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, Inc. (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 and nine months ended September 30, 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.
Interest Income Recognition
Interest income on our lending assets is accrued based on the actual coupon rate adjusted for accretion of any purchase discounts, the amortization of any purchase premiums and the accretion of any deferred fees, in accordance with GAAP.
Loans that have been assigned a risk rating of 4 or 5, discussed in "Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net," may be placed on non-accrual. When a loan is placed on non-accrual, interest is only recorded as interest income when it's received. Under certain circumstances, we may apply cost recovery under which interest collected on a loan is a reduction to its amortized cost. The cost recovery method will no longer apply if collection of all principal and interest is reasonably assured.
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 expected 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 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. The fair value of the interest rate swap is determined by comparing the present value of remaining fixed payments to the present value of expected floating rate payments based on the forward one-month LIBOR curve. 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 September 30, 2019 and December 31, 2018 ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2019
|
|
Fair Value as of December 31, 2018
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Foreign currency forward assets, net
|
$
|
—
|
|
|
$
|
35,729
|
|
|
$
|
—
|
|
|
$
|
35,729
|
|
|
$
|
—
|
|
|
$
|
23,700
|
|
|
$
|
—
|
|
|
$
|
23,700
|
|
Interest rate swap liability
|
—
|
|
|
(23,420
|
)
|
|
—
|
|
|
(23,420
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Note 4 – Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net
Our loan portfolio was comprised of the following at September 30, 2019 and December 31, 2018 ($ in thousands):
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|
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Loan Type
|
|
September 30, 2019
|
|
December 31, 2018
|
Commercial mortgage loans, net
|
|
$
|
4,779,501
|
|
|
$
|
3,878,981
|
|
Subordinate loans and other lending assets, net
|
|
1,335,073
|
|
|
1,048,612
|
|
Total investments, net
|
|
$
|
6,114,574
|
|
|
$
|
4,927,593
|
|
Our loan portfolio consisted of 94% and 91% floating rate loans, based on amortized cost, as of September 30, 2019 and December 31, 2018, respectively.
Activity relating to our loan investment portfolio, for the nine months ended September 30, 2019, was as follows ($ in thousands):
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|
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Principal Balance
|
|
Deferred Fees/Other Items (1)
|
|
Provision for Loan Loss (2)
|
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Carrying Value
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December 31, 2018
|
|
$
|
4,982,514
|
|
|
$
|
(17,940
|
)
|
|
$
|
(36,981
|
)
|
|
$
|
4,927,593
|
|
New loan fundings
|
|
1,770,623
|
|
|
—
|
|
|
—
|
|
|
1,770,623
|
|
Add-on loan fundings (3)
|
|
290,043
|
|
|
—
|
|
|
—
|
|
|
290,043
|
|
Loan repayments
|
|
(843,417
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)
|
|
—
|
|
|
—
|
|
|
(843,417
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)
|
Gain (loss) on foreign currency translation
|
|
(38,505
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)
|
|
105
|
|
|
—
|
|
|
(38,400
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)
|
Realized loss on investment, net of provision for loan loss reversal (2)
|
|
(12,513
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)
|
|
—
|
|
|
15,000
|
|
|
2,487
|
|
Provision for loan losses
|
|
—
|
|
|
—
|
|
|
(35,000
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)
|
|
(35,000
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)
|
Deferred fees
|
|
—
|
|
|
(24,524
|
)
|
|
—
|
|
|
(24,524
|
)
|
PIK interest and amortization of fees
|
|
43,728
|
|
|
21,441
|
|
|
—
|
|
|
65,169
|
|
September 30, 2019
|
|
$
|
6,192,473
|
|
|
$
|
(20,918
|
)
|
|
$
|
(56,981
|
)
|
|
$
|
6,114,574
|
|
———————
(1) Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses.
(2) In addition to the $57.0 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. During the second quarter of 2019, the underlying collateral on a commercial mortgage loan and a contiguous subordinate loan secured by a multifamily property located in Williston, ND was sold resulting in a realized loss of $12.5 million. Consequently, the previously recorded $15.0 million loan loss provision was reversed.
(3) Represents fundings for loans closed prior to 2019.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
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|
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|
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|
|
September 30, 2019
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|
December 31, 2018
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Number of loans
|
|
74
|
|
|
69
|
|
Principal balance
|
|
$
|
6,192,473
|
|
|
$
|
4,982,514
|
|
Carrying value
|
|
$
|
6,114,574
|
|
|
$
|
4,927,593
|
|
Unfunded loan commitments (1)
|
|
$
|
1,073,423
|
|
|
$
|
1,095,598
|
|
Weighted-average cash coupon (2)
|
|
7.5
|
%
|
|
8.4
|
%
|
Weighted-average remaining term (3)
|
|
3.1 years
|
|
|
2.8 years
|
|
———————
|
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(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.
