CIM REAL ESTATE FINANCE TRUST, INC. 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 endedDecember 31, 2021 and 2020, 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
Overview 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. 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 onJuly 27, 2010 , and we elected to be taxed, and conduct our operations to qualify, as a REIT forU.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 ofCIM Group , a community-focused real estate and infrastructure owner, operator, lender and developer. 55
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As ofDecember 31, 2022 , our loan portfolio consisted of 350 loans with a net book value of$4.0 billion , and investments in real estate-related securities of$576.4 million . As ofDecember 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 . As ofDecember 31, 2022 , we owned condominium developments with a net book value of$130.5 million . In furtherance of our strategy, during the year endedDecember 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, onDecember 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 toDecember 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. 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 ofDecember 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 andU.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. 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 99.2% of our rentable square feet was under lease, including any month-to-month agreements, as ofDecember 31, 2022 , with a weighted average remaining lease term of 10.6 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 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 betweenRussia andUkraine is also contributing to mounting inflationary pressure. Inflation has caused theFederal Reserve to continue raising interest rates, 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 theU.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. 56
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Operating Highlights and Key Performance Indicators
2022 Activity
Operating Results:
•Net income attributable to the Company of
•Declared aggregate distributions of
Credit Portfolio Activity:
•Invested
•Invested
•Invested
•Converted
•Invested
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
•Disposed of condominium units for an aggregate sales price of
•Entered into the Realty Income Purchase and Sale Agreement to dispose of 185
single-tenant net lease properties for total consideration of approximately
Financing Activity:
•Increased total debt by
•Entered into a new repurchase agreement and increased maximum financing amounts
on two existing repurchase facilities to provide up to
•Entered into a new credit agreement that provides for borrowings of up to
•Paid down the
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The following table shows the carrying value of our portfolio by investment type
as of
As of December 31,
2022 2021
Asset Count Carrying Value Asset Count Carrying Value
Loan Held-For-Investment
First mortgage loans 29 $ 3,285,193 48.8 % 22 $ 1,968,585 29.8 %
Liquid corporate senior loans 317 701,540 10.4 % 295 655,516 9.9 %
Corporate senior loans 4 57,165 0.8 % - - - %
Less: Current expected credit losses (42,344) (0.6) % (15,201) (0.2) %
Total loans held-for-investment and related
receivable, net 350 4,001,554 59.4 % 317 2,608,900 39.5 %
Real Estate-Related Securities
CMBS and equity security 21 576,391 8.6 % 3 41,981 0.6 %
Preferred units - - - % 1 63,490 1.0 %
Real Estate
Total real estate assets and intangible
lease liabilities, net 380 2,158,874 32.0 % 514 3,887,348 58.9 %
Total Investment Portfolio 751 $ 6,736,819 100.0 % 835 $ 6,601,719 100.0 %
Credit Portfolio Information
The following table details overall statistics for our credit portfolio as of
Liquid Corporate CMBS and Equity Corporate
CRE Loans (1) Senior Loans Security Senior Loans
Number of investments (2) 29 317 21 4
Principal balance $ 3,306,411 $ 708,254 $ 683,612 $ 57,918
Net book value $ 3,264,841 $ 680,345 $ 576,391 $ 56,368
Unfunded loan commitments $ 304,649 $ 1,425 - $ 4,324
Weighted-average interest rate 7.6 % 8.0 % 8.5 % 10.5 %
Weighted-average maximum years to
maturity (3) 3.6 4.7 2.5 4.6
____________________________________
(1)As of
(2)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$100.6 million as ofDecember 31, 2022 .
(3)Maximum maturity date assumes all extension options are exercised by the borrower; however, our CRE loans may be repaid prior to such date.
