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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-28 · 203 added, 199 removed, 345 unchanged (54% of the section changed)

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Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

We are a non-traded REIT that seeks to attain attractive risk-adjusted returns and create long term value for its investors by investing in a diversified portfolio of senior secured mortgage loans, creditworthy long-term net-leased property investments and other senior loan and liquid credit investments.

We are a non-traded REIT that seeks to attain attractive risk-adjusted returns and create long term value for our stockholders by investing in a diversified portfolio of senior secured mortgage loans, creditworthy long-term net-leased property investments and other senior loan and liquid credit investments.

Our investment strategy allows us to adapt 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.

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federal income tax purposes.

We have no paid employees and are externally managed by CMFT Management and, with respect to investments in securities and certain other of our investments, our Investment Advisor, each of which is an affiliate of CIM Group, a community-focused real estate and infrastructure owner, operator, lender and developer.

We have no paid employees and are externally managed by CMFT Management and, with respect to investments in securities and certain other of our investments, our Investment Advisor, each of which is an affiliate of CIM Group, a vertically-integrated community-focused real estate and infrastructure owner, operator, lender and developer.

As of December 31, 2023, our loan portfolio consisted of 291 loans with a net book value of $4.3 billion, and investments in real estate-related securities of $519.7 million.

As of December 31, 2022, we owned 380 properties, which consisted of 363 retail properties, nine office properties, and eight industrial properties, representing 25 industry sectors and comprising 10.9 million rentable square feet of commercial space located in 43 states, with a net book value of $2.0 billion.

The Company expects to conduct its commercial real estate lending business through CLR, a Maryland statutory trust and currently wholly owned subsidiary of the Company which we expect to be taxed as a REIT for U.S.

federal income tax purposes.

As of February 29, 2024, CLR holds a diversified portfolio of approximately $1.6 billion of the Company’s senior secured mortgage loans and commercial mortgage-backed securities.

As of December 31, 2023, we owned 192 properties, which consisted of 179 retail properties, eight office properties, and five industrial properties, representing 17 industry sectors and comprising approximately 6.2 million rentable square feet of commercial space located in 37 states, with a net book value of $1.1 billion.

As of December 31, 2023, we owned condominium developments with a net book value of $87.6 million.

In furtherance of our strategy, during the year ended December 31, 2022, we disposed of 134 properties and an outparcel of land, including the two properties previously owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”), encompassing 11.8 million gross rentable square feet, as further discussed in Note 4 — Real Estate Assets to the consolidated financial statements in this Annual Report on Form 10-K.

In addition, on December 29, 2022, certain subsidiaries of the Company entered into the Realty Income Purchase and Sale Agreement to sell 185 single-tenant net lease properties for total consideration of $894.0 million.

Subsequent to December 31, 2022, the sale of 151 properties closed under the Realty Income Purchase and Sale Agreement for total consideration of $779.0 million, as further discussed in Note 19 — Subsequent Events to the consolidated financial statements in this Annual Report on Form 10-K.

The remaining properties are expected to close in the second quarter of 2023, although no assurances can be made that we will complete the sale of the remaining properties within that timeframe, or at all.

Our operating results and cash flows are primarily influenced by interest income from our credit investments, rental and other property income from our commercial properties, interest expense on our indebtedness and credit investments and operating expenses.

During the year ended December 31, 2023, we disposed of 188 properties encompassing 4.8 million gross rentable square feet, including the sale of 178 properties that closed pursuant to the Realty Income Purchase and Sale Agreement (as defined in Note 4 — Real Estate Assets to the consolidated financial statements in this Annual Report on Form 10-K) for total consideration of $861.0 million, as further discussed in Note 4 — Real Estate Assets to the consolidated financial statements in this Annual Report on Form 10-K.

In general, our business model is such that rising interest rates will correlate to increases in our net income, while declining interest rates will correlate to decreases in our net income.

As of December 31, 2022, 99.3% of our CMBS and loans held-for-investment by carrying value earned a floating rate of interest, primarily indexed to SOFR and U.S.

dollar LIBOR, and were financed with liabilities that pay interest at floating rates, which resulted in an amount of net equity that is positively correlated to rising interest rates, subject to the impact of interest rate floors on certain of our floating rate loans.

As of December 31, 2023, 99.3% of our CMBS and loans held-for-investment by carrying value earned a floating rate of interest, indexed to Secured Overnight Financing Rate (“SOFR”), and were financed with liabilities that pay interest at floating rates, which resulted in an amount of net equity that is positively correlated to rising interest rates, subject to the impact of interest rate floors on certain of our floating rate loans.

CMFT Management reviews our investment portfolio and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

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Macroeconomic Environment

The year 2022 was characterized by steep declines and significant volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty.

Inflation across many key economies reached generational highs, prompting central banks to take monetary policy tightening actions that have created, and will likely continue to create, headwinds to economic growth.

The ongoing war between Russia and Ukraine is also contributing to mounting inflationary pressure.

Inflation has caused the Federal Reserve to continue raising interest rates, which has created further uncertainty for the economy and for our borrowers and tenants.

The year 2023 was characterized by continued volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth, political and regulatory uncertainty and geopolitical conditions.

Events affecting financial institutions have contributed to instability in the banking sector and have also contributed to diminished liquidity and credit availability in the market broadly.

Continued inflation has caused the Federal Reserve to raise interest rates, and while the Federal Reserve has left interest rates unchanged since its July 26, 2023 meeting, interest rates are expected to remain at an elevated level in the near-term, which has created further uncertainty for the economy and for our borrowers and tenants.

Although the majority of our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers, tenants and owned property values.

