CIM REAL ESTATE FINANCE TRUST, INC. Management report and analysis of the financial position and operating results (Form 10-Q)
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The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in "Part I - Financial Information" of this Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements contained therein, and the terms "we," "us," "our" and the "Company" refer toCIM Real Estate Finance Trust, Inc. Forward-Looking Statements This Quarterly Report on Form 10-Q includes "forward-looking statements" (within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that reflect our expectations and projections about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by the use of words such as "may," "will," "seek," "expects," "anticipates," "believes," "targets," "intends," "should," "estimates," "could," "continue," "assume," "projects," "plans" or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed below. In addition, these risks and uncertainties include those associated with (i) the scope, severity and duration of the current pandemic of COVID-19 and actions taken to contain the pandemic or mitigate its impact, (ii) the potential adverse effect of the COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets, among others, and (iii) general economic, market and other conditions. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of changes in underlying assumptions or new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law. The forward-looking statements should be read in light of the risk factors identified in Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements: â¢We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all. â¢We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties. â¢Our properties, intangible assets and other assets may be subject to impairment charges. â¢We could be subject to unexpected costs or unexpected liabilities that may arise from dispositions. â¢We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties, and we may suffer delays or be unable to acquire, dispose of, or lease properties on advantageous terms. â¢We are subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally. â¢We have substantial indebtedness, which may affect our ability to pay distributions and expose us to interest rate fluctuation risk and the risk of default under our debt obligations. â¢We are subject to risks associated with the incurrence of additional secured or unsecured debt. â¢We may not be able to maintain profitability. â¢We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations. â¢Our continued compliance with debt covenants depends on many factors and could be impacted by current or future economic conditions associated with the COVID-19 pandemic. â¢We may be affected by risks resulting from losses in excess of insured limits. â¢We may fail to remain qualified as a REIT forU.S. federal income tax purposes. â¢We may be unable to successfully reposition our portfolio or list our shares on a national securities exchange in the timeframe we expect or at all. 45
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â¢We may be unable to achieve the cost synergies anticipated to result from the CCIT III and CCPT V Mergers and the CIM Income NAV Merger. Definitions We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings: The phrase "annualized rental income" refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance. Under a "net lease," the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. The tenant generally agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. There are various forms of net leases, most typically classified as either triple-net or double-net. Triple-net leases typically require the tenant to pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance). Overview We were formed onJuly 27, 2010 , and we elected to be taxed, and currently qualify, as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2012 . We commenced our principal operations onApril 13, 2012 , when we satisfied the conditions of our escrow agreement regarding the minimum offering and issued approximately 308,000 shares of our common stock. We have no paid employees and are externally managed by CMFT Management and, with respect to investments in securities, our Investment Advisor. CIM indirectly owns and/or controls CMFT Management; our dealer manager,CCO Capital ; our property manager,CREI Advisors ; andCCO Group . We ceased issuing shares in our Offering onApril 4, 2014 and in the Initial DRIP Offering effective as ofJune 30, 2016 , but will continue to issue shares of common stock under the Secondary DRIP Offering until certain liquidity events occur, such as the listing of our shares on a national securities exchange or the sale of our company, or the Secondary DRIP Offering is otherwise terminated by our Board. We suspended issuing shares of common stock under our Secondary DRIP Offering onAugust 30, 2020 in connection with our entry into the merger agreements with CCIT III and CCPT V. OnMarch 25, 2021 , the Board approved reinstating the DRIP effectiveApril 1, 2021 . We intend to continue to pursue a diversified investment strategy across the capital structure by balancing our existing portfolio of core commercial real estate assets with investments in commercial mortgage loans and other real estate-related credit investments in which our sponsor and its affiliates have expertise. We expect to adapt our investment strategy over time in order to respond to evolving market conditions and to capitalize on investment opportunities that may arise at different points in the economic and real estate investment cycle. Assuming the successful repositioning of our portfolio, we then expect to pursue a listing of our common stock on a national securities exchange in 2022, though we can provide no assurances that a listing will happen on that timeframe or at all. Our operating results and cash flows are primarily influenced by rental and other property income from our commercial properties, interest income from our credit investments, interest expense on our indebtedness and investment and operating expenses. As 94.2% of our rentable square feet was under lease, including any month-to-month agreements, as ofSeptember 30, 2021 , with a weighted average remaining lease term of 8.3 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Our manager regularly monitors the creditworthiness of our tenants by reviewing each tenant's financial results, any available credit rating agency reports on the tenant or guarantor, the operating history of the property with such tenant, the tenant's market share and track record within its industry segment, the general health and outlook of the tenant's industry segment and other information for changes and possible trends. If CMFT Management identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant's financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property or identifying a possible replacement tenant should the current tenant fail to perform on the lease. In addition, our manager reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. 46
