — | — | 69,000 | — | — | 69,000 | |||||||||||||||
|
2016 |
— | — | — | — | — | — | — | |||||||||||||||
|
2017 |
— | 97,485 | — | — | — | — | 97,485 | |||||||||||||||
|
2018 |
— | — | — | — | — | — | — | |||||||||||||||
|
Thereafter |
— | — | — | — | — | — | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
|
|
$ | 166,934 | $ | 97,485 | $ | — | $ | 69,000 | $ | — | $ | — | $ | 333,419 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
|||
7. ALLOWANCE FOR LOSS SHARING
Loans originated and sold by ACRE Capital to Fannie Mae under the Fannie Mae DUS program are subject to the terms and conditions of a Master Loss Sharing Agreement by ACRE Capital, which was amended and restated during 2012. Under the Master Loss Sharing Agreement, ACRE Capital is responsible for absorbing certain losses incurred by Fannie Mae with respect to loans originated under the DUS program, as described below in more detail.
The losses incurred with respect to individual loans are allocated between ACRE Capital and Fannie Mae based on the loss level designation ("Loss Level") for the particular loan. Loans are designated as Loss Level I, Loss Level II or Loss Level III. All loans are designated Loss Level I unless Fannie Mae and ACRE Capital agree upon a different Loss Level for a particular loan at the time of the loan commitment, or if Fannie Mae determines that the loan was not underwritten, processed or serviced according to Fannie Mae guidelines.
Losses on Loss Level I loans are shared 33.33% by ACRE Capital and 66.67% by Fannie Mae. The maximum amount of ACRE Capital's risk-sharing obligation with respect to any Loss Level I loan is 33.33% of the original principal amount of the loan. Losses incurred in connection with Loss Level II and Loss Level III loans are allocated disproportionately to ACRE Capital until ACRE Capital has absorbed the maximum level of its risk-sharing obligation with respect to the particular loan. The maximum loss allocable to ACRE Capital for Loss Level II loans is 30% of the original principal amount of the loan, and for Loss Level III loans is 40% of the original principal amount of the loan.
According to the Master Loss Sharing Agreement, Fannie Mae may unilaterally increase the amount of the risk-sharing obligation of ACRE Capital with respect to individual loans without regard to a particular Loss Level if (i) the loan does not meet specific underwriting criteria, (ii) loan is defaulted within twelve (12) months after it is purchased by Fannie Mae, or (iii) Fannie Mae determines that there was fraud, material representation or gross negligence by ACRE Capital in its underwriting, closing, delivery or servicing of the loan. Under certain limited circumstances, Fannie Mae may require ACRE Capital to absorb 100% of the losses incurred on a loan by requiring ACRE Capital to repurchase the loan.
The amount of loss incurred on a particular loan is determined at the time the loss is incurred, for example, at the time a property is foreclosed by Fannie Mae (whether acquired by Fannie Mae or a third party) or at the time a loan is modified in connection with a default. Losses may be determined by reference to the price paid by a third party at a foreclosure sale or by reference to an appraisal obtained by Fannie Mae in connection with the default on the loan.
As part of the Acquisition, Alliant, Inc., a Florida corporation, and The Alliant Company, LLC, a Florida limited liability company (the "Sellers"), are jointly and severally obligated to fund directly (if permitted) or to reimburse ACRE Capital for amounts due and owing after the closing date to Fannie Mae pursuant to ACRE Capital's allowance for loss sharing with respect to settlement of certain DUS program mortgage loans originated and serviced by ACRE Capital, subject to certain limitations. In addition, the Sellers are jointly and severally obligated to indemnify ACRE Capital for, among other things, certain losses arising from Sellers' failure to fulfill the funding or reimbursement obligations described above. As of December 31, 2013, the preliminary estimate of the portion of such contributions towards such losses relating to the allowance for loss sharing of ACRE Capital is $1.9 million and is included within other assets in the consolidated balance sheets. Additionally, with respect to the settlement of certain non-designated DUS program mortgage loans originated and serviced by ACRE Capital, the Sellers are jointly and severally obligated to fund directly (if permitted) or to reimburse ACRE Capital in each of the three 12 month periods following the closing date for eighty percent (80%) of amounts due and owing after the closing date to Fannie Mae pursuant to ACRE Capital's allowance for loss sharing in excess of $2.0 million during such 12 month period; provided that in no event shall Sellers obligations exceed in the aggregate $3.0 million for the entire three year period.
ACRE Capital uses several tools to manage its risk-sharing obligation, including maintenance of disciplined underwriting and approval processes and procedures, and periodic review and evaluation of underwriting criteria based on underlying multifamily housing market data and limitation of exposure to particular geographic markets and submarkets and to individual borrowers. In situations where payment under the guaranty is probable and estimable on a specific loan, the Company records an additional liability through a charge to the provision for loss sharing in the consolidated statements of operations. The amount of the provision reflects the Company's assessment of the likelihood of payment by the borrower, the estimated disposition value of the underlying collateral and the level of risk-sharing. Historically, among other factors, the loss recognition occurs at or before the loan becoming 60 days delinquent.
A summary of the Company's allowance for loss sharing for the year ended December 31, 2013 is as follows ($ in thousands):
| |
For the Year Ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Allowance for loss sharing assumed in the ACRE Capital acquisition (See Note 18) |
$ | 18,386 | ||
|
Current period provision for loss sharing |
6 | |||
|
Settlements/Writeoffs |
(1,912 | ) | ||
| | | | | |
|
Ending balance |
$ | 16,480 | ||
| | | | | |
| | | | | |
As of December 31, 2013, the maximum quantifiable allowance for loss sharing associated with the Company's guarantees under the Fannie Mae DUS agreement was $1.3 billion from a total recourse at risk pool of $3.7 billion. Additionally, the non-at risk pool was $5.2 million. The at risk pool is subject to Fannie Mae's Master Loss Sharing Agreement and the non-at risk pool is not subject to such agreement. The maximum quantifiable allowance for loss sharing is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.
|
|||
8. COMMITMENTS AND CONTINGENCIES
The Company has various commitments to fund investments in its portfolio, extend credit and sell loans as described below.
As of December 31, 2013 and 2012, the Company had the following commitments to fund various stretch senior and transitional senior mortgage loans, as well as subordinated and mezzanine debt investments:
| |
As of December 31, | ||||||
|---|---|---|---|---|---|---|---|
|
$ in thousands |
2013 | 2012 | |||||
|
Total commitments |
$ | 1,191,212 | $ | 405,695 | |||
|
Less: funded commitments |
(1,050,674 | ) | (356,930 | ) | |||
| | | | | | | | |
|
Total unfunded commitments |
$ | 140,538 | $ | 48,765 | |||
| | | | | | | | |
| | | | | | | | |
Commitments to extend credit by ACRE Capital are generally agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Occasionally, the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. As of December 31, 2013, ACRE Capital had the following commitments to sell and fund loans:
|
$ in thousands |
As of December 31, 2013 |
|||
|---|---|---|---|---|
|
Commitments to sell loans |
$ | 56,115 | ||
|
Commitments to fund loans |
$ | 51,794 | ||
Lease Commitments
ACRE Capital is obligated under a number of operating leases for office spaces with terms ranging from less than one year to more than five years. Rent expense for the year ended December 31, 2013 was $230 thousand.
The following table shows future minimum payments under the Company's operating leases for the year ended December 31, 2013 ($ in thousands):
| For the year ended December 31, 2013 |
||||
|---|---|---|---|---|
|
2014 |
$ | 453 | ||
|
2015 |
234 | |||
|
2016 |
200 | |||
|
2017 |
124 | |||
|
2018 |
89 | |||
|
Thereafter |
7 | |||
| | | | | |
|
Total |
$ | 1,107 | ||
| | | | | |
| | | | | |
The Company from time to time may be party to litigation relating to claims arising in the normal course of business. As of December 31, 2013, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations.
|
|||
9. DERIVATIVES
Non-designated Hedges
Derivatives not designated as hedges are derivatives that do not meet the criteria for hedge accounting under GAAP or for which the Company has not elected to designate as hedges. Changes in the fair value of derivatives related to the loan commitments and forward sale commitments are recorded directly in "Gains from mortgage banking activities" and changes in the fair value of the embedded conversion option are included within changes in fair value of derivatives in the consolidated statements of operations.
Loan commitments and forward sale commitments
Through its subsidiary, ACRE Capital, the Company enters into loan commitments with borrowers on loan originations whereby the interest rate on the prospective loan is determined prior to funding. In general, ACRE Capital simultaneously enters into forward sale commitments with investors in order to hedge against the interest rate exposure on loan commitments. The forward sale commitment with the investor locks in an interest rate and price for the sale of the loan. The terms of the loan commitments with the borrower and the forward sale commitment with the investor are matched with the objective of hedging interest rate risk. Loan commitments and forward sale commitments are considered undesignated derivative instruments. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value, with changes in fair value recorded in earnings. Since the date of Acquisition through December 31, 2013, the Company entered into 20 loan commitments and 20 forward sale commitments.
As of December 31, 2013, the Company had 2 loan commitments with a total notional amount of $51.8 million and 5 forward sale commitments with a total notional amount of $56.1 million, with maturities ranging from 24 to 60 days that were not designated as hedges in qualifying hedging relationships.
Right to acquire MSRs
In connection with the Acquisition, the Company assumed the right to acquire the servicing for certain HUD loans at a future date. This right was contingent upon satisfaction of certain conditions, which were all satisfied in the fourth quarter of 2013. Accordingly, the Company will assume servicing of these loans on January 1, 2014. The derivative asset associated with the right to service these loans in 2014 is included within other assets in the consolidated balance sheets.
Embedded conversion option
In connection with the issuance of the 2015 Convertible Notes, the Company could not elect to issue shares of common stock upon conversion of the 2015 Convertible Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the 2015 Convertible Notes until the Company received stockholder approval for issuances above this threshold. As a result, the embedded conversion option did not qualify for equity classification and instead was separately valued and accounted for as a derivative liability. On June 26, 2013, stockholder approval was obtained for the issuance of shares in excess of 20% of the Company's common stock outstanding to satisfy any conversions of the 2015 Convertible Notes. As a result, the Company had the ability to fully settle in shares the conversion option and the embedded conversion option was no longer required to be separately valued and accounted for as a derivative liability on a prospective basis.
As of December 31, 2012, the Company's derivative liability associated with the issuance of the 2015 Convertible Notes was $1.8 million, which is included within other liabilities in the consolidated balance sheets. See Note 6 for information on the 2015 Convertible Notes and the derivative liability reclassification.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification within the Company's consolidated balance sheets as of December 31, 2013 and 2012 ($ in thousands):
| |
As of December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||||||
| |
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | |||||||
|
Derivatives not designated as hedging instruments |
|||||||||||
|
Loan commitments |
Other assets | $ | 1,886 | — | $ | — | |||||
|
Forward sale commitments |
Other assets | 272 | — | — | |||||||
|
Right to acquire MSRs |
Other assets | 1,717 | — | — | |||||||
|
Forward sale commitments |
Other liabilities | (500 | ) | — | — | ||||||
|
Embedded conversion option |
Other liabilities | — | Other liabilities | (1,825 | ) | ||||||
| | | | | | | | | | | | |
|
Total derivatives not designated as hedging instruments |
$ | 3,375 | $ | (1,825 | ) | ||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
|||
10. SERIES A CONVERTIBLE PREFERRED STOCK
On February 8, 2012, the Company's board of directors adopted resolutions classifying and designating 600 shares of authorized preferred stock as shares of Series A Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"). Holders of shares of Series A Preferred Stock were entitled to receive, when and as authorized by the Company's board of directors and declared by us out of funds legally available for that purpose, dividends at the Prevailing Dividend Rate, compounded quarterly. The "Prevailing Dividend Rate" means (a) beginning on the issue date through and including December 31, 2012, 10% per annum, (b) beginning on January 1, 2013 through and including December 31, 2013, 11% per annum, (c) beginning on January 1, 2014 through and including December 31, 2014, 12% per annum, and (d) beginning on January 1, 2015 and thereafter, 13% per annum; provided, however, that the Prevailing Dividend Rate may decrease by certain specified amounts if the Company achieves a certain coverage ratio.
Shares of Series A Preferred Stock were redeemable by the Company at any time, in whole or in part, beginning on September 30, 2012, at the applicable redemption price. Additionally, shares of Series A Preferred Stock were redeemable at the option of the holder upon an IPO, at the applicable redemption price. Holders of shares of the Series A Preferred Stock exercised this redemption in connection with the IPO.
During the year ended December 31, 2012, the Company issued 114.4578 shares of Series A Preferred Stock for an aggregate subscription price of approximately $5.7 million, paid a cash dividend of $102 thousand, and recognized the accretion of $572 thousand for the redemption premium for a total balance of approximately $6.3 million. The redemption price for redeemed shares of Series A Preferred Stock was equal to (i) the sum of (a) the subscription price, (b) any dividends per share added thereto pursuant to the terms of the Series A Preferred Stock and (c) any accrued and unpaid dividends per share plus (ii) an amount equal to a percentage of the subscription price of the Series A Preferred Stock and 10%.
|
|||
11. STOCKHOLDERS' EQUITY
On May 9, 2013, the Company filed a registration statement on Form S-3 (the "Shelf Registration Statement"), with the SEC in order to permit the Company to offer, from time to time, in one or more offerings or series of offerings up to $1.5 billion of the Company's common stock, preferred stock, debt securities, subscription rights to purchase shares of the Company's common stock, warrants representing rights to purchase shares of the Company's common stock, preferred stock or debt securities, or units. On June 17, 2013, the registration statement was declared effective by the SEC.