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(2)
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For floating rate loans, based on applicable benchmark rates as of the specified dates.
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(3)
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Assumes all extension options are exercised.
|
Property Type
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
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|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
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Property Type
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Hotel
|
|
$
|
1,579,667
|
|
|
25.8
|
%
|
|
$
|
1,286,590
|
|
|
26.1
|
%
|
Residential-for-sale: construction
|
|
629,069
|
|
|
10.3
|
%
|
|
528,510
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|
|
10.7
|
%
|
Residential-for-sale: inventory
|
|
349,259
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|
|
5.7
|
%
|
|
577,053
|
|
|
11.7
|
%
|
Office
|
|
1,406,678
|
|
|
23.0
|
%
|
|
832,620
|
|
|
16.9
|
%
|
Urban Predevelopment
|
|
602,946
|
|
|
9.9
|
%
|
|
683,886
|
|
|
13.9
|
%
|
Urban Retail
|
|
466,343
|
|
|
7.6
|
%
|
|
—
|
|
|
—
|
%
|
Multifamily
|
|
306,142
|
|
|
5.0
|
%
|
|
448,899
|
|
|
9.1
|
%
|
Industrial
|
|
227,696
|
|
|
3.7
|
%
|
|
32,000
|
|
|
0.6
|
%
|
Retail Center
|
|
126,068
|
|
|
2.1
|
%
|
|
156,067
|
|
|
3.2
|
%
|
Healthcare
|
|
190,832
|
|
|
3.1
|
%
|
|
156,814
|
|
|
3.2
|
%
|
Other
|
|
127,229
|
|
|
2.1
|
%
|
|
151,197
|
|
|
3.1
|
%
|
Mixed Use
|
|
102,645
|
|
|
1.7
|
%
|
|
73,957
|
|
|
1.5
|
%
|
Total
|
|
$
|
6,114,574
|
|
|
100.0
|
%
|
|
$
|
4,927,593
|
|
|
100.0
|
%
|
Geography
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
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Geographic Location
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Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Manhattan, NY
|
|
$
|
2,286,709
|
|
|
37.4
|
%
|
|
$
|
1,669,145
|
|
|
33.9
|
%
|
Brooklyn, NY
|
|
443,966
|
|
|
7.3
|
%
|
|
346,056
|
|
|
7.0
|
%
|
Northeast
|
|
19,195
|
|
|
0.3
|
%
|
|
23,479
|
|
|
0.5
|
%
|
West
|
|
728,788
|
|
|
11.9
|
%
|
|
614,160
|
|
|
12.5
|
%
|
Midwest
|
|
626,867
|
|
|
10.3
|
%
|
|
631,710
|
|
|
12.8
|
%
|
Southeast
|
|
568,103
|
|
|
9.3
|
%
|
|
559,043
|
|
|
11.3
|
%
|
Southwest
|
|
126,506
|
|
|
2.1
|
%
|
|
96,345
|
|
|
2.0
|
%
|
Mid Atlantic
|
|
110,895
|
|
|
1.8
|
%
|
|
211,775
|
|
|
4.3
|
%
|
United Kingdom
|
|
815,168
|
|
|
13.3
|
%
|
|
700,460
|
|
|
14.2
|
%
|
Germany
|
|
185,208
|
|
|
3.0
|
%
|
|
—
|
|
|
—
|
%
|
Italy
|
|
129,524
|
|
|
2.1
|
%
|
|
—
|
|
|
—
|
%
|
Other International
|
|
73,645
|
|
|
1.2
|
%
|
|
75,420
|
|
|
1.5
|
%
|
Total
|
|
$
|
6,114,574
|
|
|
100.0
|
%
|
|
$
|
4,927,593
|
|
|
100.0
|
%
|
Risk Rating
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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Risk Rating
|
|
Number of Loans
|
|
Carrying Value
|
|
% of Loan Portfolio
|
|
Number of Loans
|
|
Carrying Value
|
|
% of Loan Portfolio
|
1
|
|
—
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
|
$
|
—
|
|
|
—
|
%
|
2
|
|
9
|
|
470,409
|
|
|
8
|
%
|
|
3
|
|
138,040
|
|
|
3
|
%
|
3
|
|
63
|
|
5,502,402
|
|
|
90
|
%
|
|
63
|
|
4,573,930
|
|
|
93
|
%
|
4
|
|
—
|
|
—
|
|
|
—
|
%
|
|
—
|
|
—
|
|
|
—
|
%
|
5
|
|
2
|
|
141,763
|
|
|
2
|
%
|
|
3
|
|
215,623
|
|
|
4
|
%
|
|
|
74
|
|
$
|
6,114,574
|
|
|
100
|
%
|
|
69
|
|
$
|
4,927,593
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average risk rating
|
|
|
|
3.0
|
|
|
|
|
|
|
3.1
|
|
Provision for Loan Losses and Impairments