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As ofSeptember 30, 2021 , we owned 403 properties, which consisted of 346 retail properties, 53 anchored shopping centers, three industrial properties and one office property, representing 36 industry sectors and comprising 17.6 million rentable square feet of commercial space located in 40 states. In addition, during the nine months endedSeptember 30, 2021 , we completed foreclosure proceedings and took control of the assets which previously secured our mezzanine loans. As ofSeptember 30, 2021 , we owned$189.3 million of condominium developments. As ofSeptember 30, 2021 , our loan portfolio consisted of 273 loans with a net book value of$1.5 billion . As ofSeptember 30, 2021 , we had$87.4 million of unsettled broadly syndicated loan purchases included in cash and cash equivalents, and investments in real estate-related securities of$185.2 million . COVID-19 We are closely monitoring the negative impacts that the COVID-19 pandemic and the efforts to mitigate its spread are having on the economy, our tenants and our business. The extent to which the COVID-19 pandemic continues to impact our operations and those of our tenants will depend on future developments, including, among other factors, the duration, spread and resurgences of the virus, including certain variants thereof, along with related travel advisories and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, the pace, scope and efficacy of vaccination programs, and general uncertainty as to the impact of COVID-19, including related variants, on the global economy. During the three and nine months endedSeptember 30, 2021 , the majority of lease concessions provided were in the form of rent abatements to certain tenants in response to the impact of the COVID-19 pandemic on those tenants. As ofNovember 8, 2021 , we have collected approximately 99.3% of rental payments billed to tenants during the three months endedSeptember 30, 2021 , and as ofNovember 8, 2021 , we collected$6.4 million of deferred rent, representing approximately 97% of amounts due throughSeptember 30, 2021 . Pending Merger OnSeptember 21, 2021 , we entered into the Merger Agreement. Subject to the terms and conditions of the Merger Agreements, CIM Income NAV will merge with and into Merger Sub with Merger Sub surviving the CIM Income NAV Merger, such that following the CIM Income NAV Merger, the surviving entity will continue as our wholly owned subsidiary. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of CIM Income NAV shall cease. At the effective time of the CIM Income NAV Merger and subject to the terms and conditions of the Merger Agreement, each issued and outstanding share of the Class D Common Stock will be converted into the right to receive 2.574 shares of CMFT Common Stock, each issued and outstanding share of the Class T Common Stock will be converted into the right to receive 2.510 shares of CMFT Common Stock, each issued and outstanding share of the Class S Common Stock will be converted into the right to receive 2.508 shares of CMFT Common Stock, and each issued and outstanding share of the Class I Common Stock will be converted into the right to receive 2.622 shares of CMFT Common Stock, in each case, subject to the treatment of fractional shares in accordance with the Merger Agreement. The combined company after the Merger will retain the nameCIM Real Estate Finance Trust, Inc. The Merger is intended to qualify as a "reorganization" under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). For additional information on the Merger, see Note 1 - Organization and Business to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q and our Current Reports on Form 8-K filed with theSEC onSeptember 22, 2021 . 47
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Operating Highlights and Key Performance Indicators Activity throughSeptember 30, 2021 â¢Invested$720.1 million in senior loans and received principal repayments of$285.1 million . â¢Invested$267.0 million in broadly syndicated loans and sold broadly syndicated loans for an aggregate gross sales price of$55.5 million . â¢Invested$171.9 million in CMBS and preferred units and sold CMBS for an aggregate gross sales price of$27.0 million . â¢Disposed of 113 properties and one outparcel of land for an aggregate sales price of$484.4 million . â¢Completed foreclosure to take control of the assets which previously secured our mezzanine loans, including 75 condominium units and 21 rental units across four buildings. â¢Increased total debt by$656.6 million , from$2.1 billion to$2.8 billion . Portfolio Information The following table shows the carrying value of our portfolio by investment type as ofSeptember 30, 2021 and 2020 (dollar amounts in thousands): As of September 30, 2021 2020 Asset Count Carrying Value Asset Count Carrying Value Loan Held-For-Investment Mezzanine loans - $ - - % 8$ 146,516 4.2 % Senior loans 11 890,804 19.2 % 4 327,244 9.3 % Broadly syndicated loans 262 571,488 12.3 % 161 419,135 12.0 % Less: Allowance for credit losses (11,219) (0.2) % (35,039) (1.0) % Total loans held-for-investment and related receivable, net 273 1,451,073 31.2 % 173 857,856 24.5 %Real Estate-Related Securities CMBS 15 121,757 2.6 % 5 75,212 2.1 % Preferred units 1 63,490 1.4 % - - - % Real Estate Total real estate assets and intangible lease liabilities, net 403 3,011,599 64.8 % 380 2,568,842 73.4 % Total Investment Portfolio 691$ 4,647,919 100.0 % 558$ 3,501,910 100.0 %
The following table details the overall statistics of our credit portfolio at
Broadly Senior Loans Syndicated (1) (2) Loans CMBS Preferred Units Number of loans 11 262 15 1 Net book value$ 885,517
Weighted average interest rate
3.7 % 3.6 % 2.8 % 8.9 % Weighted-average maximum years to maturity 2.7 5.0 12.4 0.7
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(1)As ofSeptember 30, 2021 , 100% of our loans by principal balance earned a floating rate of interest, primarily indexed toU.S. dollar LIBOR. (2)Maximum maturity date assumes all extension options are exercised by the borrowers; however, our CRE loans may be repaid prior to such date. Real Estate Portfolio Information As ofSeptember 30, 2021 , we owned 403 properties located in 40 states, the gross rentable square feet of which was 94.2% leased, including any month-to-month agreements, with a weighted average lease term remaining of 8.3 years. As of 48
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September 30, 2021 , no single tenant accounted for greater than 10% of our 2021 annualized rental income. As ofSeptember 30, 2021 , we had certain geographic and industry concentrations in our property holdings. In particular, 46 of our properties were located inCalifornia , which accounted for 11% of our 2021 annualized rental income. In addition, we had tenants in the sporting goods, hobby and musical instruments stores and health and personal care stores industries, which accounted for 13% and 11%, respectively, of our 2021 annualized rental income. The following table shows the property statistics of our real estate assets as ofSeptember 30, 2021 and 2020: As of
2021 2020 Number of commercial properties 403 380 Rentable square feet (in thousands) (1) 17,623 17,938 Percentage of rentable square feet leased 94.2 % 94.3 % Percentage of investment-grade tenants (2) 36.9 % 37.9 %
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(1) Includes square feet of buildings on land parcels subject to ground leases. (2) Investment-grade tenants are those with a credit rating of BBB- or higher byStandard & Poor's or a credit rating of Baa3 or higher byMoody's Investor Service, Inc. ("Moody's"). The ratings may reflect those assigned byStandard & Poor's or Moody's to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated byStandard & Poor's . The following table summarizes our real estate acquisition activity during the nine months endedSeptember 30, 2021 and 2020: Three Months Ended September
30, nine months completed
2021 2020 2021 2020 Commercial properties acquired - 2 - 3 Purchase price of acquired properties (in thousands) $ -$ 9,851 $ -$ 14,510 Rentable square feet (in thousands) (1) - 37 - 56
