Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands—except share and per share data)
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 Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The Company primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities (“CMBS”) and other commercial real estate-related debt investments. These asset classes are referred to as the Company’s target assets.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include the Company’s accounts and those of its 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. The Company’s most significant estimates include the fair value of financial instruments and loan loss reserve. 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 the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
, 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 the Company’s financial position, results of operations and cash flows have been included. The Company's results of operations for the quarterly period ended
September 30, 2016
are not necessarily indicative of the results to be expected for the full year or any other future period.
On August 31, 2016, the Company, pursuant to the terms and conditions of the Agreement and Plan of Merger, dated February 26, 2016 (as amended, the “Merger Agreement”) acquired Apollo Residential Mortgage, Inc., a Maryland corporation (“AMTG”). AMTG merged with and into the Company (“Merger”) with the Company continuing as the surviving entity. As a result, all operations of AMTG and its former subsidiaries are consolidated with the operations of the Company. As of September 30, 2016, substantially all of the assets acquired from AMTG had been sold.
Under Financial Accounting Standards Board (the "FASB") ASC Topic 805, "Business Combinations", or ASC 805, the acquirer in a business combination must recognize, with certain exceptions, the fair values of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. We applied the provisions of ASC 805 in accounting for our acquisition of AMTG. In doing so, we recorded provisional amounts for certain items as of the date of the acquisition, including the fair value of certain assets and liabilities. During the measurement period, a period which shall not exceed one year, we retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of such date that, if known, would have affected the measurement of the amounts recognized. See further discussion in Note 19 "Business Combination".
The Company currently operates in
one
business segment.
Recent Accounting Pronouncements
In May 2014, the FASB issued guidance which broadly amends the accounting guidance for revenue recognition. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The Company is currently assessing the impact that this accounting guidance will have on the Company's condensed consolidated financial statements when adopted.
In August 2014, the FASB issued guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance requires that management evaluate each annual and interim reporting period whether conditions exist that give rise to substantial doubt about the entity’s ability to continue as a going concern within one year from the financial statement issuance date, and if so, provide related disclosures. Disclosures are only required if conditions give rise to substantial doubt, whether or
not the substantial doubt is alleviated by management’s plans. No disclosures are required specific to going concern uncertainties if an assessment of the conditions does not give rise to substantial doubt. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. If substantial doubt is alleviated as a result of the consideration of management’s plans, a company should disclose information that enables users of financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes): (1) principal conditions that initially give rise to substantial doubt, (2) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (3) management’s plans that alleviated substantial doubt. If substantial doubt is not alleviated after considering management’s plans, disclosures should enable investors to understand the underlying conditions, and include the following: (1) a statement indicating that there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date, (2) the principal conditions that give rise to substantial doubt, (3) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (4) management's plans that are intended to mitigate the adverse conditions. The new guidance applies to all companies. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company's condensed consolidated financial statements.
In February 2015, the FASB issued guidance which amends the guidance related to accounting for the consolidation of certain legal entities. The modifications impact limited partnerships and similar legal entities, the evaluation of (i) fees paid to a decision maker or a service provider as a variable interest, (ii) fee arrangements, and (iii) related parties on the primary beneficiary determination. The Company adopted this guidance and determined there was no material impact on the Company's condensed consolidated financial statements.
In April 2015, the FASB issued guidance that simplifies the presentation of debt issuance costs by amending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amendments are consistent with the accounting guidance related to debt discounts. The Company adopted this guidance and applied its provisions retrospectively. This resulted in the reclassification of unamortized deferred financing costs from deferred financing costs, net to reductions in borrowings under repurchase agreements of
$7,875
and
$7,353
for the period ended September 30, 2016 and December 31, 2015, respectively. Other than this reclassification, the adoption of this guidance did not have an impact on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” or ASU 2016-09. ASU 2016-09 requires all income tax effects of share-based payment awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares for tax withholding purposes than is permitted under current guidance without triggering liability accounting. Finally, the guidance allows a policy election to account for employee forfeitures as they occur. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for any entity in any interim or annual period. The Company is currently assessing the impact that this accounting guidance will have on the Company's condensed consolidated financial statements when adopted.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326),” or 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. The Company is currently assessing the impact of the guidance will have on the Company's condensed consolidated financial statements when adopted.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230),” or ASU 2016-15. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance addresses the classification of various transactions including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, distributions received from equity method investments, beneficial interests in securitization transactions, and others. The Company is currently assessing the impact that this guidance will have on the Company's condensed consolidated financial statements when adopted.