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As ofDecember 31, 2022 , our CRE loans had the following characteristics based on carrying values: Collateral Property Type As of December 31, 2022 Office $ 1,889,630 57.5 % Mixed Use 67,260 2.0 % Multifamily 1,122,755 34.2 % Retail 64,603 2.0 % Industrial 80,368 2.5 % Self Storage 60,577 1.8 % $ 3,285,193 100.0 % Geographic Location As of December 31, 2022 South $ 1,365,357 41.6 % West 1,167,579 35.5 % East 726,647 22.1 % Midwest 25,610 0.8 % $ 3,285,193 100.0 %
Real Estate Portfolio Information
As ofDecember 31, 2022 , we owned 380 properties located in 43 states, the gross rentable square feet of which was 99.2% leased, including any month-to-month agreements, with a weighted average lease term remaining of 10.6 years. During the year endedDecember 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 . Additionally, during the year endedDecember 31, 2022 , we sold condominium units for an aggregate gross sales price of$40.7 million .
The following table shows the property statistics of our real estate assets as
of
As of December 31,
2022 2021
Number of commercial properties 380 514
Rentable square feet (in thousands) (1) 10,935 22,720
Percentage of rentable square feet leased 99.2 % 94.2 %
Percentage of investment-grade tenants (2) 39.4 % 37.4 %
____________________________________
(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 byStandard & 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 byStandard & Poor's or Moody's to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income and is for only those tenants rated byStandard & Poor's .
The following table summarizes our real estate acquisition activity during the
years ended
Year Ended
2022 2021
Commercial properties acquired - 115
Purchase price of acquired properties (in thousands) $ -
Rentable square feet (in thousands) (1) -
5,124
____________________________________
(1) Includes square feet of buildings on land parcels subject to ground leases.
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The following table shows the tenant diversification of our real estate
portfolio, based on annualized rental income, as of
2022 2022 Percentage of
Total Leased Annualized Annualized 2022
Number Square Feet Rental Income Rental Income Annualized
per Square Foot
Tenant of Leases (1) (in thousands) (2) (in thousands) (2) Rental Income
Lowe's 16 2,071 $ 14,087 $ 6.80 9 %
CVS 43 539 11,740 21.78 7 %
United Oil 4 64 10,928 170.75 7 %
Walgreens 25 368 8,756 23.79 5 %
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 %
Tractor Supply 16 312 4,193 13.44 3 %
Wal-Mart 4 440 4,043 9.19 3 %
Republic Services 1 134 3,543 26.44 2 %
Other 172 6,123 82,320 13.44 52 %
290 10,852 $ 158,091 $ 14.57 100 %
____________________________________
(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
2022 2022 Percentage of
Total Leased Annualized Annualized 2022
Number Square Feet Rental Income Rental Income Annualized
per Square Foot
Industry of Leases (1) (in thousands) (2) (in thousands) (2) Rental Income
Health and Personal Care Stores 70 927 $ 20,918 $ 22.57 13 %
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 10 1,271 12,545 9.87 8 %
General Merchandise Stores,
including Warehouse Clubs and
Superstores 34 1,068 10,697 10.02 7 %
Automotive Repair and Maintenance 15 444 9,471 21.33 6 %
Restaurants and Other Eating Places 16 244 9,216 37.77 6 %
Arts, Entertainment, and Recreation 7 318 5,970 18.77 4 %
Other 73 1,982 31,883 16.09 20 %
290 10,852 $ 158,091 $ 14.57 100 %
____________________________________
(1) Includes leases which are master lease agreements.
(2) Includes square feet of the buildings on land parcels subject to ground leases.