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(1) Includes square feet of buildings on land parcels subject to ground leases. Results of Operations Overview We are not aware of any material trends or uncertainties, other than those listed in the risk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and this Quarterly Report on Form 10-Q, the effects of the COVID-19 pandemic, and national economic conditions affecting real estate in general that may reasonably be expected to have a material impact on our results from the acquisition, management and operation of properties. Currently, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in future periods due to numerous uncertainties. Same Store Analysis Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. We review our stabilized operating results, measured by net operating income, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as "same store" properties, and we believe that the presentation of operating results for same store properties provides useful information to stockholders. Net operating income is a supplemental non-GAAP financial measure of a real estate company's operating performance. Net operating income is considered by management to be a helpful supplemental performance measure, as it enables management to evaluate the impact of occupancy, rents, leasing activity, and other controllable property operating results at our real estate properties, and it provides a consistent method for the comparison of our properties. We define net operating income as operating revenues less operating expenses, which exclude (i) depreciation and amortization, (ii) interest expense and other non-property related revenue and expense items such as (a) general and administrative expenses, (b) expense reimbursements to related parties, (c) management fees, (d) transaction-related expenses, (e) real estate impairment, (f) provision for credit losses, (g) gain on disposition of real estate and condominium developments, net, (h) merger-related expenses, net and (i) interest income. Our net 49
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operating income may not be comparable to that of other REITs and should not be considered to be more relevant or accurate in evaluating our operating performance than the current GAAP methodology used in calculating net income (loss). In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment. Comparison of the Three Months EndedSeptember 30, 2021 and 2020 The following table reconciles net loss, calculated in accordance with GAAP, to net operating income (dollar amounts in thousands): For the Three
Ended months
2021 2020 Change Net income$ 42,603 $ 4,179 $ 38,424 Loss on extinguishment of debt 3,251 89 3,162 Interest expense and other, net 20,381 15,964 4,417 Operating income 66,235 20,232 46,003 Merger-related expenses, net 398 1,207 (809)
Gain on disposal of condominium buildings and developments, net
(34,033) (3,219) (30,814)
(Decrease) increase in the allowance for credit losses (1,792)
7,355 (9,147) Real estate impairment 891 476 415 Depreciation and amortization 22,801 19,967 2,834 Transaction-related expenses 6 58 (52) Management fees 11,703 10,139 1,564 Expense reimbursements to related parties 2,516 1,439 1,077 General and administrative expenses 3,076 3,208 (132) Interest income (19,755) (6,631) (13,124) Net operating income$ 52,046 $ 54,231 $ (2,185) Our operating segments include credit and real estate. Refer to Note 15 - Segment Reporting to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of our operating segments. Real Estate Segment A total of 295 properties were acquired beforeJuly 1, 2020 and represent our "same store" properties during the three months endedSeptember 30, 2021 and 2020. "Non-same store" properties, for purposes of the table below, includes properties acquired or disposed of on or afterJuly 1, 2020 . 50
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The following table details the components of net operating income broken out between same store and non-same store properties (dollar amounts in thousands): Total Same Store Non-Same Store For the Three Months Ended September 30, For the Three Months Ended September 30, For
the three months ended
2021 2020 Change 2021 2020 Change 2021 2020 Change Rental and other property income$ 70,794 $ 66,011 $ 4,783 $ 55,202 $ 55,490 $ (288) $ 15,592 $ 10,521 $ 5,071 Property operating expenses 11,157 5,214 5,943 5,534 4,556 978 5,623 658 4,965 Real estate tax expenses 7,591 6,566 1,025 6,095 5,924 171 1,496 642 854 Total property operating expenses 18,748 11,780 6,968 11,629 10,480 1,149 7,119 1,300 5,819 Net operating income$ 52,046 $ 54,231 $ (2,185) $ 43,573 $ 45,010 $ (1,437) $ 8,473 $ 9,221 $ (748) Loss on Extinguishment of Debt The increase in loss on extinguishment of debt of$3.2 million for the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the extinguishment of five mortgage loans with an aggregate carrying value of$89.4 million and the repayment and termination of the Credit Facilities. Interest Expense and Other, Net Interest expense and other, net also includes amortization of deferred financing costs. The increase in interest expense and other, net, of$4.4 million for the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to an increase in the average aggregate amount of debt outstanding from$1.8 billion as ofSeptember 30, 2020 to$2.8 billion as ofSeptember 30, 2021 as a result of entering into and upsizing additional repurchase agreements, originating the Mortgage Loan and Class A Notes, and assuming the CCPT V Credit Facility as part of the CCIT III and CCPT V Mergers subsequent toSeptember 30, 2020 . This increase was partially offset by a decrease in the weighted average interest rate from 3.3% as ofSeptember 30, 2020 to 2.8% as ofSeptember 30, 2021 . Merger-Related Expenses, Net The decrease in merger-related expenses, net of$809,000 during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to incurring expenses related to the CIM Income NAV Merger of$398,000 during the three months endedSeptember 30, 2021 , compared to incurring expenses related to the CCIT III and CCPT V Mergers of$1.2 million during the three months endedSeptember 30, 2020 . Gain on Disposition of Real Estate and Condominium Developments, Net The increase in gain on disposition of real estate and condominium developments, net, of$30.8 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the disposition of 66 properties and one outparcel of land for a gain of$30.7 million during the three months endedSeptember 30, 2021 compared to the disposition of three properties for a gain of$3.2 million during the three months endedSeptember 30, 2020 . Real Estate Impairment The increase in real estate impairments of$415,000 during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was due to six properties that was deemed to be impaired, resulting in impairment charges of$891,000 during the three months endedSeptember 30, 2021 , compared to one property that was deemed to be impaired, resulting in impairment charges of$476,000 during the three months endedSeptember 30, 2020 . Depreciation and Amortization The increase in depreciation and amortization of$2.8 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the acquisition of 146 properties in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 , partially offset by the disposition of 124 properties subsequent toSeptember 30, 2020 . 51