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While there is debate among economists as to whether such factors indicate that the U.S.

has entered, or in the near term will enter, a recession, it remains difficult to predict the full impact of recent changes and any future changes in interest rates or inflation.

will enter a recession, it remains difficult to predict the full impact of recent changes and any future changes in interest rates or inflation.

Operating Highlights and Key Performance Indicators

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Credit Portfolio Activity:

• Invested $1.3 billion in first mortgage loans and received principal repayments on loans held-for-investment of $172.6 million.

• Invested $477.3 million in first mortgage loans.

• Invested $121.3 million in liquid corporate senior loans and sold liquid corporate senior loans for an aggregate gross sales price of $210.8 million.

• Invested $558.2 million in CMBS.

• Converted $68.2 million of preferred units into a CRE loan upon maturity.

• Invested $74.8 million in corporate senior loans and received repayments of $17.9 million.

• Invested $154.1 million in corporate senior loans.

• Received principal repayments on loans held-for-investment of $197.0 million.

• Invested $163.9 million in CMBS, received principal repayments on CMBS of $60.2 million and sold CMBS for an aggregate gross sales price of $77.4 million.

• Funded an additional $40.0 million in NP JV Holdings (as defined in Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements in this Annual Report on Form 10-K).

Real Estate Portfolio Activity:

• Disposed of 134 properties and an outparcel of land, including the two properties previously owned through the Consolidated Joint Venture, for an aggregate sales price of $1.7 billion.

• Disposed of 188 properties for an aggregate sales price of $925.9 million.

• Disposed of 18 condominium units for an aggregate sales price of $51.2 million.

• Entered into the Realty Income Purchase and Sale Agreement to dispose of 185 single-tenant net lease properties for total consideration of approximately $894.0 million.

Financing Activity:

• Increased total debt by $272.5 million.

• Entered into a new repurchase agreement and increased maximum financing amounts on two existing repurchase facilities to provide up to $1.25 billion and $750.0 million, respectively, to finance a portfolio of existing and future commercial real estate mortgage loans and CMBS.

• Entered into a new credit agreement that provides for borrowings of up to $300.0 million, which includes a $100.0 million term loan facility and the ability to borrow up to $200.0 million in revolving loans under a revolving credit facility with a $30.0 million letter of credit subfacility.

• Paid down the $212.5 million outstanding balance under the CIM Income NAV Credit Facility (as defined below) and terminated the CIM Income NAV Credit Facility.

• Decreased total debt by $504.8 million.

• Entered into a new financing facility with Ally Bank (as defined in Note 10 — Repurchase Facilities, Notes Payable and Credit Facilities to the consolidated financial statements in this Annual Report on Form 10-K) that provides up to $300.0 million in financing, which may be increased to an aggregate principal amount up to $500.0 million, pursuant to the revolving loan and security agreement entered into.

• Paid down the $240.0 million outstanding balance under the CMFT Credit Facility (as defined below) and terminated the CMFT Credit Facility.

• Paid down the $121.9 million outstanding balance on the first lien mortgage loan with JP Morgan Chase (as defined below).

• Paid down the $43.1 million outstanding balance on the refinanced Assumed Variable Rate Debt (as defined in Note 10 — Repurchase Facilities, Notes Payable and Credit Facilities to the consolidated financial statements in this Annual Report on Form 10-K) and terminated the respective amended borrowing agreement.

• Increased the aggregate maximum financing amount under the repurchase facilities with Citibank, N.A.

to $650.0 million.

Portfolio Information

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CMBS and equity security 23 555,522 9.3 % 21 576,391 8.6 %

Preferred units — — — % 1 63,490 1.0 %

Current expected credit losses

(35,808) (0.6) % — — %

Total real estate-related securities, net

23 519,714 8.7 % 21 576,391 8.6 %

Total real estate assets and intangible lease liabilities, net 192 1,195,276 20.0 % 380 2,158,874 32.0 %

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CRE Loans (1)(2)

Liquid Corporate Senior Loans CMBS and Equity Security Corporate Senior Loans

Liquid Corporate Senior Loans CMBS and Equity Security (2)

Corporate Senior Loans

Number of investments (3)

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Weighted-average interest rate (4)

8.7 % 9.3 % 9.2 % 11.9 %

Weighted-average maximum years to maturity

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(1) As of December 31, 2022, 100% of our loans by principal balance earned a floating rate of interest, primarily indexed to U.S.

dollar LIBOR and SOFR.

(1) As of December 31, 2023, 100% of our loans by principal balance earned a floating rate of interest indexed to SOFR.

(2) Maximum maturity date assumes all extension options are exercised by the borrowers and assumes all relevant conditions are met for such extensions;

however, our loans and CMBS may be repaid prior to such date.

(3) Table does not include our investment in the Unconsolidated Joint Venture (as defined in Note 2 — Summary of Significant Accounting Policies — Investment in Unconsolidated Entities to the consolidated financial statements in this Annual Report on Form 10-K), which had a carrying value of $126.8 million as of December 31, 2023.

(3) Maximum maturity date assumes all extension options are exercised by the borrower;

however, our CRE loans may be repaid prior to such date.

As of December 31, 2022, our CRE loans had the following characteristics based on carrying values:

(4) The weighted-average interest rate for variable rate investments is based on the relevant floating benchmark plus a spread.

(5) Includes two tranches of a CMBS position held by the Company that did not mature as anticipated in December and therefore were in maturity default as of December 31, 2023.

