Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1
– Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the "Company," "ARI," "we," "us" and "our") is a corporation that has elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We were formed in
Maryland
on
June 29, 2009
, commenced operations on
September 29, 2009
and are externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries, "Apollo").
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain our tax qualification as a REIT, we are required to distribute at least
90%
of our taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2
– Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates include loan loss reserves and impairment. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2018
, as filed with the Securities and Exchange Commission (the "SEC"). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows have been included. Our results of operations for the three months ended
March 31, 2019
are not necessarily indicative of the results to be expected for the full year or any other future period.
We currently operate in
one
reporting segment.
Recent Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting" ("ASU 2018-07"). The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. We adopted ASU 2018-07 in the first quarter of 2019 and it did not have any impact on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326)" ("ASU 2016-13"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance will replace the "incurred loss" approach under existing guidance with an "expected loss" model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While we are currently evaluating the impact ASU 2016-13 will have on our condensed consolidated financial statements, we expect that the adoption will result in higher provisions for potential loan losses.
Note 3
– Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair values. Market based, or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy as noted in ASC 820 "
Fair Value Measurements and Disclosures"
are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While we anticipate that our valuation methods will be appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
The estimated fair values of our derivative instruments are determined using a discounted cash flow analysis on the
expected cash flows of each derivative. The fair values of interest rate caps are determined using the market standard
methodology of discounting the future expected cash receipts (or payments) that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an
expectation of future interest rates derived from observable market interest rate curves and volatilities. The fair values of
foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange
rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for
the underlying countries. Our derivative instruments are classified as Level II in the fair value hierarchy.
The following table summarizes the levels in the fair value hierarchy into which our financial instruments were categorized as of
March 31, 2019
and
December 31, 2018
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2019
|
|
Fair Value as of December 31, 2018
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Derivative assets, net
|
$
|
—
|
|
|
$
|
8,715
|
|
|
$
|
—
|
|
|
$
|
8,715
|
|
|
$
|
—
|
|
|
$
|
23,700
|
|
|
$
|
—
|
|
|
$
|
23,700
|
|
Total
|
$
|
—
|
|
|
$
|
8,715
|
|
|
$
|
—
|
|
|
$
|
8,715
|
|
|
$
|
—
|
|
|
$
|
23,700
|
|
|
$
|
—
|
|
|
$
|
23,700
|
|
Note 4
– Commercial Mortgage and Subordinate Loans, Net
Our loan portfolio was comprised of the following at
March 31, 2019
and
December 31, 2018
($ in thousands):
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
March 31, 2019
|
|
December 31, 2018
|
Commercial mortgage loans, net
|
|
$
|
4,003,089
|
|
|
$
|
3,878,981
|
|
Subordinate loans, net
|
|
1,183,910
|
|
|
1,048,612
|
|
Total loans, net
|
|
$
|
5,186,999
|
|
|
$
|
4,927,593
|
|
Our loan portfolio consisted of
93%
and
91%
floating rate loans, based on amortized cost, as of
March 31, 2019
and
December 31, 2018
, respectively.
Activity relating to our loan investment portfolio, for the
three months ended
March 31, 2019
, was as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance
|
|
Deferred Fees/Other Items
(1)
|
|
Provision for Loan Loss
(2)
|
|
Carrying Value
|
December 31, 2018
|
|
$
|
4,982,514
|
|
|
$
|
(17,940
|
)
|
|
$
|
(36,981
|
)
|
|
$
|
4,927,593
|
|
New loan fundings
|
|
441,844
|
|
|
—
|
|
|
—
|
|
|
441,844
|
|
Add-on loan fundings
(3)
|
|
110,331
|
|
|
—
|
|
|
—
|
|
|
110,331
|
|
Loan repayments
|
|
(322,354
|
)
|
|
—
|
|
|
—
|
|
|
(322,354
|
)
|
Gain (loss) on foreign currency translation
|
|
15,033
|
|
|
(136
|
)
|
|
—
|
|
|
14,897
|
|
Deferred fees
|
|
—
|
|
|
(6,069
|
)
|
|
—
|
|
|
(6,069
|
)
|
PIK interest and amortization of fees
|
|
14,321
|
|
|
6,436
|
|
|
—
|
|
|
20,757
|
|
March 31, 2019
|
|
$
|
5,241,689
|
|
|
$
|
(17,709
|
)
|
|
$
|
(36,981
|
)
|
|
$
|
5,186,999
|
|
———————
(1)
Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses.
(2)
In addition to the
$37.0 million
provision for loan loss, we recorded an impairment of
$3.0 million
against an investment previously recorded under other assets on our condensed consolidated balance sheet.