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Transaction-Related Expenses Transaction-related expenses include abandoned deal costs for acquisition and disposition activity. Transaction-related expenses remained generally consistent during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. Management Fees We pay CMFT Management a management fee pursuant to the Management Agreement, payable quarterly in arrears, equal to the greater of (a)$250,000 per annum ($62,500 per quarter) and (b) 1.50% per annum (0.375% per quarter) of the Company's Equity (as defined in the Management Agreement). Furthermore, as discussed in Note 11 - Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q, pursuant to the Investment Advisory and Management Agreement, for management of investments in the Managed Assets (as defined in the Investment Advisory and Management Agreement),CMFT Securities pays the Investment Advisor the Investment Advisory Fee, payable quarterly in arrears, equal to 1.50% per annum (0.375% per quarter) ofCMFT Securities' Equity (as defined in the Investment Advisory and Management Agreement). Because the Managed Assets are excluded from the calculation of management fees payable by the Company to CMFT Management pursuant to the Management Agreement, the total management and advisory fees payable by the Company to its external advisors are not increased as a result of the Investment Advisory and Management Agreement. In addition, pursuant to the Sub-Advisory Agreement, in connection with providing investment management services with respect to the corporate credit-related securities held byCMFT Securities , on a quarterly basis, the Investment Advisor designates 50% of the sum of the Investment Advisory Fee payable to the Investment Advisor as sub-advisory fees. The increase in management fees of$1.6 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to increased equity from the issuance of common stock in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 . Expense Reimbursements to Related Parties Pursuant to the Investment Advisory and Management Agreement,CMFT Securities reimburses the Investment Advisor for costs and expenses incurred by the Investment Advisor on its behalf. Additionally, we may be required to reimburse certain expenses incurred by CMFT Management in providing management services, subject to limitations as set forth in the Management Agreement (as discussed in Note 11 - Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q). The increase in expense reimbursements to related parties of$1.1 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to acquiring 146 properties as part of the CCIT III and CCPT V Mergers that closed inDecember 2020 . General and Administrative Expenses The primary general and administrative expense items are transfer agency costs and banking fees. The decrease in general and administrative expenses of$132,000 for the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a decrease in fees related to the unused portion of our line of credit due to the pay down and termination of the Credit Facilities during the three months endedSeptember 30, 2021 . This decrease was partially offset by increased expenses related to the CCIT III and CCPT V Mergers completed inDecember 2020 and the foreclosure completed inJanuary 2021 to take control of the assets which previously secured the Company's mezzanine loans, as discussed in Note 7 - Loans Held-For-Investment to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Net Operating Income Same store property net operating income decreased$1.4 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. The change was primarily due to a decrease in occupancy from 94.3% as ofSeptember 30, 2020 to 93.8% as ofSeptember 30, 2021 . Non-same store property net operating income decreased$748,000 during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. The increase was primarily due to the acquisition of 146 properties in connection with the CCIT III and CCPT V Mergers that closedDecember 2020 , offset by the disposition of 124 properties subsequent toSeptember 30, 2020 . 52
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Credit Segment (Decrease ) Increase in Provision for Credit Losses The decrease in provision for credit losses of$9.1 million during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the Company's foreclosure of the assets which previously secured the Company's mezzanine loans. During the three months endedSeptember 30, 2020 , the borrower on the Company's eight mezzanine loans remained delinquent on the required reserve payments and became delinquent on principal and interest, resulting in the Company recording$3.6 million in credit losses related to the mezzanine loans. Upon completing foreclosure inJanuary 2021 , the Company took control of the assets which previously secured the loans, and as such, a provision for credit losses related to the mezzanine loans was not recorded for the three months endedSeptember 30, 2021 . During the three months endedSeptember 30, 2021 , a decrease in the provision for credit losses was recorded related to its senior loans and broadly syndicated loans due to the ongoing market recovery from COVID-19. Interest Income The increase in interest income of$13.1 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, was due to an increase in credit investments. As ofSeptember 30, 2021 , we held investments in CRE loans held-for-investment of$890.8 million , broadly syndicated loans of$571.5 million , and CMBS of$121.8 million . As ofSeptember 30, 2020 , we held investments in CRE loans held-for-investment of$473.8 million , broadly syndicated loans of$419.1 million , and CMBS of$75.2 million . Comparison of the Nine Months EndedSeptember 30, 2021 and 2020 The following table reconciles net income, calculated in accordance with GAAP, to net operating income (dollar amounts in thousands): For the Nine
Ended months
2021 2020 Change Net income (loss)$ 97,637 $ (11,742) $ 109,379 Loss on extinguishment of debt 4,729 4,841 (112) Interest expense and other, net 56,863 47,240 9,623 Operating income 159,229 40,339 118,890 Merger-related expenses, net 398 1,207 (809)
Gain on disposal of condominium buildings and developments, net
(80,502) (20,120) (60,382)
(Decrease) increase in the allowance for credit losses (1,101)
33,037 (34,138) Real estate impairment 5,268 15,983 (10,715) Depreciation and amortization 73,186 60,486 12,700 Transaction-related expenses 37 308 (271) Management fees 35,035 29,739 5,296 Expense reimbursements to related parties 8,387 6,674 1,713 General and administrative expenses 11,109 9,110 1,999 Interest income (48,168) (19,395) (28,773) Net operating income$ 162,878 $ 157,368 $ 5,510 Real Estate Segment A total of 294 properties were acquired beforeJanuary 1, 2020 and represent our "same store" properties during the nine months endedSeptember 30, 2021 and 2020. "Non-same store" properties, for purposes of the table below, includes properties acquired or disposed of on or afterJanuary 1, 2020 . 53
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The following table details the components of net operating income broken out between same store and non-same store properties (dollar amounts in thousands): Total Same Store Non-Same Store For the Nine Months Ended September 30, For the Nine Months Ended September 30,
For the nine months ended
2021 2020 Change 2021 2020 Change 2021 2020 Change Rental and other property income$ 223,026 $ 194,550 $ 28,476 $ 163,049 $ 161,609 $ 1,440 $ 59,977 $ 32,941 $ 27,036 Property operating expenses 32,632 16,890 15,742 17,237 14,547 2,690 15,395 2,343 13,052 Real estate tax expenses 27,516 20,292 7,224 18,183 17,926 257 9,333 2,366 6,967 Total property operating expenses 60,148 37,182 22,966 35,420 32,473 2,947 24,728 4,709 20,019 Net operating income$ 162,878 $ 157,368 $ 5,510 $ 127,629 $ 129,136 $ (1,507) $ 35,249 $ 28,232 $ 7,017 Loss on Extinguishment of Debt The decrease in loss on extinguishment of debt of$112,000 for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the extinguishment of five mortgage note with an aggregate carrying value of$89.4.0 million and the pay down and termination of the Credit Facilities during the nine months endedSeptember 30, 2021 , as compared the extinguishment of two mortgage notes with an aggregate carrying value of$97.0 million during the nine months endedSeptember 30, 2020 . Interest Expense and Other, Net The increase in interest expense and other, net, of$9.6 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to an increase in the average aggregate amount of debt outstanding from$1.7 billion as ofSeptember 30, 2020 to$2.5 billion as ofSeptember 30, 2021 as a result of entering into additional repurchase agreements, originating the Mortgage Loan and Class A Notes, and assuming the CCPT V Credit Facility as part of the CCIT III and CCPT V Mergers subsequent toSeptember 30, 2020 . This increase was partially offset by a decrease in the weighted average interest rate from 3.3% as ofSeptember 30, 2020 to 2.8% as ofSeptember 30, 2021 . Merger-Related Expenses, Net The decrease in merger-related expenses, net of$809,000 during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to incurring expenses related to the CIM Income NAV Merger of$398,000 during the nine months endedSeptember 30, 2021 , compared to incurring expenses related to the CCIT III and CCPT V Mergers of$1.2 million during the nine months endedSeptember 30, 2020 . Gain on Disposition of Real Estate and Condominium Developments, Net The increase in gain on disposition of real estate and condominium developments, net, of$60.4 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the disposition of 113 properties and one outparcel of land for a gain of$75.6 million during the nine months endedSeptember 30, 2021 , compared to the disposition of 19 properties for a gain of$20.1 million during the nine months endedSeptember 30, 2020 . Real Estate Impairment The decrease in impairments of$10.7 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was due to 11 properties that were deemed to be impaired, resulting in impairment charges of$5.3 million during the nine months endedSeptember 30, 2021 , compared to 11 properties that were deemed to be impaired, resulting in impairment charges of$16.0 million during the nine months endedSeptember 30, 2020 . Depreciation and Amortization The increase in depreciation and amortization of$12.7 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the acquisition of 146 properties in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 , partially offset by the disposition of 124 properties subsequent toSeptember 30, 2020 . 54
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Transaction-Related Expenses The decrease in transaction-related expenses of$271,000 during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was due to a decrease in abandoned deal costs for the nine months endedSeptember 30, 2021 . Management Fees The increase in management fees of$5.3 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to increased equity from the issuance of common stock in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 . Expense Reimbursements to Related Parties The increase in expense reimbursements to related parties of$1.7 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to increased operating expense reimbursements due to CMFT Management as a result of acquiring 146 properties as part of the CCIT III and CCPT V Mergers that closed inDecember 2020 . General and Administrative Expenses The increase in general and administrative expenses of$2.0 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, was primarily due to increased expenses resulting from board members added to our Board and the acquisition of 146 properties in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 . The increase was also due to increases in appraisal fees related to the foreclosure completed inJanuary 2021 to take control of the assets which previously secured the Company's mezzanine loans, as discussed in Note 7 - Loans Held-For-Investment to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Net Operating Income Same store property net operating income decreased$1.5 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The decrease was primarily due to increases in property operating expenses relating to parking lot repairs, partially offset by an increase in rental income as a result of the impact of COVID-19 leading to a temporary reduction in rental income during the nine months endedSeptember 30, 2020 for certain tenants. Non-same store property net operating income increased$7.0 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The increase is due to the acquisition of 146 properties in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 , partially offset by the disposition of 124 properties subsequent toSeptember 30, 2020 . Credit Segment (Decrease ) Increase in Provision for Credit Losses The decrease in provision for credit losses of$34.1 million during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the Company recording$23.4 million in credit losses related to the mezzanine loans. The mezzanine loans and underlying assets were foreclosed on inJanuary 2021 , and as such a provision for credit losses was not recorded during the nine months endedSeptember 30, 2021 related to these loans. Interest Income The increase in interest income of$28.8 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was due to an increase in credit investments. As ofSeptember 30, 2021 , we held investments in CRE loans held-for-investment of$890.8 million , broadly syndicated loans of$571.5 million , and CMBS of$121.8 million . As ofSeptember 30, 2020 , we held investments in CRE loans held-for-investment of$473.8 million , broadly syndicated loans of$419.1 million , and CMBS of$75.2 million . Distributions Prior toApril 1, 2020 , on a quarterly basis, our Board authorized a daily distribution for the succeeding quarter. Our Board authorized the following daily distribution amounts per share for the periods indicated below: 55
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Table of Contents Period Commencing Period Ending Daily Distribution Amount April 14, 2012 December 31, 2012$0.001707848 January 1, 2013 December 31, 2015$0.001712523 January 1, 2016 December 31, 2016$0.001706776 January 1, 2017 December 31, 2019$0.001711452 January 1, 2020 March 31, 2020$0.001706776 OnApril 20, 2020 , our Board decided to make a determination as to the amount and timing of distributions on a monthly, instead of a quarterly, basis until such time that we had greater visibility into the impact that the COVID-19 pandemic would have on our tenants' ability to continue to pay rent on their leases on a timely basis or at all, the degree to which federal, state or local governmental authorities grant rent relief or other relief or amnesty programs applicable to our tenants, our ability to access the capital markets, and onthe United States and worldwide financial markets and economy. OnMarch 25, 2021 , the Board resumed declaring distributions on a quarterly basis. SinceApril 2020 , our Board authorized the following monthly distribution amounts per share for the periods indicated below: Record Date Distribution Amount April 30, 2020$0.0130 May 31, 2020$0.0130 June 30, 2020$0.0161 July 30, 2020$0.0304 August 28, 2020$0.0303 September 29, 2020$0.0303 October 29, 2020$0.0303 November 27, 2020$0.0303 December 30, 2020$0.0303 January 28, 2021$0.0303 February 25, 2021$0.0303 March 29, 2021$0.0303 April 29, 2021$0.0303 May 28, 2021$0.0303 June 29, 2021$0.0303 July 29, 2021$0.0303 August 30, 2021$0.0303 September 29, 2021$0.0303 October 28, 2021$0.0303 November 29, 2021$0.0303 December 30, 2021$0.0303
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The following table shows the distributions and sources of distributions for the periods indicated below (amounts in thousands of dollars):
Nine months ended
2021 2020 Amount Percent Amount Percent Distributions paid in cash$ 82,541 84 %$ 62,529 65 % Distributions reinvested 16,264 16 % 34,191 35 % Total distributions$ 98,805 100 %$ 96,720 100 % Sources of distributions: Net cash provided by operating activities (1)$ 97,518 99 %$ 81,390 (2) 84 % Proceeds from the issuance of debt (3) 1,287 1 % 7,022 7 % Proceeds from the issuance of common stock - - % 8,308 (4) 9 % Total sources$ 98,805 100 %$ 96,720 100 %