As of December 31, 2023, our CRE loans had the following characteristics based on carrying values (dollar amounts in thousands):

Collateral Property Type As of December 31, 2023

Office $ 1,848,219 50.5 %

Mixed Use 67,260 2.0 %

Multifamily 1,171,128 32.1 %

Retail 64,603 2.0 %

Industrial 344,772 9.5 %

Hospitality 89,797 2.5 %

Mixed Use 68,966 1.9 %

Retail 64,747 1.8 %

Self-Storage 60,722 1.7 %

Total first mortgage loans

$ 3,648,351 100.0 %

current expected credit losses

Total first mortgage loans, net

Geographic Location As of December 31, 2023

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East 767,626 21.0 %

Midwest 25,610 0.8 %

$ 3,285,193 100.0 %

Various 324,826 8.9 %

Total first mortgage loans $ 3,648,351 100.0 %

current expected credit losses

Total first mortgage loans, net

Real Estate Portfolio Information

As of December 31, 2023, we owned 192 properties located in 37 states, the gross rentable square feet of which was 99.9% leased, including any month-to-month agreements, with a weighted average lease term remaining of 10.7 years.

During the year ended December 31, 2022, we disposed of 134 properties and an outparcel of land, including the two properties previously owned through the Consolidated Joint Venture, for an aggregate gross sales price of $1.7 billion.

During the year ended December 31, 2023, we disposed of 188 properties for an aggregate gross sales price of $925.9 million.

Additionally, during the year ended December 31, 2023, we sold 18 condominium units for an aggregate gross sales price of $51.2 million.

During the years ended December 31, 2023 and 2022, the Company did not acquire any properties.

The following table shows the property statistics of our real estate assets as of December 31, 2023 and 2022:

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Rentable square feet (in thousands) (1)

10,935 22,720

Percentage of rentable square feet leased 99.9 % 99.2 %

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The weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated by Standard & Poor’s.

The following table summarizes our real estate acquisition activity during the years ended December 31, 2022 and 2021:

Year Ended December 31,

Commercial properties acquired — 115

Purchase price of acquired properties (in thousands) $ — $ 911,262

Rentable square feet (in thousands) (1)

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(1) Includes square feet of buildings on land parcels subject to ground leases.

The following table shows the tenant diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2023:

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Rental Income

Lowe’s 16 2,071 $ 14,087 $ 6.80 9 %

CVS 33 421 $ 8,852 $ 21.03 10 %

Cabela’s 1 403 7,198 17.86 8 %

United Oil 2 38 6,508 171.26 7 %

Lowe’s 8 1,073 6,321 5.89 7 %

Walgreens 11 162 3,903 24.09 4 %

Cabela’s 1 403 7,198 17.86 5 %

Bob Evans 3 190 6,866 36.14 4 %

LA Fitness 5 208 4,417 21.24 3 %

Vanguard Group 1 137 3,675 26.82 4 %

BJ’s Wholesale Club, Inc.

2 225 3,270 14.53 4 %

Valvoline Oil Change 1 162 3,060 18.89 4 %

Tractor Supply 11 213 2,892 13.58 3 %

Wal-Mart 4 440 4,043 9.19 3 %

Republic Services 1 134 3,543 26.44 2 %

Bob Evans 2 76 2,826 37.18 3 %

Other 65 3,234 41,459 12.82 46 %

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Health and Personal Care Stores 44 584 $ 12,755 $ 21.84 14 %

Sporting Goods, Hobby, and Musical Instrument Stores 14 1,154 15,551 13.48 10 %

Grocery Stores 23 1,278 14,458 11.31 9 %

Building Material and Supplies Dealers 16 2,071 14,087 6.80 9 %

Gasoline Stations 12 95 13,295 139.95 8 %

Manufacturing 7 1,009 10,320 10.23 12 %

General Merchandise Stores, including Warehouse Clubs and Superstores 34 1,068 10,697 10.02 7 %

Sporting Goods, Hobby, and Musical Instrument Retailers 4 575 9,807 17.06 11 %

Automotive Repair and Maintenance 9 312 7,603 24.37 8 %

Gasoline Stations 5 52 7,272 139.85 8 %

Warehouse Clubs, Supercenters, and Other General Merchandise Retailers 9 695 6,804 9.79 8 %

Finance and Insurance 2 257 6,486 25.24 7 %

Building Material and Supplies Dealers 8 1,073 6,321 5.89 7 %

Grocery Stores 9 717 6,279 8.76 7 %

Restaurants and Other Eating Places 10 108 4,313 39.94 5 %

Arts, Entertainment, and Recreation 7 318 5,970 18.77 4 %

Other 30 762 12,004 15.75 13 %

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California 28 72 7,164 99.50 8 %

Wisconsin 7 677 6,530 9.65 7 %

Florida 9 607 5,991 9.87 7 %

Texas 24 189 4,873 25.78 6 %

Illinois 9 594 4,659 7.84 5 %

Florida 19 741 9,796 13.22 6 %

Wisconsin 12 939 9,707 10.34 6 %

Georgia 10 737 8,663 11.75 5 %

Michigan 14 463 6,601 14.26 4 %

Arizona 2 140 3,973 28.38 5 %

Virginia 10 239 3,960 16.57 4 %

Kentucky 3 188 3,632 19.32 4 %

New Jersey 3 146 3,523 24.13 4 %

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Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, such as inflation and rising interest rates, that may reasonably be expected to have a material impact on our results from the acquisition, management and operation of properties other than those listed in Part I, Item 1A.

Risk Factors .

For a comparison of the years ended December 31, 2021 and 2020, see I tem 7.

For a comparison of the years ended December 31, 2022 and 2021, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Our operating segments include Credit and Real Estate.

Refer to Note 18 — Segment Reporting to our consolidated financial statements in this Annual Report on Form 10-K for further discussion of our operating segments.