On June 21, 2013, the Company priced a public offering of 18,000,000 shares of its common stock at a public offering price of $13.50 per share (the "Offering"), raising gross proceeds of approximately $243.0 million. The Company incurred approximately $8.4 million in offering expenses related to the public offering resulting in net proceeds of $234.6 million. In connection with the Offering, the Company also granted the underwriters an option to purchase up to an additional 2.7 million shares of common stock. On July 9, 2013, the Company sold 601,590 shares of its common stock to the underwriters, pursuant to the underwriters' partial exercise of the option to purchase additional shares. The Company raised approximately $7.7 million in net proceeds from the sale of these additional shares of its common stock, which brought the total net proceeds of the offering to approximately $242.3 million. The Offering was made under the Company's Shelf Registration Statement. The net proceeds from the Offering are being used to invest in target investments, repay indebtedness, fund future funding commitments on existing loans and for other general corporate purposes.
On August 30, 2013, the Company issued 588,235 shares of its common stock in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933 as part of the consideration for the Acquisition. See Note 18 for additional information on the Acquisition.
Equity Incentive Plan
On April 23, 2012, the Company adopted an equity incentive plan (the "2012 Equity Incentive Plan"). Pursuant to the 2012 Equity Incentive Plan, the Company may grant awards consisting of restricted shares of the Company's common stock, restricted stock units and/or other equity-based awards to the Company's outside directors, the Company's Chief Financial Officer, ACREM and other eligible awardees under the plan, subject to an aggregate limitation of 690,000 shares of common stock (7.5% of the issued and outstanding shares of the Company's common stock immediately after giving effect to the issuance of the shares sold in the IPO). Any restricted shares of the Company's common stock and restricted stock units will be accounted for under FASB ASC Topic 718, Compensation—Stock Compensation, ("ASC 718") resulting in share-based compensation expense equal to the grant date fair value of the underlying restricted shares of common stock or restricted stock units.
Restricted stock grants generally vest ratably over a one to four year period from the vesting start date. The grantee receives additional compensation for each outstanding restricted stock grant, classified as dividends paid, equal to the per-share dividends received by common shareholders.
The following table details the restricted stock grants awarded as of December 31, 2013.
|
Grant Date |
Vesting Start Date | Shares Granted | ||||
|---|---|---|---|---|---|---|
|
May 1, 2012 |
July 1, 2012 | 35,135 | ||||
|
June 18, 2012 |
July 1, 2012 | 7,027 | ||||
|
July 9, 2012 |
October 1, 2012 | 25,000 | ||||
|
June 26, 2013 |
July 1, 2013 | 22,526 | ||||
|
November 25, 2013 |
November 25, 2016 | 30,381 | ||||
| | | | | | | |
|
Total |
120,069 | |||||
| | | | | | | |
| | | | | | | |
The following tables summarize the non-vested shares of restricted stock and the vesting schedule of shares of restricted stock for directors, officers and employees as of December 31, 2013.
Schedule of Non-Vested Share and Share Equivalents
| |
Restricted Stock Grants—Directors |
Restricted Stock Grants—Officer |
Restricted Stock Grants—Employees |
Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance as of December 31, 2012 |
31,080 | 23,436 | — | 54,516 | |||||||||
|
Granted |
22,526 | — | 30,381 | 52,907 | |||||||||
|
Vested |
(25,269 | ) | (6,250 | ) | — | (31,519 | ) | ||||||
|
Forfeited |
(2,917 | ) | — | — | (2,917 | ) | |||||||
| | | | | | | | | | | | | | |
|
Balance as of December 31, 2013 |
25,420 | 17,186 | 30,381 | 72,987 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Future Anticipated Vesting Schedule
| |
Restricted Stock Grants—Directors |
Restricted Stock Grants—Officer |
Restricted Stock Grants—Employees |
Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 |
18,768 | 6,250 | — | 25,018 | |||||||||
|
2015 |
5,818 | 6,250 | — | 12,068 | |||||||||
|
2016 |
834 | 4,686 | 30,381 | 35,901 | |||||||||
|
2017 |
— | — | — | — | |||||||||
|
2018 |
— | — | — | — | |||||||||
| | | | | | | | | | | | | | |
|
Total |
25,420 | 17,186 | 30,381 | 72,987 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The following table summarizes the restricted stock compensation expense included in general and administrative expenses, the total fair value of shares vested and the aggregate grant date fair value of the restricted stock granted to the directors, officers and employees of the Company for the years ended December 31, 2013 and 2012 (in thousands):
| |
For the Year Ended December 31, | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | ||||||||||||||||||||
| |
Restricted Stock Grants | Restricted Stock Grants | ||||||||||||||||||||
| |
Directors | Officers | Employees | Total | Directors | Officers | Total | |||||||||||||||
|
Compensation expense included in general and administrative expenses |
$ | 408 | $ | 106 | $ | 10 | $ | 524 | $ | 285 | $ | 53 | $ | 338 | ||||||||
|
Total fair value of shares vested(1) |
366 | 92 | — | 458 | 182 | 26 | 208 | |||||||||||||||
|
Weighted average grant date fair value |
289 | — | 398 | 756 | 423 | |||||||||||||||||
As of December 31, 2013 and 2012, the total compensation cost related to non-vested awards not yet recognized totaled $967 thousand and $858 thousand, respectively, and the weighted-average period over which the non-vested awards are expected to be recognized is 2.17 years and 2.57 years, respectively.
|
|||
12. EARNINGS PER SHARE
The following information sets forth the computations of basic and diluted earnings (loss) per common share for the years ended December 31, 2013, 2012 and for the period from September 1, 2011 (Inception) to December 31, 2011:
| |
For the Years Ended December 31, |
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
For the period From September 1, 2011 (Inception) to December 31, 2011 |
|||||||||
|
$ in thousands (except share and per share data) |
2013 | 2012 | ||||||||
|
Net income (loss) attributable to common stockholders: |
$ | 13,766 | $ | 186 | $ | (163 | ) | |||
|
Divided by: |
||||||||||
|
Basic weighted average shares of common stock outstanding: |
18,989,500 | 6,532,706 | 19,052 | |||||||
|
Diluted weighted average shares of common stock outstanding: |
19,038,152 | 6,567,309 | 19,052 | |||||||
| | | | | | | | | | | |
|
Basic and diluted earnings (loss) per common share: |
$ | 0.72 | $ | 0.03 | $ | (8.56 | ) | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company has considered the impact of the 2015 Convertible Notes and the restricted shares on diluted earnings per common share. The number of shares of common stock that the 2015 Convertible Notes are convertible into were not included in the computation of diluted net income per common share because the inclusion of those shares would have been anti-dilutive for the years ended December 31, 2013, 2012 and for the period from September 1, 2011 (Inception) to December 31, 2011.
|
|||
13. INCOME TAX
As discussed in Note 1, the Company established a TRS, TRS Holdings, in connection with the Acquisition. In addition, in December 2013, the Company formed ACRC TRS, in order to issue and hold certain loans intended for sale. The TRS' income tax provision consisted of the following for the year ended December 31, 2013 ($ in thousands):
| |
For the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Current |
$ | 115 | ||
|
Deferred |
61 | |||
| | | | | |
|
Total income tax provision |
$ | 176 | ||
| | | | | |
| | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are presented net by tax jurisdiction and are included within other assets and other liabilities in the consolidated balance sheets, respectively. As of December 31, 2013, the TRS' U.S. tax jurisdiction was in a net deferred tax liability position. The following table presents the U.S. tax jurisdiction and the tax effects of temporary differences on their respective net deferred tax assets and liabilities ($ in thousands). The TRSs are not currently subject to tax in any foreign tax jurisdictions.
| |
As of December 31, 2013 | |||
|---|---|---|---|---|
|
Deferred tax assets |
||||
|
Mortgage servicing rights |
$ | 749 | ||
|
Other temporary differences |
125 | |||
| | | | | |
|
Sub-Total—deferred tax assets |
874 | |||
| | | | | |
|
Deferred tax liability |
||||
|
Basis difference in assets from acquisition of ACRE Capital |
(2,810 | ) | ||
|
Components of gains from mortgage banking activities |
(893 | ) | ||
|
Amortization of intangible assets |
(49 | ) | ||
| | | | | |
|
Net deferred tax liability |
$ | (2,878 | ) | |
| | | | | |
| | | | | |
Based on the TRS' assessment, it is more likely than not that the deferred tax assets will be realized through future taxable income. The TRS' recognizes interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statements of operations. Accrued interest and penalties are included within other liabilities in the consolidated balance sheets.
The following table is a reconciliation of the TRS' effective tax rate to the TRS' statutory U.S. federal income tax rate for the year ended December 31, 2013:
| |
For the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Federal statutory rate |
35.0 | % | ||
|
State income taxes |
5.7 | % | ||
|
Federal benefit of state tax deduction |
(2.0 | )% | ||
| | | | | |
|
Effective tax rate |
38.7 | % | ||
| | | | | |
| | | | | |
|
|||
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows FASB ASC Topic 820-10, Fair Value Measurement ("ASC 820-10"), which expands the application of fair value accounting. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for a financial instrument in a current sale, which assumes an orderly transaction between market participants on the measurement date. The financial instruments recorded at fair value on a recurring basis in the Company's consolidated financial statements are derivative instruments, MSRs and loans held for sale. ASC 820-10 specifies a hierarchy of valuation techniques based on the inputs used in measuring fair value. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:
The three levels of inputs that may be used to measure fair value are as follows:
Level I—Quoted prices in active markets for identical assets or liabilities.
Level II—Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III—Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows using market yields, or other valuation methodologies. Any changes to the valuation methodology will be reviewed by the Company's management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the Company anticipates that the valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may fall within periods of market dislocation, during which price transparency may be reduced.
Financial Instruments reported at fair value
The Company has certain assets and liabilities that are required to be recorded at fair value on a recurring basis in accordance with GAAP. Included in financial instruments reported at fair value in the Company's consolidated financial statements are MSRs, loan commitments, forward sale commitments, loans held for sale and an embedded conversion option related to the Company's 2015 Convertible Notes. The carrying values of cash and cash equivalents, restricted cash, interest receivable and accrued expenses approximate their fair values due to their short-term nature.
The following table summarizes the levels in the fair value hierarchy into which the Company's financial instruments were categorized as of December 31, 2013 and 2012 ($ in thousands):
| |
Fair Value as of December 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Level I | Level II | Level III | Total | |||||||||
|
Loans held for sale |
$ | — | $ | 89,233 | $ | — | $ | 89,233 | |||||
|
Mortgage servicing rights |
$ | — | $ | — | 59,640 | $ | 59,640 | ||||||
|
Derivative assets: |
|||||||||||||
|
Loan commitments |
$ | — | $ | — | $ | 1,886 | $ | 1,886 | |||||
|
Forward sale commitments |
$ | — | $ | — | $ | 272 | $ | 272 | |||||
|
Right to acquire MSRs |
$ | — | $ | — | $ | 1,717 | $ | 1,717 | |||||
|
Derivative liabilities: |
|||||||||||||
|
Forward sale commitments |
$ | — | $ | — | $ | (500 | ) | $ | (500 | ) | |||
| |
Fair Value as of December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Level I | Level II | Level III | Total | |||||||||
|
Embedded conversion option |
$ | — | $ | — | $ | (1,825) | (1) | $ | (1,825 | ) | |||
There were no transfers between the levels as of December 31, 2013 and 2012. Transfers between levels are recognized based on the fair value of the financial instrument at the beginning of the period.
Loan commitments and forward sale commitments are valued based on a discounted cash flow model that incorporates changes in interest rates during the period. The MSRs and right to acquire MSRs are valued based on discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The loans held for sale are valued based on discounted cash flow models that incorporate quoted observable prices from market participants. The embedded conversion option fair value analysis as of December 31, 2012 reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs to the extent available, including interest rate curves, spot and market forward points. The valuation of derivative instruments are determined using widely accepted valuation techniques, including market yield analyses and discounted cash flow analysis on the expected cash flows of each derivative.
The following table summarizes the significant unobservable inputs the Company used to value financial instruments categorized within Level III as of December 31, 2013 ($ in thousands):
| |
|
|
Unobservable Input | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Asset Category |
Fair Value |
Primary Valuation Technique |
Input | Range | Weighted Average |
||||||||
|
Mortgage servicing rights |
$ | 59,640 | Discounted cash flow | Discount rate | 8 – 14% | 12 | % | ||||||
|
Loan commitments |
$ | 1,886 | Discounted cash flow | Discount rate | 8% | 8 | % | ||||||
|
Right to acquire MSRs |
$ | 1,717 | Discounted cash flow | Discount rate | 8% | 8 | % | ||||||
|
Forward sale commitments |
$ | (228 | ) | Discounted cash flow | Discount rate | 8 – 12% | 8 | % | |||||
The following table summarizes the significant unobservable inputs the Company used to value financial instruments categorized within Level III as of December 31, 2012 ($ in thousands):
| |
|
|
Unobservable Input | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Asset Category |
Fair Value | Primary Valuation Technique |
Input | Range | Weighted Average | ||||||||
|
Embedded conversion option |
$ | (1,825 | ) | Option Pricing Model | Volatility | 16.4% – 17.4% | 16.4 | % | |||||
The table above is not intended to be all-inclusive, but instead is intended to capture the significant unobservable inputs relevant to the Company's determination of fair values.