(3) Represents fundings for loans closed prior to
2019
.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Number of loans
|
|
69
|
|
|
69
|
|
Principal balance
|
|
$
|
5,241,689
|
|
|
$
|
4,982,514
|
|
Carrying value
|
|
$
|
5,186,999
|
|
|
$
|
4,927,593
|
|
Unfunded loan commitments
(1)
|
|
$
|
1,039,089
|
|
|
$
|
1,095,598
|
|
Weighted-average cash coupon
(2)
|
|
8.4
|
%
|
|
8.4
|
%
|
Weighted-average remaining term
(3)
|
|
2.9 years
|
|
|
2.8 years
|
|
———————
|
|
(1)
|
Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
|
|
|
(2)
|
For floating rate loans, based on applicable benchmark rates as of the specified dates.
|
|
|
(3)
|
Assumes all extension options are exercised.
|
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Property Type
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Hotel
|
|
$
|
1,330,842
|
|
|
25.7
|
%
|
|
$
|
1,286,590
|
|
|
26.1
|
%
|
Residential-for-sale: construction
|
|
631,501
|
|
|
12.1
|
%
|
|
528,510
|
|
|
10.7
|
%
|
Residential-for-sale: inventory
|
|
421,815
|
|
|
8.1
|
%
|
|
577,053
|
|
|
11.7
|
%
|
Office
|
|
956,989
|
|
|
18.5
|
%
|
|
832,620
|
|
|
16.9
|
%
|
Urban Predevelopment
|
|
610,888
|
|
|
11.8
|
%
|
|
683,886
|
|
|
13.9
|
%
|
Multifamily
|
|
521,087
|
|
|
10.0
|
%
|
|
448,899
|
|
|
9.1
|
%
|
Industrial
|
|
227,206
|
|
|
4.4
|
%
|
|
32,000
|
|
|
0.6
|
%
|
Retail Center
|
|
156,008
|
|
|
3.0
|
%
|
|
156,067
|
|
|
3.2
|
%
|
Healthcare
|
|
144,310
|
|
|
2.8
|
%
|
|
156,814
|
|
|
3.2
|
%
|
Mixed Use
|
|
114,284
|
|
|
2.2
|
%
|
|
73,957
|
|
|
1.5
|
%
|
Other
|
|
72,069
|
|
|
1.4
|
%
|
|
151,197
|
|
|
3.1
|
%
|
Total
|
|
$
|
5,186,999
|
|
|
100.0
|
%
|
|
$
|
4,927,593
|
|
|
100.0
|
%
|
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Geographic Location
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Manhattan, NY
|
|
$
|
1,825,136
|
|
|
35.2
|
%
|
|
$
|
1,669,145
|
|
|
33.9
|
%
|
Brooklyn, NY
|
|
547,139
|
|
|
10.5
|
%
|
|
346,056
|
|
|
7.0
|
%
|
Northeast
|
|
18,751
|
|
|
0.4
|
%
|
|
23,479
|
|
|
0.5
|
%
|
West
|
|
635,733
|
|
|
12.3
|
%
|
|
614,160
|
|
|
12.5
|
%
|
Midwest
|
|
617,599
|
|
|
11.9
|
%
|
|
631,710
|
|
|
12.8
|
%
|
Southeast
|
|
567,794
|
|
|
10.9
|
%
|
|
559,043
|
|
|
11.3
|
%
|
Southwest
|
|
120,127
|
|
|
2.3
|
%
|
|
96,345
|
|
|
2.0
|
%
|
Mid Atlantic
|
|
110,754
|
|
|
2.1
|
%
|
|
211,775
|
|
|
4.3
|
%
|
United Kingdom
|
|
668,507
|
|
|
12.9
|
%
|
|
700,460
|
|
|
14.2
|
%
|
Other International
|
|
75,459
|
|
|
1.5
|
%
|
|
75,420
|
|
|
1.5
|
%
|
Total
|
|
$
|
5,186,999
|
|
|
100.0
|
%
|
|
$
|
4,927,593
|
|
|
100.0
|
%
|
We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio ("LTV"), debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:
1. Very low risk
2. Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or has been impaired
The following table allocates the carrying value of our loan portfolio based on our internal risk ratings at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Risk Rating
|
|
Number of Loans
|
|
Carrying Value
|
|
% of Loan Portfolio
|
|
Number of Loans
|
|
Carrying Value
|
|
% of Loan Portfolio
|
1
|
|
—
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
|
$
|
—
|
|
|
—
|
%
|
2
|
|
2
|
|
58,847
|
|
|
1
|
%
|
|
3
|
|
138,040
|
|
|
3
|
%
|
3
|
|
64
|
|
4,915,843
|
|
|
95
|
%
|
|
63
|
|
4,573,930
|
|
|
93
|
%
|
4
|
|
—
|
|
—
|
|
|
—
|
%
|
|
—
|
|
—
|
|
|
—
|
%
|
5
|
|
3
|
|
212,309
|
|
|
4
|
%
|
|
3
|
|
215,623
|
|
|
4
|
%
|
|
|
69
|
|
$
|
5,186,999
|
|
|
100
|
%
|
|
69
|
|
$
|
4,927,593
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average risk rating
|
|
|
|
3.1
|
|
|
|
|
|
|
3.1
|
|
We evaluate our loans for possible impairment on a quarterly basis. We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service
requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.
We evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR") and/or substantial modification, under ASC Topic 310, "Receivables." During the second quarter of 2018, we determined that a modification of one commercial mortgage loan, secured by a retail center in Cincinnati, OH, with a principal balance of
$169.0 million
constituted a TDR as the interest rate spread was reduced from
5.5%
over LIBOR to
3.0%
over LIBOR. The entity in which we own an interest and which owns the underlying property was deemed to be a variable interest entity ("VIE") and it was determined that we are not the primary beneficiary of that VIE. During the fourth quarter of 2018, we recorded a
$15.0 million
loan loss provision against this loan. After the loan loss provision, the amortized cost of the loan was
$156.0 million
as of
March 31, 2019
and
December 31, 2018
. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using the direct capitalization method. The significant unobservable inputs used in determining the collateral value were in-place net operating income and capitalization rate which were
$10.5 million
and
6.8%
, respectively. The loan is on accrual status and we continue to receive contractual interest due. As of
March 31, 2019
and
2018
, this loan was assigned a risk rating of
5
.
We recorded a
$10.0 million
loan loss provision and impairment against a commercial mortgage loan secured by a fully-built, for-sale residential condominium units located in Bethesda, MD. This was comprised of (i)
$5.0 million
loan loss recorded during the second quarter of 2018, and (ii)
$2.0 million
loan loss provision and
$3.0 million
of impairment recorded during the second quarter of 2017. The impairment was recorded on an investment previously recorded under other assets on our condensed consolidated balance sheet. After the loan loss provisions and related impairment, the amortized cost balance of the loan was
$24.2 million
and
$27.2 million
as of
March 31, 2019
and
December 31, 2018
, respectively. The loan loss provision and impairment were based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of
$662
per square foot across properties and
15%
, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and account for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance). As of
March 31, 2019
and
December 31, 2018
, this loan was assigned a risk rating of
5
.
During 2016, we recorded a loan loss provision of
$10.0 million
on a commercial mortgage loan and
$5.0 million
on a contiguous subordinate loan secured by a multifamily property located in Williston, ND. After the loan loss provisions, the amortized cost of the loan was
$32.1 million
and
$32.4 million
as of
March 31, 2019
and
December 31, 2018
, respectively. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were
11%
and
10%
, respectively. The entity in which we own an interest and which owns the underlying property was deemed to be a VIE and it was determined that we are not the primary beneficiary of the VIE. We ceased accruing interest associated with the loan and only recognize interest income upon receipt of cash. As of
March 31, 2019
and
December 31, 2018
, this loan was assigned a risk rating of
5
.
During the year ended
December 31, 2018
, we sold a
$75.0 million
(
$17.7 million
funded) subordinate position of our
$265.0 million
loans for the construction of an office campus in Renton, Washington. As of
March 31, 2019
, our exposure to the property is limited to a
$190.0 million
(
$96.1 million
funded) mortgage loan. This transaction was evaluated under ASC 860 - Transfers and Servicing and we determined that it qualifies as a sale and accounted for as such.
As of
March 31, 2019
and
December 31, 2018
, the aggregate loan loss provision was
$37.0 million
for commercial mortgage loans and subordinate loans.
We recognized payment-in-kind ("PIK") interest of
$14.5 million
and
$10.6 million
for the
three months ended
March 31, 2019
and
2018
, respectively.
We recognized pre-payment penalties and accelerated fees of
$3.7 million
for the
three months ended
March 31, 2019
. There were
no
pre-payment penalties and accelerated fees for the
three months ended
March 31, 2018.
Note 5
– Loan Proceeds Held by Servicer
Loan proceeds held by servicer represents principal payments held by our third-party loan servicer as of the balance sheet date which were remitted to us subsequent to the balance sheet date. Loan proceeds held by servicer was
$1.0 million
as of
December 31, 2018
. There were
no
loan proceeds held by servicer as of
March 31, 2019
.
Note 6
– Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Interest receivable
|
$
|
36,085
|
|
|
$
|
33,399
|
|
Other
|
455
|
|
|
321
|
|
Total
|
$
|
36,540
|
|
|
$
|
33,720
|
|
Note 7
– Secured Debt Arrangements, Net
At
March 31, 2019
and
December 31, 2018
, our borrowings had the following secured debt arrangements, maturities and weighted-average interest rates ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
(2)
|
|
December 31, 2018
(2)
|
|
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity
(1)
|
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity
(1)
|
|
JPMorgan Facility (USD)
|
$
|
1,305,435
|
|
|
$
|
873,771
|
|
|
June 2021
|
|
$
|
1,333,503
|
|
|
$
|
680,141
|
|
|
June 2021
|
|
JPMorgan Facility (GBP)
|
49,565
|
|
|
49,565
|
|
|
June 2021
|
|
48,497
|
|
|
48,497
|
|
|
June 2021
|
|
DB Repurchase Facility (USD)
|
858,919
|
|
|
475,871
|
|
|
March 2021
|
|
904,181
|
|
|
419,823
|
|
|
March 2021
|
|
DB Repurchase Facility (GBP)
|
141,081
|
|
|
141,081
|
|
|
March 2021
|
|
150,819
|
|
|
150,819
|
|
|
March 2021
|
|
Goldman Facility
|
500,000
|
|
|
233,312
|
|
|
November 2021
|
|
300,000
|
|
|
210,072
|
|
|
November 2020
|
|
CS Facility (USD)
|
188,037
|
|
|
188,037
|
|
|
September 2019
|
|
187,117
|
|
|
187,117
|
|
|
June 2019
|
|
CS Facility (GBP)
|
148,219
|
|
|
148,219
|
|
|
September 2019
|
|
151,773
|
|
|
151,773
|
|
|
June 2019
|
|
HSBC Facility (GBP)
|
49,911
|
|
|
49,911
|
|
|
December 2019
|
|
48,835
|
|
|
48,835
|
|
|
December 2019
|
|
Sub-total
|
3,241,167
|
|
|
2,159,767
|
|
|
|
|
3,124,725
|
|
|
1,897,077
|
|
|
|
|
less: deferred financing costs
|
N/A
|
|
|
(17,828
|
)
|
|
|
|
N/A
|
|
|
(17,555
|
)
|
|
|
|
Total / Weighted-Average
|
$
|
3,241,167
|
|
|
$
|
2,141,939
|
|
|
$
|
3,124,725
|
|
|
$
|
1,879,522
|
|
|
|
———————
(1) Maturity date assumes extensions at our option are exercised.