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The following table shows the geographic diversification of our real estate
portfolio, based on annualized rental income, as of
2022 2022 Percentage of
Total Rentable Annualized Annualized 2022
Number of Square Feet Rental Income Rental Income Annualized
per Square Foot
Location Properties (in thousands) (1) (in thousands) (1) Rental Income
Ohio 38 1,501 $ 18,470 $ 12.31 12 %
California 44 147 12,168 82.78 8 %
Texas 44 680 11,888 17.48 7 %
Illinois 17 906 10,524 11.62 7 %
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 %
Virginia 16 368 5,921 16.09 4 %
New Jersey 7 257 5,657 22.01 4 %
Other 159 4,196 58,696 13.99 37 %
380 10,935 $ 158,091 $ 14.46 100 %
____________________________________
(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
2022 2022 Percentage of
Total Rentable Annualized Annualized 2022
Number of Square Feet Rental Income Rental Income Annualized
per Square Foot
Property Type Properties (in thousands) (1) (in thousands) (1) Rental Income
Retail 363 8,705 $ 132,197 $ 15.19 84 %
Office 9 1,106 19,193 17.35 12 %
Industrial 8 1,124 6,701 5.96 4 %
380 10,935 $ 158,091 $ 14.46 100 %
____________________________________
(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$3.5 million (average of$420,000 ). Certain leases provide for limited increases in rent as a result of fixed increases or increases in the consumer price index. 61
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The following table shows lease expirations of our real estate portfolio, as ofDecember 31, 2022 , during each of the next ten years and thereafter, assuming no exercise of renewal options: 2022 Total Leased Annualized 2022 Percentage of Number Square Feet Rental Income Annualized 2022 of Leases Expiring Expiring Rental Income Annualized per Square Foot
Year of Lease Expiration Expiring (1) (inthousands) (2) (in thousands) (2) Rental Income 2023 5 113$ 2,232 $ 19.75 1 % 2024 19 450 4,880 10.84 3 % 2025 12 472 5,034 10.67 3 % 2026 6 439 5,424 12.36 3 % 2027 6 434 5,400 12.44 3 % 2028 8 246 3,355 13.64 2 % 2029 17 317 7,046 22.23 5 % 2030 16 202 4,882 24.17 3 % 2031 36 1,864 17,423 9.35 11 % 2032 26 1,289 19,823 15.38 13 % Thereafter 139 5,026 82,592 16.43 53 % 290 10,852$ 158,091 $ 14.57 100 %
____________________________________
(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
2022 2021
Economic Metrics
Weighted-average lease term (in years) (1) 10.6 8.6
Lease rollover (1)(2):
Annual average 2.9% 6.2%
Maximum for a single year 3.4% 8.7%
____________________________________
(1)Based on annualized rental income of our real estate portfolio as of
(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 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. 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 endedDecember 31, 2021 .
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
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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
The following table reconciles net income, calculated in accordance with GAAP, to net operating income (dollar amounts in thousands):
Total
For the Year Ended December 31,
2022 2021 Change
Net income $ 143,866 $ 86,490 $ 57,376
Loss on extinguishment of debt 19,644 4,895 14,749
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)
Gain on disposition of real estate and condominium developments, net
(121,902) (83,045) (38,857)
Increase in provision for credit losses 29,476 2,881 26,595
Real estate impairment 32,321 18,078 14,243
Depreciation and amortization 70,606 95,190 (24,584)
Transaction-related expenses 534 315 219
Management fees 52,564 47,020 5,544
Expense reimbursements to related parties 16,567 11,624 4,943
General and administrative expenses 15,364 15,078 286
Interest income (238,757) (70,561) (168,196)
Net operating income $ 179,987 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
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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 endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily due to an increase in the average aggregate amount of debt outstanding from$2.8 billion as ofDecember 31, 2021 to$4.3 billion as ofDecember 31, 2022 as a result of entering into and upsizing additional repurchase agreements and assuming the credit agreement withJPMorgan 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") onDecember 16, 2021 . The change was also driven by an increase in the Company's weighted average interest rate from 2.6% as ofDecember 31, 2021 to 5.6% as ofDecember 31, 2022 .
Increase in Provision for Credit Losses
The increase in provision for credit losses of$26.6 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily due to the increased number of loan investments entered into during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 .
Unrealized Loss on Equity Security
The increase in unrealized loss on equity security of$15.1 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 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
A total of 300 properties were acquired before
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
Rental and other
property income $ 213,389 $ 295,164 $ (81,775) $ 117,053 $ 115,977 $ 1,076 $ 96,336 $ 179,187 $ (82,851)
Property operating
expenses 20,790 47,559 (26,769) 3,225 3,179 46 17,565 44,380 (26,815)
Real estate tax
expenses 12,612 34,943 (22,331) 3,842 4,259 (417) 8,770 30,684 (21,914)
Total property
operating expenses 33,402 82,502 (49,100) 7,067 7,438 (371) 26,335 75,064 (48,729)
Net operating income $ 179,987 $ 212,662 $ (32,675) $ 109,986 $ 108,539 $ 1,447 $ 70,001 $ 104,123 $ (34,122) ____________________________________
(1) Includes condominium and rental units acquired via foreclosure during the
year ended
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt of$14.7 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 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 endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 .