Changes in market yields, discount rates or EBITDA multiples, each in isolation, may have changed the fair value of the financial instruments. Generally, an increase in market yields or discount rates or decrease in EBITDA multiples may have resulted in a decrease in the fair value of the financial instruments.
The Company's management is responsible for the Company's fair value valuation policies, processes and procedures related to Level III financial instruments. The management reports to the CFO, who has final authority over the valuation of the Company's Level III financial instruments.
The following table summarizes the change in derivative assets and liabilities classified as Level III related to mortgage banking activities for the year ended December 31, 2013 ($ in thousands):
| |
As of and for the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Derivative assets and liabilities acquired in the ACRE Capital acquisition, net (See Note 18) |
$ | 182 | ||
|
Settlements |
(2,098 | ) | ||
|
Realized gains (losses) recorded in net income(1) |
1,916 | |||
|
Unrealized gains (losses) recorded in net income(1) |
3,375 | |||
| | | | | |
|
Ending balance, as of December 31, 2013 |
$ | 3,375 | ||
| | | | | |
| | | | | |
The change in the embedded conversion option classified as Level III is as follows for the year ended December 31, 2013 and 2012 ($ in thousands):
| |
As of and for the year ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
|
Beginning balance, as of December 31, 2012 |
$ | (1,825 | ) | $ | — | ||
|
Written option sold specific to the convertible debt offering |
— | (1,728 | ) | ||||
|
Unrealized gain (loss) on the embedded conversion option |
1,739 | (1) | (97 | ) | |||
|
Reclassification to additional paid in capital |
86 | — | |||||
| | | | | | | | |
|
Ending balance, as of December 31, 2013 |
$ | — | $ | (1,825 | ) | ||
| | | | | | | | |
| | | | | | | | |
See Note 4 for the changes in MSRs that are classified as Level III.
The following table presents the carrying values and fair values of the Company's financial assets and liabilities recorded at cost as of December 31, 2013 and 2012. Changes in market yields, credit quality and other variables may change the fair value of the Company's assets and liabilities. As of December 31, 2013 and 2012, the fair value of the Company's financial instruments recorded at cost is as follows ($ in thousands).
| |
As of December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||||||||
| |
Carrying Value |
Fair Value | Carrying Value |
Fair Value | |||||||||
|
Financial instruments not recorded at fair value: |
|||||||||||||
|
Loans held for investment |
$ | 958,495 | $ | 958,495 | $ | 353,500 | $ | 353,500 | |||||
|
Financial liabilities: |
|||||||||||||
|
Secured funding agreements |
$ | 264,419 | $ | 264,419 | $ | 144,256 | $ | 144,256 | |||||
|
Convertible notes |
67,815 | 67,815 | 67,289 | 67,289 | |||||||||
|
Commercial mortgage-backed securitization debt (consolidated VIE) |
395,027 | 395,027 | — | — | |||||||||
|
|||
15. RELATED PARTY TRANSACTIONS
Management Agreements
The Company was party to an interim management agreement with ACREM prior to the IPO. Pursuant to the interim management agreement, ACREM provided investment advisory and management services to the Company on an interim basis until the IPO. For providing these services, ACREM received only reimbursements from the Company for any third party costs that ACREM incurred on behalf of the Company.
On April 25, 2012, in connection with the Company's IPO, the Company entered into a management agreement (the "Management Agreement") with ACREM under which ACREM, subject to the supervision and oversight of the Company's board of directors, will be responsible for, among other duties, (a) performing all of the Company's day-to-day functions, (b) determining the Company's investment strategy and guidelines in conjunction with the Company's board of directors, (c) sourcing, analyzing and executing investments, asset sales and financing and (d) performing portfolio management duties.
In addition, ACREM has an Investment Committee that oversees compliance with the Company's investment strategy and guidelines, investment portfolio holdings and financing strategy.
Effective May 1, 2012, in exchange for its services, ACREM is entitled to receive a base management fee, an incentive fee, expense reimbursements, grants of equity-based awards pursuant to the Company's 2012 Equity Incentive Plan and a termination fee, if applicable, as set forth below.
The base management fee is equal to 1.5% of the Company's stockholders' equity per annum, which is calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, stockholders' equity means: (a) the sum of (i) the net proceeds from all issuances of the Company's equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (ii) the Company's retained earnings at the end of the most recently completed fiscal quarter determined in accordance with GAAP, (without taking into account any non-cash equity compensation expense incurred in current or prior periods); less (b) (x) any amount that the Company has paid to repurchase the Company's common stock since inception, (y) any unrealized gains and losses and other non-cash items that have impacted stockholders' equity as reported in the Company's consolidated financial statements prepared in accordance with GAAP, and (z) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between ACREM and the Company's independent directors and approval by a majority of the Company's independent directors. As a result, the Company's stockholders' equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders' equity shown on the Company's consolidated financial statements.
The incentive fee is an amount, not less than zero, equal to the difference between: (a) the product of (i) 20% and (ii) the difference between (A) the Company's Core Earnings (as defined below) for the previous 12-month period, and (B) the product of (1) the weighted average of the issue price per share of the Company's common stock of all of the Company's public offerings of common stock multiplied by the weighted average number of all shares of common stock outstanding (including any restricted shares of the Company's common stock, restricted units or any shares of the Company's common stock not yet issued, but underlying other awards granted under the Company's 2012 Equity Incentive Plan (See Note 11)) in the previous 12-month period, and (2) 8%; and (b) the sum of any incentive fees earned by ACREM with respect to the first three fiscal quarters of such previous 12-month period; provided, however, that no incentive fee is payable with respect to any fiscal quarter unless cumulative Core Earnings for the 12 most recently completed fiscal quarters is greater than zero. "Core Earnings" is a non-GAAP measure and is defined as GAAP net income (loss) computed in accordance with GAAP, excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization (to the extent that any of the Company's target investments are structured as debt and the Company forecloses on any properties underlying such debt), any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss), and one-time events pursuant to changes in GAAP and certain non-cash charges after discussions between ACREM and the Company's independent directors and after approval by a majority of the Company's independent directors. For purposes of calculating the incentive fee prior to the completion of a 12-month period following the IPO, Core Earnings will be calculated on the basis of the number of days that the Management Agreement has been in effect on an annualized basis. No incentive fees were earned for the years ended December 31, 2013 and 2012.
The Company reimburses ACREM at cost for operating expenses that ACREM incurs on the Company's behalf, including expenses relating to legal, financial, accounting, servicing, due diligence and other services. The Company's reimbursement obligation is not subject to any dollar limitation other than as noted below with respect to the Servicing Limitation and the Restricted Cost Amendment.
The Company will not reimburse ACREM for the salaries and other compensation of its personnel, except for the allocable share of the salaries and other compensation of the Company's (a) Chief Financial Officer, based on the percentage of his time spent on the Company's affairs and (b) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment professional personnel of ACREM or its affiliates who spend all or a portion of their time managing the Company's affairs based on the percentage of their time spent on the Company's affairs (collectively, "Personnel Expenses"). The Company is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of ACREM and its affiliates that are required for the Company's operations (collectively, "Overhead Expenses"). The initial term of the Management Agreement will end May 1, 2015, with automatic one-year renewal terms. Except under limited circumstances, upon a termination of the Management Agreement, the Company will pay ACREM a termination fee equal to three times the average annual base management fee and incentive fee received by ACREM during the 24-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination, each as described above.
Certain of the Company's subsidiaries, along with the Company's lenders under the Wells Fargo Facility, the Citibank Facility and certain other facilities have entered into various servicing agreements with ACREM's subsidiary servicer, Ares Commercial Real Estate Servicer LLC ("ACRES"), a Standard & Poor's-rated commercial primary and special servicer that is included on Standard & Poor's Select Servicer List. Effective May 1, 2012, ACRES agreed that no servicing fees pursuant to these servicing agreements would be charged to the Company or its subsidiaries for so long as the Management Agreement remains in effect, but that ACRES will continue to receive reimbursement for overhead related to servicing and operational activities pursuant to the terms of the Management Agreement (the "Servicing Limitation").
Effective as of September 30, 2013, the Company and ACREM entered into an amendment to the Management Agreement (the "Restricted Cost Amendment") whereby ACREM agreed not to seek reimbursement of Restricted Costs (as defined below), in excess of $1.0 million per quarter for the quarterly periods ending on September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014. "Restricted Costs" are Personnel Expenses and Overhead Expenses incurred in the ordinary course of the Company's origination business and do not include any Personnel Expenses or Overhead Expenses that were incurred in connection with transactions outside our ordinary course of business, including without limitation, transactions for the acquisition of a portfolio of investments or for the acquisition of another company or its assets and business.
Summarized below are the related-party costs incurred by the Company, including ACRE Capital for the year ended December 31, 2013, 2012 and for the period from September 1, 2011 (Inception) to December 31, 2011 and amounts payable to the Manager as of December 31, 2013 and 2012:
| |
Incurred | |
|
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Payable | |||||||||||||||
| |
|
|
For the Period From September 1, 2011 (Inception) to December 31, 2011 |
|||||||||||||
| |
For the years ended December 31, |
As of December 31, |
||||||||||||||
|
$ in thousands |
2013 | 2012 | 2013 | 2012 | ||||||||||||
|
Affiliate Payments |
||||||||||||||||
|
Management fees |
$ | 4,241 | $ | 1,665 | $ | — | $ | 1,497 | $ | 621 | ||||||
|
General and administrative expenses |
3,610 | 1,602 | — | 1,000 | 668 | |||||||||||
|
Direct third party costs |
769 | 643 | 827 | 299 | 31 | |||||||||||
|
Other |
— | 17 | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
|
|
$ | 8,620 | $ | 3,927 | $ | 827 | $ | 2,796 | $ | 1,320 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Ares Investments
On February 8, 2012, the Company entered into a promissory note with Ares Investments Holdings LLC ("Ares Investments"), whereby Ares Investments loaned the Company $2.0 million. The note was repaid with $4 thousand in interest due under the note on March 1, 2012 with the proceeds from the sale of the Series A Preferred Stock.
As of December 31, 2012, Ares Investments owned approximately 2,000,000 shares of the Company's common stock representing approximately 21.6% of the total shares outstanding. As of December 31, 2013, Ares Investments did not own any shares of the Company's common stock. In addition, as of December 31, 2013 and 2012, Ares Investments owned $1.2 million aggregate principal amount of the 2015 Convertible Notes.
Intercompany Note
In connection with the Acquisition, the Company partially capitalized the new TRS, TRS Holdings, with a $44.0 million note. The income statement effects of this obligation are eliminated in consolidation for financial reporting purposes, but the interest income and expense from the note will affect the taxable income of the Company and TRS Holdings.
|
|||
16. DIVIDENDS AND DISTRIBUTIONS
The following table summarizes the Company's dividends declared during the years ended December 31, 2013 and 2012 ($ in thousands, except per share data):
|
Date declared |
Record date | Payment date | Per share amount |
Total amount |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the year ended December 31, 2013 |
|||||||||||||
|
November 13, 2013 |
December 31, 2013 | January 22, 2014 | $ | 0.25 | $ | 7,127 | |||||||
|
August 7, 2013 |
September 30, 2013 | October 17, 2013 | 0.25 | 7,119 | |||||||||
|
May 15, 2013 |
June 28, 2013 | July 18, 2013 | 0.25 | 6,822 | |||||||||
|
March 14, 2013 |
April 8, 2013 | April 18, 2013 | 0.25 | 2,317 | |||||||||
| | | | | | | | | | | | | | |
|
Total cash dividends declared for the year ended December 31, 2013. |
$ | 1.00 | $ | 23,385 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
For the year ended December 31, 2012 |
|||||||||||||
|
November 7, 2012 |
December 31, 2012 | January 10, 2013 | $ | 0.25 | $ | 2,316 | |||||||
|
September 21, 2012 |
October 2, 2012 | October 11, 2012 | 0.06 | 556 | |||||||||
|
June 19, 2012 |
June 29, 2012 | July 12, 2012 | 0.06 | 555 | |||||||||
|
March 30, 2012 |
March 31, 2012 | April 2, 2012 | 0.30 | 450 | (1) | ||||||||
| | | | | | | | | | | | | | |
|
Total cash dividends declared for the year ended December 31, 2012. |
$ | 0.67 | $ | 3,877 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
|||
17. VARIABLE INTEREST ENTITIES
On November 19, 2013, ACRC 2013-FL1 Depositor LLC (the "Depositor"), a wholly owned subsidiary of the Company entered into a Pooling and Servicing Agreement, dated as of November 1, 2013 (the "Pooling and Servicing Agreement"), with Wells Fargo Bank, National Association, as master servicer ("Wells Fargo"), Ares Commercial Real Estate Servicer LLC, as special servicer ("Ares Servicer"), U.S. Bank National Association, as trustee, certificate administrator, paying agent and custodian, and Trimont Real Estate Advisors, Inc., as trust advisor, in connection with forming ACRE Commercial Mortgage Trust 2013-FL1 (the "Trust"). The Pooling and Servicing Agreement governs the issuance of approximately $493.8 million aggregate principal balance commercial mortgage pass-through certificates (the "Certificates") in a CMBS effected by the Depositor.