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(1)Net cash provided by operating activities for the nine months endedSeptember 30, 2021 and 2020 was$97.5 million and$71.8 million , respectively. (2)Our distributions covered by cash flows from operating activities for the nine months endedSeptember 30, 2020 include cash flows from operating activities in excess of distributions from prior periods of$9.6 million . (3)Net proceeds on the credit facilities and notes payable for the nine months endedSeptember 30, 2021 and 2020 were$584.1 million and$237.8 million , respectively. (4)In accordance with GAAP, certain real estate acquisition-related fees and expenses, such as expenses and fees incurred in connection with property acquisitions accounted for as business combinations, are expensed, and therefore reduce net cash flows from operating activities. Therefore, for consistency, proceeds from the issuance of common stock used as a source of distributions for the nine months endedSeptember 30, 2020 include the amount by which real estate acquisition-related fees and expenses have reduced net cash flows from operating activities in those prior periods. Share Redemptions Our amended and restated share redemption program (the "Amended Share Redemption Program") permits our stockholders to sell their shares of common stock back to us, subject to certain conditions and limitations. Funding for the redemption of shares will be limited to the cumulative net proceeds we receive from the sale of shares under the Secondary DRIP Offering, net of shares redeemed to date. In addition, we will generally limit quarterly redemptions to approximately 1.25% of the weighted average number of shares outstanding during the trailing 12-month period ending on the last day of the fiscal quarter for which the redemptions are being paid, and to the net proceeds we receive from the sale of shares in the respective quarter under the Secondary DRIP Offering. Any of the foregoing limits might prevent us from accommodating all redemption requests made in any fiscal quarter or in any 12-month period. In addition, our Board may choose to amend the terms of, suspend or terminate our Amended Share Redemption Program at any time in its sole discretion if it believes that such action is in the best interest of us and our stockholders. Any material modifications or suspension of the Amended Share Redemption Program will be disclosed to our stockholders as promptly as practicable in our reports filed with theSEC and via our website. In connection with the CCIT III and CCPT V Mergers, our Board suspended our Amended Share Redemption Program onAugust 30, 2020 , and therefore, no shares were redeemed from our stockholders after that date untilMarch 25, 2021 , when our Board reinstated the Amended Share Redemption Program, effectiveApril 1, 2021 . During the nine months endedSeptember 30, 2021 , we received valid redemption requests under our share redemption program totaling approximately 61.8 million shares, of which we redeemed approximately 1.7 million shares as ofSeptember 30, 2021 for$12.0 million at an average redemption price of$7.20 per share, and 1.3 million shares subsequent toSeptember 30, 2021 for$9.4 million (at a redemption price of$7.20 per share). The remaining redemption requests relating to approximately 58.8 million shares went unfulfilled. A valid redemption request is one that complies with the applicable requirements and guidelines of our share redemption program then in effect. The share redemptions were funded with proceeds from the Secondary DRIP Offering and available borrowings. Liquidity and Capital Resources General We expect to utilize proceeds from real estate dispositions, sales proceeds and principal payments received on credit investments, cash flows from operations and future proceeds from secured or unsecured financing to complete future 57
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acquisitions and loan originations, repayment of certain indebtedness and for general corporate uses. The sources of our operating cash flows will primarily be provided by the rental and other property income received from current and future leased properties and interest income from our portfolio of credit investments. During the nine months endedSeptember 30, 2021 , and with the proceeds from the Mortgage Loan and the sale of the Class A Notes, the Company paid down the$1.11 billion outstanding balance under the Credit Facilities and terminated the Credit Facilities. As ofSeptember 30, 2021 , we had cash and cash equivalents of$289.8 million , which included$87.4 million of unsettled broadly syndicated loan purchases. As ofSeptember 30, 2021 , the Credit and Security Agreement provided for borrowings in an aggregate principal amount up to$500.0 million under the Credit Securities Revolver, which may be increased from time to time pursuant to the Credit and Security Agreement. Borrowings under the Credit and Security Agreement are secured by substantially all of the assets held byCMFT Corporate Credit Securities, LLC , which shall primarily consist of broadly-syndicated senior secured loans subject to certain eligibility criteria under the Credit and Security Agreement. As ofSeptember 30, 2021 , the amounts borrowed and outstanding under the Credit Securities Revolver totaled$406.5 million . Subsequent toSeptember 30, 2021 , the Company amended the Credit and Security Agreement by increasing available borrowings under theCredit Securities Revolver up to$550.0 million , as discussed in Note 16 - Subsequent Events to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. As ofSeptember 30, 2021 , the Repurchase Agreements provided up to an aggregate of$1.2 billion of financing under the Repurchase Facilities. The Repurchase Agreements provide for simultaneous agreements by the banks to re-sell purchased CRE mortgage loans back to the CMFT Lending Subs at a certain future date or upon demand. As ofSeptember 30, 2021 , we had nine senior loans with an aggregate carrying value of$712.8 million financed with$507.3 million under the Repurchase Facilities,$184.4 million of which was financed under the Barclays Repurchase Facility,$199.2 million of which was financed under the Citibank Repurchase Facility and$123.6 million of which was financed under the Wells Fargo Repurchase Facility. As ofSeptember 30, 2021 , we believe that we were in compliance with the financial covenants of the Mortgage Loan, the Class A Notes, and the Repurchase Agreements, as well as the financial covenants under our various fixed and variable rate debt agreements, as further discussed in Note 9 - Notes Payable, Repurchase Facilities and Credit Facilities to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Short -term Liquidity and Capital Resources On a short-term basis, our principal demands for funds will be for the acquisition of real estate-related securities, real estate and real estate-related assets and the payment of acquisition-related fees and expenses, operating expenses, distributions, redemptions and interest and principal on current and any future debt financings, including principal repayments of$98.5 million within the next 12 months. We expect to meet our short-term liquidity requirements through cash proceeds from real estate asset dispositions, net cash provided by operations and proceeds from the Secondary DRIP Offering, as well as secured or unsecured borrowings from banks and other lenders to finance our future acquisitions and loan originations. Operating cash flows are expected to increase as we complete future acquisitions. We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months. Management intends to use the proceeds from the disposition of properties to, among other things, acquire additional high-quality net-lease properties and credit investments in furtherance of our investment objectives and for other general corporate purposes. Long-term Liquidity and Capital Resources On a long-term basis, our principal demands for funds will be for the acquisition of real estate-related securities, real estate and real estate-related credit investments and the payment of tenant improvements, acquisition-related expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on any current and future indebtedness. Generally, we expect to meet our long-term liquidity requirements through proceeds from cash flows from operations, proceeds from secured or unsecured borrowings from banks and other lenders, and proceeds raised pursuant to the Secondary DRIP Offering. We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including borrowings on our unencumbered assets. To the extent that cash flows from operations are lower, distributions paid to our stockholders may be lower. We expect that 58