(2) Weighted-average rates as of
March 31, 2019
and
December 31, 2018
were USD L +
2.19%
/ GBP L +
2.30%
and USD L +
2.17%
/ GBP L +
2.28%
, respectively.
JPMorgan Facility
In May 2017, through
two
indirect wholly-owned subsidiaries, we entered into a Fifth Amended and Restated Master Repurchase Agreement with JPMorgan Chase Bank, National Association (as amended, the "JPMorgan Facility"). The JPMorgan Facility provides for maximum total borrowing capacity of $
1.4 billion
, comprised of a $
1.25 billion
repurchase facility and a $
105.0 million
asset specific financing and enables us to elect to receive advances in either U.S. dollars, British pounds ("GBP"), or Euros ("EUR"). The repurchase facility matures in
June 2020
, plus a
one
-year extension available at our option, subject to certain conditions. The asset specific financing matures in May 2019. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of our indirect wholly-owned subsidiaries under the JPMorgan Facility.
As of
March 31, 2019
, we had
$923.3 million
(including
£38.0 million
assuming conversion into U.S. dollars) of borrowings outstanding under the JPMorgan Facility secured by certain of our commercial mortgage loans.
DB Repurchase Facility
In April 2018, through an indirect wholly-owned subsidiary, we entered into a Second Amended and Restated Master Repurchase Agreement with Deutsche Bank AG, Cayman Islands Branch and Deutsche Bank AG, London Branch (as amended, the "DB Repurchase Facility"), which was upsized in September 2018, and provides for advances of up to
$1.0 billion
for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties located in the United States, United Kingdom and the European Union, and enables us to elect to receive advances in either U.S. dollars, British pounds, or Euros. The repurchase facility matures in
March 2020
, plus a
one
-year extension available at our option, subject to certain conditions. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
March 31, 2019
, we had
$617.0 million
(including
£108.2 million
assuming conversion into U.S. dollars) of borrowings outstanding under the DB Repurchase Facility secured by certain of our commercial mortgage loans.
Goldman Facility
In November 2017, through an indirect wholly-owned subsidiary, we entered into a master repurchase and securities contract agreement with Goldman Sachs Bank USA (the "Goldman Facility"), which was upsized in March 2019 from
$300.0 million
to
$500.0 million
and matures in
November 2019
, plus
two
one
-year extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of the seller under the Goldman Facility.
As of
March 31, 2019
, we had
$233.3 million
of borrowings outstanding under the Goldman Facility.
CS Facility - USD
In July 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - USD"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - USD matures
six
months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
March 31, 2019
, we had
$188.0 million
of borrowings outstanding under the CS Facility - USD secured by certain of our commercial mortgage loans.
CS Facility - GBP
In June 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - GBP"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - GBP matures
six
months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
March 31, 2019
, we had
$148.2 million
(
£113.7 million
assuming conversion into U.S. dollars) of borrowings outstanding under the CS Facility - GBP secured by one of our commercial mortgage loans.
HSBC Facility
In September 2018, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc (the "HSBC Facility"), which provides for a single asset financing. The facility matures in
December 2019
and unless terminated by either party, automatically extends for further periods prior to maturity. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
March 31, 2019
, we had
$49.9 million
(
£38.3 million
assuming conversion into U.S. dollars) of borrowings outstanding under the HSBC Facility secured by one of our commercial mortgage loans.
At
March 31, 2019
, our borrowings had the following remaining maturities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
(1)
|
|
1 to 3
years
(1)
|
|
3 to 5
years
|
|
More than
5 years
|
|
Total
|
JPMorgan Facility
|
$
|
159,854
|
|
|
$
|
763,482
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
923,336
|
|
DB Repurchase Facility
|
109,142
|
|
|
507,810
|
|
|
—
|
|
|
—
|
|
|
616,952
|
|
Goldman Facility
|
—
|
|
|
233,312
|
|
|
—
|
|
|
—
|
|
|
233,312
|
|
CS Facility - USD
|
188,037
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
188,037
|
|
CS Facility - GBP
|
148,219
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
148,219
|
|
HSBC Facility
|
49,911
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,911
|
|
Total
|
$
|
655,163
|
|
|
$
|
1,504,604
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,159,767
|
|
———————
(1)
Assumes underlying assets are financed through the fully extended maturity date of the facility.