In connection with the securitization, the Depositor contributed to the Trust a pool of 18 adjustable rate participation interests (the "Trust Assets") in commercial mortgage loans secured by 27 commercial properties, which loans were originated or co-originated by the Company or its subsidiaries. The Certificates represent, in the aggregate, the entire beneficial ownership interest in, and the obligations of, the Trust.
In connection with the securitization, the Company offered and sold the following classes of certificates: Class A, Class B, Class C and Class D Certificates (collectively, the "Offered Certificates) to third parties pursuant to an offering made privately in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). As of December 31, 2013, the aggregate principal balance of the Offered Certificates is approximately $395.0 million and the weighted average coupon of the Offered Certificates is LIBOR plus 1.89%. In addition, a wholly owned subsidiary of the Company retained approximately $98.8 million of the Certificates. The total commitments made in connection with the Offered Certificates was approximately $493.8 million principal balance of CMBS Certificates.
The proceeds from the sale of the Offered Certificates, net of expenses, were approximately $389.3 million. The Company used the net proceeds to repay outstanding amounts under its secured funding agreements and to acquire the A-Notes with respect to certain mortgage loans in which the Company held the related B-Notes.
As discussed in Note 2, the Company evaluates all of its investments and other interests in entities for consolidation, including its investments in this CMBS transaction and the Company's retained interests in securitization transactions it initiated, all of which are generally considered to be variable interests in a VIE.
The primary and special servicer is designated to be Ares Servicer, which is a wholly owned subsidiary of Ares Commercial Real Estate Management LLC (the Manager of the Company and thus, a related party of the Company). Ares Servicer has the power to direct activities of the Trust during the loan workout process on defaulted and delinquent loans, which is the activity that most significantly impacts the economic performance of the Trust. Additionally, the Company, as the holder of the subordinated classes of the Trust, has the obligation to absorb losses of the Trust (the Company has a first loss position in the capital structure of the Trust). In addition, there are no substantive kick-out rights of any party to remove the special servicer without cause; however, the Company, as directing holder, has the ability to remove the special servicer without cause. Based on these factors, the Company is determined to be the primary beneficiary of the VIE; thus, the VIE is consolidated into the Company's financial statements.
The VIE consolidated in accordance with FASB ASC Topic 810 is structured as a pass through entity that receives principal and interest on the underlying collateral and distributes those payments to the Certificate holders. The proceeds from the issuance of debt of the consolidated VIE are treated as a financing activity in the consolidated statements of cash flows. The assets and other instruments held by this securitization entity are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the securitization entity do not have any recourse to the general credit of any other consolidated entities, nor to the Company as the primary beneficiary.
The inclusion of the assets and liabilities of VIEs in which the Company is deemed the primary beneficiary has no economic effect on the Company. The Company's exposure to the obligations of VIEs is generally limited to its investment in these entities. The Company is not obligated to provide, nor has it provided, any financial support for any of these consolidated structures. As such, the risk associated with the Company's involvement in these VIEs is limited to the carrying value of its investment in the entity. As of December 31, 2013, the Company's maximum risk of loss was $98.8 million. The Company incurred $423 thousand in deferred financing fees which have been accelerated, as the loans that were transferred to the CMBS trust had unamortized costs associated with the secured funding agreements for which it will no longer receive the benefit. These accelerated deferred financing fees are included within interest expense in the Company's consolidated statements of operations. For the year ended December 31, 2013, the Company incurred interest expense of $972 thousand and is included within interest expense in the Company's consolidated statements of operations.
|
|||
18. ACQUISITION OF ACRE CAPITAL
On August 30, 2013, (the "Acquisition Date"), the Company completed its acquisition of all of the outstanding common units of ACRE Capital from the Sellers. For accounting purposes, the Acquisition was deemed to be effective on the close of business September 1, 2013, the Accounting Effective Date. Pursuant to the Purchase and Sale Agreement, dated as of May 14, 2013, by and among the Company and the Sellers, the Company paid approximately $53.4 million in cash, subject to adjustment, and issued 588,235 shares of its common stock in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933 resulting in total consideration paid of approximately $60.9 million. The transaction was accounted for as a business combination under FASB ASC 805, as discussed in Note 2.
Through ACRE Capital, the Company operates a mortgage banking business with a focus on multifamily lending. ACRE Capital primarily originates, sells and services multifamily and other senior living-related CRE loans under programs offered by Fannie Mae and HUD. ACRE Capital is approved as a DUS lender to Fannie Mae, a Multifamily Accelerated Processing ("MAP") and Section 232 LEAN lender for HUD, and a Ginnie Mae issuer.
The Company provisionally allocated the purchase price to the assets acquired and liabilities assumed based on their estimated Accounting Effective Date fair values. The purchase price allocation may change as additional information becomes available and additional analyses are completed. A change to the provisional amounts recorded for assets acquired and liabilities assumed during the measurement period affects the amount of the purchase price allocated to gain on acquisition. Such changes to the purchase price allocation during the measurement period are recorded as retrospective adjustments to the consolidated financial statements. During the measurement period, the Company identified adjustments to certain of the provisional amounts recorded that had the net effect of decreasing gain on acquisition by $747 thousand.
The following table summarizes the purchase price allocation recorded as of the Acquisition Date, including retrospective adjustments during the measurement period ($ in thousands):
|
Assets acquired: |
||||
|
Cash |
$ | 1,157 | ||
|
Restricted cash |
15,586 | |||
|
Loans held for sale |
22,154 | |||
|
Mortgage servicing rights |
61,236 | |||
|
Intangible assets |
5,000 | |||
|
Derivative assets |
182 | |||
|
Risk-sharing indemnification |
3,703 | |||
|
Other assets |
4,748 | |||
| | | | | |
|
Total assets acquired |
$ | 113,766 | ||
|
Liabilities assumed: |
||||
|
Warehouse lines of credit |
$ | 14,472 | ||
|
Allowance for loss sharing |
18,386 | |||
|
Accounts payable and accrued expenses |
4,748 | |||
|
Other liabilities |
10,795 | (1) | ||
| | | | | |
|
Total liabilitites assumed |
$ | 48,401 | ||
| | | | | |
|
Net Assets Acquired |
$ | 65,365 | ||
| | | | | |
| | | | | |
The measurement period adjustments included in the purchase price allocation above were recorded based on information obtained subsequent to the Acquisition Date that related to information that existed as of the Acquisition Date.
The Sellers provided the Company with a minimum working capital balance prior to the Accounting Effective Date. To the extent actual working capital exceeded or fell below the minimum requirement, the Company would either pay or receive funds from the Sellers. Final purchase price allocations are subject to further adjustments under the terms of the Purchase and Sale Agreement, including among other provisions, adjustments to working capital.
Gain on acquisition represents the excess of the fair value of the net assets acquired over the fair value of the consideration transferred. This determination of the gain on acquisition is as follows ($ in thousands):
|
Fair value of net assets acquired |
$ | 65,365 | ||
|
Fair value of consideration transferred |
(60,927 | ) | ||
| | | | | |
|
Gain on acquisition |
$ | 4,438 | ||
| | | | | |
| | | | | |
The gain on acquisition of $4.4 million is included within gain on acquisition in the Company's consolidated statements of operations for the year ended December 31, 2013. The Company believes it was able to acquire ACRE Capital at a discount to its fair value as, among other factors, the sale of ACRE Capital was not broadly marketed, ACRE Capital had undergone recent changes in senior management and the purchase price consideration for ACRE Capital, in part, was in the form of a fixed number of common shares of the Company.
Since the Accounting Effective Date, ACRE Capital has recognized revenues of $9.8 million and net income of $1.4 million which are reflected in the Company's consolidated statements of operations. The Company incurred acquisition-related costs such as advisory, legal, and due diligence services of approximately $4.1 million, during the year ended December 31, 2013 which are included within acquisition and investment pursuit costs in the Company's consolidated statements of operations.
The unaudited pro-forma revenue and net income of the combined entity for the years ended December 31, 2013 and 2012, assuming the business combination was consummated on January 1, 2012, are as follows ($ in thousands):
| |
For the years ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
|
Revenues |
$ | 56,050 | $ | 36,253 | |||
|
Net income |
11,414 | 6,477 | |||||
|
|||
19. SEGMENTS
The Company's reportable segments reflect the significant components of the Company's operations that are evaluated separately by the Company's chief operating decision maker and have discrete financial information available. The Company organizes its segments based primarily upon the nature of the underlying products and services. The Company's Co-Chief Executive Officers and management review certain financial information, including segmented internal profit and loss statements, which are presented below on that basis. The amounts in the reportable segments included in the tables below are in conformity with GAAP and the Company's significant accounting policies as described in Note 2.
Prior to the Acquisition, the Company operated in one reportable business segment. As a result of the Acquisition, the Company now operates in two reportable business segments:
The Company is primarily focused on two business segments involving CRE loans. First, in its principal lending business, the Company originates, invests in, manages and services middle-market CRE loans and other CRE-related investments for its own account. These loans are generally held for investment and are secured, directly or indirectly, by office, multifamily, retail, industrial and other commercial real estate properties, or by ownership interests therein. Second, in its mortgage banking business, conducted through a recently acquired subsidiary, ACRE Capital, the Company originates, sells and retains servicing of primarily multifamily and other senior living-related CRE loans. These loans are generally held for sale.
Allocated costs between the segments include management fees and general and administrative expenses payable to the Company's Manager, both of which represent shared costs. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. As the Company integrates ACRE Capital into its existing business, the Company expects future allocations to include costs relating to services performed by one segment on behalf of other segments.
The table below presents the Company's total assets as of December 31, 2013 by business segment ($ in thousands):
| |
Principal Lending |
Mortgage Banking |
Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Cash and cash equivalents |
$ | 14,444 | $ | 5,656 | $ | 20,100 | ||||
|
Restricted cash |
3,036 | 13,918 | 16,954 | |||||||
|
Loans held for investment |
958,495 | — | 958,495 | |||||||
|
Loans held for sale, at fair value |
84,769 | 4,464 | 89,233 | |||||||
|
Mortgage servicing rights |
— | 59,640 | 59,640 | |||||||
|
Other assets |
16,632 | 15,861 | 32,493 | |||||||
| | | | | | | | | | | |
|
Total Assets |
$ | 1,077,376 | $ | 99,539 | $ | 1,176,915 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The table below presents the Company's consolidated net income for the year ended December 31, 2013 by business segment ($ in thousands):
| |
Principal Lending |
Mortgage Banking |
Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Net interest margin: |
||||||||||
|
Interest income from loans held for investment |
$ | 37,600 | $ | — | $ | 37,600 | ||||
|
Interest expense |
(8,774 | ) | — | $ | (8,774 | ) | ||||
| | | | | | | | | | | |
|
Net interest margin |
28,826 | — | 28,826 | |||||||
| | | | | | | | | | | |
|
Mortgage banking revenue: |
||||||||||
|
Servicing fees, net |
— | 5,802 | 5,802 | |||||||
|
Gains from mortgage banking activities |
— | 5,328 | 5,328 | |||||||
|
Provision for loss sharing |
— | (6 | ) | (6 | ) | |||||
|
Change in fair value of mortgage servicing rights |
— | (2,697 | ) | (2,697 | ) | |||||
| | | | | | | | | | | |
|
Mortgage banking revenue |
— | 8,427 | 8,427 | |||||||
| | | | | | | | | | | |
|
Other income |
— | 1,333 | 1,333 | |||||||
| | | | | | | | | | | |
|
Total revenue |
28,826 | 9,760 | 38,586 | |||||||
| | | | | | | | | | | |
|
Expenses: |
||||||||||
|
Other interest expense |
6,199 | 357 | (1) | 6,556 | ||||||
|
Management fees to affiliate |
4,125 | 116 | 4,241 | |||||||
|
Professional fees |
2,447 | 477 | 2,924 | |||||||
|
Compensation and benefits |
— | 5,456 | 5,456 | |||||||
|
Acquisition and investment pursuit costs |
4,079 | — | 4,079 | |||||||
|
General and administrative expenses |
2,430 | 1,525 | 3,955 | |||||||
|
General and administrative expenses reimbursed to affiliate |
3,394 | 216 | 3,610 | |||||||
| | | | | | | | | | | |
|
Total expenses |
22,674 | 8,147 | 30,821 | |||||||
| | | | | | | | | | | |
|
Changes in fair value of derivatives |
1,739 | — | 1,739 | |||||||
| | | | | | | | | | | |
|
Income from operations before gain on acquisition and income taxes |
7,891 | 1,613 | 9,504 | |||||||
|
Gain on acquisition |
4,438 | — | 4,438 | |||||||
| | | | | | | | | | | |
|
Income before income taxes |
12,329 | 1,613 | 13,942 | |||||||
| | | | | | | | | | | |
|
Income tax expense |
— | 176 | 176 | |||||||
| | | | | | | | | | | |
|
Net income |
$ | 12,329 | $ | 1,437 | $ | 13,766 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Revenues from three of the Company's customers in the principal lending segment represented approximately $15.0 million of the Company's consolidated revenues for the year ended December 31, 2013. No revenues from a single customer represented 10% or more of the Company's consolidated revenues for the year ended December 31, 2012.