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 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 $171.2 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 loan loss provision of $15.0 million and due to factors including continued weakness in the retail sector, we recorded an additional $32.0 million loan loss provision during the third quarter of 2019, bringing the total provision for loan loss to $47.0 million. The carrying value, as a result of the provision, of the loan was $126.1 million and $156.1 million as of September 30, 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 the direct capitalization method. The significant unobservable input used in determining the collateral value was the capitalization rate which was 7.75% and 6.75% as of September 30, 2019 and December 31, 2018, respectively. Effective September 30, 2019, 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 carrying value of the loan for accounting purposes). As of September 30, 2019 and December 31, 2018, this loan was assigned a risk rating of 5.
We recorded a $13.0 million loan loss provision and impairment against a commercial mortgage loan secured by fully-built, for-sale residential condominium units located in Bethesda, MD. Each of the loan loss provisions were due to factors including slower than expected sales pace of the underlying condominium units and were comprised of (i) $3.0 million loan loss recorded during the third quarter of 2019, (ii) $5.0 million loan loss recorded during the second quarter of 2018, and (iii) $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 $15.7 million and $27.2 million as of September 30, 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 $597 and $662 per square foot across properties and 10% and 15% as of September 30, 2019 and December 31, 2018, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and account for the loan on a cost-recovery basis. As of September 30, 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. 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. We ceased accruing interest associated with the loan and only recognized interest income upon receipt of cash. As of December 31, 2018, the amortized cost of the loan, net of the loan loss provision, was $32.4 million and was assigned a risk rating of 5. During the second quarter of 2019, the underlying collateral was sold resulting in a realized loss of $12.5 million. Consequently, the previously recorded $15.0 million loan loss provision was reversed.
As of September 30, 2019 and December 31, 2018, the aggregate loan loss provision was $57.0 million and $37.0 million for commercial mortgage loans and subordinate loans, respectively.
Other Loan and Lending Assets Activity
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 September 30, 2019, our exposure to the property is limited to a $190.0 million ($121.8 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.
We recognized payment-in-kind ("PIK") interest of $13.7 million and $42.8 million for the three and nine months ended September 30, 2019, respectively, and $10.2 million and $29.9 million for the three and nine months ended September 30, 2018, respectively.
We recognized $0.3 million and $4.0 million pre-payment penalties and accelerated fees for the three and nine months ended September 30, 2019, respectively and $0.2 million and $1.8 million for the three and nine months ended September 30, 2018, respectively.
Our portfolio includes two other lending assets, which are subordinate risk retention interests in securitization vehicles. The underlying mortgages related to our subordinate risk retention interests are secured by a portfolio of properties located throughout the United States. Our maximum exposure to loss from the subordinate risk retention interests is limited to the book value of such interests of $68.3 million as of September 30, 2019. These interests have a weighted average maturity of 7.07 years. We are not obligated to provide, and do not intend to provide financial support to these subordinate risk retention interests.
Both interests are accounted for as held-to-maturity and recorded at amortized cost on the condensed consolidated balance sheet. We did not hold any collateral securing our subordinate risk retention interests as of December 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 were $3.3 million and $1.0 million as of September 30, 2019 and December 31, 2018, respectively.