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substantially all net cash flows from the Offerings or debt financings will be used to fund acquisitions, loan originations, certain capital expenditures, repayments of outstanding debt or distributions and redemptions to our stockholders. Contractual Obligations As ofSeptember 30, 2021 , we had debt outstanding with a carrying value of$2.8 billion and a weighted average interest rate of 2.8%. See Note 9 - Notes Payable, Repurchase Facilities and Credit Facilities to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for certain terms of our debt outstanding. Our contractual obligations as ofSeptember 30, 2021 were as follows (in thousands): Payments due by period (1) Less Than 1 More Than Total Year 1-3 Years 3-5 Years 5 Years Principal payments - fixed rate debt (2)$ 387,262 $ 7,870
29,488 15,279 14,022 187 - Principal payments - variable rate debt 82,844 82,844 - - - Interest payments - variable rate debt (4) 2,759 2,759 - - - Principal payments - first lien mortgage loan (5) 650,000 - 650,000 - - Interest payments - first lien mortgage loan (5) 33,857 18,200 15,657 - - Principal payments - net-lease mortgage notes (6) 772,710 7,740 6,450 - 758,520 Interest payments - net-lease mortgage notes (6) 186,543 21,636 43,450 43,390 78,067 Principal payments - credit facilities 406,500 - - 406,500 - Interest payments - credit facilities 23,815 7,317 14,654 1,844 - Principal payments - repurchase facilities (7) 507,253 - 507,253 - - Interest payments - repurchase facilities (7) 28,094 10,650 17,444 - - Total$ 3,111,125 $ 174,295 $ 1,625,341 $ 474,902 $ 836,587
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(1)The table does not include amounts due to CMFT Management or its affiliates pursuant to our Management Agreement because such amounts are not fixed and determinable. The table also does not include$123.7 million of unfunded commitments related to our existing CRE loans held-for-investment which are subject to the satisfaction of borrower milestones. (2)Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties, which excludes the fair value adjustment, net of amortization, of mortgage notes assumed. (3)As ofSeptember 30, 2021 , we had variable rate debt outstanding of$82.8 million with a weighted average interest rate of 5.5%. We used the weighted average interest rate to calculate the debt payment obligations in future periods. (4)As ofSeptember 30, 2021 , the amounts outstanding under theCredit Securities Revolver totaled$406.5 million and had a weighted average interest rate of 1.8%. (5)As ofSeptember 30, 2021 , the amounts outstanding under the Mortgage Loan totaled$650.0 million and had a weighted average interest rate of 2.8%. (6)As ofSeptember 30, 2021 , the amounts outstanding under the Class A Notes totaled$772.7 million and had a weighted average interest rate of 2.8%. (7)As ofSeptember 30, 2021 , the amount outstanding under the Citibank Repurchase Facility was$199.2 million at a weighted average interest rate of 2.1%, the amount outstanding under the Barclays Repurchase Facility was$184.4 million at a weighted average interest rate of 2.3%, and the amount outstanding under the Wells Fargo Repurchase Facility was$123.6 million at a weighted average interest rate of 1.8%. 59
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We expect to incur additional borrowings in the future to acquire additional properties and credit investments. There is no limitation on the amount we may borrow against any single improved property. As ofSeptember 30, 2021 , our ratio of debt to total gross assets net of gross intangible lease liabilities was 55.0% and our ratio of debt to the fair market value of our gross assets net of gross intangible lease liabilities was 57.1%. Fair market value is based on the estimated market value of our real estate assets as ofSeptember 30, 2020 that were used to determine our estimated per share NAV, and for those assets acquired fromJuly 1, 2020 throughSeptember 30, 2021 is based on the purchase price. Our management reviews net debt as part of its management of our overall liquidity, financial flexibility, capital structure and leverage, and we therefore believe that the presentation of net debt provides useful information to stockholders. Net debt is a non-GAAP measure used to show our outstanding principal debt balance, excluding certain GAAP adjustments, such as premiums or discounts, financing and issuance costs, and related accumulated amortization, less all cash and cash equivalents. As ofSeptember 30, 2021 , our net debt leverage ratio, which is the ratio of net debt to total gross real estate and related assets net of gross intangible lease liabilities, was 49.3%. The following table provides a reconciliation of the notes payable and credit facility, net balance, as reported on our condensed consolidated balance sheet, to net debt as ofSeptember 30, 2021 (dollar amounts in thousands):
Sale at
September 30, 2021 Notes payable, repurchase facilities and credit facilities, net$ 2,776,215 Deferred costs and net premiums (1) 30,354 Less: Cash and cash equivalents (289,840) Net debt$ 2,516,729 Gross real estate and related assets, net (2)$ 5,107,228 Net debt leverage ratio 49.3 %
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(1) Deferred costs relate to mortgage notes payable and the term portion of the Credit Facilities. (2) Net of gross intangible lease liabilities. Includes gross assets held for sale, as well as real estate-related securities and loans held-for-investment principal balance, net of allowance for credit losses, of$1.7 billion . Cash Flow Analysis Operating Activities. Net cash provided by operating activities increased by$25.8 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The increase was primarily due to the acquisition of 146 properties in connection with the CCIT III and CCPT V Mergers that closed inDecember 2020 along with increases in credit investments driving higher interest income, partially offset by the disposition of 124 properties and one outparcel of land subsequent toSeptember 30, 2020 . See "- Results of Operations" for a more complete discussion of the factors impacting our operating performance. Investing Activities. Net cash used in investing activities decreased$141.6 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The change was primarily due to a decrease in the net investment in broadly syndicated loans of$237.4 million , and an increase in proceeds from disposition of real estate assets of$265.0 million . The change was partially offset by an increase in the net investment in loans held-for-investment of$287.6 million and an increase in the net investment of real estate-related securities of$67.6 million . Financing Activities. Net cash provided by financing activities increased$323.1 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The change was primarily due to an increase in net proceeds on the credit facilities, notes payable and repurchase facilities of$346.2 million as a result of entering into and upsizing the Repurchase Facilities, the Mortgage Loan and the Class A Notes, coupled with a decrease in redemptions of common stock of$35.7 million as a result of the Board's suspension of the Amended Share Redemption Program fromAugust 30, 2020 throughMarch 31, 2021 . The change was offset by increased deferred financing costs paid as a result of entering into new debt agreements as described above. 60