Note 3 – Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on observable 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 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 the Company anticipates that its 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. The Company 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 value of the CMBS portfolio is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. The Company believes that these dealers who are usually market makers in these securities utilize various valuation techniques and inputs including, but not limited to, observable trades, discounted cash flow, market yield and duration to price these securities. Broker quotes are only indicative of fair value and may not necessarily represent what the Company would receive in an actual trade for the applicable instrument. Management performs additional analysis on prices received based on broker quotes to validate the prices and adjustments are made as deemed necessary by management to capture current market information. The estimated fair values of the Company’s securities are based on observable market parameters and are classified as Level II in the fair value hierarchy. In accordance with GAAP, the Company elects the fair value option for these securities at the date of purchase in order to allow the Company to measure these securities at fair value with the change in estimated fair value included as a component of earnings in order to reflect the performance of investment in a timely manner.
The estimated fair values of the Company’s derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts 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. The Company’s 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 the Company’s financial instruments were categorized as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2016
|
|
Fair Value as of December 31, 2015
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
CMBS (Fair Value Option)
|
$
|
—
|
|
|
$
|
347,456
|
|
|
$
|
—
|
|
|
$
|
347,456
|
|
|
$
|
—
|
|
|
$
|
493,149
|
|
|
$
|
—
|
|
|
$
|
493,149
|
|
Derivative instruments
|
—
|
|
|
5,037
|
|
|
—
|
|
|
5,037
|
|
|
—
|
|
|
3,327
|
|
|
—
|
|
|
3,327
|
|
Total
|
$
|
—
|
|
|
$
|
352,493
|
|
|
$
|
—
|
|
|
$
|
352,493
|
|
|
$
|
—
|
|
|
$
|
496,476
|
|
|
$
|
—
|
|
|
$
|
496,476
|
|
Note 4 – Debt Securities
At
September 30, 2016
, all of the Company's CMBS (Fair Value Option) were pledged to secure borrowings under the Company’s master repurchase agreements with UBS AG, London Branch ("UBS") (the "UBS Facility") and Deutsche Bank AG ("DB") (the "DB Facility"). See "Note 8 - Borrowings Under Repurchase Agreements" for further information regarding these facilities.
CMBS (Held-to-Maturity) represents a loan the Company closed during May 2014 that was subsequently contributed to a securitization during August 2014. During May 2014, the Company closed a
$155,000
floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. The property consists of
442
hotels rooms,
114
timeshare units,
two
casinos and approximately
131,500
square feet of retail space. During June 2014, the Company syndicated a
$90,000
senior participation in the loan and retained a
$65,000
junior participation. The Company evaluated this transaction and concluded due to its continuing involvement the transaction should not be accounted for as a sale. During August 2014, both the
$90,000
senior participation and the Company's
$65,000
junior participation were contributed to a CMBS securitization. In exchange for contributing its
$65,000
junior participation, the Company received a CMBS secured solely by the
$65,000
junior participation. The whole loan has a
three
-year term with
two
one
-year extension options and an appraised loan-to-value ("LTV") of approximately
60%
.
The amortized cost and estimated fair value of the Company’s debt securities at
September 30, 2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Description
|
Face
Amount
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated Fair
Value
|
CMBS (Fair Value Option)
|
$
|
402,392
|
|
|
$
|
395,160
|
|
|
$
|
116
|
|
|
$
|
(47,820
|
)
|
|
$
|
347,456
|
|
CMBS (Held-to-Maturity)
|
147,280
|
|
|
147,190
|
|
|
—
|
|
|
—
|
|
|
147,190
|
|
Total
|
$
|
549,672
|
|
|
$
|
542,350
|
|
|
$
|
116
|
|
|
$
|
(47,820
|
)
|
|
$
|
494,646
|
|
During August 2016, the Company sold CMBS with an amortized cost of
$86,676
resulting in a net realized loss of
$225
, which was comprised of realized gains of
$90
and realized losses of
$315
. The sale generated proceeds of $16,222 after the repayment of
$70,229
of borrowings under the Company's master repurchase agreement with Deutsche Bank AG ("DB") (the "DB Facility").