Note 6 – Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Interest receivable
|
$
|
36,908
|
|
|
$
|
33,399
|
|
Other
|
950
|
|
|
321
|
|
Total
|
$
|
37,858
|
|
|
$
|
33,720
|
|
Note 7 – Secured Debt Arrangements, Net
At September 30, 2019 and December 31, 2018, our borrowings had the following secured debt arrangements, maturities and weighted-average interest rates ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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)
|
$
|
1,253,271
|
|
|
$
|
1,067,635
|
|
|
June 2024
|
|
$
|
1,333,503
|
|
|
$
|
680,141
|
|
|
June 2021
|
|
JPMorgan Facility (GBP)
|
46,729
|
|
|
46,729
|
|
|
June 2024
|
|
48,497
|
|
|
48,497
|
|
|
June 2021
|
|
DB Repurchase Facility (USD)
|
1,116,993
|
|
|
558,905
|
|
|
March 2021
|
|
904,181
|
|
|
419,823
|
|
|
March 2021
|
|
DB Repurchase Facility (GBP)
|
133,007
|
|
|
133,007
|
|
|
March 2021
|
|
150,819
|
|
|
150,819
|
|
|
March 2021
|
|
Goldman Facility
|
500,000
|
|
|
267,711
|
|
|
November 2021
|
|
300,000
|
|
|
210,072
|
|
|
November 2020
|
|
CS Facility - USD
|
174,279
|
|
|
174,279
|
|
|
March 2020
|
|
187,117
|
|
|
187,117
|
|
|
June 2019
|
|
CS Facility - GBP
|
124,707
|
|
|
124,707
|
|
|
March 2020
|
|
151,773
|
|
|
151,773
|
|
|
June 2019
|
|
HSBC Facility - GBP
|
36,621
|
|
|
36,621
|
|
|
December 2019
|
|
48,835
|
|
|
48,835
|
|
|
December 2019
|
|
HSBC Facility - EUR
|
149,724
|
|
|
149,724
|
|
|
January 2021
|
|
—
|
|
|
—
|
|
|
N/A
|
|
Sub-total
|
3,535,331
|
|
|
2,559,318
|
|
|
|
|
3,124,725
|
|
|
1,897,077
|
|
|
|
|
less: deferred financing costs
|
N/A
|
|
|
(18,031
|
)
|
|
|
|
N/A
|
|
|
(17,555
|
)
|
|
|
|
Total / Weighted-Average
|
$
|
3,535,331
|
|
|
$
|
2,541,287
|
|
|
$
|
3,124,725
|
|
|
$
|
1,879,522
|
|
|
|
———————
(1) Maturity date assumes extensions at our option are exercised.
(2) Weighted-average rates as of September 30, 2019 and December 31, 2018 were USD L + 2.09% / GBP L + 2.31% / EUR L + 1.35% 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"). During the third quarter of 2019, we amended the JPMorgan Facility to allow for $1.3 billion of maximum borrowings and maturity in June 2022, plus two one-year extensions available at our option, subject to certain conditions. The JPMorgan Facility enables us to elect to receive advances in U.S. dollars ("USD"), British pounds ("GBP"), or Euros ("EUR"). 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 September 30, 2019, we had $1.1 billion (including £38.0 million assuming conversion into USD) 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 2019, and provides for advances of up to $1.25 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 USD, GBP, or EUR.
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 September 30, 2019, we had $691.9 million (including £108.2 million assuming conversion into USD) 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 our indirect wholly-owned subsidiaries under this facility.
As of September 30, 2019, we had $267.7 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 subsidiary under this facility.
As of September 30, 2019, we had $174.3 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 subsidiary under this facility.
As of September 30, 2019, we had $124.7 million (£101.5 million assuming conversion into USD) of borrowings outstanding under the CS Facility - GBP secured by one of our commercial mortgage loans.
HSBC Facility - GBP
In September 2018, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc (the "HSBC Facility - GBP"), which provides for a single asset financing. The facility matures in December 2019. 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 subsidiary under this facility.
As of September 30, 2019, we had $36.6 million (£29.8 million assuming conversion into USD) of borrowings outstanding under the HSBC Facility - GBP secured by one of our commercial mortgage loans.
HSBC Facility - EUR
In July 2019, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc (the "HSBC Facility - EUR"), which provides for a single asset financing. The facility matures in January 2021. 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 subsidiary under this facility.
As of September 30, 2019, we had $149.7 million (€137.4 million assuming conversion into USD) of borrowings outstanding under the HSBC Facility - EUR secured by one of our commercial mortgage loans.