|
|||
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly financial results for each quarter of the years ended December 31, 2013, 2012 and the period from September 1, 2011 (Inception) to December 31, 2011 (amounts in thousands, except per share data):
| |
For the Three-Month Period Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
March 31 | June 30 | September 30 | December 31 | |||||||||
|
2013: |
|||||||||||||
|
Net interest margin |
$ | 5,326 | $ | 6,207 | $ | 8,700 | $ | 8,593 | |||||
|
Mortgage banking revenue |
$ | — | $ | — | $ | 3,861 | (1) | $ | 4,566 | ||||
|
Net income |
$ | 327 | $ | 3,265 | $ | 6,884 | (2) | $ | 3,290 | ||||
|
Net income allocable to common stockholder |
$ | 327 | $ | 3,265 | $ | 6,884 | (2) | $ | 3,290 | ||||
|
Net income per common share—Basic and diluted |
$ | 0.04 | $ | 0.32 | $ | 0.25 | (2) | $ | 0.12 | ||||
|
2012: |
|||||||||||||
|
Net interest margin |
$ | 610 | $ | 1,206 | $ | 1,491 | $ | 3,629 | |||||
|
Net income (loss) |
$ | 508 | $ | (175 | ) | $ | (554 | ) | $ | 1,081 | |||
|
Net income (loss) allocable to common stockholder |
$ | (116 | ) | $ | (225 | ) | $ | (554 | ) | $ | 1,081 | ||
|
Net income per common share—Basic and diluted |
$ | (0.11 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | 0.12 | ||
|
|||
21. SUBSEQUENT EVENTS
The Company's management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the year ended December 31, 2013, except as disclosed below.
On January 22, 2014, the Company originated a $11.7 million transitional first mortgage loan on an apartment complex located in Ft. Myers, Florida. At closing, the outstanding principal balance was approximately $9.7 million. The loan has an interest rate of LIBOR + 3.80% subject to a 0.25% LIBOR floor and a term of three years.
On January 22, 2014, the Company originated a $15.0 million transitional first mortgage loan on an apartment complex located in Ft. Myers, Florida. At closing, the outstanding principal balance was approximately $12.4 million. The loan has an interest rate of LIBOR + 3.80% subject to a 0.25% LIBOR floor and a term of three years.
On January 31, 2014, the agreement governing the BAML Line of Credit was amended to extend the maturity date to April 1, 2014.
On February 20, 2014, the Company originated a $36.8 million transitional first mortgage loan on an apartment complex located in Orlando, Florida. At closing, the outstanding principal balance was approximately $33.2 million. The loan has an interest rate of LIBOR + 3.75% subject to a 0.25% LIBOR floor and a term of three years.
On March 12, 2014, the Company, through a wholly owned subsidiary, closed a $50 million secured revolving funding facility with City National Bank (the "CNB Facility"). The CNB Facility will be used to finance new investments and for other working capital and general corporate needs. Draws from the CNB Facility may be used as capital to allow us to obtain additional leverage under the Company's other funding facilities. The interest rate on the CNB Facility is LIBOR plus 3.0% or a base rate plus 1.25%, in each case, subject to a 3.0% all-in rate floor. The initial maturity date is March 11, 2016 subject to one 12 month extension option if certain conditions are met.
On March 14, 2014, the Company originated a $17.0 million transitional first mortgage loan on an apartment complex located in Charlotte, North Carolina. At closing, the outstanding principal balance was approximately $14.3 million. The loan has an interest rate of LIBOR + 4.00% subject to a 0.25% LIBOR floor and a term of three years.
On March 17, 2014, the Company declared a cash dividend of $0.25 per common share for the first quarter of 2014. The first quarter 2014 dividend is payable on April 16, 2014 to common stockholders of record as of March 31, 2014.
|
|||
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles ("GAAP") and include the accounts of the Company, the consolidated variable interest entity ("VIE") for which the Company controls and is the primary beneficiary, and its wholly owned subsidiaries, including the results of operations of ACRE Capital from September 1, 2013 (the "Accounting Effective Date") to December 31, 2013. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the Company's results of operations and financial condition as of and for the periods presented. All significant intercompany balances and transactions have been eliminated.
Variable Interest Entities
The Company evaluates all of its interests in VIEs for consolidation. When the Company's interests are determined to be variable interests, the Company assesses whether it is deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. FASB ASC Topic 810, Consolidation ("ASC 810"), defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. The Company considers its variable interests as well as any variable interests of its related parties in making this determination. Where both of these factors are present, the Company is deemed to be the primary beneficiary and it consolidates the VIE. Where either one of these factors is not present, the Company is not the primary beneficiary and it does not consolidate the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, the Company considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE's economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE's capital structure; and the reasons why the interests are held by the Company.
The Company issued a commercial mortgage backed security ("CMBS") which is a rated security issued by a CMBS trust and it retained the subordinated portion of the trust. The CMBS trust is treated for U.S. federal income tax purposes as a real estate mortgage investment conduit. A related party of the Company has the role of special servicer. In the related party's role as special servicer, the Company has the power to direct activities of the trust during the loan workout process on defaulted and delinquent loans, as permitted by the underlying contractual agreements. In exchange for these services, the related party of the Company receives a fee. These rights give the Company the ability to direct activities that could significantly impact the CMBS trust's economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove the special servicer, the Company does not have the power to direct activities that most significantly impact the CMBS trust's economic performance. The Company evaluated its positions in such investments for consolidation.
For VIEs in which the Company is determined to be the primary beneficiary, all of the underlying assets, liabilities, equity, revenue and expenses of the structures are consolidated into the Company's consolidated financial statements.
The Company performs an ongoing reassessment of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding our involvement with a VIE causes the Company's consolidation conclusion regarding the VIE to change.
Segment Reporting
Prior to the Acquisition, the Company focused primarily on originating, investing in and managing middle-market CRE loans and other CRE-related investments and operated in one reportable business segment. As a result of the Acquisition, the Company now has two reportable business segments: principal lending, and through ACRE Capital, mortgage banking of multifamily CRE loans. ACRE Capital is included in the consolidated financial statements for the period from September 1, 2013 to December 31, 2013. See Note 19 for further discussion of the Company's reportable business segments.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. Deferred financing costs and accrued interest receivable have been reclassified into other assets in the consolidated balance sheets. Derivative liability and accounts payable and accrued expenses have been reclassified into other liabilities in the consolidated balance sheets. Interest receivable and refundable deposits have been reclassified into other assets in the consolidated statements of cash flows. The unrealized loss on the 2015 Convertible Notes has been reclassified into changes in fair value of derivatives in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include funds on deposit with financial institutions, including demand deposits with financial institutions.
Restricted Cash
Restricted cash includes escrow deposits for taxes, insurance, leasing outlays, capital expenditures, tenant security deposits and payments required under certain loan agreements. These escrow deposits are held on behalf of the respective borrowers and are offset by escrow liabilities included in "Other liabilities" in the consolidated balance sheets. As of December 31, 2013, ACRE Capital's restricted cash consisted of reserves that are a requirement of the Delegated Underwriting and Servicing ("DUS") program and borrower deposits, which represent funds that were collected for the processing of the borrowers loan applications and loan commitments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, loans held for investment, mortgage servicing rights ("MSR"), loans held for sale, interest receivable, derivative financial instruments and allowance for loss sharing. The Company places its cash and cash equivalents with financial institutions and, at times, cash held may exceed the FDIC-insured limit. The Company has exposure to credit risk on its loans held for investment and through its subsidiary ACRE Capital, the Company has exposure on credit risk on loans held for sale and the servicing portfolio whereby ACRE Capital shares in the risk of loss (see Note 7). The Company's Manager will seek to manage credit risk by performing credit fundamental analysis of potential collateral assets.
Loans Held for Investment
The Company originates CRE debt and related instruments generally to be held for investment and to maturity. Loans that are held for investment are carried at cost, net of unamortized loan fees and origination costs, unless the loans are deemed impaired.
Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, the Company will record an allowance to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan's contractual effective rate.
Each loan classified as held for investment is evaluated for impairment on a periodic basis. Loans are collateralized by real estate and as a result, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower could impact the expected amounts received and as a result are regularly evaluated. The Company monitors performance of its investment portfolio under the following methodology: (1) borrower review, which analyzes the borrower's ability to execute on its original business plan, reviews its financial condition, assesses pending litigation and considers its general level of responsiveness and cooperation; (2) economic review, which considers underlying collateral, (i.e. leasing performance, unit sales and cash flow of the collateral and its ability to cover debt service as well as the residual loan balance at maturity); (3) property review, which considers current environmental risks, changes in insurance costs or coverage, current site visibility, capital expenditures and market perception; and (4) market review, which analyzes the collateral from a supply and demand perspective of similar property types, as well as from a capital markets perspective. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, and the borrower's exit plan, among other factors.
In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of December 31, 2013, 2012 and for the period from September 1, 2011 (Inception) to December 31, 2011, there are no impairments on the Company's loan portfolio.
Loans held for sale
Through its subsidiaries, ACRE Capital and ACRC TRS, the Company originates multifamily mortgage loans, which are recorded at fair value. The holding period for loans made by ACRE Capital is approximately 30 days. The carrying value of the mortgage loans sold is reduced by the value allocated to the associated retained MSRs based on relative fair value at the time of the sale. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the adjusted value of the related mortgage loans sold.
Although the Company generally holds its target investments as long-term investments within its principal lending business, the Company may occasionally classify some of its investments as held for sale. Investments held for sale will be carried at fair value within loans held for sale, at fair value in the Company's consolidated balance sheets, with changes in fair value recorded through earnings. The fees received are deferred and recognized as part of the gain or loss on sale. As of December 31, 2013, the Company had one loan held for sale in its principal lending business of $84.8 million, net of deferred fees, included in the $89.2 million of loans held for sale in the consolidated balance sheets.
Mortgage Servicing Rights
When a mortgage loan is sold, ACRE Capital retains the right to service the loan and recognizes the MSR at fair value. The initial fair value represents expected net cash flows from servicing, as well as borrower prepayment penalties, interest earnings on escrows and interim cash balances, delinquency rates, late charges along with ancillary fees that are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the underlying loan. After initial recognition, changes in the MSR fair value are included within change in fair value of mortgage servicing rights in the Company's consolidated statements of operations for the period in which the change occurs.
Intangible Assets
Intangible assets consist of ACRE Capital's licenses permitting it to participate in programs offered by the Federal National Mortgage Association ("Fannie Mae") and the Government National Mortgage Association ("Ginnie Mae") and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, "HUD"). These licenses are intangible assets with indefinite lives and were acquired in connection with the Acquisition. As of the date of the Acquisition, these assets are recorded at fair value. The Company evaluates identified intangibles for impairment annually or if other events or circumstances indicate that the carrying value may be impaired.
Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the terms of the respective debt instrument.
Derivative Financial Instruments
The Company does not hold or issue derivative instruments for trading purposes. The Company recognizes derivatives on its balance sheet, measures them at their estimated fair value and recognizes changes in their estimated fair value in the Company's results of operations for the period in which the change occurs.
On December 19, 2012, the Company issued $69.0 million aggregate principal amount of unsecured 7.000% Convertible Senior Notes due 2015 (the "2015 Convertible Notes"). The conversion features of the 2015 Convertible Notes were deemed to be an embedded derivative under FASB ASC Topic 815, Derivatives and Hedging ("ASC 815"). In accordance with ASC 815, the Company was required to bifurcate the embedded derivative related to the conversion features of the 2015 Convertible Notes. Prior to June 26, 2013, the Company recognized the embedded derivative as a liability on its balance sheet, measured at its estimated fair value and recognized changes in its estimated fair value within changes in fair value of derivatives in the Company's consolidated statements of operations for the period in which the change occurs. See Note 6 for information on the derivative liability reclassification.
Through its subsidiary, ACRE Capital, the Company enters into loan commitments with borrowers on loan originations whereby the interest rate on the prospective loan is determined prior to funding. In general, ACRE Capital simultaneously enters into forward sale commitments with investors in order to hedge against the interest rate exposure on loan commitments. The forward sale commitment with the investor locks in an interest rate and price for the sale of the loan. The terms of the loan commitment with the borrower and the forward sale commitment with the investor are matched with the objective of hedging interest rate risk. Loan commitments and forward sale commitments are considered undesignated derivative instruments. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value, with changes in fair value recorded in earnings.
Fair Value Measurements
The Company determines the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The financial instruments recorded at fair value on a recurring basis in the Company's consolidated financial statements are derivative financial instruments, MSRs and loans held for sale. The Company has not elected the fair value option for certain other financial instruments, including loans held for investment, secured funding agreements and other debt instruments. Such financial instruments are carried at cost. Fair value is separately disclosed (see Note 14). The three levels of inputs that may be used to measure fair value are as follows:
Level I—Quoted prices in active markets for identical assets or liabilities.
