CIM GROUP, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also the Cautionary Note Regarding Forward-Looking Statements section preceding Part I of this Annual Report on Form 10-K. 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. 57 Table of Contents Overview 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. Subject to market conditions, we expect to pursue a listing of our common stock on a national securities exchange at such time as our Board determines that such a listing would be in the best interests of our stockholders, though we can provide no assurance that a listing will happen in a particular timeframe or at all. We were formed on July 27, 2010, and we elected to be taxed, and conduct our operations to qualify, as a REIT for U.S. 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 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. 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. 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. 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 expenses. 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, 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. In addition, as 99.9% of our rentable square feet was under lease, including any month-to-month agreements, as of December 31, 2023, with a weighted average remaining lease term of 10.7 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 our manager 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. Recent Developments Macroeconomic Environment 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. 58 Table of Contents 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. Additionally, rising rates and increasing costs may dampen consumer spending and slow corporate profit growth, which may negatively impact the collateral underlying certain of our loans and the ability of our tenants to pay rent. While there is debate among economists as to whether such factors indicate that the U.S. 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 2023 Activity Operating Results: • Net income attributable to the Company of $28.1 million, or $0.06 per share. • Declared aggregate distributions of $0.425 per share. Credit Portfolio Activity: • 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 $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 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. Financing Activity: • 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. 59 Table of Contents Portfolio Information The following table shows the carrying value of our portfolio by investment type as of December 31, 2023 and 2022 (dollar amounts in thousands): As of December 31, 2023 2022 Asset Count Carrying Value Asset Count Carrying Value Loan Held-For-Investment First mortgage loans 33 $ 3,648,351 61.0 % 29 $ 3,285,193 48.8 % Liquid corporate senior loans 237 537,990 9.0 % 317 701,540 10.4 % Corporate senior loans 21 210,722 3.5 % 4 57,165 0.8 % Less: Current expected credit losses (132,598) (2.2) % (42,344) (0.6) % Total loans held-for-investment and related receivable, net 291 4,264,465 71.3 % 350 4,001,554 59.4 % Real Estate-Related Securities CMBS and equity security 23 555,522 9.3 % 21 576,391 8.6 % Less: Current expected credit losses (35,808) (0.6) % — — % Total real estate-related securities, net 23 519,714 8.7 % 21 576,391 8.6 % Real Estate Total real estate assets and intangible lease liabilities, net 192 1,195,276 20.0 % 380 2,158,874 32.0 % Total Investment Portfolio 506 $ 5,979,455 100.0 % 751 $ 6,736,819 100.0 % Credit Portfolio Information The following table details overall statistics for our credit portfolio as of December 31, 2023 (dollar amounts in thousands): CRE Loans (1)(2) Liquid Corporate Senior Loans CMBS and Equity Security (2) Corporate Senior Loans Number of investments (3) 33 237 23 21 Principal balance $ 3,669,116 $ 543,837 $ 671,861 $ 214,650 Net book value $ 3,539,111 $ 518,252 $ 519,714 $ 207,102 Unfunded loan commitments $ 241,708 $ 152 — $ 30,592 Weighted-average interest rate (4) 8.7 % 9.3 % 9.2 % 11.9 % Weighted-average maximum years to maturity 2.8 4.2 4.7 (5) 3.8 ____________________________________ (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. (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. 60 Table of Contents 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 % Multifamily 1,171,128 32.1 % 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 % Less: current expected credit losses (109,240) Total first mortgage loans, net $ 3,539,111 Geographic Location As of December 31, 2023 South $ 1,429,721 39.2 % West 1,126,178 30.9 % East 767,626 21.0 % Various 324,826 8.9 % Total first mortgage loans $ 3,648,351 100.0 % Less: current expected credit losses (109,240) Total first mortgage loans, net $ 3,539,111 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, 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: As of December 31, 2023 2022 Number of commercial properties 192 380 Rentable square feet (in thousands) (1) 6,153 10,935 Percentage of rentable square feet leased 99.9 % 99.2 % Percentage of investment-grade tenants (2) 33.8 % 39.4 % ____________________________________ (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 by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) or a credit rating of Baa3 or higher by Moody’s Investor Service, Inc. (“Moody’s”). The ratings may reflect those assigned by Standard & 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 by Standard & Poor’s. 61 Table of Contents The following table shows the tenant diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2023: 2023 2023 Percentage of Total Leased Annualized Annualized 2023 Number Square Feet Rental Income Rental Income Annualized Tenant of Leases (1) (in thousands) (2) (in thousands) per Square Foot (2) Rental Income 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 % 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 % Bob Evans 2 76 2,826 37.18 3 % Other 65 3,234 41,459 12.82 46 % 137 6,144 $ 89,964 $ 14.64 100 % ____________________________________ (1) Includes leases which are master lease agreements. (2) Includes square feet of the buildings on land parcels subject to ground leases. The following table shows the tenant industry diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2023: 2023 2023 Percentage of Total Leased Annualized Annualized 2023 Number Square Feet Rental Income Rental Income Annualized Industry of Leases (1) (in thousands) (2) (in thousands) per Square Foot (2) Rental Income Health and Personal Care Stores 44 584 $ 12,755 $ 21.84 14 % Manufacturing 7 1,009 10,320 10.23 12 % 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 % Other 30 762 12,004 15.75 13 % 137 6,144 $ 89,964 $ 14.64 100 % ____________________________________ (1) Includes leases which are master lease agreements. (2) Includes square feet of the buildings on land parcels subject to ground leases. 62 Table of Contents The following table shows the geographic diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2023: 2023 2023 Percentage of Total Rentable Annualized Annualized 2023 Number of Square Feet Rental Income Rental Income Annualized Location Properties (in thousands) (1) (in thousands) per Square Foot (1) Rental Income Ohio 20 1,243 $ 14,735 $ 11.85 16 % 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 % 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 % Other 77 2,058 30,924 15.03 34 % 192 6,153 $ 89,964 $ 14.62 100 % ____________________________________ (1) Includes square feet of the buildings on land parcels subject to ground leases. The following table shows the property type diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2023: 2023 2023 Percentage of Total Rentable Annualized Annualized 2023 Number of Square Feet Rental Income Rental Income Annualized Property Type Properties (in thousands) (1) (in thousands) per Square Foot (1) Rental Income Retail 179 4,266 $ 67,419 $ 15.80 75 % Office 8 1,025 18,069 17.63 20 % Industrial 5 862 4,476 5.19 5 % 192 6,153 $ 89,964 $ 14.62 100 % ____________________________________ (1) Includes square feet of the buildings on land parcels subject to ground leases. Leases Although there are variations in the specific terms of the leases of our properties, the following is a summary of the general structure of our current leases. Generally, the leases of the properties acquired provide for initial terms of ten or more years and provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions as the initial lease term. Certain leases also provide that in the event we wish to sell the property subject to that lease, we first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which we intend to accept for the sale of the property. The properties are generally leased under net leases pursuant to which the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance, while certain of the leases require us to maintain the roof, structure and parking areas of the building. Additionally, certain leases provide for increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume. The leases of the properties provide for annual rental payments (payable in monthly installments) ranging from $47,000 to $3.7 million (average of $471,000). Certain leases provide for limited increases in rent as a result of fixed increases or increases in the consumer price index. 63 Table of Contents The following table shows lease expirations of our real estate portfolio, as of December 31, 2023, during each of the next ten years and thereafter, assuming no exercise of renewal options: 2023 Total Leased Annualized 2023 Percentage of Number Square Feet Rental Income Annualized 2023 of Leases Expiring Expiring Rental Income Annualized Year of Lease Expiration Expiring (1) (in thousands) (2) (in thousands) per Square Foot (2) Rental Income 2024 4 174 $ 1,872 $ 10.76 2 % 2025 1 60 998 16.63 1 % 2026 2 296 3,333 11.26 4 % 2027 3 420 5,067 12.06 6 % 2028 — — — — — % 2029 2 145 2,188 15.09 2 % 2030 5 86 1,491 17.34 2 % 2031 10 815 6,011 7.38 7 % 2032 11 449 8,588 19.13 9 % 2033 12 588 8,533 14.51 9 % Thereafter 87 3,111 51,883 16.68 58 % 137 6,144 $ 89,964 $ 14.64 100 % ____________________________________ (1) Includes leases which are master lease agreements. (2) Includes square feet of the buildings on land parcels subject to ground leases. The following table shows the economic metrics of our real estate assets as of and for the years ended December 31, 2023 and 2022: 2023 2022 Economic Metrics Weighted-average lease term (in years) (1) 10.7 10.6 Lease rollover (1)(2) : Annual average 2.5% 2.9% Maximum for a single year 5.6% 3.4% ____________________________________ (1) Based on annualized rental income of our real estate portfolio as of December 31, 2023 and 2022. (2) Through the end of the next five years as of the respective reporting date. Results of Operations Overview 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 and credit investments other than those listed in Part I, Item 1A. Risk Factors . 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. 