At September 30, 2019, our borrowings had the following remaining maturities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year (1)
|
|
1 to 3
years (1)
|
|
3 to 5
years (1)
|
|
More than
5 years
|
|
Total
|
JPMorgan Facility
|
$
|
60,500
|
|
|
$
|
311,219
|
|
|
$
|
742,645
|
|
|
$
|
—
|
|
|
$
|
1,114,364
|
|
DB Repurchase Facility
|
102,896
|
|
|
589,016
|
|
|
—
|
|
|
—
|
|
|
691,912
|
|
Goldman Facility
|
—
|
|
|
267,711
|
|
|
—
|
|
|
—
|
|
|
267,711
|
|
CS Facility - USD
|
174,279
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
174,279
|
|
CS Facility - GBP
|
124,707
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
124,707
|
|
HSBC Facility - GBP
|
36,621
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,621
|
|
HSBC Facility - EUR
|
—
|
|
|
149,724
|
|
|
—
|
|
|
—
|
|
|
149,724
|
|
Total
|
$
|
499,003
|
|
|
$
|
1,317,670
|
|
|
$
|
742,645
|
|
|
$
|
—
|
|
|
$
|
2,559,318
|
|
———————
(1) Assumes underlying assets are financed through the fully extended maturity date of the facility.
The table below summarizes the outstanding balances at September 30, 2019, as well as the maximum and average month-end balances for the nine months ended September 30, 2019 for our borrowings under secured debt arrangements ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
For the nine months ended September 30, 2019
|
|
Balance
|
|
Amortized Cost of Collateral
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
JPMorgan Facility
|
$
|
1,114,364
|
|
|
$
|
1,809,170
|
|
|
$
|
1,150,317
|
|
|
$
|
875,895
|
|
DB Repurchase Facility
|
691,912
|
|
|
1,205,456
|
|
|
691,912
|
|
|
598,285
|
|
Goldman Facility
|
267,711
|
|
|
445,898
|
|
|
312,507
|
|
|
220,631
|
|
CS Facility - USD
|
174,279
|
|
|
241,989
|
|
|
188,037
|
|
|
180,792
|
|
CS Facility - GBP
|
124,707
|
|
|
178,612
|
|
|
150,811
|
|
|
139,991
|
|
HSBC Facility - GBP
|
36,621
|
|
|
52,593
|
|
|
50,784
|
|
|
44,007
|
|
HSBC Facility - EUR
|
149,724
|
|
|
185,208
|
|
|
152,155
|
|
|
150,914
|
|
Total
|
$
|
2,559,318
|
|
|
$
|
4,118,926
|
|
|
|
|
|
We were in compliance with the covenants under each of our secured debt arrangements at September 30, 2019 and December 31, 2018.
Note 8 – Senior Secured Term Loan, Net
In May 2019, we entered into a $500.0 million senior secured term loan. The senior secured term loan bears interest at LIBOR plus 2.75% and was issued at a price of 99.5%. The senior secured term loan matures in May 2026 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities.
During the three months ended September 30, 2019, we repaid $1.3 million of principal related to the senior secured term loan.
Covenants
The senior secured term loan includes the following financial covenants: (i) our ratio of total non-recourse debt to tangible net worth cannot be greater than 3:1; and (ii) our ratio of total unencumbered assets to total pari-passu indebtedness must be at least 1.25:1.
We were in compliance with the covenants under the senior secured term loan at September 30, 2019.
Interest Rate Swap
In connection with the senior secured term loan, we entered into an interest rate swap to fix LIBOR at 2.12% effectively fixing our all-in coupon on the senior secured term loan at 4.87%.
Note 9 – 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 and nine months ended September 30, 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 September 30, 2019, the 2022 Notes had a carrying value of $337.1 million and an unamortized discount of $7.9 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 September 30, 2019, the 2023 Notes had a carrying value of $223.5 million and an unamortized discount of $6.5 million.
The following table summarizes the terms of the Notes ($ 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
|
%
|
50.2260
|
|
8/23/2022
|
2.90
|
2023 Notes
|
230,000
|
|
5.38
|
%
|
6.16
|
%
|
48.7187
|
|
10/15/2023
|
4.04
|
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 September 30, 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 $7.2 million and $21.9 million for the three and nine months ended September 30, 2019, respectively, as compared to approximately $5.5 million and $20.7 million for the three and nine months ended September 30, 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 $1.5 million and $4.6 million for the three and nine months ended September 30, 2019, respectively, as compared to $1.2 million and $4.9 million for the three and nine months ended September 30, 2018, respectively.
Note 10 – Derivatives
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD.
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 USD at various dates through February 2023. These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments.
In connection with the senior secured term loan, we entered into an interest rate swap to fix LIBOR at 2.12% or an all-in interest rate of 4.87%. We use interest rate swaps and caps to manage exposure to variable cash flows on portions of our borrowings under term loan debt. Interest rate swap and cap agreements allow us to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure. Gains or losses related to the interest rate swap are recorded net under interest expense in our condensed consolidated statement of operations.