The amortized cost and estimated fair value of the Company’s debt securities at
December 31, 2015
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Description
|
Face
Amount
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
CMBS (Fair Value Option)
|
$
|
511,482
|
|
|
$
|
504,253
|
|
|
$
|
2,614
|
|
|
$
|
(13,718
|
)
|
|
$
|
493,149
|
|
CMBS (Held-to-Maturity)
|
153,250
|
|
|
153,193
|
|
|
—
|
|
|
—
|
|
|
153,193
|
|
Total
|
$
|
664,732
|
|
|
$
|
657,446
|
|
|
$
|
2,614
|
|
|
$
|
(13,718
|
)
|
|
$
|
646,342
|
|
During February 2015, the Company sold CMBS with an amortized cost of
$24,038
resulting in a net realized loss of
$443
, which was comprised of realized gains of
$43
and realized losses of
$486
. As a result of the sale,
$678
was reclassified out of accumulated other comprehensive income. The sale generated proceeds of
$1,341
after the repayment of
$22,254
of borrowings under the Company's master repurchase agreement with Wells Fargo Bank, N.A. ("Wells Fargo") (the "Wells Facility").
The overall statistics for the Company’s CMBS (Fair Value Option) investments calculated on a weighted average basis assuming no early prepayments or defaults as of
September 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Credit Ratings *
|
B
+
- D
|
|
|
BB-D
|
|
Coupon
|
5.9
|
%
|
|
5.9
|
%
|
Yield
|
5.9
|
%
|
|
6.5
|
%
|
RemainingWeighted Average Life
|
2.0 years
|
|
|
1.6 years
|
|
|
|
*
|
Ratings per Fitch Ratings, Inc., Moody’s Investors Service, Inc. or Standard & Poor's Ratings Services.
|
The percentage vintage, property type and location of the collateral securing the CMBS (Fair Value Option) investments calculated on a weighted average basis as of
September 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
Vintage
|
September 30, 2016
|
|
December 31, 2015
|
2005
|
1.2
|
%
|
|
8.3
|
%
|
2006
|
15.5
|
|
|
20.0
|
|
2007
|
71.6
|
|
|
62.4
|
|
2008
|
11.7
|
|
|
9.3
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Property Type
|
September 30, 2016
|
|
December 31, 2015
|
Office
|
34.6
|
%
|
|
32.0
|
%
|
Retail
|
27.8
|
|
|
30.2
|
|
Multifamily
|
13.3
|
|
|
13.5
|
|
Other *
|
24.3
|
|
|
24.3
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
*
No other individual category comprises more than 10% of the total.
|
|
|
|
|
|
|
Location
|
September 30, 2016
|
|
December 31, 2015
|
South Atlantic
|
23.0
|
%
|
|
23.0
|
%
|
Middle Atlantic
|
16.0
|
|
|
18.1
|
|
Pacific
|
15.8
|
|
|
17.8
|
|
East North Central
|
11.3
|
|
|
12.5
|
|
Other *
|
33.9
|
|
|
28.6
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
*
No other individual category comprises more than 10% of the total.
Note 5 – Commercial Mortgage Loans
The Company’s commercial mortgage loan portfolio was comprised of the following at
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Maturity
Date
|
|
|
Current Principal Balance
|
|
Carrying
Value
|
|
Fixed/Floating
|
|
Property Size
|
Condominium – New York, NY (1)
|
|
Nov-16
|
|
|
3,175
|
|
|
3,198
|
|
|
Floating
|
|
40,000 sq. ft.
|
Condominium – Bethesda, MD (1)(2)
|
|
Apr-17
|
|
|
49,893
|
|
|
50,337
|
|
|
Floating
|
|
50 units
|
Vacation Home Portfolio - Various (1)
|
|
Apr-19
|
|
|
91,015
|
|
|
90,270
|
|
|
Fixed
|
|
229 properties
|
Hotel - Philadelphia, PA (1)(3)
|
|
May-17
|
|
|
34,000
|
|
|
33,980
|
|
|
Floating
|
|
301 keys
|
Condo Construction - Bethesda, MD (4)
|
|
Dec-16
|
|
|
51,419
|
|
|
51,737
|
|
|
Floating
|
|
40 units
|
Multifamily - Brooklyn, NY (1)(5)
|
|
Oct-16
|
|
|
34,500
|
|
|
34,984
|
|
|
Floating
|
|
63 units
|
Mixed Use - Cincinnati, OH (1)(3)
|
|
May-18
|
|
|
165,000
|
|
|
163,517
|
|
|
Floating
|
|
65 acres
|
Multifamily - Williston, ND (1)(3)
|
|
Nov-17
|
|
|
49,706
|
|
|
39,715
|
|
|
Floating
|
|
366 units/homes
|
Vacation Home Portfolio - Various U.S. (1)(3)
|
|
Nov-19
|
|
|
59,500
|
|
|
59,167
|
|
|
Fixed
|
|
29 properties
|
Mixed Use - Brooklyn, NY (1)(8)
|
|
Mar-17
|
|
|
85,770
|
|
|
86,051
|
|
|
Floating
|
|
330,000 sq. ft.