Level II—Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III—Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
Allowance for loss sharing
When a loan is sold under the Fannie Mae DUS program, ACRE Capital undertakes an obligation to partially guarantee the performance of the loan. The date ACRE Capital commits to make a loan to a borrower, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized. Subsequent to the initial commitment date, the Company monitors the performance of each loan for events or circumstances which may signal a liability to be recognized if there is a probable and estimable loss. The initial fair value of the guarantee is estimated by examining historical loss share experienced in the ACRE Capital portfolio since inception. The initial fair value of the guarantee is included within provision for loss sharing in the Company's consolidated statements of operations. These historical loss shares serve as a basis to derive a loss share rate which is then applied to the current ACRE Capital portfolio (net of specifically identified impaired loans that are subject to a separate loss share reserve analysis).
Servicing fee payable
ACRE Capital provides additional payments to certain personnel by providing them with a percentage of the servicing fee revenue that is earned by ACRE Capital, which is initially recorded as a liability when the MSR is obtained and expensed as the servicing fee is earned over the life of the related mortgage loan ("servicing fee payable"). ACRE Capital incurs an expense over the life of each loan as long as the related loan is performing. If a particular loan is not performing, the recipient will not receive the additional compensation on that loan, and if a loss sharing event is triggered, the recipient will not receive a portion of the additional compensation on other loans. The servicing fee payable is included within other liabilities in the consolidated balance sheets and the related expense is included within servicing fee revenue on a net basis in the consolidated statements of operations.
Revenue Recognition
Interest income from loans held for investment is accrued based on the outstanding principal amount and the contractual terms of each loan. For loans held for investment, origination fees, contractual exit fees and direct loan origination costs are also recognized in interest income from loans held for investment over the initial loan term as a yield adjustment using the effective interest method. Fees earned on loans held for sale are included within gains from mortgage banking activities below.
Servicing fees are earned for servicing mortgage loans, including all activities related to servicing the loans, and are recognized as services are provided over the life of the related mortgage loan. Also included in servicing fees are the fees earned on borrower prepayment penalties and interest earned on borrowers' escrow payments and interim cash balances, along with other ancillary fees.
Gains from mortgage banking activities includes the initial fair value of MSRs, loan origination fees, gain on the sale of loans, interest income on loans held for sale and changes to the fair value of derivative financial instruments, attributable to the loan commitments and forward sale commitments. The initial fair value of MSRs, loan origination fees, gain on the sale of loans, and certain direct loan origination costs for loans held for sale are recognized when ACRE Capital commits to make a loan to a borrower. When the Company enters into a sale agreement and transfers the mortgage loan to the seller, the Company recognizes a MSR asset equal to the present value of the expected net cash flows associated with the servicing of loans sold.
Stock-Based Compensation
The Company recognizes the cost of stock-based compensation, which is included within general and administrative expenses in the consolidated statements of operations. The fair value of the time vested restricted stock or restricted stock units granted is recorded to expense on a straight-line basis over the vesting period for the award, with an offsetting increase in stockholders' equity. For grants to directors, officers and employees, the fair value is determined based upon the market price of the stock on the grant date.
Underwriting Commissions and Offering Costs
Underwriting commissions and offering costs incurred in connection with common stock offerings are reflected as a reduction of additional paid-in capital. Costs incurred that are not directly associated with the completion of a common stock offering are expensed when incurred. Underwriting commissions that are the responsibility of and paid by a related party, such as the Company's Manager, are reflected as a contribution of additional paid-in capital from a sponsor in the consolidated financial statements.
Income Taxes
The Company has elected and qualified for taxation as a REIT commencing with its taxable year ended December 31, 2012. As a result of the Company's REIT qualification and its distribution policy, the Company does not generally pay U.S. federal corporate level income taxes. Many of the REIT requirements, however, are highly technical and complex. To continue to qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute annually at least 90% of the Company's REIT taxable income to the Company's stockholders. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company's four subsequent taxable years. Even though the Company currently qualifies for taxation as a REIT, the Company may be subject to certain U.S. federal, state, local and foreign taxes on the Company's income and property and to U.S. federal income and excise taxes on the Company's undistributed REIT taxable income.
The Company currently owns 100% of the equity of TRS Holdings and ACRC TRS, each of which is a TRS. A TRS is subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRS that are not conducted on an arm's-length basis. For financial reporting purposes, a provision for current and deferred taxes has been established for the portion of the Company's GAAP consolidated earnings recognized by TRS Holdings and ACRC TRS.
FASB ASC Topic 740, Income Taxes, ("ASC 740") prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. As of December 31, 2013 and 2012, based on the Company's evaluation, there is no reserve for any uncertain income tax positions. TRS Holdings and ACRC TRS recognize interest and penalties related to unrecognized tax benefits within income tax expense in the consolidated statements of operations. Accrued interest and penalties are included within other liabilities in the consolidated balance sheets.
Comprehensive Income
For the years ended December 31, 2013 and 2012 and the period from September 1, 2011 (inception) to December 31, 2011, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.
Earnings per Share
The Company calculates basic earnings (loss) per share by dividing net income (loss) allocable to common stockholders for the period by the weighted-average shares of common stock outstanding for that period after consideration of the earnings (loss) allocated to the Company's restricted stock and restricted stock units, which are participating securities as defined in GAAP. Diluted earnings (loss) per share takes into effect any dilutive instruments, such as restricted stock, restricted stock units and convertible debt, except when doing so would be anti-dilutive. With respect to the 2015 Convertible Notes (as defined above), the Company has the ability and intention to settle the principal in cash and to settle any amount above par in shares of the Company's common stock if the conversion options were exercised. As such, the Company is applying the treasury stock method when determining the dilutive impact on earnings per share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The Company recognizes identifiable assets acquired and liabilities (both specific and contingent) assumed at their fair values at the acquisition date. Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. The excess of the assets acquired, identifiable intangible assets and liabilities assumed over the purchase price is recognized as a gain on acquisition. During the measurement period, the Company records adjustments to the assets acquired and liabilities assumed with corresponding adjustments to the gain on acquisition. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded through earnings.
|
|||
| |
December 31, 2013 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$ in thousands |
Carrying Amount(1) |
Outstanding Principal(1) |
Weighted Average Interest Rate |
Weighted Average Unleveraged Effective Yield |
Weighted Average Remaining Life (Years) |
|||||||||||
|
Senior mortgage loans |
$ | 867,578 | $ | 873,781 | 5.1 | % | 5.6 | % | 2.4 | |||||||
|
Subordinated and mezzanine loans |
90,917 | 91,655 | 9.8 | % | 10.2 | % | 3.6 | |||||||||
| | | | | | | | | | | | | | | | | |
|
Total |
$ | 958,495 | $ | 965,436 | 5.5 | % | 6.0 | % | 2.5 | |||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| |
December 31, 2012 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$ in thousands |
Carrying Amount(1) |
Outstanding Principal(1) |
Weighted Average Interest Rate |
Weighted Average Unleveraged Effective Yield |
Weighted Average Remaining Life (Years) |
|||||||||||
|
Senior mortgage loans |
$ | 312,883 | $ | 315,750 | 5.9 | % | 6.8 | % | 2.8 | |||||||
|
Subordinated and mezzanine loans |
40,617 | 41,000 | 9.9 | % | 11.4 | % | 2.4 | |||||||||
| | | | | | | | | | | | | | | | | |
|
Total |
$ | 353,500 | $ | 356,750 | 6.4 | % | 7.4 | % | 2.8 | |||||||
| | | | | | | | | | | | | | | | | |
A more detailed listing of the Company's current investment portfolio, based on information available as of December 31, 2013 is as follows:
(amounts in millions, except percentages)
|
Loan Type |
Location | Total Commitment (at closing) |
Outstanding Principal(1) |
Carrying Amount(1) |
Interest Rate |
LIBOR Floor |
Unleveraged Effective Yield(2) |
Maturity Date(3) |
Payment Terms(4) |
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Transitional Senior Mortgage Loans: |
|||||||||||||||||||||||||||
|
Retail |
Chicago, IL | 75.9 | $ | 70.0 | $ | 69.3 | L+4.25% | 0.3 | % | 4.9 | % | Aug 2017 | I/O | ||||||||||||||
|
Office |
Orange County, CA | 75.0 | 75.0 | 74.3 | L+3.75% | 0.2 | % | 4.2 | % | Aug 2017 | I/O | ||||||||||||||||
|
Apartment |
Brandon, FL | 49.6 | 47.8 | 47.5 | L+4.80% | 0.5 | % | 5.9 | % | Jan 2016 | I/O | ||||||||||||||||
|
Apartment |
McKinney, TX | 45.3 | 40.3 | 40.0 | L+3.75% | — | 4.5 | % | Jul 2016 | I/O | |||||||||||||||||
|
Office |
Dallas, TX | 105.8 | 44.2 | 43.1 | L+5.00% | 0.3 | % | 6.0 | % | Jan 2017 | I/O | ||||||||||||||||
|
Office |
Austin, TX | 38.0 | 33.0 | 32.8 | L+5.75%- L+5.25% |
(5) |
1.0 | % | 7.6 | % | Mar 2015 | I/O | |||||||||||||||
|
Industrial |
Kansas City, MO | 38.0 | 38.0 | 37.6 | L+4.30% | 0.3 | % | 5.1 | % | Jan 2017 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 38.4 | (6) | 37.4 | 37.1 | L+5.00% | 0.8 | % | 6.1 | % | Oct 2017 | I/O | |||||||||||||||
|
Apartment |
Houston, TX | 35.5 | 32.9 | 32.6 | L+3.75% | — | 4.5 | % | Jul 2016 | I/O | |||||||||||||||||
|
Office |
Cincinnati, OH | 35.5 | 28.5 | 28.4 | L+5.35%- L+5.00% |
(7) |
0.3 | % | 6.0 | % | Nov 2015 | I/O | |||||||||||||||
|
Apartment |
New York, NY | 26.3 | 25.5 | 25.4 | L+5.75%- L+5.00% |
(8) |
0.2 | % | 6.5 | % | Dec 2015 | I/O | |||||||||||||||
|
Office |
Overland Park, KS | 25.5 | 25.4 | 25.2 | L+5.00% | 0.3 | % | 5.8 | % | Mar 2016 | I/O | ||||||||||||||||
|
Apartment |
Richmond, TX | 28.2 | 25.1 | 24.9 | L+3.65% | — | 4.4 | % | Jan 2017 | I/O | |||||||||||||||||
|
Apartment |
Fort Worth, TX | 25.4 | 23.0 | 22.9 | L+3.65% | — | 4.4 | % | Jan 2017 | I/O | |||||||||||||||||
|
Apartment |
