Quantitative and Qualitative Disclosures About Market Risk
−Removed: We are exposed to market risks in the ordinary course of our business.
−Removed: These risks primarily relate to fluctuations in interest rates.
−Removed: Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers.
−Removed: Changes in market yields and revenue multiples may change the fair value of certain of our loans.
−Removed: Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, while a decrease in revenue multiples may result in a decrease in the fair value of certain of our loans ;
−Removed: however, this is mitigated to the extent our loans bear interest at a floating rate.
−Removed: As of September 30, 2023 , a decrease of 50 bps or increase of 50 bps of the market yield would have resulted in a change in unrealized gain (loss) of approximately $0.3 million and $(0.3) million, respectively.
−Removed: As of September 30, 2023 , we had seven floating-rate loans, representing approximately 68% of our portfolio based on aggregate outstanding principal balances.
−Removed: These floating benchmark rates included one-month SOFR subject to a weighted average floor of 3.3% and quoted at 5.3% and U.S.
−Removed: prime rate subject to a weighted average floor of 4.9% and quoted at 8.5%.
−Removed: We estimate that a hypothetical 100 basis points increase in the floating benchmark rate would result in an increase in annual interest income of approximately $2.7 million and a hypothetical 100 basis points decrease in the floating benchmark rate would result in a decrease in annual interest income of approximately $(2.4) million.
+Added: Risk Management
+Added: To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio.
+Added: Generally, with the guidance and experience of our Manager:
+Added: • we manage our portfolio through an interactive process with our Manager and service our self-originated loans through our Manager’s servicer;
+Added: • we invest in a mix of floating- and fixed-rate loans to mitigate the interest rate risk associated with the financing of our portfolio;
+Added: • we actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools such as software and services licensed or purchased from third-parties and proprietary analytical methods developed by our Manager;
+Added: • we seek to manage credit risk through our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate.
+Added: In addition, with respect to any particular target investment, prior to origination or acquisition our Manager’s investment team evaluates, among other things, relative valuation, comparable company analysis, supply and demand trends, shape-of-yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral.
LIBOR Transition
1 unchanged sentence
The ICE Benchmark Administration (the “IBA”), which is supervised by the FCA, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021, and the remaining USD LIBOR tenors (overnight, one-month, three-month, six-month and 12-month) ended following their publication on June 30, 2023.
−Removed: On April 3, 2023, the FCA announced that it will compel the IBA to publish an unrepresentative synthetic USD LIBOR through September 30, 2024 for use in legacy contracts.
−Removed: As of September 30, 2023 , seven of our loans, representing approximately 68% of our portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to either SOFR or U.S.
+Added: On April 3, 2023, the FCA announced that it would compel the IBA to publish an unrepresentative synthetic USD LIBOR through September 30, 2024 for use in legacy contracts.
+Added: As of March 31, 2024 , eight of our loans, representing approximately 51% of our portfolio based on aggregate outstanding principal balances, paid interest at a variable rate tied to either SOFR or U.S.
If one of these floating benchmarks are no longer available, our applicable loan documents generally include fallback provisions that allow us to choose a new index based upon comparable information.
2 unchanged sentences
In addition, changes to another index could result in mismatches with the interest rate of loans that we are financing.
−Removed: As of September 30, 2023 , none of our loans paid interest at a variable rate tied to LIBOR, transitioning the remaining loan tied to LIBOR to one-month SOFR in July 2023 in accordance with the loan documents.
+Added: As of March 31, 2024 , none of our loans paid interest at a variable rate tied to LIBOR.
Changes in Fair Value of Our Assets
2 unchanged sentences
We may carry our loans at fair value or carrying value in our consolidated balance sheet.
−Removed: As of September 30, 2023 and December 31, 2022 , two and three of our loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, respectively, with changes in fair value recorded through earnings.
+Added: As of March 31, 2024 and December 31, 2023, two of our loans held for investment were carried at fair value within loans held at fair value in our consolidated balance sheets, respectively, with changes in fair value recorded through earnings.
We evaluate our loans on a quarterly basis and fair value is determined by our Board through its independent Audit and Valuation Committee.
1 unchanged sentence
Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers.
+Added: Alternative valuation methodologies may be used as appropriate, and can include a market analysis, income analysis, or recovery analysis.
To determine fair value using a yield analysis, a current price is imputed for the loan based upon an assessment of the expected market yield for a similarly structured loan with a similar level of risk.
2 unchanged sentences
As loans held by us are substantially illiquid with no active transaction market, we depend on primary market data, including newly funded loans, as well as secondary market data with respect to high-yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable.
−Removed: Changes in market yields and revenue multiples may change the fair value of certain of our loans.
−Removed: Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, while a decrease in revenue multiples may result in a decrease in the fair value of certain of our loans ;
+Added: Changes in market yields, recovery rates, and revenue multiples may change the fair value of certain of our loans.