The following table compares our summarized results of operations for the years ended December 31, 2023 and 2022 by operating segment (amounts in thousands):

For the Year Ended December 31,

2023 2022 Change

Credit Segment

$ 453,480 $ 238,757 $ 214,723

Real Estate Segment

115,056 213,001 (97,945)

568,859 452,146 116,713

Credit Segment

412,341 171,624 240,717

Real Estate Segment

105,874 176,207 (70,333)

58,126 68,213 (10,087)

576,341 416,044 160,297

Other (expense) income:

Credit Segment

(17,674) (4,964) (12,710)

Real Estate Segment

44,159 104,129 (59,970)

9,083 8,599 484

35,568 107,764 (72,196)

28,086 143,866 (115,780)

Net income allocated to non-controlling interest

Net income attributable to the Company

$ 28,078 $ 143,800 $ (115,722)

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Credit Segment

The increase in our Credit segment revenues of $214.7 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to increased average index rates during 2023, as well as an increase in the overall size of our investment portfolio.

As of December 31, 2023, we held $4.8 billion in credit investments compared to $4.6 billion in credit investments as of December 31, 2022.

Expenses for our Credit segment consist primarily of interest expense, increases (decreases) to our provision for credit losses, management fees, and general and administrative expenses.

The increase in our Credit segment expenses of $240.7 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to a $123.3 million increase in interest expense, net due to higher average index rates during 2023 and increased outstanding borrowings used to fund credit investments.

The increase was further driven by a $104.8 million increase in the provision for credit losses, primarily due to the asset-specific credit loss provision of $64.6 million recognized on two of the Company’s first mortgage loan investments and the $35.8 million credit loss allowance related to a CMBS position that was recognized due to a decline in the underlying collateral value during the year ended December 31, 2023.

Other Expense

Other expense for our Credit segment consists of gain on investment in unconsolidated entities, unrealized gain (loss) on equity security, along with dividend income from our equity security.

The increase in our Credit segment other expense of $12.7 million during the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to a $35.4 million decrease in other (expense) income, net, $39.4 million of which was due to the realized loss on sale of CMBS.

The increase in other expense was partially offset by a $4.8 million unrealized gain on equity security recognized during the year ended December 31, 2023, compared to a $15.1 million unrealized loss on equity security recognized during the

year ended December 31, 2022, a $4.9 million increase in gain on investment in unconsolidated entities and a $3.6 million increase driven by increased dividend income on our equity security and increased interest income generated by short-term investments included in cash and cash equivalents on the consolidated balance sheet for the year ended December 31, 2023.

Real Estate Segment

The decrease in our Real Estate segment revenues of $97.9 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to the disposition of 188 properties subsequent to December 31, 2022 and the disposition of 134 properties during the year ended December 31, 2022.

Refer to “Same Store Analysis” below for a further discussion of net operating income at our “same store properties”.

The decrease in our Real Estate segment expenses of $70.3 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to the disposition of 188 properties subsequent to December 31, 2022.

Refer to “Same Store Analysis” below for a further discussion of net operating income at our “same store properties”.

The decrease was partially offset by an increase in impairment charges of $4.2 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022, as six properties were deemed to be impaired during the year ended December 31, 2023, resulting in impairment charges of $20.4 million, as compared to 23 properties that were deemed to be impaired during the year ended December 31, 2022, resulting in impairment charges of $16.2 million.

Other income for our Real Estate segment primarily consists of gain on disposition of real estate and condominium developments, net, loss on extinguishment of debt and other income, net.

The decrease in our Real Estate segment other income of $60.0 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily due to the disposition of 188 properties resulting in a net gain of $44.4 million during the year ended December 31, 2023, compared to the disposition of 134 properties and an outparcel of land for a gain of $117.8 million during the year ended December 31, 2022.

Other income was further reduced due to a $4.6 million decrease in the fair value of our interest rate caps during the year ended December 31, 2023, as compared to a $4.5 million increase in the fair value of our interest rate caps during the year ended December 31, 2022.

The decrease was partially offset by a $17.5 million decrease in loss on extinguishment of debt, driven by increased termination of certain mortgage notes in connection with the disposition of the underlying properties during the year ended December 31, 2022, as compared to the year ended December 31, 2023.

Corporate and Other

Our corporate revenues, which consist primarily of rental income from our condominium and rental units acquired via foreclosure, decreased $65,000 during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to the write-off of certain rent previously owed as a result of a settlement during the year ended December 31, 2023.

Our corporate expenses consist primarily of general and administrative expenses, expense reimbursements to related parties, interest expense, net related to our credit facilities, and impairment on our condominium and rental units acquired via foreclosure.

The decrease in corporate expenses of $10.1 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022, was primarily due to a decrease in interest expense, net of $9.3 million, driven by the pay down and termination of the credit agreement with JPMorgan Chase Bank, N.A.

(“JP Morgan Chase”) and PNC Bank, N.A.

(the “CMFT Credit Facility”) during the year ended December 31, 2023, along with a decrease in expense reimbursements to related parties of $3.3 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The decrease was partially offset by a $3.4 million increase in transaction-related expenses driven by a tax settlement related to the Company’s condominium units during the year ended December 31, 2023.

The increase in corporate other income of $484,000 during the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily driven by an increase in other income, net of $9.6 million due to interest income generated by an increase in short-term liquid investments included in cash and cash equivalents on the consolidated balance

sheet for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

The increase was partially offset by the $5.2 million net gain during the year ended December 31, 2022, related to our investment in CIM UII Onshore, L.P.

(“CIM UII Onshore”), which was subsequently redeemed during 2022.

The increase was further offset by a $3.4 million increase in loss on extinguishment of debt during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily in connection with the paydown and termination of the CMFT Credit Facility and the refinanced Assumed Variable Rate Debt.