|
Retail Redevelopment - Miami, FL (1)(7)
|
|
Jan-17
|
|
|
45,000
|
|
|
45,308
|
|
|
Floating
|
|
63,300 sq. ft.
|
Retail - Brooklyn, NY (1)
|
|
Mar-17
|
|
|
23,000
|
|
|
22,982
|
|
|
Floating
|
|
10,500 sq. ft.
|
Hotel - New York, NY (1)(9)
|
|
Sept-18
|
|
|
101,764
|
|
|
101,463
|
|
|
Floating
|
|
317 keys
|
Retail - Brooklyn, NY
|
|
Mar-17
|
|
|
5,910
|
|
|
5,904
|
|
|
Floating
|
|
5,500 sq. ft.
|
Hotel - U.S. Virgin Islands (1)(10)
|
|
Jan-18
|
|
|
42,000
|
|
|
41,747
|
|
|
Floating
|
|
180 keys
|
Office - Richmond, VA (1)(11)
|
|
Jan-18
|
|
|
54,000
|
|
|
53,750
|
|
|
Floating
|
|
262,000 sq. ft.
|
Retail Redevelopment - Miami, FL (1)(12)
|
|
Jan-18
|
|
|
220,000
|
|
|
218,173
|
|
|
Floating
|
|
113,000 sq. ft.
|
Office - Boston, MA (6)(1)
|
|
Mar-18
|
|
|
28,570
|
|
|
28,392
|
|
|
Floating
|
|
114,000 sq. ft.
|
Mixed Use - New York, NY (13)(1)
|
|
Jun-18
|
|
|
45,069
|
|
|
44,717
|
|
|
Floating
|
|
91,584 sq. ft.
|
Condo Conversion - Brooklyn, NY (14)(1)
|
|
Jun-18
|
|
|
40,600
|
|
|
40,295
|
|
|
Floating
|
|
133,550 sq. ft.
|
Hotel - New York, NY (15)
|
|
Aug-18
|
|
|
78,140
|
|
|
77,141
|
|
|
Floating
|
|
612 keys
|
Mixed Use - Chicago, IL (16)
|
|
Oct-18
|
|
|
128,000
|
|
|
126,721
|
|
|
Floating
|
|
737,382 sq. ft.
|
Retail - Brooklyn, NY
|
|
Mar-17
|
|
|
7,500
|
|
|
7,441
|
|
|
Floating
|
|
6,500 sq. ft.
|
Total
|
|
|
|
|
$
|
1,443,531
|
|
|
$
|
1,426,990
|
|
|
|
|
|
|
|
(1)
|
At
September 30, 2016
, this loan was pledged to secure borrowings under the Company’s repurchase agreements entered into with JPMorgan Chase Bank, N.A. (the “JPMorgan Facility”) or Goldman Sachs Bank USA (the “Goldman Loan”). See "Note 8 – Borrowings Under Repurchase Agreements" for a description of these agreements.
|
|
|
(2)
|
This loan includes a
six
-month extension option subject to certain conditions and the payment of a fee.
|
|
|
(3)
|
This loan includes
two
one
-year extension options subject to certain conditions and the payment of a fee.
|
|
|
(4)
|
This loan includes a
six
-month extension option subject to certain conditions and the payment of a fee.
|
|
|
(5)
|
This loan includes
three
one
-year extension options subject to certain conditions and the payment of a fee.
|
|
|
(6)
|
This loan includes
one
six
-month extension option subject to certain conditions and the payment of a fee. At
September 30, 2016
, the Company had
$2,430
of unfunded loan commitments related to this loan.
|
|
|
(7)
|
This loan includes
two
six
- month extension options subject to certain conditions and the payment of a fee for each extension.
|
|
|
(8)
|
At
September 30, 2016
, the Company had
$6,730
of unfunded loan commitments related to this loan.
|
|
|
(9)
|
This loan includes
two
one
-year extension options subject to certain conditions and the payment of a fee. At
September 30, 2016
, the Company had
$36,643
of unfunded loan commitments related to this loan.
|
|
|
(10)
|
This loan includes
three
one
-year extension options subject to certain conditions and the payment of a fee for such extension. At
September 30, 2016
, the Company had
$1,500
of unfunded loan commitments related to this loan.