+Added: Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, while a decrease in revenue multiples and recovery rates may result in a decrease in the fair value of certain of our loans ;
however, this is mitigated to the extent our loans bear interest at a floating rate.
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If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
+Added: We are exposed to market risks in the ordinary course of our business.
+Added: These risks primarily relate to fluctuations in interest rates.
+Added: Our loans are typically valued using a yield analysis, which is typically performed for non-credit impaired loans to borrowers.
+Added: Alternative valuation methodologies may be used as appropriate, and can include a market analysis, income analysis, or recovery analysis.
+Added: Changes in market yields, revenue multiples, and recovery rates may change the fair value of certain of our loans.
+Added: Generally, an increase in market yields may result in a decrease in the fair value of certain of our loans, while a decrease in revenue multiples and recovery rates may result in a decrease in the fair value of certain of our loans;
+Added: however, this is mitigated to the extent our loans bear interest at a floating rate.
+Added: As of March 31, 2024, a decrease of 50 bps or increase of 50 bps of the market yield would have resulted in a change in unrealized gain (loss) of approximately $0.2 million and $(0.2) million, respectively.
+Added: As of March 31, 2024, we had eight floating-rate loans, representing approximately 51% of our portfolio based on aggregate outstanding principal balances.
+Added: These floating benchmark rates included one-month SOFR subject to a weighted average floor of 3.7% and quoted at 5.3% and U.S.
+Added: prime rate subject to a weighted average floor of 5.4% and quoted at 8.5%.
+Added: We estimate that a hypothetical 100 basis points increase in the floating benchmark rate would result in an increase in annual interest income of approximately $2.3 million and a hypothetical 100 basis points decrease in the floating benchmark rate would result in a decrease in annual interest income of approximately $(1.9) million.
Interest Rate Cap Risk
7 unchanged sentences
Interest Rate Mismatch Risk
−Removed: We may fund a portion of our origination of loans, or of loans that we may in the future acquire, with borrowings that are based on various benchmarks, while the interest rates on these assets may be fixed or indexed to LIBOR, SOFR, U.S.
+Added: We may fund a portion of our origination of loans, or of loans that we may in the future acquire, with borrowings that are based on various benchmarks, while the interest rates on these assets may be fixed or indexed to SOFR, U.S.
prime rate, or another index rate.
15 unchanged sentences
As a result, we cannot predict the percentage of our capital that will be invested in any individual target investment at any given time.
−Removed: Our loan portfolio as of September 30, 2023 was concentrated with the top four borrowers representing approximately 68.5% of the aggregate outstanding principal balances and approximately 68.8% of the total loan commitments.
+Added: Our loan portfolio as of March 31, 2024 was concentrated with the top four borrowers representing approximately 58.3% of the aggregate outstanding principal balances and approximately 57.3% of the total loan commitments.
Additionally, the industry is experiencing significant consolidation, which we expect to increase, among cannabis operations and certain of our borrowers may combine, increasing the concentration of our borrower portfolio with those consolidated operators.
−Removed: Our largest credit facility represented approximately 21.1% of the aggregate outstanding principal balances of our portfolio and approximately 19.4% of our total loan commitments as of September 30, 2023.
+Added: Our largest credit facility represented approximately 19.0% of the aggregate outstanding principal balances of our portfolio and approximately 16.8% of our total loan commitments as of March 31, 2024.
The borrower under this credit facility is a Subsidiary of Public Company H, a multi-state operator with real estate assets in several states, certain of which have been included as collateral in connection with the senior term loan.
−Removed: Our portion of the senior term loan provided to such borrower has a principal amount of $84.0 million outstanding as of September 30, 2023, which is fully funded.
+Added: Our portion of the senior term loan provided to such borrower has a principal amount of $84.0 million outstanding as of March 31, 2024, which is fully funded.
This senior term loan accrues interest at a variable rate of U.S.
23 unchanged sentences
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses.
−Removed: Risk Management
−Removed: To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio.
−Removed: Generally, with the guidance and experience of our Manager:
−Removed: • we manage our portfolio through an interactive process with our Manager and service our self-originated loans through our Manager’s servicer;
−Removed: • we invest in a mix of floating- and fixed-rate loans to mitigate the interest rate risk associated with the financing of our portfolio;
−Removed: • we actively employ portfolio-wide and asset-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools such as software and services licensed or purchased from third-parties and proprietary analytical methods developed by our Manager;
−Removed: • we seek to manage credit risk through our due diligence process prior to origination or acquisition and through the use of non-recourse financing, when and where available and appropriate.
−Removed: In addition, with respect to any particular target investment, prior to origination or acquisition our Manager’s investment team evaluates, among other things, relative valuation, comparable company analysis, supply and demand trends, shape-of-yield curves, delinquency and default rates, recovery of various sectors and vintage of collateral.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.