Net Income Allocated to Non-Controlling Interest

The change in net income allocated to non-controlling interest for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was due to the Company having sold the two properties previously owned through a consolidated joint venture arrangement during the year ended December 31, 2022, and therefore no longer having a controlling financial interest in the consolidated joint venture arrangement during the year ended December 31, 2023.

Same Store Analysis

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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 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) increase in 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 calculation of net 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 Years Ended December 31, 2023 and 2022

The following table reconciles net income, calculated in accordance with GAAP, to net operating income (dollar amounts in thousands):

The following table reconciles our Real Estate segment net income, calculated in accordance with GAAP, to net operating income (in thousands):

For the Year Ended December 31,

2023 2022 Change

Net income $ 143,866 $ 86,490 $ 57,376

$ 53,341 $ 140,923 $ (87,582)

Loss on extinguishment of debt 1,192 18,646 (17,454)

Interest expense and other, net 156,539 83,899 72,640

Unrealized loss on equity security 15,117 — 15,117

Gain on investment in unconsolidated entities (11,952) (606) (11,346)

Operating income 323,214 174,678 148,536

Merger-related expenses, net — 1,404 (1,404)

Other income (expense), net

4,380 (5,012) 9,392

Gain on disposition of real estate and condominium developments, net

Increase in provision for credit losses 29,476 2,881 26,595

(49,731) (117,763) 68,032

Real estate impairment

20,404 16,184 4,220

Depreciation and amortization

42,532 70,606 (28,074)

Transaction-related expenses

Management fees

Expense reimbursements to related parties 16,567 11,624 4,943

10,702 21,526 (10,824)

General and administrative expenses

Interest income (238,757) (70,561) (168,196)

Interest expense, net

22,884 41,295 (18,411)

Net operating income

Our operating segments include credit and real estate.

Refer to Note 18 — Segment Reporting to our consolidated financial statements in this Annual Report on Form 10-K for further discussion of our operating segments.

Credit Segment

Interest Income

The increase in interest income of $168.2 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due to an increase in the overall size of our investment portfolio.

As of December 31, 2022, we held $4.6 billion in credit investments compared to $2.7 billion in credit investments as of December 31, 2021.

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 $72.6 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to an increase in the average aggregate amount of debt outstanding from $2.8 billion as of December 31, 2021 to $4.3 billion as of December 31, 2022 as a result of entering into and upsizing additional repurchase agreements and assuming the credit agreement with JPMorgan Chase Bank, N.A., which provided for borrowings of up to $425.0 million (the “CIM Income NAV Credit Facility”) as part of the merger with CIM Income NAV, Inc.

(the “CIM Income NAV Merger”) on December 16, 2021.

The change was also driven by an increase in the Company’s weighted average interest rate from 2.6% as of December 31, 2021 to 5.6% as of December 31, 2022.

Increase in Provision for Credit Losses

The increase in provision for credit losses of $26.6 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to the increased number of loan investments entered into during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Unrealized Loss on Equity Security

The increase in unrealized loss on equity security of $15.1 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was due to capital market volatility driven by high inflation and escalating interest rates throughout 2022 following our acquisition of the equity security in connection with the RTL Purchase and Sale Agreement during the first quarter of 2022.

Real Estate Segment

$ 106,423 $ 187,469 $ (81,046)

A total of 192 properties were acquired before January 1, 2022 and represent our “same store” properties during the years ended December 31, 2023 and 2022.

“Non-same store” properties, for purposes of the table below, includes properties acquired or disposed of on or after January 1, 2021.

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 (1)

For the Year Ended December 31, For the Year Ended December 31, For the Year Ended December 31,

2022 2021 Change 2022 2021 Change 2022 2021 Change

“Non-same store” properties, for purposes of the table below, include properties acquired or disposed of on or after January 1, 2022.

The following table details the components of our Real Estate segment net operating income broken out between same store and non-same store properties (in thousands):

Total Same Store

Non-Same Store

For the Year Ended December 31,

For the Year Ended December 31, For the Year Ended December 31,

2023 2022 Change

2023 2022 Change 2023 2022 Change

Rental and other property income

$ 115,057 $ 213,001 $ (97,944) $ 96,844 $ 95,876 $ 968 $ 18,213 $ 117,125 $ (98,912)

Property operating expenses

5,204 14,609 (9,405) 4,027 3,717 310 1,177 10,892 (9,715)

Real estate tax expenses

3,430 10,923 (7,493) 3,677 3,656 21 (247) 7,267 (7,514)

Total property operating expenses

8,634 25,532 (16,898) 7,704 7,373 331 930 18,159 (17,229)

Net operating income

$ 106,423 $ 187,469 $ (81,046) $ 89,140 $ 88,503 $ 637 $ 17,283 $ 98,966 $ (81,683)

(1) Includes condominium and rental units acquired via foreclosure during the year ended December 31, 2021.

Loss on Extinguishment of Debt

The increase in loss on extinguishment of debt of $14.7 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to the increased terminations of certain mortgage notes in connection with the disposition of the underlying properties during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Gain on Investment in Unconsolidated Entities

The increase in gain on investment in unconsolidated entities of $11.3 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was due to the Company’s investments in CIM UII Onshore and NP JV Holdings (each as defined in Note 2 — Summary of Significant Accounting Policies — Investment in Unconsolidated Entities to the consolidated financial statements in this Annual Report on Form 10-K), in the fourth quarter of 2021.

Merger-Related Expenses, Net

The decrease in merger-related expenses, net of $1.4 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was due to the expenses incurred related to the CIM Income NAV Merger during the year ended December 31, 2021.