The table below summarizes the outstanding balances at
March 31, 2019
, as well as the maximum and average month-end balances for the
three months ended
March 31, 2019
for our borrowings under secured debt arrangements ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
For the three months ended March 31, 2019
|
|
Balance
|
|
Amortized Cost of Collateral
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
JPMorgan Facility
|
$
|
923,336
|
|
|
$
|
1,612,510
|
|
|
$
|
929,496
|
|
|
$
|
925,679
|
|
DB Repurchase Facility
|
616,952
|
|
|
1,013,662
|
|
|
672,477
|
|
|
636,283
|
|
Goldman Facility
|
233,312
|
|
|
517,122
|
|
|
259,167
|
|
|
250,286
|
|
CS Facility - USD
|
188,037
|
|
|
254,090
|
|
|
188,037
|
|
|
187,424
|
|
CS Facility - GBP
|
148,219
|
|
|
211,468
|
|
|
150,811
|
|
|
145,814
|
|
HSBC Facility
|
49,911
|
|
|
71,141
|
|
|
50,784
|
|
|
50,296
|
|
Total
|
$
|
2,159,767
|
|
|
$
|
3,679,993
|
|
|
|
|
|
We were in compliance with the covenants under each of our secured debt arrangements at
March 31, 2019
and
December 31, 2018
.
Note 8
– Convertible Senior Notes, Net
In
two
separate offerings during 2014, we issued an aggregate principal amount of
$254.8
million of
5.50%
Convertible Senior Notes due 2019 (the "2019 Notes"), for which we received
$248.6 million
, after deducting the underwriting discount and offering expenses.
The 2019 Notes were exchanged or converted for shares of our common stock and cash as follows:
(i) On August 2, 2018, we entered into privately negotiated exchange agreements with a limited number of holders of the 2019 Notes pursuant to which we exchanged
$206.2 million
of the 2019 Notes for an aggregate of (a)
10,020,328
newly issued shares of our common stock, and (b)
$39.3 million
in cash. We recorded
$166.0 million
of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions,
(ii) Certain holders elected to convert
$47.9 million
of the 2019 Notes, which were settled for an aggregate of (a)
2,775,509
newly issued shares of our common stock, and (b)
$0.2 million
in cash. We recorded
$13.9 million
of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions. These conversions occurred from August 2018 through maturity.
The remaining
$0.7 million
in principal amount of the 2019 Notes were repaid at maturity on March 15, 2019.
During the year ended December 31, 2018, we recorded a loss on early extinguishment of debt of
$2.6 million
, in connection with the exchanges and conversions of the 2019 Notes. This includes fees and accelerated amortization of
capitalized costs. There was
no
such loss related to the 2019 Notes during the three months ended
March 31, 2019
.
In
two
separate offerings during 2017, we issued an aggregate principal amount of
$345.0 million
of
4.75%
Convertible Senior Notes due 2022 (the "2022 Notes"), for which we received
$337.5 million
, after deducting the underwriting discount and offering expenses.
At
March 31, 2019
, the 2022 Notes had a carrying value of
$335.9 million
and an unamortized discount of
$9.1 million
.
During the fourth quarter of 2018, we issued
$230.0 million
of
5.375%
Convertible Senior Notes due 2023 ("2023 Notes," and together with the 2019 Notes and 2022 Notes, the "Notes"), for which we received
$223.7 million
after deducting the underwriting discount and offering expenses. At
March 31, 2019
, the 2023 Notes had a carrying value of
$222.8 million
and an unamortized discount of
$7.2 million
.
The following table summarizes the terms of the Notes ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
Coupon Rate
|
Effective Rate
(1)
|
Conversion Rate
(2)
|
Maturity Date
|
Remaining Period of Amortization
|
2022 Notes
|
$
|
345,000
|
|
4.75
|
%
|
5.60
|
%
|
50.226
|
|
8/23/2022
|
3.4
|
2023 Notes
|
230,000
|
|
5.38
|
%
|
6.16
|
%
|
48.7187
|
|
10/15/2023
|
4.55
|
Total
|
$
|
575,000
|
|
|
|
|
|
|
———————
|
|
(1)
|
Effective rate includes the effect of the adjustment for the conversion option (See endnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital.
|
|
|
(2)
|
We have the option to settle any conversions in cash, shares of common stock or a combination thereof. The conversion rate represents the number of shares of common stock issuable per
one thousand
principal amount of the Notes converted, and includes adjustments relating to cash dividend payments made by us to stockholders that have been deferred and carried-forward in accordance with, and are not yet required to be made pursuant to, the terms of the applicable supplemental indenture.
|
In accordance with ASC 470 - Debt, the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) is to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. GAAP requires that the initial proceeds from the sale of the Notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by us at such time. We measured the fair value of the debt components of the Notes as of their issuance date based on effective interest rates. As a result, we attributed approximately
$15.4 million
of the proceeds to the equity component of the Notes (
$11.0 million
to the 2022 Notes and
$4.4 million
to the 2023 Notes), which represents the excess proceeds received over the fair value of the liability component of the Notes at the date of issuance. The equity component of the Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of
March 31, 2019
. The resulting debt discount is being amortized over the period during which the Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the Notes will increase in subsequent reporting periods through the maturity date as the Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately
$7.6 million
and
$7.6 million
for the
three months ended
March 31, 2019
and
2018
, respectively. With respect to the amortization of the discount on the liability component of the Notes as well as the amortization of deferred financing costs, we reported additional non-cash interest expense of approximately
$1.7 million
and
$1.8 million
for the
three months ended
March 31, 2019
and
2018
, respectively.