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Election as a REIT We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes commencing with our taxable year endedDecember 31, 2012 . To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated financial statements. Critical Accounting Policies and Significant Accounting Estimates Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 - Summary of Significant Accounting Policies to our audited consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We consider our critical accounting policies to be the following: â¢Recoverability of Real Estate Assets; â¢Allocation of Purchase Price of Real Estate Assets; and â¢Allowance for Credit Losses. A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year endedDecember 31, 2020 and related notes thereto. We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate assets may not be recoverable. Impairment indicators that we consider include, but are not limited to: bankruptcy or other credit concerns of a property's major tenant, such as a history of late payments, lease concessions and other factors; a significant decrease in a property's revenues due to lease terminations; vacancies; co-tenancy clauses; reduced lease rates; or changes in anticipated holding periods. We continue to evaluate our portfolio to determine if anticipated holding periods for certain properties may materially differ from the initial intended holding periods for such properties, which could result in an impairment charge in the future. 61
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Related-Party Transactions and Agreements We have entered into agreements with CMFT Management or its affiliates whereby we agree to pay certain fees to, or reimburse certain expenses of, CMFT Management or its affiliates such as management and advisory fees and expenses, organization and offering costs, leasing fees and reimbursement of certain operating costs. See Note 11 - Related-Party Transactions and Arrangements to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements and fees. Conflicts of InterestRichard S. Ressler , the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CMFT Management, is the chairman of the board, chief executive officer and president of CIM Income NAV. One of our directors,Avraham Shemesh , who is also a founder and principal of CIM and is an officer/director of certain of its affiliates including CMFT Management, serves as a director of CIM Income NAV. One of our directors,Elaine Y. Wong , also serves as a director of CIM Income NAV. One of our independent directors,W. Brian Kretzmer , also serves as an independent director of CIM Income NAV.Nathan D. DeBacker , our chief financial officer and treasurer, who is also the chief financial officer and treasurer of CIM Income NAV, is a vice president of CMFT Management and is an officer of certain of its affiliates. In addition, affiliates of CMFT Management act as an advisor to CIM Income NAV. As such, there may be conflicts of interest where CMFT Management or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another real estate program sponsored or operated by CIM orCCO Group , including other real estate offerings in registration, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions and loan investments (and the allocation thereof), dispositions, and property management, among others. The compensation arrangements between affiliates of CMFT Management and these other real estate programs sponsored or operated byCIM and CCO Group could influence the advice provided to us. See Part I, Item 1. Business - Conflicts of Interest in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Off-Balance Sheet Arrangements As ofSeptember 30, 2021 andDecember 31, 2020 , we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources. Item 3.Quantitative and Qualitative Disclosures About Market Risk Market Risk The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations. Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match the interest rate characteristics of our investments with the interest rate characteristics of any related financing obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. As ofSeptember 30, 2021 , we had an aggregate of$1.6 billion of variable rate debt, and therefore, we are exposed to interest rate changes in LIBOR. As ofSeptember 30, 2021 , an increase or decrease of 50 basis points in interest rates would result in an increase or decrease in interest expense of$8.2 million per year. As ofSeptember 30, 2021 , we had five interest rate cap agreements outstanding, which mature on various dates fromMay 2022 throughJuly 2023 , with an aggregate notional amount of$752.6 million and an aggregate fair value of the net derivative asset of$51,000 . The fair value of these interest rate cap agreements is dependent upon existing market interest rates. As ofSeptember 30, 2021 , an increase of 50 basis points in interest rates would result in a change of$166,000 to the fair value of the 62
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net derivative asset, resulting in a net derivative asset of$217,000 . A decrease of 50 basis points in interest rates would result in a$45,000 change to the fair value of the net derivative asset, resulting in a net derivative asset of$6,000 . As the information presented above includes only those exposures that existed as ofSeptember 30, 2021 , it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations. These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure. InJuly 2017 , theFinancial Conduct Authority ("FCA") that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, theFederal Reserve Board and theFederal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative toU.S. dollar LIBOR in derivatives and other financial contracts. InMarch 2021 , theFCA confirmed its intention to cease publishing one week and two-month LIBOR afterDecember 31, 2021 and all remaining LIBOR afterJune 30, 2023 . This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to SOFR. Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances byDecember 31, 2021 . The Company anticipates that LIBOR will continue to be available at least untilJune 30, 2023 . Any changes adopted byFCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. We have interest rate cap agreements maturing on various dates fromMay 2022 throughJuly 2023 , as further discussed above, that are indexed to LIBOR. As such, we are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition. If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected. While we expect LIBOR to be available in substantially its current form until at least the end ofJune 30, 2023 , it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate. The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR. Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the Company. Credit Risk Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We are subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, states or industries could result in a material reduction of our cash flows or material losses to us. The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status, including the impact of the COVID-19 pandemic (credit ratings for public companies are used as a 63
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primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality of our existing tenant base, reviews of prospective tenants' risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants and mitigation options. Our loans and investments are also subject to credit risk. The performance and value of our loans and investments depend upon the owners' ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our manager reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. Item 4.Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as ofSeptember 30, 2021 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as ofSeptember 30, 2021 , were effective at a reasonable assurance level. Changes in Internal Control Over Financial Reporting No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months endedSeptember 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 64
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