Gain on Disposition of Real Estate and Condominium Developments, Net

The increase in gain on disposition of real estate and condominium developments, net of $38.9 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was due to the disposition of 134 properties and one outparcel of land for a gain of $117.8 million and the disposition of condominium units for a gain of $4.1 million during the year ended December 31, 2022, compared to the disposition of 117 properties for a gain of $77.2 million and the disposition of condominium units for a gain of $5.9 million during the year ended December 31, 2021.

Real Estate Impairment

The increase in real estate impairments of $14.2 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was due to certain condominium units and 23 properties that were deemed to be impaired, resulting in impairment charges of $32.3 million during the year ended December 31, 2022, compared to certain condominium units and 12 properties that were deemed to be impaired, resulting in impairment charges of $18.1 million during the year ended December 31, 2021.

Depreciation and Amortization

The decrease in depreciation and amortization expenses of $24.6 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to the disposition of 134 properties subsequent to December 31, 2021, partially offset by the acquisition of 115 properties through the CIM Income NAV Merger that closed in December 2021.

Transaction-Related Expenses

The increase in transaction-related expenses of $219,000 during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to escrow holdbacks that were deemed uncollectible during the year ended December 31, 2022 and were therefore written off.

No such write-offs occurred during the year ended December 31, 2021.

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 13 — Related-Party Transactions and Arrangements to our consolidated financial statements in this Annual Report on Form 10-K, 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) of CMFT 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 by CMFT 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 $5.5 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to increased equity from the issuance of common stock in connection with the CIM Income NAV Merger that closed in December 2021.

Net Operating Income

Same store property net operating income increased $1.4 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The increase was primarily due to amended lease agreements increasing rent, coupled with a decrease in real estate taxes primarily due to lower assessed values at certain properties and a change in payment terms on select properties.

Same store property net operating income remained relatively consistent during the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Non-same store property net operating income decreased $81.7 million during the year ended December 31, 2023, as compared to the year ended December 31, 2022.

The decrease is primarily due to the disposition of 117 properties during the year ended December 31, 2021 and the disposition of 134 properties during the year ended December 31, 2022, 99 of which were acquired prior to 2021.

The decrease is partially offset by an increase in net operating income due to the acquisition of 115 properties in connection with the CIM Income NAV Merger that closed in December 2021.

Corporate/Other Segment

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 13 — Related-Party Transactions and Arrangements to our consolidated financial statements in this Annual Report on Form 10-K).

The increase in expense reimbursements to related parties of $4.9 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily due to increased operating expense reimbursements due to CMFT Management, primarily as a result of increased allocated payroll resulting from increased portfolio activity.

General and Administrative Expenses

The primary general and administrative expense items are legal and accounting fees, banking fees and transfer agency and board of directors costs.

General and administrative expenses remained relatively consistent during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The decrease was primarily due to the disposition of 188 properties subsequent to December 31, 2022 in addition to the disposition of 134 properties during the year ended December 31, 2022.

Distributions

Prior to April 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:

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

From April 20, 2020 through March 24, 2021, the Board determined the amount and timing of distributions on a monthly, instead of a quarterly, basis.

On March 25, 2021, the Board resumed declaring distributions on a quarterly basis, which are paid out on a monthly basis.

Since April 2020, our Board authorized the following monthly distribution amounts per share, payable to stockholders as of the record date for the applicable month, for the periods indicated below:

Our Board authorizes distributions on a quarterly basis, which are paid out on a monthly basis.

Our Board authorized the following monthly distribution amounts per share, payable to stockholders as of the record date for the applicable month, for the periods indicated below:

Period Commencing Period Ending Monthly Distribution Amount

April 2020 May 2020 $0.0130

June 2020 June 2020 $0.0161

July 2020 July 2020 $0.0304

August 2020 December 2021 $0.0303

December 2021

January 2022 September 2022 $0.0305

October 2022 December 2022 $0.0339

January 2023 June 2023 $0.0350

January 2023 September 2023

December 2023

June 2024 $0.0375

As of December 31, 2023, we had distributions payable of $16.0 million.

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Share Redemptions

In connection with the mergers with Cole Office & Industrial REIT (CCIT III), Inc.

and Cole Credit Property Trust V, Inc.

(the “CCIT III and CCPT V Mergers”), our Board suspended our share redemption program on August 30, 2020, and therefore, no shares were redeemed from our stockholders after that date until March 25, 2021, when our Board reinstated the share redemption program, effective April 1, 2021.

During the year ended December 31, 2023, we received valid redemption requests under our share redemption program totaling approximately 110.2 million shares, of which we redeemed approximately 5.2 million shares as of December 31, 2023 for $33.9 million (at an average redemption price of $6.57 per share) and approximately 1.7 million shares subsequent to December 31, 2023 for $11.0 million (at an average redemption price of $6.31 per share).

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Liquidity and Capital Resources

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 acquisitions and loan originations, repayment of certain indebtedness and for general corporate uses.

We expect to utilize proceeds from net cash provided by operations, cash proceeds from the sale of credit investments, principal payments received on credit investments, cash proceeds from real estate asset dispositions, proceeds from the Secondary DRIP Offering, proceeds from the sale of subsidiary equity, distributions, as well as secured or unsecured borrowings from banks and other lenders to finance our future 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 interest income from our portfolio of credit investments and the rental and other property income received from current and future leased properties.

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Portfolio Financing Outstanding Principal Balance Maximum Capacity (1)

Notes payable – fixed rate debt $ 36,538 $ 36,538

Notes payable – variable rate debt $ 622,841 $ 622,841

First lien mortgage loan 121,940 121,940

ABS mortgage notes 758,520 758,520

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(1) Subject to borrowing availability.

