CNSREIT-AR-2024 Final - Flipbook - Page 67
We may utilize non-recourse securitizations of certain of our CMBS investments, which may expose us to risks that
could result in losses.
We may seek to utilize non-recourse securitizations of certain of our CMBS investments to the extent consistent with
REIT and Investment Company Act requirements. This would likely involve us creating a special-purpose vehicle,
contributing a pool of our assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers
(whom we would expect to be willing to accept a lower interest rate to invest in investment-grade loan pools). We would
expect to retain all or a portion of the equity in the securitized pool of loans or investments. Prior to any such financing, we
may use short-term facilities to finance the acquisition of securities until a sufficient quantity of securities had been
accumulated, at which time we would refinance these facilities through a securitization, such as a CMBS, or issuance of
CLOs, or the private placement of loan participations or other long-term financing. If we were to employ this strategy, we
would be subject to the risk that we would not be able to acquire, during the period that our short-term facilities were
available, a sufficient amount of eligible securities to maximize the efficiency of a CMBS, CLO or private placement
issuance. We also would be subject to the risk that we would not be able to obtain short-term credit facilities or would not
be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit
facilities to allow more time to seek and acquire the necessary eligible securities for a long-term financing. The inability to
consummate securitizations of our portfolio to finance our loans and investments on a long-term basis could require us to
seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could
adversely affect our performance and our ability to grow our business. Moreover, conditions in the capital and credit
markets, including volatility and disruption, may not permit a non-recourse securitization at any particular time or may
make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets. We may
also suffer losses if the value of the mortgage loans we acquire declines prior to securitization. Declines in the value of a
mortgage loan can be due to, among other things, changes in interest rates and changes in the credit quality of the loan. In
addition, transaction costs incurred in executing transactions impact any liability that we may incur, or may be required to
reserve for, in connection with executing a transaction can cause a loss to us. To the extent that we incur a loss executing or
participating in future securitizations for the reasons described above or for other reasons, it could materially and adversely
impact our business and financial condition.
In addition, the securitization of investments in our portfolio might magnify our exposure to losses because any equity
interest we retain in the issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb
all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses.
The inability to securitize our portfolio may hurt our performance and our ability to grow our business. At the same time,
the securitization of our loans or investments might expose us to losses, as the residual loans or investments in which we do
not sell interests will tend to be riskier and more likely to generate losses. Moreover, the Dodd-Frank Act contains a risk
retention requirement for all asset-backed securities, which requires both public and private securitizers, to retain not less
than 5% of the credit risk of the assets collateralizing any asset-backed security issuance. Significant restrictions exist, and
additional restrictions may be added in the future, regarding who may hold risk retention interests, the structure of the
entities that hold risk retention interests and when and how such risk retention interests may be transferred. Therefore such
risk retention interests will generally be illiquid. As a result of the risk retention requirements, we may be required to
purchase and retain certain interests in a securitization into which we sell mortgage loans or when we act as issuer, may be
required to sell certain interests in a securitization at prices below levels that such interests have historically yielded or may
be required to enter into certain arrangements related to risk retention that we have not historically been required to enter
into and, accordingly, the risk retention rules may increase our potential liabilities or reduce our potential profits in
connection with securitization of mortgage loans. It is likely, therefore, that these risk retention rules will increase the
administrative and operational costs of asset securitizations.
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