Avondale, AZ | 22.1 | 21.4 | 21.3 | L+4.25% | 1.0 | % | 5.9 | % | Sep 2015 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 21.9 | 20.3 | 20.1 | L+5.75%- L+5.00% |
(8) |
0.2 | % | 6.5 | % | Dec 2015 | I/O | |||||||||||||||
|
Apartment |
New York, NY | 21.8 | 20.1 | 20.0 | L+5.75%- L+5.00% |
(8) |
0.2 | % | 6.5 | % | Dec 2015 | I/O | |||||||||||||||
|
Flex/Warehouse |
Springfield, VA | 19.7 | 19.0 | 18.8 | L+5.25% | 0.3 | % | 6.4 | % | Dec 2015 | I/O | ||||||||||||||||
|
Office |
San Diego, CA | 17.1 | 14.9 | 14.7 | L+3.75% | 0.3 | % | 4.5 | % | Jul 2016 | I/O | ||||||||||||||||
|
Office |
Irvine, CA | 15.2 | 14.7 | 14.6 | L+4.50% | 0.3 | % | 5.3 | % | Jul 2016 | I/O | ||||||||||||||||
|
Office |
Denver, CO | 11.0 | 10.5 | 10.5 | L+5.50% | 1.0 | % | 7.8 | % | Jan 2015 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 16.5 | 14.3 | 14.1 | L+4.50% | 0.2 | % | 5.2 | % | Dec 2016 | I/O | ||||||||||||||||
|
Apartment |
Decatur, GA | 23.5 | (9) | 21.9 | 21.9 | L+4.95% | (9) | 0.5 | % | 5.7 | % | Apr 2016 | I/O | ||||||||||||||
|
Apartment |
Alpharetta, GA | 38.6 | (9) | 36.1 | 36.1 | L+4.95% | (9) | 0.5 | % | 5.7 | % | Apr 2016 | I/O | ||||||||||||||
|
Apartment |
Chamblee, GA | 46.0 | (9) | 42.6 | 42.6 | L+4.95% | (9) | 0.5 | % | 5.7 | % | Apr 2016 | I/O | ||||||||||||||
|
Office |
Fort Lauderdale, FL | 37.0 | (10) | 30.3 | 30.3 | L+5.25% | (10) | 0.8 | % | 6.3 | % | Feb 2015 | I/O | ||||||||||||||
|
Stretch Senior Mortgage Loans: |
|||||||||||||||||||||||||||
|
Office |
Miami, FL | 47.0 | 47.0 | (11) | 47.0 | L+5.25% | 1.0 | % | 6.5 | % | Apr 2014 | I/O | |||||||||||||||
|
Office |
Mountain View, CA | 15.0 | 14.5 | 14.4 | L+4.75% | 0.5 | % | 5.7 | % | Feb 2016 | I/O | ||||||||||||||||
|
Subordinated Debt Investments: |
|||||||||||||||||||||||||||
|
Office |
Chicago, IL | 37.0 | 37.0 | 36.7 | 8.75% | — | 9.1 | % | Aug 2016 | I/O | |||||||||||||||||
|
Apartment |
Long Island, NY | 15.3 | 7.1 | 6.9 | 11.50% | (12) | — | 11.9 | % | Nov 2016 | I/O | ||||||||||||||||
|
Apartment |
New York, NY | 31.3 | 28.4 | 28.3 | L+9.90% | (13) | 0.2 | % | 10.4 | % | Jan 2019 | I/O | |||||||||||||||
|
Office |
Atlanta, GA | 14.3 | 14.3 | 14.3 | 10.50% | (14) | — | 11.0 | % | Aug 2017 | I/O | ||||||||||||||||
|
Apartment |
Houston, TX | 4.9 | 4.9 | 4.8 | L+11.00% | (15) | — | 11.6 | % | Oct 2016 | I/O | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Total/Average |
$ | 1,097.6 | $ | 965.4 | $ | 958.5 | 6.0 | % | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
A summary of the difference between outstanding principal on loans originated and held for sale is as follows (in thousands):
| |
As of December 31, 2013 | |||
|---|---|---|---|---|
|
Loans held for investment |
$ | 965,436 | ||
|
Loans held for sale |
85,238 | (1) | ||
| | | | | |
|
Total outstanding principal |
$ | 1,050,674 | ||
| | | | | |
| | | | | |
For the years ended December 31, 2013 and 2012, the activity in the Company's loan portfolio was as follows ($ in thousands):
|
Balance as December 31, 2011 |
$ | 4,945 | ||
|
Initial funding |
347,779 | |||
|
Receipt of origination fee, net of costs |
(3,540 | ) | ||
|
Additional funding |
4,096 | |||
|
Amortizing payments |
(180 | ) | ||
|
Origination fee accretion |
400 | |||
| | | | | |
|
Balance at December 31, 2012 |
$ | 353,500 | ||
| | | | | |
| | | | | |
|
Initial funding |
640,384 | |||
|
Receipt of origination fee, net of costs |
(6,058 | ) | ||
|
Additional funding |
35,223 | |||
|
Amortizing payments |
(150 | ) | ||
|
Origination fee accretion |
2,366 | |||
|
Loan payoffs(1) |
(66,770 | ) | ||
| | | | | |
|
Balance at December 31, 2013 |
$ | 958,495 | ||
| | | | | |
| | | | | |
|
|||
Activity related to MSRs for the year ended December 31, 2013 was as follows (in thousands):
| |
For the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
MSRs acquired in the ACRE Capital acquisition (See Note 18) |
$ | 61,236 | ||
|
Additions, following sale of loan |
2,385 | |||
|
Changes in fair value |
(2,697 | ) | ||
|
Prepayments and write-offs |
(1,284 | ) | ||
| | | | | |
|
Ending balance, as of December 31, 2013 |
$ | 59,640 | ||
| | | | | |
| | | | | |
|
|||
| |
As of December 31, 2013 | As of December 31, 2012 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$ in thousands |
Outstanding Balances |
Total Commitment |
Outstanding Balances |
Total Commitment |
|||||||||
|
Wells Fargo Facility |
$ | 166,934 | $ | 225,000 | $ | 98,196 | $ | 172,500 | |||||
|
Citibank Facility |
97,485 | 125,000 | 13,900 | 86,225 | |||||||||
|
Capital One Facility |
— | 100,000 | 32,160 | 50,000 | |||||||||
|
ASAP Line of Credit |
— | 105,000 | — | — | |||||||||
|
BAML Line of Credit |
— | 80,000 | — | — | |||||||||
| | | | | | | | | | | | | | |
|
Total |
$ | 264,419 | $ | 635,000 | $ | 144,256 | $ | 308,725 | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
At December 31, 2013, approximate principal maturities of the Company's Funding Agreements and the 2015 Convertible Notes are as follows ($ in thousands):
| |
Wells Fargo Facility |
Citibank Facility |
Capital One Facility |
2015 Convertible Notes |
ASAP Line of Credit |
BAML Line of Credit |
Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 |
$ | 166,934 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 166,934 | ||||||||
|
2015 |
— | — | — | 69,000 | — | — | 69,000 | |||||||||||||||
|
2016 |
— | — | — | — | — | — | — | |||||||||||||||
|
2017 |
— | 97,485 | — | — | — | — | 97,485 | |||||||||||||||
|
2018 |
— | — | — | — | — | — | — | |||||||||||||||
|
Thereafter |
— | — | — | — | — | — | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
|
|
$ | 166,934 | $ | 97,485 | $ | — | $ | 69,000 | $ | — | $ | — | $ | 333,419 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
|||
A summary of the Company's allowance for loss sharing for the year ended December 31, 2013 is as follows ($ in thousands):
| |
For the Year Ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Allowance for loss sharing assumed in the ACRE Capital acquisition (See Note 18) |
$ | 18,386 | ||
|
Current period provision for loss sharing |
6 | |||
|
Settlements/Writeoffs |
(1,912 | ) | ||
| | | | | |
|
Ending balance |
$ | 16,480 | ||
| | | | | |
| | | | | |
|
|||
| |
As of December 31, | ||||||
|---|---|---|---|---|---|---|---|
|
$ in thousands |
2013 | 2012 | |||||
|
Total commitments |
$ | 1,191,212 | $ | 405,695 | |||
|
Less: funded commitments |
(1,050,674 | ) | (356,930 | ) | |||
| | | | | | | | |
|
Total unfunded commitments |
$ | 140,538 | $ | 48,765 | |||
| | | | | | | | |
| | | | | | | | |
|
$ in thousands |
As of December 31, 2013 |
|||
|---|---|---|---|---|
|
Commitments to sell loans |
$ | 56,115 | ||
|
Commitments to fund loans |
$ | 51,794 | ||
The following table shows future minimum payments under the Company's operating leases for the year ended December 31, 2013 ($ in thousands):
| For the year ended December 31, 2013 |
||||
|---|---|---|---|---|
|
2014 |
$ | 453 | ||
|
2015 |
234 | |||
|
2016 |
200 | |||
|
2017 |
124 | |||
|
2018 |
89 | |||
|
Thereafter |
7 | |||
| | | | | |
|
Total |
$ | 1,107 | ||
| | | | | |
| | | | | |
|
|||
The table below presents the fair value of the Company's derivative financial instruments as well as their classification within the Company's consolidated balance sheets as of December 31, 2013 and 2012 ($ in thousands):
| |
As of December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||||||
| |
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | |||||||
|
Derivatives not designated as hedging instruments |
|||||||||||
|
Loan commitments |
Other assets | $ | 1,886 | — | $ | — | |||||
|
Forward sale commitments |
Other assets | 272 | — | — | |||||||
|
Right to acquire MSRs |
Other assets | 1,717 | — | — | |||||||
|
Forward sale commitments |
Other liabilities | (500 | ) | — | — | ||||||
|
Embedded conversion option |
Other liabilities | — | Other liabilities | (1,825 | ) | ||||||
| | | | | | | | | | | | |
|
Total derivatives not designated as hedging instruments |
$ | 3,375 | $ | (1,825 | ) | ||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
|||
The following table details the restricted stock grants awarded as of December 31, 2013.
|
Grant Date |
Vesting Start Date | Shares Granted | ||||
|---|---|---|---|---|---|---|
|
May 1, 2012 |
July 1, 2012 | 35,135 | ||||
|
June 18, 2012 |
July 1, 2012 | 7,027 | ||||
|
July 9, 2012 |
October 1, 2012 | 25,000 | ||||
|
June 26, 2013 |
July 1, 2013 | 22,526 | ||||
|
November 25, 2013 |
November 25, 2016 | 30,381 | ||||
| | | | | | | |
|
Total |
120,069 | |||||
| | | | | | | |
| | | | | | | |
| |
Restricted Stock Grants—Directors |
Restricted Stock Grants—Officer |
Restricted Stock Grants—Employees |
Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance as of December 31, 2012 |
31,080 | 23,436 | — | 54,516 | |||||||||
|
Granted |
22,526 | — | 30,381 | 52,907 | |||||||||
|
Vested |
(25,269 | ) | (6,250 | ) | — | (31,519 | ) | ||||||
|
Forfeited |
(2,917 | ) | — | — | (2,917 | ) | |||||||
| | | | | | | | | | | | | | |
|
Balance as of December 31, 2013 |
25,420 | 17,186 | 30,381 | 72,987 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| |
Restricted Stock Grants—Directors |
Restricted Stock Grants—Officer |
Restricted Stock Grants—Employees |
Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 |
18,768 | 6,250 | — | 25,018 | |||||||||
|
2015 |
5,818 | 6,250 | — | 12,068 | |||||||||
|
2016 |
834 | 4,686 | 30,381 | 35,901 | |||||||||
|
2017 |
— | — | — | — | |||||||||
|
2018 |
— | — | — | — | |||||||||
| | | | | | | | | | | | | | |
|
Total |
25,420 | 17,186 | 30,381 | 72,987 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The following table summarizes the restricted stock compensation expense included in general and administrative expenses, the total fair value of shares vested and the aggregate grant date fair value of the restricted stock granted to the directors, officers and employees of the Company for the years ended December 31, 2013 and 2012 (in thousands):
| |
For the Year Ended December 31, | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | ||||||||||||||||||||
| |
Restricted Stock Grants | Restricted Stock Grants | ||||||||||||||||||||
| |
Directors | Officers | Employees | Total | Directors | Officers | Total | |||||||||||||||
|
Compensation expense included in general and administrative expenses |
$ | 408 | $ | 106 | $ | 10 | $ | 524 | $ | 285 | $ | 53 | $ | 338 | ||||||||
|
Total fair value of shares vested(1) |
366 | 92 | — | 458 | 182 | 26 | 208 | |||||||||||||||
|
Weighted average grant date fair value |
289 | — | 398 | 756 | 423 | |||||||||||||||||
|
|||
| |
For the Years Ended December 31, |
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
For the period From September 1, 2011 (Inception) to December 31, 2011 |
|||||||||
|
$ in thousands (except share and per share data) |
2013 | 2012 | ||||||||
|
Net income (loss) attributable to common stockholders: |
$ | 13,766 | $ | 186 | $ | (163 | ) | |||
|
Divided by: |
||||||||||
|
Basic weighted average shares of common stock outstanding: |
18,989,500 | 6,532,706 | 19,052 | |||||||
|
Diluted weighted average shares of common stock outstanding: |
19,038,152 | 6,567,309 | 19,052 | |||||||
| | | | | | | | | | | |
|
Basic and diluted earnings (loss) per common share: |
$ | 0.72 | $ | 0.03 | $ | (8.56 | ) | |||
| | | | | | | | | | | |
| | | | | | | | | | | |
|
|||
The TRS' income tax provision consisted of the following for the year ended December 31, 2013 ($ in thousands):
| |
For the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Current |
$ | 115 | ||
|
Deferred |
61 | |||
| | | | | |
|
Total income tax provision |
$ | 176 | ||
| | | | | |
| | | | | |
The following table presents the U.S. tax jurisdiction and the tax effects of temporary differences on their respective net deferred tax assets and liabilities ($ in thousands). The TRSs are not currently subject to tax in any foreign tax jurisdictions.