|
|
|
(11)
|
This loan includes
two
one
-year extension options subject to certain conditions and the payment of a fee. At
September 30, 2016
, the Company had
$1,000
of unfunded loan commitments related to this loan.
|
|
|
(12)
|
This loan includes a
one
-year extension option subject to certain conditions and the payment of a fee.
|
|
|
(13)
|
This loan includes a
six
-month extension option subject to certain conditions and the payment of a fee. At
September 30, 2016
, the Company had
$4,931
of unfunded loan commitments related to this loan.
|
|
|
(14)
|
At
September 30, 2016
, the Company had
$4,900
of unfunded loan commitments related to this loan.
|
|
|
(15)
|
This loan includes
three
one
-year extension options subject to certain conditions and the payment of a fee. At
September 30, 2016
, the Company had
$26,860
of unfunded loan commitments related to this loan.
|
|
|
(16)
|
This loan includes
two
one
-year extension options subject to certain conditions and the payment of a fee. At
September 30, 2016
, the Company had
$5,000
of unfunded loan commitments related to this loan.
|
The Company’s commercial mortgage loan portfolio was comprised of the following at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Maturity
Date
|
|
|
Current Principal Balance
|
|
Carrying
Value
|
|
Fixed/Floating
|
|
Property Size
|
Condominium – New York, NY (1)
|
|
Sept-16
|
|
|
$
|
24,114
|
|
|
$
|
24,289
|
|
|
Floating
|
|
40,000 sq. ft.
|
Condominium- Bethesda, MD (2)
|
|
Sept-16
|
|
|
65,125
|
|
|
65,087
|
|
|
Floating
|
|
50 units
|
Vacation Home Portfolio - Various (1)
|
|
Apr-19
|
|
|
94,147
|
|
|
93,277
|
|
|
Fixed
|
|
229 properties
|
Hotel - Philadelphia, PA (1)(3)
|
|
May-17
|
|
|
34,000
|
|
|
33,994
|
|
|
Floating
|
|
301 keys
|
Condo Construction - Bethesda, MD (4)
|
|
Dec-16
|
|
|
50,000
|
|
|
49,960
|
|
|
Floating
|
|
40 units
|
Multifamily - Brooklyn, NY (1)(5)
|
|
Aug-16
|
|
|
34,500
|
|
|
34,886
|
|
|
Floating
|
|
63 units
|
Mixed Use - Cincinnati, OH (1)(3)
|
|
May-18
|
|
|
165,000
|
|
|
163,173
|
|
|
Floating
|
|
65 acres
|
Condo Conversion - New York, NY (1)
|
|
Jun-16
|
|
|
67,300
|
|
|
67,038
|
|
|
Floating
|
|
86,000 sq. ft.
|
Multifamily - Williston, ND (1)(3)
|
|
Nov-17
|
|
|
49,691
|
|
|
49,665
|
|
|
Floating
|
|
366 units/homes
|
Vacation Home Portfolio - Various U.S. (1)(3)
|
|
Nov-19
|
|
|
50,000
|
|
|
49,595
|
|
|
Fixed
|
|
24 properties
|
Mixed Use - Brooklyn, NY (1)(6)
|
|
Mar-17
|
|
|
85,770
|
|
|
85,658
|
|
|
Floating
|
|
330,000 sq. ft.
|
Retail Redevelopment - Miami, FL (1)(7)
|
|
Jan-17
|
|
|
45,000
|
|
|
44,925
|
|
|
Floating
|
|
63,300 sq. ft.
|
Retail Redevelopment - Miami, FL (1)
|
|
Jul-17
|
|
|
33,000
|
|
|
32,804
|
|
|
Floating
|
|
16,600 sq. ft.
|
Retail - Brooklyn, NY (1)(8)
|
|
Mar-17
|
|
|
1,653
|
|
|
1,636
|
|
|
Floating
|
|
10,500 sq. ft.
|
Hotel - New York, NY (1)(9)
|
|
Sept-18
|
|
|
98,373
|
|
|
97,381
|
|
|
Floating
|
|
317 keys
|
Retail - Brooklyn, NY (1)
|
|
Mar-17
|
|
|
5,910
|
|
|
5,858
|
|
|
Floating
|
|
5,500 sq. ft.
|
Hotel - U.S. Virgin Islands (10)
|
|
Jan-18
|
|
|
42,000
|
|
|
41,600
|
|
|
Floating
|
|
180 keys
|
Office - Richmond, VA (11)
|
|
Jan-18
|
|
|
54,000
|
|
|
53,475
|
|
|
Floating
|
|
262,000 sq. ft.