The following table summarizes our non-designated foreign exchange ("Fx") forwards and our interest rate swap as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
|
Weighted-Average Years to Maturity
|
Fx Contracts - GBP
|
97
|
|
431,334
|
|
GBP
|
|
October 2019 - April 2022
|
|
0.75
|
Fx Contracts - EUR
|
27
|
|
178,922
|
|
EUR
|
|
October 2019 - February 2023
|
|
1.47
|
Interest Rate Swap
|
1
|
|
500,000
|
|
USD
|
|
May 2026
|
|
6.62
|
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 and nine months ended September 30, 2019 and 2018 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss)
recognized in income
|
|
Amount of gain (loss)
recognized in income
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Location of Gain (Loss) Recognized in Income
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Forward currency contracts
|
Gain on derivative instruments - unrealized
|
|
$
|
16,227
|
|
|
$
|
5,046
|
|
|
$
|
12,029
|
|
|
$
|
20,987
|
|
Forward currency contracts
|
Gain on derivative instruments - realized
|
|
7,926
|
|
|
1,246
|
|
|
16,590
|
|
|
7,811
|
|
Interest rate caps(1)
|
Loss on derivative instruments - unrealized
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Gain on derivative instruments
|
|
24,153
|
|
|
6,291
|
|
|
28,619
|
|
|
28,797
|
|
———————
|
|
(1)
|
With a notional amount of $0.0 million and $36.2 million at September 30, 2019, and 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss
recognized in income
|
|
Amount of loss
recognized in income
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Location of Loss Recognized in Income
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest rate swap(1)
|
Unrealized loss on interest rate swap
|
|
(10,307
|
)
|
|
—
|
|
|
(23,420
|
)
|
|
—
|
|
———————
|
|
(1)
|
With a notional amount of $500.0 million and $0.0 million at September 30, 2019, and 2018, respectively.
|
The following table summarizes the gross asset and liability amounts related to our derivatives at September 30, 2019 and December 31, 2018 ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Gross
Amount of
Recognized
Assets (Liabilities)
|
|
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
|
|
Net Amounts
of Assets (Liabilities)
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
|
$
|
35,811
|
|
|
$
|
(82
|
)
|
|
$
|
35,729
|
|
|
$
|
23,753
|
|
|
$
|
(53
|
)
|
|
$
|
23,700
|
|
Interest rate swap
|
(23,420
|
)
|
|
—
|
|
|
(23,420
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Note 11 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Accrued dividends payable
|
$
|
74,290
|
|
|
$
|
69,033
|
|
Collateral deposited under derivative agreements
|
170
|
|
|
20,000
|
|
Accrued interest payable
|
13,908
|
|
|
14,208
|
|
Accounts payable and other liabilities
|
9,863
|
|
|
1,505
|
|
Total
|
$
|
98,231
|
|
|
$
|
104,746
|
|
Note 12 – 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, 2020 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 $10.4 million and $30.3 million in base management fees under the Management Agreement for the three and nine months ended September 30, 2019, respectively, as compared to approximately $9.5 million and $26.6 million for the three and nine months ended September 30, 2018, respectively.
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 and nine months ended September 30, 2019, we paid expenses totaling $0.5 million and $2.0 million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement as compared to $0.6 million and $1.8 million for the same periods in the prior year. These expenses are included in the general and administrative expenses line item of the condensed consolidated statement of operations.
Included in payable to related party on the condensed consolidated balance sheet at September 30, 2019 and December 31, 2018 are approximately $10.4 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 USD) 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.
Senior Secured Term Loan
In May 2019, Apollo Global Funding, LLC, an affiliate of the Manager, served as one of the five arrangers for the issuance of our senior secured term loan and received $0.6 million of arrangement fees.
Note 13 – Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc. 2009 Equity Incentive Plan ("2009 LTIP") and on April 16, 2019, our board of directors approved the Amended and Restated Apollo Commercial Real Estate Finance, Inc. 2019 Equity Incentive Plan ("2019 LTIP," and together with the 2009 LTIP, the "LTIPs"), which amended and restated the 2009 LTIP. Following the approval of the 2019 LTIP by our stockholders at our 2019 annual meeting of stockholders on June 12, 2019, no additional awards will be granted under the 2009 LTIP and all outstanding awards granted under the 2009 LTIP remain in effect in accordance with the terms in the 2009 LTIP.
The 2019 LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7,000,000 shares of our common stock. The LTIPs are administered by the compensation committee of our board of directors (the "Compensation Committee") and all grants under the LTIPs must be approved by the Compensation Committee.