| |
As of December 31, 2013 | |||
|---|---|---|---|---|
|
Deferred tax assets |
||||
|
Mortgage servicing rights |
$ | 749 | ||
|
Other temporary differences |
125 | |||
| | | | | |
|
Sub-Total—deferred tax assets |
874 | |||
| | | | | |
|
Deferred tax liability |
||||
|
Basis difference in assets from acquisition of ACRE Capital |
(2,810 | ) | ||
|
Components of gains from mortgage banking activities |
(893 | ) | ||
|
Amortization of intangible assets |
(49 | ) | ||
| | | | | |
|
Net deferred tax liability |
$ | (2,878 | ) | |
| | | | | |
| | | | | |
| |
For the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Federal statutory rate |
35.0 | % | ||
|
State income taxes |
5.7 | % | ||
|
Federal benefit of state tax deduction |
(2.0 | )% | ||
| | | | | |
|
Effective tax rate |
38.7 | % | ||
| | | | | |
| | | | | |
|
|||
The following table summarizes the levels in the fair value hierarchy into which the Company's financial instruments were categorized as of December 31, 2013 and 2012 ($ in thousands):
| |
Fair Value as of December 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Level I | Level II | Level III | Total | |||||||||
|
Loans held for sale |
$ | — | $ | 89,233 | $ | — | $ | 89,233 | |||||
|
Mortgage servicing rights |
$ | — | $ | — | 59,640 | $ | 59,640 | ||||||
|
Derivative assets: |
|||||||||||||
|
Loan commitments |
$ | — | $ | — | $ | 1,886 | $ | 1,886 | |||||
|
Forward sale commitments |
$ | — | $ | — | $ | 272 | $ | 272 | |||||
|
Right to acquire MSRs |
$ | — | $ | — | $ | 1,717 | $ | 1,717 | |||||
|
Derivative liabilities: |
|||||||||||||
|
Forward sale commitments |
$ | — | $ | — | $ | (500 | ) | $ | (500 | ) | |||
| |
Fair Value as of December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Level I | Level II | Level III | Total | |||||||||
|
Embedded conversion option |
$ | — | $ | — | $ | (1,825) | (1) | $ | (1,825 | ) | |||
The following table summarizes the significant unobservable inputs the Company used to value financial instruments categorized within Level III as of December 31, 2013 ($ in thousands):
| |
|
|
Unobservable Input | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Asset Category |
Fair Value |
Primary Valuation Technique |
Input | Range | Weighted Average |
||||||||
|
Mortgage servicing rights |
$ | 59,640 | Discounted cash flow | Discount rate | 8 – 14% | 12 | % | ||||||
|
Loan commitments |
$ | 1,886 | Discounted cash flow | Discount rate | 8% | 8 | % | ||||||
|
Right to acquire MSRs |
$ | 1,717 | Discounted cash flow | Discount rate | 8% | 8 | % | ||||||
|
Forward sale commitments |
$ | (228 | ) | Discounted cash flow | Discount rate | 8 – 12% | 8 | % | |||||
The following table summarizes the significant unobservable inputs the Company used to value financial instruments categorized within Level III as of December 31, 2012 ($ in thousands):
| |
|
|
Unobservable Input | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Asset Category |
Fair Value | Primary Valuation Technique |
Input | Range | Weighted Average | ||||||||
|
Embedded conversion option |
$ | (1,825 | ) | Option Pricing Model | Volatility | 16.4% – 17.4% | 16.4 | % | |||||
The following table summarizes the change in derivative assets and liabilities classified as Level III related to mortgage banking activities for the year ended December 31, 2013 ($ in thousands):
| |
As of and for the year ended December 31, 2013 |
|||
|---|---|---|---|---|
|
Derivative assets and liabilities acquired in the ACRE Capital acquisition, net (See Note 18) |
$ | 182 | ||
|
Settlements |
(2,098 | ) | ||
|
Realized gains (losses) recorded in net income(1) |
1,916 | |||
|
Unrealized gains (losses) recorded in net income(1) |
3,375 | |||
| | | | | |
|
Ending balance, as of December 31, 2013 |
$ | 3,375 | ||
| | | | | |
| | | | | |
As of December 31, 2013 and 2012, the fair value of the Company's financial instruments recorded at cost is as follows ($ in thousands).
| |
As of December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||||||||
| |
Carrying Value |
Fair Value | Carrying Value |
Fair Value | |||||||||
|
Financial instruments not recorded at fair value: |
|||||||||||||
|
Loans held for investment |
$ | 958,495 | $ | 958,495 | $ | 353,500 | $ | 353,500 | |||||
|
Financial liabilities: |
|||||||||||||
|
Secured funding agreements |
$ | 264,419 | $ | 264,419 | $ | 144,256 | $ | 144,256 | |||||
|
Convertible notes |
67,815 | 67,815 | 67,289 | 67,289 | |||||||||
|
Commercial mortgage-backed securitization debt (consolidated VIE) |
395,027 | 395,027 | — | — | |||||||||
The change in the embedded conversion option classified as Level III is as follows for the year ended December 31, 2013 and 2012 ($ in thousands):
| |
As of and for the year ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
|
Beginning balance, as of December 31, 2012 |
$ | (1,825 | ) | $ | — | ||
|
Written option sold specific to the convertible debt offering |
— | (1,728 | ) | ||||
|
Unrealized gain (loss) on the embedded conversion option |
1,739 | (1) | (97 | ) | |||
|
Reclassification to additional paid in capital |
86 | — | |||||
| | | | | | | | |
|
Ending balance, as of December 31, 2013 |
$ | — | $ | (1,825 | ) | ||
| | | | | | | | |
| | | | | | | | |
|
|||
| |
Incurred | |
|
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Payable | |||||||||||||||
| |
|
|
For the Period From September 1, 2011 (Inception) to December 31, 2011 |
|||||||||||||
| |
For the years ended December 31, |
As of December 31, |
||||||||||||||
|
$ in thousands |
2013 | 2012 | 2013 | 2012 | ||||||||||||
|
Affiliate Payments |
||||||||||||||||
|
Management fees |
$ | 4,241 | $ | 1,665 | $ | — | $ | 1,497 | $ | 621 | ||||||
|
General and administrative expenses |
3,610 | 1,602 | — | 1,000 | 668 | |||||||||||
|
Direct third party costs |
769 | 643 | 827 | 299 | 31 | |||||||||||
|
Other |
— | 17 | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
|
|
$ | 8,620 | $ | 3,927 | $ | 827 | $ | 2,796 | $ | 1,320 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
|||
The following table summarizes the Company's dividends declared during the years ended December 31, 2013 and 2012 ($ in thousands, except per share data):
|
Date declared |
Record date | Payment date | Per share amount |
Total amount |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the year ended December 31, 2013 |
|||||||||||||
|
November 13, 2013 |
December 31, 2013 | January 22, 2014 | $ | 0.25 | $ | 7,127 | |||||||
|
August 7, 2013 |
September 30, 2013 | October 17, 2013 | 0.25 | 7,119 | |||||||||
|
May 15, 2013 |
June 28, 2013 | July 18, 2013 | 0.25 | 6,822 | |||||||||
|
March 14, 2013 |
April 8, 2013 | April 18, 2013 | 0.25 | 2,317 | |||||||||
| | | | | | | | | | | | | | |
|
Total cash dividends declared for the year ended December 31, 2013. |
$ | 1.00 | $ | 23,385 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
For the year ended December 31, 2012 |
|||||||||||||
|
November 7, 2012 |
December 31, 2012 | January 10, 2013 | $ | 0.25 | $ | 2,316 | |||||||
|
September 21, 2012 |
October 2, 2012 | October 11, 2012 | 0.06 | 556 | |||||||||
|
June 19, 2012 |
June 29, 2012 | July 12, 2012 | 0.06 | 555 | |||||||||
|
March 30, 2012 |
March 31, 2012 | April 2, 2012 | 0.30 | 450 | (1) | ||||||||
| | | | | | | | | | | | | | |
|
Total cash dividends declared for the year ended December 31, 2012. |
$ | 0.67 | $ | 3,877 | |||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
|
|||
The following table summarizes the purchase price allocation recorded as of the Acquisition Date, including retrospective adjustments during the measurement period ($ in thousands):
|
Assets acquired: |
||||
|
Cash |
$ | 1,157 | ||
|
Restricted cash |
15,586 | |||
|
Loans held for sale |
22,154 | |||
|
Mortgage servicing rights |
61,236 | |||
|
Intangible assets |
5,000 | |||
|
Derivative assets |
182 | |||
|
Risk-sharing indemnification |
3,703 | |||
|
Other assets |
4,748 | |||
| | | | | |
|
Total assets acquired |
$ | 113,766 | ||
|
Liabilities assumed: |
||||
|
Warehouse lines of credit |
$ | 14,472 | ||
|
Allowance for loss sharing |
18,386 | |||
|
Accounts payable and accrued expenses |
4,748 | |||
|
Other liabilities |
10,795 | (1) | ||
| | | | | |
|
Total liabilitites assumed |
$ | 48,401 | ||
| | | | | |
|
Net Assets Acquired |
$ | 65,365 | ||
| | | | | |
| | | | | |
Gain on acquisition represents the excess of the fair value of the net assets acquired over the fair value of the consideration transferred. This determination of the gain on acquisition is as follows ($ in thousands):
|
Fair value of net assets acquired |
$ | 65,365 | ||
|
Fair value of consideration transferred |
(60,927 | ) | ||
| | | | | |
|
Gain on acquisition |
$ | 4,438 | ||
| | | | | |
| | | | | |
The unaudited pro-forma revenue and net income of the combined entity for the years ended December 31, 2013 and 2012, assuming the business combination was consummated on January 1, 2012, are as follows ($ in thousands):
| |
For the years ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
|
Revenues |
$ | 56,050 | $ | 36,253 | |||
|
Net income |
11,414 | 6,477 | |||||
|
|||
The table below presents the Company's total assets as of December 31, 2013 by business segment ($ in thousands):
| |
Principal Lending |
Mortgage Banking |
Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Cash and cash equivalents |
$ | 14,444 | $ | 5,656 | $ | 20,100 | ||||
|
Restricted cash |
3,036 | 13,918 | 16,954 | |||||||
|
Loans held for investment |
958,495 | — | 958,495 | |||||||
|
Loans held for sale, at fair value |
84,769 | 4,464 | 89,233 | |||||||
|
Mortgage servicing rights |
— | 59,640 | 59,640 | |||||||
|
Other assets |
16,632 | 15,861 | 32,493 | |||||||
| | | | | | | | | | | |
|
Total Assets |
$ | 1,077,376 | $ | 99,539 | $ | 1,176,915 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The table below presents the Company's consolidated net income for the year ended December 31, 2013 by business segment ($ in thousands):
| |
Principal Lending |
Mortgage Banking |
Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Net interest margin: |
||||||||||
|
Interest income from loans held for investment |
$ | 37,600 | $ | — | $ | 37,600 | ||||
|
Interest expense |
(8,774 | ) | — | $ | (8,774 | ) | ||||
| | | | | | | | | | | |
|
Net interest margin |
28,826 | — | 28,826 | |||||||
| | | | | | | | | | | |
|
Mortgage banking revenue: |
||||||||||
|
Servicing fees, net |
— | 5,802 | 5,802 | |||||||
|
Gains from mortgage banking activities |
— | 5,328 | 5,328 | |||||||
|
Provision for loss sharing |
— | (6 | ) | (6 | ) | |||||
|
Change in fair value of mortgage servicing rights |
— | (2,697 | ) | (2,697 | ) | |||||
| | | | | | | | | | | |
|
Mortgage banking revenue |
— | 8,427 | 8,427 | |||||||
| | | | | | | | | | | |
|
Other income |
— | 1,333 | 1,333 | |||||||
| | | | | | | | | | | |
|
Total revenue |
28,826 | 9,760 | 38,586 | |||||||
| | | | | | | | | | | |
|
Expenses: |
||||||||||
|
Other interest expense |
6,199 | 357 | (1) | 6,556 | ||||||
|
Management fees to affiliate |
4,125 | 116 | 4,241 | |||||||
|
Professional fees |
2,447 | 477 | 2,924 | |||||||
|
Compensation and benefits |
— | 5,456 | 5,456 | |||||||
|
Acquisition and investment pursuit costs |
4,079 | — | 4,079 | |||||||
|
General and administrative expenses |
2,430 | 1,525 | 3,955 | |||||||
|
General and administrative expenses reimbursed to affiliate |
3,394 | 216 | 3,610 | |||||||
| | | | | | | | | | | |
|
Total expenses |
22,674 | 8,147 | 30,821 | |||||||
| | | | | | | | | | | |
|
Changes in fair value of derivatives |
1,739 | — | 1,739 | |||||||
| | | | | | | | | | | |
|
Income from operations before gain on acquisition and income taxes |
7,891 | 1,613 | 9,504 | |||||||
|
Gain on acquisition |
4,438 | — | 4,438 | |||||||
| | | | | | | | | | | |
|
Income before income taxes |
12,329 | 1,613 | 13,942 | |||||||
| | | | | | | | | | | |
|
Income tax expense |
— | 176 | 176 | |||||||
| | | | | | | | | | | |
|
Net income |
$ | 12,329 | $ | 1,437 | $ | 13,766 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
|
|||
The following table summarizes the Company's quarterly financial results for each quarter of the years ended December 31, 2013, 2012 and the period from September 1, 2011 (Inception) to December 31, 2011 (amounts in thousands, except per share data):
| |
For the Three-Month Period Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
March 31 | June 30 | September 30 | December 31 | |||||||||
|
2013: |
|||||||||||||
|
Net interest margin |
$ | 5,326 | $ | 6,207 | $ | 8,700 | $ | 8,593 | |||||
|
Mortgage banking revenue |
$ | — | $ | — | $ | 3,861 | (1) | $ | 4,566 | ||||
|
Net income |
$ | 327 | $ | 3,265 | $ | 6,884 | (2) | $ | 3,290 | ||||
|
Net income allocable to common stockholder |
$ | 327 | $ | 3,265 | $ | 6,884 | (2) | $ | 3,290 | ||||
|
Net income per common share—Basic and diluted |
$ | 0.04 | $ | 0.32 | $ | 0.25 | (2) | $ | 0.12 | ||||
|
2012: |
|||||||||||||
|
Net interest margin |
$ | 610 | $ | 1,206 | $ | 1,491 | $ | 3,629 | |||||
|
Net income (loss) |
$ | 508 | $ | (175 | ) | $ | (554 | ) | $ | 1,081 | |||
|
Net income (loss) allocable to common stockholder |
$ | (116 | ) | $ | (225 | ) | $ | (554 | ) | $ | 1,081 | ||
|
Net income per common share—Basic and diluted |
$ | (0.11 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | 0.12 | ||
|
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