Note 9
– Derivatives, Net
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than U.S. dollars.
We have entered into a series of forward contracts to sell an amount of foreign currency (British pound and Euro) for an agreed upon amount of U.S. dollars at various dates through
December 2021
. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments.
The following table summarizes our non-designated foreign exchange ("Fx") forwards as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
|
Weighted-Average Years to Maturity
|
Fx Contracts - GBP
|
78
|
|
259,604
|
|
GBP
|
|
April 2019- December 2021
|
|
1.07
|
The following table summarizes our non-designated Fx forwards as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
|
Weighted-Average Years to Maturity
|
Fx Contracts - GBP
|
43
|
|
270,161
|
|
GBP
|
|
January 2019 - November 2020
|
|
0.69
|
We have not designated any of our derivative instruments as hedges as defined in ASC 815 "
Derivatives and Hedging"
and, therefore, changes in the fair value of our derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to our derivatives for the
three months ended
March 31, 2019
and
2018
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss)
recognized in income
|
|
|
|
Three months ended March 31,
|
|
Location of Gain (Loss) Recognized in Income
|
|
2019
|
|
2018
|
Forward currency contracts
|
Loss on derivative instruments - unrealized
|
|
$
|
(14,985
|
)
|
|
$
|
(8,859
|
)
|
Forward currency contracts
|
Gain (loss) on derivative instruments - realized
|
|
8,265
|
|
|
(2,177
|
)
|
Interest rate caps
(1)
|
Gain on derivative instruments - unrealized
|
|
—
|
|
|
4
|
|
Total
|
|
|
$
|
(6,720
|
)
|
|
$
|
(11,032
|
)
|
———————
|
|
(1)
|
With a notional amount of
$33.6 million
and
$38.9 million
at
March 31, 2019
, and
2018
, respectively.
|
The following table summarizes the gross asset and liability amounts related to our derivatives at
March 31, 2019
and
December 31, 2018
($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
|
|
Net Amounts
of Assets
Presented in
the Condensed Consolidated Balance Sheet
|
|
Gross Amount of Recognized Assets
|
|
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
|
|
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet
|
Forward currency contracts
|
9,852
|
|
|
(1,137
|
)
|
|
8,715
|
|
|
23,753
|
|
|
(53
|
)
|
|
23,700
|
|
Total derivative instruments
|
$
|
9,852
|
|
|
$
|
(1,137
|
)
|
|
$
|
8,715
|
|
|
$
|
23,753
|
|
|
$
|
(53
|
)
|
|
$
|
23,700
|
|
Note 10
– Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Accrued dividends payable
|
$
|
69,799
|
|
|
$
|
69,033
|
|
Collateral deposited under derivative agreements
|
1,820
|
|
|
20,000
|
|
Accrued interest payable
|
13,488
|
|
|
14,208
|
|
Accounts payable and other liabilities
|
6,450
|
|
|
1,505
|
|
Total
|
$
|
91,557
|
|
|
$
|
104,746
|
|
Note 11
– Related Party Transactions
Management Agreement
In connection with our initial public offering in September 2009, we entered into a management agreement (the "Management Agreement") with the Manager, which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing our day-to-day operations, subject to the direction and oversight of our board of directors.
Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to
1.5%
per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The current term of the Management Agreement was renewed during the period and expires on September 29, 2019 and is automatically renewed for successive
one
-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the
one
-year extension term only upon the affirmative vote of at least two-thirds of our independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to ARI or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least
180 days
prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the
24
-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by our independent directors in February 2019, which included a discussion of the Manager’s performance and the level of the management fees thereunder, we determined not to seek termination of the Management Agreement.
We incurred approximately
$9.6 million
in base management fees under the Management Agreement for the three months ended
March 31, 2019
as compared to approximately
$8.1 million
for the three months ended
March 31, 2018
.
In addition to the base management fee, we are also responsible for reimbursing the Manager for certain expenses paid by the Manager on our behalf or for certain services provided by the Manager to us.
For the
three months ended
March 31, 2019
and
2018
, we paid expenses totaling
$0.7 million
and
$0.6 million
, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement. Expenses incurred by the Manager and reimbursed by us are reflected in the respective condensed consolidated statement of operations expense category or the condensed consolidated balance sheet based on the nature of the item.
Included in payable to related party on the condensed consolidated balance sheet at
March 31, 2019
and
December 31, 2018
are approximately
$9.6 million
and
$9.8 million
, respectively, for base management fees incurred but not yet paid under the Management Agreement.