64 Table of Contents 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 Revenues: Credit Segment $ 453,480 $ 238,757 $ 214,723 Real Estate Segment 115,056 213,001 (97,945) Corporate 323 388 (65) 568,859 452,146 116,713 Expenses: Credit Segment 412,341 171,624 240,717 Real Estate Segment 105,874 176,207 (70,333) Corporate 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) Corporate 9,083 8,599 484 35,568 107,764 (72,196) Net income 28,086 143,866 (115,780) Net income allocated to non-controlling interest 8 66 (58) 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 Revenues 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 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 65 Table of Contents 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 Revenues 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”. Expenses 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 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 Revenues 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. Expenses 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. Other Income 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 66 Table of Contents 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 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) 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. 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. 67 Table of Contents Comparison of the Years Ended December 31, 2023 and 2022 The following table reconciles our Real Estate segment net income, calculated in accordance with GAAP, to net operating income (in thousands): Total For the Year Ended December 31, 2023 2022 Change Net income $ 53,341 $ 140,923 $ (87,582) Loss on extinguishment of debt 1,192 18,646 (17,454) Other income (expense), net 4,380 (5,012) 9,392 Gain on disposition of real estate and condominium developments, net (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 10 511 (501) Management fees 10,702 21,526 (10,824) General and administrative expenses 709 553 156 Interest expense, net 22,884 41,295 (18,411) Net operating income $ 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, 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) Net Operating Income 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 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 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: 68 Table of Contents Period Commencing Period Ending Monthly Distribution Amount August 2020 December 2021 $0.0303 January 2022 September 2022 $0.0305 October 2022 December 2022 $0.0339 January 2023 September 2023 $0.0350 October 2023 December 2023 $0.0367 January 2024 June 2024 $0.0375 As of December 31, 2023, we had distributions payable of $16.0 million. The following table presents distributions and source of distributions for the periods indicated below (dollar amounts in thousands): Year Ended December 31, 2023 2022 Amount Percent Amount Percent Distributions paid in cash $ 141,818 77 % $ 124,038 76 % Distributions reinvested 42,879 23 % 38,912 24 % Total distributions $ 184,697 100 % $ 162,950 100 % Source of distributions: Net cash provided by operating activities (1) $ 184,697 100 % $ 162,950 100 % Total sources $ 184,697 100 % $ 162,950 100 % ____________________________________ (1) Net cash provided by operating activities for the years ended December 31, 2023 and 2022 was $223.8 million and $178.7 million, respectively. Share Redemptions 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). The remaining redemption requests relating to approximately 103.3 million shares went unfulfilled. During the year ended December 31, 2022, we received valid redemption requests under our share redemption program totaling approximately 99.2 million shares, of which we redeemed approximately 4.1 million shares as of December 31, 2022 for $29.7 million (at an average redemption price of $7.20 per share) and approximately 1.6 million shares subsequent to December 31, 2022 for $10.5 million (at an average redemption price of $6.57 per share). The remaining redemption requests relating to approximately 93.5 million shares went unfulfilled. See the discussion of our share redemption program in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Share Redemption Program in this Annual Report on Form 10-K. Liquidity and Capital Resources General 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. 69 Table of Contents Sources of Liquidity Our primary sources of liquidity include cash and cash equivalents and available borrowings under our debt facilities, which are set forth in the following table (in thousands): December 31, 2023 December 31, 2022 Cash and cash equivalents $ 247,500 $ 118,978 Unused borrowing capacity (1) 1,441,838 513,121 $ 1,689,338 $ 632,099 ____________________________________ (1) Subject to borrowing availability. See Note 10 — Repurchase Facilities, Notes Payable and Credit Facilities to our consolidated financial statements in this Annual Report on Form 10-K for additional details regarding our repurchase facilities, notes payable and credit facilities. The following table details our outstanding financing arrangements and borrowing capacity as of December 31, 2023 (in thousands): Portfolio Financing Outstanding Principal Balance Maximum Capacity (1) Notes payable – variable rate debt $ 622,841 $ 622,841 ABS mortgage notes 758,520 758,520 Credit facilities 490,500 850,000 Repurchase facilities 2,067,264 3,149,602 (2) Total portfolio financing $ 3,939,125 $ 5,380,963 ___________________________________ (1) Subject to borrowing availability. (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. 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; 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 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. Contractual Obligations As of December 31, 2023, we had debt outstanding with a carrying value of $3.9 billion and a weighted average interest rate of 6.4%. See Note 10 — Repurchase Facilities, Notes Payable and Credit Facilities to our consolidated financial statements in this Annual Report on Form 10-K for certain terms of our debt outstanding. 