Gain on Investment in Unconsolidated Entities
The increase in gain on investment in unconsolidated entities of$11.3 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was due to the Company's investments inCIM 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. 64
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Table of Contents Merger-Related Expenses, Net The decrease in merger-related expenses, net of$1.4 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was due to the expenses incurred related to the CIM Income NAV Merger during the year endedDecember 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 endedDecember 31, 2022 , as compared to the year endedDecember 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 endedDecember 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 endedDecember 31, 2021 . Real Estate Impairment The increase in real estate impairments of$14.2 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 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 endedDecember 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 endedDecember 31, 2021 .
Depreciation and Amortization
The decrease in depreciation and amortization expenses of$24.6 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily due to the disposition of 134 properties subsequent toDecember 31, 2021 , partially offset by the acquisition of 115 properties through the CIM Income NAV Merger that closed inDecember 2021 .
Transaction-Related Expenses
The increase in transaction-related expenses of$219,000 during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily due to escrow holdbacks that were deemed uncollectible during the year endedDecember 31, 2022 and were therefore written off. No such write-offs occurred during the year endedDecember 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) ofCMFT Securities' Equity (as defined in the Investment Advisory and Management Agreement). Because the Managed Assets are excluded from the calculation of management fees payable by the Company to CMFT Management pursuant to the Management Agreement, the total management and advisory fees payable by the Company to its external advisors are not increased as a result of the Investment Advisory and Management Agreement. In addition, pursuant to the Sub-Advisory Agreement, in connection with providing investment management services with respect to the corporate credit-related securities held byCMFT Securities , on a quarterly basis, the Investment Advisor designates 50% of the sum of the Investment Advisory Fee payable to the Investment Advisor as sub-advisory fees.
The increase in management fees of
Net Operating Income
Same store property net operating income increased$1.4 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 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. 65
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Non-same store property net operating income decreased$34.1 million during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The decrease is primarily due to the disposition of 117 properties during the year endedDecember 31, 2021 and the disposition of 134 properties during the year endedDecember 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 inDecember 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 endedDecember 31, 2022 , as compared to the year endedDecember 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
Distributions
Prior to
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
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
January 2022 September 2022 $0.0305
October 2022 December 2022 $0.0339
January 2023 June 2023 $0.0350 As of
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The following table presents distributions and source of distributions for the periods indicated below (dollar amounts in thousands):
Year Ended December 31,
2022 2021
Amount Percent Amount Percent
Distributions paid in cash $ 124,038 76 % $ 105,978 80 %
Distributions reinvested 38,912 24 % 25,784 20 %
Total distributions $ 162,950 100 % $ 131,762 100 %
Source of distributions:
Net cash provided by operating activities (1) $ 162,950 100 % $ 131,762 100 %
Total sources $ 162,950 100 % $ 131,762 100 %
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(1)Net cash provided by operating activities for the years ended
Share Redemptions
In connection with the mergers with Cole Office & Industrial REIT (CCIT III), Inc. andCole Credit Property Trust V, Inc. (the "CCIT III and CCPT V Mergers"), our Board suspended our share redemption program onAugust 30, 2020 , and therefore, no shares were redeemed from our stockholders after that date untilMarch 25, 2021 , when our Board reinstated the share redemption program, effectiveApril 1, 2021 . During the year endedDecember 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 ofDecember 31, 2022 for$29.7 million (at an average redemption price of$7.20 per share) and approximately 1.6 million shares subsequent toDecember 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. During the year endedDecember 31, 2021 , we received valid redemption requests under our share redemption program totaling approximately 86.2 million shares, of which we redeemed approximately 3.0 million shares as ofDecember 31, 2021 for$22.0 million (at an average redemption price of$7.20 per share) and approximately 1.3 million shares subsequent toDecember 31, 2021 for$9.4 million (at an average redemption price of$7.20 per share). The remaining redemption requests relating to approximately 81.9 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 ofEquity Securities - Share Redemption Program in this Annual Report on Form 10-K.