Loans receivable
In June 2017, we increased our outstanding loan commitment through the acquisition of an additional
$25.0 million
of interests in an existing subordinate loan from a fund managed by an affiliate of the Manager, increasing our total outstanding loan commitment to
$100.0 million
. Furthermore, in September 2017 we funded an additional
$25.0 million
to acquire a portion of the same pre-development subordinate loan from a fund managed by an affiliate of the Manager, increasing our total outstanding loan commitment to
$125.0 million
. In May 2018, we increased our outstanding principal balance through the
acquisition of an additional
$28.2
million interest in the same subordinate loan from a fund managed by an affiliate of the Manager. The pre-development subordinate loan is for the construction of a residential condominium building in New York, New York and is part of a
$300.0 million
subordinate loan.
In June 2018, we increased our outstanding loan commitment through the acquisition of
£4.8
million (
$6.4
million assuming conversion into U.S. dollars) pari-passu interest in an existing subordinate loan from a fund managed by an affiliate of the Manager. The subordinate loan is secured by a healthcare portfolio located in the United Kingdom.
Note 12
– Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (as amended from time to time, the "LTIP"). The LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of
7.5%
of the issued and outstanding shares of our common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of our board of directors (the "Compensation Committee") and all grants under the LTIP must be approved by the Compensation Committee.
We recognized stock-based compensation expense of
$3.9 million
and
$3.3 million
for the
three months ended
March 31, 2019
and
2018
, respectively, related to restricted stock and RSU vesting. We adopted ASU 2018-07 on January 1, 2019 and the stock-based compensation expense for grants before the adoption of ASU 2018-07 is based on the closing price of our common stock of
$16.66
on December 31, 2018, which was the last business day before we adopted ASU 2018-07. Refer to "Note 2 - Summary of Significant Accounting Policies" for further discussion on our adoption of ASU 2018-07.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the
three months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Restricted Stock
|
|
RSUs
|
|
Grant Date Fair Value ($ in thousands)
|
Outstanding at December 31, 2018
|
|
65,697
|
|
|
1,852,957
|
|
|
|
|
Vested
|
|
(1,419
|
)
|
|
—
|
|
|
N/A
|
|
Forfeiture
|
|
—
|
|
|
(4,174
|
)
|
|
N/A
|
Outstanding at March 31, 2019
|
|
64,278
|
|
|
1,848,783
|
|
|
|
Below is a summary of restricted stock and RSU vesting dates as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
Vesting Year
|
|
Restricted Stock
|
|
RSU
|
|
Total Awards
|
2019
|
|
40,671
|
|
|
887,222
|
|
|
927,893
|
|
2020
|
|
14,251
|
|
|
626,738
|
|
|
640,989
|
|
2021
|
|
9,356
|
|
|
334,823
|
|
|
344,179
|
|
Total
|
|
64,278
|
|
|
1,848,783
|
|
|
1,913,061
|
|
At
March 31, 2019
, we had unrecognized compensation expense of approximately
$0.6 million
and
$27.1 million
, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.
RSU Deliveries
During the
three months ended
March 31, 2019
and 2018, we delivered
433,426
and
354,996
shares of common stock for
730,717
and
603,677
vested RSUs, respectively. We allow RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on the condensed consolidated statement of changes in stockholders' equity. The adjustment was
$5.0 million
and
$4.7 million
for the
three months ended
March 31, 2019
and 2018, respectively. The adjustment is a reduction of capital related to our equity incentive plan and is presented net of increases of capital related to our equity incentive plan in the condensed consolidated statement of changes in stockholders' equity.
Note 13
– Stockholders’ Equity
Our authorized capital stock consists of
450,000,000
shares of common stock,
$0.01
par value per share and
50,000,000
shares of preferred stock,
$0.01
par value per share. As of
March 31, 2019
,
136,254,352
shares of common stock were issued and outstanding,
6,770,393
shares of
8.00%
Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock ("Series B Preferred Stock") were issued and outstanding and
$6,900,000
shares of
8.00%
Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") were issued and outstanding.
Dividends.
During
2019
, we declared the following dividends:
|
|
|
|
|
|
|
|
Three months ended
|
Dividend declared per share of:
|
|
March 31, 2019
|
|
March 31, 2018
|
Common Stock
|
|
$0.46
|
|
$0.46
|
Series B Preferred Stock
|
|
0.50
|
|
0.50
|
Series C Preferred Stock
|
|
0.50
|
|
0.50
|
Common Stock Offerings.
During the first quarter of 2018, we completed a follow-on public offering of
15,525,000
shares of our common stock, at a price of
$17.77
per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were
$275.9
million after deducting offering expenses.
During the first quarter of 2019, we issued
1,967,361
shares of our common stock, at a per share conversion price of
$17.17
, related to conversions of the 2019 Notes, the remainder of which matured on March 15, 2019. We recorded a
$33.8 million
increase in additional paid in capital in the condensed consolidated statement of changes in stockholders' equity. Refer to "
Note 8
- Convertible Senior Notes, Net" for a further discussion on the conversions of the 2019 Notes.
Note 14
– Commitments and Contingencies
Legal Proceedings.