We recognized stock-based compensation expense of $3.9 million and $12.1 million for the three and nine months ended September 30, 2019, respectively, related to restricted stock and RSU vesting, as compared to $4.0 million and $11.4 million for the three and nine months ended September 30, 2018. 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 $16.66 on December 31, 2018, which was the last business day before we adopted ASU 2018-07. Refer to "Note 2 - Summary of Significant Accounting Policies" for further discussion on our adoption of ASU 2018-07.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Restricted Stock
|
|
RSUs
|
|
Grant Date Fair Value ($ in thousands)
|
Outstanding at December 31, 2018
|
|
65,697
|
|
|
1,852,957
|
|
|
|
|
Granted
|
|
27,245
|
|
|
—
|
|
|
500
|
|
|
Vested
|
|
(47,586
|
)
|
|
(263
|
)
|
|
N/A
|
|
|
Forfeiture
|
|
—
|
|
|
(16,451
|
)
|
|
N/A
|
|
Outstanding at September 30, 2019
|
|
45,356
|
|
|
1,836,243
|
|
|
|
Below is a summary of restricted stock and RSU vesting dates as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Vesting Year
|
|
Restricted Stock
|
|
RSU
|
|
Total Awards
|
2019
|
|
20,000
|
|
|
881,403
|
|
|
901,403
|
|
2020
|
|
25,356
|
|
|
621,515
|
|
|
646,871
|
|
2021
|
|
—
|
|
|
333,325
|
|
|
333,325
|
|
Total
|
|
45,356
|
|
|
1,836,243
|
|
|
1,881,599
|
|
At September 30, 2019, we had unrecognized compensation expense of approximately $0.3 million and $19.5 million, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.
RSU Deliveries
During the three and nine months ended September 30, 2019, we delivered 159 and 433,585 shares of common stock for 263 and 730,980 vested RSUs, respectively. We delivered 514 and 346,510 shares of common stock for 807 and 604,484 vested RSUs for the same periods in the prior year. 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 nine months ended September 30, 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 14 – 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 September 30, 2019, 153,531,756 shares of common stock were issued and outstanding, and 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.
On June 10, 2019, we redeemed all 6,900,000 shares of 8.00% Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") outstanding. Holders of the Series C Preferred Stock received the redemption price of $25.00 plus accumulated but unpaid dividends to the redemption date of $0.2223 per share.
Dividends. During 2019, we declared the following dividends:
|
|
|
|
|
|
Three months ended
|
Dividend declared per share of:
|
September 30, 2019
|
June 30, 2019
|
March 31, 2019
|
Common Stock
|
$0.46
|
$0.46
|
$0.46
|
Series B Preferred Stock
|
0.50
|
0.50
|
0.50
|
Series C Preferred Stock
|
N/A
|
0.22
|
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, including shares issued pursuant to the underwriters' option to purchase additional shares, at a price of $17.77 per share. The aggregate net proceeds from the offering were $275.9 million after deducting offering expenses.
During the third quarter of 2018, we issued 10,744,577 shares of our common stock related to exchanges and conversions
of the 2019 Notes. Refer to "Note 9 - Convertible Senior Notes, Net" for a further discussion on the exchanges and conversions
of the 2019 Notes.
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 9 - Convertible Senior Notes, Net" for a further discussion on the conversions of the 2019 Notes.
During the second quarter of 2019, we completed a follow-on public offering of 17,250,000 shares of our common stock, including shares issued pursuant to the underwriters' option to purchase additional shares, at a price of $18.27 per share. The aggregate net proceeds from the offering were $314.8 million after deducting offering expenses.
Note 15 – 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' motion to dismiss was granted on October 23, 2019 and the complaint is now dismissed, subject to appeal. We believe the claims are without merit and plan to vigorously defend the case on appeal as necessary. 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, Subordinate Loans and Other Lending Assets, Net" at September 30, 2019, we had $1.1 billion of unfunded commitments related to our commercial mortgage and subordinate loan portfolios.