Liquidity and Capital Resources
General
We expect to utilize proceeds from real estate dispositions, sales proceeds and principal payments received on credit investments, cash flows from operations and future proceeds from secured or unsecured financing to complete future 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.
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, 2022 December 31, 2021
Cash and cash equivalents $ 118,978 $ 107,381
Unused borrowing capacity (1) 513,121 549,811
$ 632,099 $ 657,192
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(1)Subject to borrowing availability.
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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 ofDecember 31, 2022 (in thousands): Portfolio Financing Outstanding Maximum Capacity Principal Balance (1) Notes payable - fixed rate debt $ 36,538$ 36,538 Notes payable - variable rate debt 465,517 485,519 First lien mortgage loan 121,940 121,940 ABS mortgage notes 763,035 763,035 Credit facilities 738,500 850,000 Repurchase facilities 2,318,381 2,700,000 (2) Total portfolio financing $
4,443,911
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(1)Subject to borrowing availability.
(2)Facilities under the Master Repurchase Agreement with
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$531.1 million within the next 12 months,$258.0 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 toDecember 31, 2022 , the Company entered into a new financing facility withAlly 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. 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. 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
As ofDecember 31, 2022 , we had debt outstanding with a carrying value of$4.4 billion and a weighted average interest rate of 5.6%. See Note 10 - Repurchase Facilities, Notes Payable and Credit Facilities to our consolidated financial statements in this Annual Report on Form 10-K for certain terms of our debt outstanding. 68
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Our contractual obligations as ofDecember 31, 2022 were as follows (in thousands): Payments due by period (1) Less Than 1 More Than Total Year 1-3 Years 3-5 Years 5 Years
Principal payments - fixed rate debt
Principal payments - variable rate debt 465,517 - 41,998 377,679 45,840 Principal payments - first lien mortgage loan 121,940 121,940 - - - Principal payments - ABS mortgage notes 763,035 4,515 - - 758,520 Principal payments - credit facilities 738,500 - 205,000 533,500 - Principal payments - repurchase facilities 2,318,381 404,240 1,914,141 - - Interest payments (2) 788,218 229,941 364,404 141,310 52,563 Total$ 5,232,129 $ 761,084 $ 2,561,633 $ 1,052,489 $ 856,923
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(1)The table does not include amounts due to CMFT Management or its affiliates pursuant to our Management Agreement because such amounts are not fixed and determinable. The table also does not include$310.4 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$112.6 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$19.8 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 ofDecember 31, 2022 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 ofDecember 31, 2022 , our ratio of debt to total gross assets net of gross intangible lease liabilities was 62.7%.
Cash Flow Analysis
Year Ended
Operating Activities. Net cash provided by operating activities increased by$30.5 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . 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 inDecember 2021 , partially offset by the disposition of 134 properties during the year endedDecember 31, 2022 . 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 endedDecember 31, 2022 , as compared to the year endedDecember 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 endedDecember 31, 2022 , compared to 117 property dispositions during the year endedDecember 31, 2021 . This change was partially offset by an increase in the net investment of real estate-related securities of$476.6 million . Financing Activities. Net cash provided by financing activities decreased by$906.6 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 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 onApril 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 endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . 69 --------------------------------------------------------------------------------
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 endedDecember 31, 2012 . To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost, unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying 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.
Inflation
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
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 ofCIM 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 ofCIM 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 andEmily Vande Krol , are employees ofCIM Group .Nathan D. 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. 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
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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.
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 properties, 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: •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.
Current Expected Credit Losses
The current expected credit loss is our current estimate of potential credit losses related to our loans held-for-investment. 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 theFinancial 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. 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. 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; 71
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•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; and •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. 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 fromTrepp 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 portfolio could vary significantly from the estimates we made as ofDecember 31, 2022 .
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.
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