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced an action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No. 653251/2018) in New York Supreme Court. The complaint names as defendants (i) ACREFI Mortgage Lending, LLC, a subsidiary of the Company, (ii) the Company, and (iii) certain funds managed by Apollo, who are co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs allege that the defendants tortiously interfered with the contractual equity put right in the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project. The plaintiffs allege the loss of a
$70.0 million
investment as part of total damages of
$700.0 million
, which includes punitive damages. The defendants moved to dismiss the complaint on August 17, 2018, and the motion was fully briefed in October 2018. Oral argument took place on March 12, 2019, and the court’s decision is pending. We believe the claims are without merit and plan to vigorously defend the case. We do not believe this will have a material adverse effect on our condensed consolidated financial statements.
Loan Commitments.
As described in "
Note 4
- Commercial Mortgage and Subordinate Loans, Net," at
March 31, 2019
, we had
$1,039.1 million
of unfunded commitments related to our commercial mortgage and subordinate loan portfolios.
Note 15
– Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of our financial instruments not carried at fair value on the condensed consolidated balance sheet at
March 31, 2019
and
December 31, 2018
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Cash and cash equivalents
|
$
|
109,343
|
|
|
$
|
109,343
|
|
|
$
|
109,806
|
|
|
$
|
109,806
|
|
Commercial first mortgage loans, net
|
4,003,089
|
|
|
4,025,760
|
|
|
3,878,981
|
|
|
3,894,947
|
|
Subordinate loans, net
|
1,183,910
|
|
|
1,187,128
|
|
|
1,048,612
|
|
|
1,047,854
|
|
Secured debt arrangements
|
(2,159,767
|
)
|
|
(2,159,767
|
)
|
|
(1,897,077
|
)
|
|
(1,897,077
|
)
|
2019 Notes
|
—
|
|
|
—
|
|
|
(34,278
|
)
|
|
(35,276
|
)
|
2022 Notes
|
(335,894
|
)
|
|
(337,762
|
)
|
|
(335,291
|
)
|
|
(326,025
|
)
|
2023 Notes
|
(222,770
|
)
|
|
(225,770
|
)
|
|
(222,431
|
)
|
|
(221,964
|
)
|
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and convertible senior notes, net are measured using observable Level I inputs as defined in "
Note 3
- Fair Value Disclosure." Estimates of fair value for all other financial instruments in the table above are measured using significant estimates, or unobservable Level III inputs as defined in "
Note 3
- Fair Value Disclosure."
Note 16
– Net Income per Share
ASC 260 "Earnings per share" requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.
The table below presents the computation of basic and diluted net income per share of common stock for the
three months ended
March 31, 2019
and
2018
($ in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
|
2018
|
Basic Earnings
|
|
|
|
Net Income
|
$
|
67,758
|
|
|
$
|
49,433
|
|
Less: Preferred dividends
|
(6,835
|
)
|
|
(6,835
|
)
|
Net income available to common stockholders
|
$
|
60,923
|
|
|
$
|
42,598
|
|
Less: Dividends on participating securities
|
(851
|
)
|
|
(751
|
)
|
Basic Earnings
|
$
|
60,072
|
|
|
$
|
41,847
|
|
|
|
|
|
Diluted Earnings
|
|
|
|
Net Income
|
$
|
67,758
|
|
|
$
|
49,433
|
|
Less: Preferred dividends
|
(6,835
|
)
|
|
(6,835
|
)
|
Net income available to common stockholders
|
$
|
60,923
|
|
|
$
|
42,598
|
|
Add: Interest expense on Notes
|
9,262
|
|
|
N/A
|
|
Diluted Earnings
|
$
|
70,185
|
|
|
$
|
42,598
|
|
|
|
|
|
Number of Shares:
|
|
|
|
Basic weighted-average shares of common stock outstanding
|
134,607,107
|
|
|
110,211,853
|
|
Diluted weighted-average shares of common stock outstanding
|
164,683,086
|
|
|
111,871,429
|
|
|
|
|
|
|
Earnings Per Share Attributable to Common Stockholders
|
|
|
|
Basic
|
$
|
0.45
|
|
|
$
|
0.38
|
|
Diluted
|
$
|
0.43
|
|
|
$
|
0.38
|
|
Prior to the three months ended September 30, 2018, we asserted our intent and ability to settle the principal amount of the Notes in cash and, as a result, the Notes did not have any impact on our diluted earnings per share. As of September 30, 2018, we no longer asserted our intent to fully settle the principal amount of the Notes in cash upon conversion. Accordingly, the dilutive effect to earnings per share for the current year periods is determined using the "if-converted" method whereby interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the
three months ended
March 31, 2019
,
30,093,312
weighted-average potentially issuable shares from the Notes were included in the dilutive earnings per share denominator. Refer to "
Note 8
- Convertible Senior Notes, Net" for further discussion.
For the
three months ended
March 31, 2019
and
2018
,
1,849,564
and
1,659,576
weighted-average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 17
– Subsequent Events
Investment activity.
Subsequent to the quarter ended
March 31, 2019
, we committed capital of
$75.6 million
(
£58.0 million
) to a first mortgage loan.
In addition, we funded approximately
$41.3 million
for loans closed prior to the quarter.
Loan Repayments. S
ubsequent to the end of the quarter, we received approximately
$13.1 million
from loan repayments.