(2) Facilities under the Master Repurchase Agreement with J.P.

Morgan Securities LLC carry no maximum facility size.

(2) Facilities under the J.P.

Morgan Repurchase Facility carry no maximum facility size.

Capital Resources

Our principal demands for funds will be for the acquisition or origination of credit investments and real estate, and the payment of tenant improvements, acquisition-related expenses, operating expenses, distributions, redemptions and interest and principal on current and any future debt financings, including principal repayments of $633.1 million within the next 12 months, $199.6 million of which has a rolling term that resets monthly, as further discussed in Note 10 — Repurchase Facilities, Notes Payable and Credit Facilities to our consolidated financial statements in this Annual Report on Form 10-K.

Additionally, subsequent to December 31, 2022, the Company entered into a new financing facility with Ally Bank that provides up to an initial amount of $300.0 million in financing, as further discussed in Note 19 — Subsequent Events to our consolidated financial statements in this Annual Report on Form 10-K.

Generally, we expect to meet our 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.

Generally, we expect to meet our liquidity requirements through net cash provided by operations, cash proceeds from the sale of credit investments, principal payments received on credit investments, cash proceeds from real estate asset dispositions, proceeds from the Secondary DRIP Offering, proceeds from the sale of subsidiary equity, distributions, as well as secured or unsecured borrowings from banks and other lenders to finance our future acquisitions and loan originations, repayment of certain indebtedness and for general corporate uses.

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;

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To the extent that cash flows from operations are lower, distributions paid to our stockholders may be lower.

Operating cash flows are expected to increase as we complete future acquisitions.

We expect that substantially all net cash flows from the Secondary DRIP Offering 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.

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.

Contractual Obligations

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Year 1-3 Years 3-5 Years More Than

Principal payments — fixed rate debt $ 36,538 $ 448 $ 36,090 $ — $ —

Principal payments — variable rate debt $ 622,841 $ 202,072 $ — $ 420,769 $ —

Principal payments — first lien mortgage loan 121,940 121,940 — — —

Principal payments — ABS mortgage notes 758,520 — — 303,408 455,112

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In addition, the table does not include $2.2 million of unsettled liquid corporate senior loan acquisitions, which is included in cash and cash equivalents on the accompanying consolidated balance sheet.

(2) Interest payments on the variable rate debt, first lien mortgage loan, credit facilities and repurchase facilities have been calculated based on outstanding balances as of December 31, 2022 through their respective maturity dates.

(2) Interest payments on the variable rate debt, credit facilities and repurchase facilities have been calculated based on outstanding balances as of December 31, 2023 through their respective maturity dates.

This is only an estimate as actual amounts borrowed and interest rates could vary over time.

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Net cash provided by operating activities increased by $45.1 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

The increase was primarily due to net increases in credit investments of $1.9 billion driving higher interest income and the acquisition of 115 properties in connection with the CIM Income NAV Merger that closed in December 2021, partially offset by the disposition of 134 properties during the year ended December 31, 2022.

The increase was primarily due to net increases in credit investments of $206.2 million coupled with an increase in interest rates driving higher interest income.

The increase was partially offset by the disposition of 188 properties during the year ended December 31, 2023.

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 by $892.7 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The change was primarily due to a decrease in the net investment in loans held-for-investment of $457.8 million, a decrease in the net investment in unconsolidated entities of $67.1 million, and an increase in proceeds from disposition of real estate assets of $801.6 million as a result of 134 property dispositions during the year ended December 31, 2022, compared to 117 property dispositions during the year ended December 31, 2021.

This change was partially offset by an increase in the net investment of real estate-related securities of $476.6 million.

For the year ended December 31, 2023, net cash provided by investing activities was $559.5 million, as compared to net cash used in investing activities of $576.5 million during the year ended December 31, 2022.

The change was primarily due to a decrease in the net investment in loans held-for-investment of $998.8 million and a decrease in the net investment in real estate-related securities of $514.6 million, partially offset by a decrease in net proceeds from real estate assets and condominium units of $337.0 million.

The change was further offset by the $26.2 million net investment in unconsolidated entities during the year ended December 31, 2023, as compared to the $13.6 million net proceeds from the investment in unconsolidated entities during the year ended December 31, 2022, resulting in a $39.8 million net decrease in cash flow provided by investing activities year over year.

Financing Activities.

Net cash provided by financing activities decreased by $906.6 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

The change was primarily due to a decrease in net proceeds on the repurchase facilities, notes payable and credit facilities of $893.5 million, coupled with an increase in redemptions of common stock of $17.3 million due to the reinstatement of the share redemption program on April 1, 2021 and increased distributions to stockholders of $18.1 million.

The change was partially offset by a $17.3 million decrease in deferred financing costs paid as a result of a reduced amount of debt agreements entered into during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

For the year ended December 31, 2023, net cash used in financing activities was $699.3 million, as compared to net cash provided by financing activities of $430.3 million during the year ended December 31, 2022.

The change was primarily due to net repayments on the repurchase facilities, notes payable and credit facilities of $505.8 million during the year ended December 31, 2023, as compared to net proceeds provided by the repurchase facilities, notes payable and credit facilities of $617.4 million during the year ended December 31, 2022.

Election as a REIT

We elected to be taxed, and operate our business to qualify, as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012.

We elected to be taxed, and operate our business to qualify, as a REIT for U.S.

federal income tax purposes commencing with our taxable year ended December 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.

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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 consolidated financial statements.

We are exposed to inflation risk as income from long-term leases is one of the main sources of our cash flows from operations.

There are, and we expect that there will continue to be, provisions in many of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation.