70 Table of Contents Our contractual obligations as of December 31, 2023 were as follows (in thousands): Payments due by period (1) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Principal payments — variable rate debt $ 622,841 $ 202,072 $ — $ 420,769 $ — Principal payments — ABS mortgage notes 758,520 — — 303,408 455,112 Principal payments — credit facilities 490,500 — — 490,500 — Principal payments — repurchase facilities 2,067,264 431,067 1,636,197 — — Interest payments (2) 630,670 228,152 283,460 84,363 34,695 Total $ 4,569,795 $ 861,291 $ 1,919,657 $ 1,299,040 $ 489,807 ____________________________________ (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 $272.5 million of unfunded commitments related to our existing CRE loans held-for-investment, corporate senior loans held-for-investment and liquid corporate senior loans and $88.4 million of unfunded commitments related to the NewPoint JV (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 are subject to the satisfaction of borrower milestones. 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, 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. 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 of December 31, 2023, our ratio of debt to total gross assets net of gross intangible lease liabilities was 63.2%. Cash Flow Analysis Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Operating Activities. 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 $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. 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. 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. 71 Election as a REIT 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. 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 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 consolidated financial statements. Related-Party Transactions and Agreements We have entered into agreements with CMFT Management and our Investment Advisor whereby we agree to pay certain fees to, or reimburse certain expenses of, CMFT Management, the Investment Advisor or their affiliates. In addition, we have invested in, and may continue to invest in, certain co-investments with funds that are advised by an affiliate of CMFT Management. We may also originate loans to third parties that use the proceeds to finance the acquisition of real estate from funds that are advised by an affiliate of CMFT Management. See Note 13 — Related-Party Transactions and Arrangements to our consolidated financial statements in this Annual Report on Form 10-K for a discussion of the various related-party transactions, agreements and fees. Conflicts of Interest Richard S. 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. Additionally, one of our directors, Jason Schreiber, is an employee of CIM Group. Nathan D. 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. See Part I, Item 1. Business — Conflicts of Interest of this Annual Report on Form 10-K. 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 consolidated financial statements in this Annual Report on Form 10-K. 72 Table of Contents 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. 1. 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; and • 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 We acquire real estate assets and subsequently monitor those assets quarterly for impairment, including the review of real estate properties subject to direct financing leases, if applicable. Additionally, we record depreciation and amortization related to our assets. The risks and uncertainties involved in applying the principles related to real estate assets include, but are not limited to, the following: • The estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our assets; • The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the carrying value of assets held and used to a fair value estimated by management and recognize an impairment loss. The process for evaluating real estate impairment requires management to make significant assumptions related to certain inputs, including holding periods; • The fair value of held for sale assets is estimated by management. This estimated value could result in a reduction of the carrying value of the asset; and • Changes in assumptions based on actual results may have a material impact on our financial results. Allocation of Purchase Price of Real Estate Assets 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. Intangible assets consist of above- and below-market lease values and the value of in-place leases. Our purchase price allocations are developed utilizing third-party appraisal reports, industry standards and management experience. The risks and uncertainties involved in applying the principles related to purchase price allocations include, but are not limited to, the following: 73 Table of Contents • The value allocated to land, as opposed to buildings, fixtures and tenant improvements, affects the amount of depreciation expense we record. If more value is attributed to land, depreciation expense is lower than if more value is attributed to buildings, fixtures and tenant improvements; • Intangible lease assets and liabilities can be significantly affected by estimates including market rent, lease terms including renewal options at rental rates below estimated market rental rates, carrying costs of the property during a hypothetical expected lease-up period, and current market conditions and costs, including tenant improvement allowances and rent concessions; and • 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. Recently Issued Accounting Pronouncements Recently issued accounting pronouncements are described in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.