Note 16 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of our financial instruments not carried at fair value on the condensed consolidated balance sheet at September 30, 2019 and December 31, 2018 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Cash and cash equivalents
|
$
|
160,934
|
|
|
$
|
160,934
|
|
|
$
|
109,806
|
|
|
$
|
109,806
|
|
Commercial mortgage loans, net
|
4,779,501
|
|
|
4,828,398
|
|
|
3,878,981
|
|
|
3,894,947
|
|
Subordinate loans and other lending assets, net (1)
|
1,335,073
|
|
|
1,344,035
|
|
|
1,048,612
|
|
|
1,047,854
|
|
Secured debt arrangements, net
|
(2,541,287
|
)
|
|
(2,541,287
|
)
|
|
(1,897,077
|
)
|
|
(1,897,077
|
)
|
Senior secured term loan, net
|
(488,947
|
)
|
|
(499,375
|
)
|
|
—
|
|
|
—
|
|
2019 Notes
|
—
|
|
|
—
|
|
|
(34,278
|
)
|
|
(35,276
|
)
|
2022 Notes
|
(337,126
|
)
|
|
(352,331
|
)
|
|
(335,291
|
)
|
|
(326,025
|
)
|
2023 Notes
|
(223,463
|
)
|
|
(234,313
|
)
|
|
(222,431
|
)
|
|
(221,964
|
)
|
———————
(1) As of September 30, 2019 includes subordinate risk retention interests in securitization vehicles with an estimated fair value that approximates their carrying value
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 17 – 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 and nine months ended September 30, 2019 and 2018 ($ in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Basic Earnings
|
|
|
|
|
|
|
|
Net Income
|
$
|
29,089
|
|
|
$
|
62,217
|
|
|
$
|
158,271
|
|
|
$
|
166,996
|
|
Less: Preferred dividends
|
(3,385
|
)
|
|
(6,836
|
)
|
|
(15,139
|
)
|
|
(20,505
|
)
|
Net income available to common stockholders
|
$
|
25,704
|
|
|
$
|
55,381
|
|
|
$
|
143,132
|
|
|
$
|
146,491
|
|
Less: Dividends on participating securities
|
(847
|
)
|
|
(733
|
)
|
|
(2,547
|
)
|
|
(2,215
|
)
|
Basic Earnings
|
$
|
24,857
|
|
|
$
|
54,648
|
|
|
$
|
140,585
|
|
|
$
|
144,276
|
|
|
|
|
|
|
|
|
|
Diluted Earnings
|
|
|
|
|
|
|
|
Net Income
|
$
|
29,089
|
|
|
$
|
62,217
|
|
|
$
|
158,271
|
|
|
$
|
166,996
|
|
Less: Preferred dividends
|
(3,385
|
)
|
|
(6,836
|
)
|
|
(15,139
|
)
|
|
(20,505
|
)
|
Net income available to common stockholders
|
$
|
25,704
|
|
|
$
|
55,381
|
|
|
$
|
143,132
|
|
|
$
|
146,491
|
|
Add: Interest expense on Notes
|
—
|
|
|
6,746
|
|
|
—
|
|
|
25,607
|
|
Diluted Earnings
|
$
|
25,704
|
|
|
$
|
62,127
|
|
|
$
|
143,132
|
|
|
$
|
172,098
|
|
|
|
|
|
|
|
|
|
Number of Shares:
|
|
|
|
|
|
|
|
Basic weighted-average shares of common stock outstanding
|
153,531,678
|
|
|
129,188,343
|
|
|
144,638,237
|
|
|
120,876,240
|
|
Diluted weighted-average shares of common stock outstanding
|
153,531,678
|
|
|
153,918,435
|
|
|
144,638,237
|
|
|
150,424,889
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Attributable to Common Stockholders
|
|
|
|
|
|
|
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Basic
|
$
|
0.16
|
|
|
$
|
0.42
|
|
|
$
|
0.97
|
|
|
$
|
1.19
|
|
Diluted
|
$
|
0.16
|
|
|
$
|
0.40
|
|
|
$
|
0.97
|
|
|
$
|
1.14
|
|
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 and nine months ended September 30, 2019, 28,533,271 and 29,041,856 weighted-average potentially issuable shares with respect to the Notes, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
For the nine months ended September 30, 2019 and 2018, 29,041,856 and 29,548,649 weighted-average potentially issuable shares with respect to the Notes were included in the dilutive earnings per share denominator, respectively. Refer to "Note 9 - Convertible Senior Notes, Net" for further discussion.
For the three and nine months ended September 30, 2019, 1,839,631 and 1,845,086 weighted-average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive as compared to 1,593,070 and 1,617,398 for the same periods in the prior year.
Note 18 – Subsequent Events
Investment activity. Subsequent to the quarter ended September 30, 2019, we committed capital of $548.3 million ($464.3 of which was funded at closing) to first mortgage loans.
In addition, we funded approximately $26.7 million for previously closed loans.
Loan Repayments. Subsequent to the end of the quarter, we received approximately $60.2 million from loan repayments.