These provisions include rent steps and clauses enabling us to receive payment of additional rent calculated as a percentage of the tenant’s gross sales above pre-determined thresholds.

In addition, most of our leases require the tenant to pay all or a majority of the property’s operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs.

However, because of the long-term nature of leases for real property, such leases may not reset frequently enough to adequately offset the effects of inflation.

Related-Party Transactions and Agreements

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Ressler, the chairman of our Board, chief executive officer and president, who is also a founder and principal of CIM Group and is an officer/director of certain of its affiliates, is the vice president of our manager.

One of our directors, Avraham Shemesh, who is also a founder and principal of CIM Group and is an officer/director of certain of its affiliates, is the president and treasurer of our manager.

Additionally, two of our directors, Jason Schreiber and Emily Vande Krol, are employees of CIM Group.

DeBacker, our chief financial officer, principal accounting officer and treasurer, is a vice president of our manager and is an officer of certain of its affiliates.

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 program sponsored or operated by affiliates of our manager, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management, among others.

Additionally, one of our directors, Jason Schreiber, is an employee of CIM Group.

DeBacker, our chief financial officer, principal accounting officer and treasurer, is an employee of CIM and a vice president of our manager, and is an officer of certain of its affiliates.

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 Group or another program sponsored or operated by affiliates of our manager, may be in conflict with us in connection with providing services to other real estate-related programs related to property acquisitions, property dispositions, and property management, among others.

The compensation arrangements between affiliates of CMFT Management and these other real estate programs sponsored or operated by affiliates of our manager could influence the advice provided to us.

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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.

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.

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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 consolidated financial statements in this Annual Report on Form 10-K.

Current Expected Credit Losses

The current expected credit loss is our current estimate of potential credit losses related to our loans held-for-investment and CMBS.

We estimate our CECL reserve for our senior loans and mezzanine loans primarily using the Weighted Average Remaining Maturity method, which has been identified as an acceptable method for estimating CECL reserves in the Financial Accounting Standards Board Staff Q&A Topic 326, No.

For our liquid corporate senior loans and corporate senior loans, we use a probability of default and loss given default method.

CMBS credit losses, if any, are estimated by calculating the difference between (i) the present value of estimated cash flows expected to be collected from the security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) the net amortized cost basis of the security.

The risks and uncertainties involved in applying the principles related to CECL reserves include, but are not limited to, the following:

• The historical loan loss data used in estimating our CECL reserve.

To estimate the historical loan losses relevant to our portfolio, we have utilized historical loan performance with market loss data from 1998 through 2023.

Within this database, we focused on the applicable subset of available loan data, which we determined based on loan metrics that are most comparable to our loan portfolio including asset type, loan structure, credit rating and years to maturity;

• The expected repayments over the contractual term of each loan and CMBS.

As part of our quarterly review of our loan and CMBS portfolios, we assess the expected repayment date of each position, which is used to determine the contractual term for purposes of computing our CECL reserve;

• The current credit quality and performance expectations of our loan and CMBS portfolios, as well as market conditions over the relevant time period and its impact on our portfolios are estimated by management;

• The expectations of performance and market conditions.

Our CECL reserve is adjusted to reflect our estimation of the current and future economic conditions that impact the performance of the commercial real estate assets securing our loans.

These estimations include unemployment rates, interest rates, inflation, and other macroeconomic factors impacting the likelihood and magnitude of potential credit losses for our loans during their anticipated term.

In addition to the CRE data we have licensed from Trepp LLC, we have also licensed certain macroeconomic financial forecasts to inform our view of the potential future impact that broader economic conditions may have on our loan portfolio’s performance.

We may also incorporate information from other sources, including information and opinions available to our Investment Advisor, to further inform these estimations.

This process requires significant judgments about future events that, while based on the information available to us as of the balance sheet date, are ultimately indeterminate and the actual economic condition impacting our portfolios could vary significantly from the estimates we made as of December 31, 2023.

Recoverability of Real Estate Assets

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Allocation of Purchase Price of Real Estate Assets

In connection with our acquisition of properties, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective relative fair values.

In connection with our acquisition of real estate assets, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective relative fair values.

Tangible assets consist of land, buildings, fixtures and tenant improvements.

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• We determine whether any financing assumed is above- or below-market based upon comparison to similar financing terms for similar types of debt financing with similar maturities.

Current Expected Credit Losses

The current expected credit loss is our current estimate of potential credit losses related to our loans held-for-investment.

For our liquid corporate senior loans and corporate senior loans, we use a probability of default and loss given default method.

The risks and uncertainties involved in applying the principles related to CECL reserves include, but are not limited to, the following:

• The historical loan loss data used in estimating our CECL reserve.

To estimate the historical loan losses relevant to our portfolio, we have utilized historical loan performance with market loan loss data from 1998 through 2022.

• The expected repayments over the contractual term of each loan.

As part of our quarterly review of our loan portfolio, we assess the expected repayment date of each loan, which is used to determine the contractual term for purposes of computing our CECL reserve;

• The current credit quality and performance expectations of our loan portfolio, as well as market conditions over the relevant time period and its impact on our loan portfolio are estimated by management.

• The expectations of performance and market conditions.

Our CECL reserve is adjusted to reflect our estimation of the current and future economic conditions that impact the performance of the commercial real estate assets securing our loans.

We may also incorporate information from other sources, including information and opinions available to our Investment Advisor, to further inform these estimations.

This process requires significant judgments about future events that, while based on the information available to us as of the balance sheet date, are ultimately indeterminate and the actual economic condition impacting our portfolio could vary significantly from the estimates we made as of December 31, 2022.

Recently Issued Accounting Pronouncements

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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.

What changed 10-K

Item 7. Management’s Discussion and Analysis