|
Total/Weighted Average
|
|
|
|
|
$
|
999,583
|
|
|
$
|
994,301
|
|
|
|
|
|
|
|
(1)
|
At
December 31, 2015
, this loan was pledged to secure borrowings under the JPMorgan Facility or the Goldman Loan. See "Note 8 – Borrowings Under Repurchase Agreements" for a description of these agreements.
|
|
|
(2)
|
This loan includes a
six
-month extension option subject to certain conditions and the payment of a fee.
|
|
|
(3)
|
This loan includes
two
one
-year extension options subject to certain conditions and the payment of a fee.
|
|
|
(4)
|
This loan includes a
six
-month extension option subject to certain conditions and the payment of a fee. At
December 31, 2015
, the Company had
$15,100
of unfunded loan commitments related to this loan.
|
|
|
(5)
|
This loan includes
three
one
-year extension options subject to certain conditions and the payment of a fee for each extension.
|
|
|
(6)
|
At
December 31, 2015
, the Company had
$6,730
of unfunded loan commitments related to this loan.
|
|
|
(7)
|
This loan includes
two
six
-month extension options subject to certain conditions and the payment of a fee.
|
|
|
(8)
|
At
December 31, 2015
, the Company had
$9,000
of unfunded loan commitments related to this loan.
|
|
|
(9)
|
This loan includes
two
one
-year extension options subject to certain conditions and the payment of a fee for each extension. At
December 31, 2015
, the Company had
$40,034
of unfunded loan commitments related to this loan.
|
|
|
(10)
|
This loan includes
three
one
-year extension options subject to certain conditions and the payment of a fee. At
December 31, 2015
, the Company had
$1,500
of unfunded loan commitments related to this loan.
|
|
|
(11)
|
This loan includes a
two
one
-year extension options subject to certain conditions and the payment of a fee. At
December 31, 2015
, the Company had
$1,000
of unfunded loan commitments related to this loan.
|
The Company evaluates its loans for possible impairment on a quarterly basis. The Company regularly evaluates 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 are 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. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment,
real estate sector and geographic sub-market in which the borrower operates. Such loan loss analyses are 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 the Company will not be able to collect all amounts due according to the contractual terms of the loan.
During the three and nine months ended
September 30, 2016
, respectively, the Company recorded a loan loss provision of
$0
and
$10,000
on a multifamily commercial mortgage loan in Williston, ND. As of
September 30, 2016
, the aggregate loan loss provision was
$10,000
. The Company has ceased accruing payment in kind ("PIK") interest associated with the loan. As of
December 31, 2015
, there was
no
provision for loan loss.
Note 6 – Subordinate Loans
The Company’s subordinate commercial loan portfolio was comprised of the following at
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Maturity
Date
|
|
|
Current Principal Balance
|
|
Carrying
Value
|
|
Fixed/Floating
|
|
Property Size
|
Subordinate to the Company's commercial mortgage loans
|
|
|
|
|
|
|
|
|
|
Hotel - New York, NY (1)
|
|
Sept-18
|
|
|
$
|
6,374
|
|
|
$
|
6,284
|
|
|
Floating
|
|
317 keys
|
Multifamily - Williston, ND (2)
|
|
Nov-17
|
|
|
5,000
|
|
|
—
|
|
|
Floating
|
|
366 units
|
Total - Subordinate to the Company's commercial mortgage loans
|
|
|
$
|
11,374
|
|
|
$
|
6,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate to third party commercial mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mixed Use – North Carolina
|
|
Aug-22
|
|
|
$
|
6,525
|
|
|
$
|
6,525
|
|
|
Fixed
|
|
170,897 sq. ft.
|
Office Complex - Missouri
|
|
Oct-22
|
|
|
9,454
|
|
|
9,454
|
|
|
Fixed
|
|
845,241 sq. ft.
|
Hotel Portfolio – Rochester, MN
|
|
Feb-18
|
|
|
23,947
|
|
|
23,947
|
|
|
Fixed
|
|
1,222 keys
|
Warehouse Portfolio - Various
|
|
May-23
|
|
|
32,000
|
|
|
32,000
|
|
|
Fixed
|
|
2,767,047 sq. ft.
|
Office Condo - New York, NY
|
|
Jul-22
|
|
|
14,000
|
|
|
13,665
|
|
|
Fixed
|
|
436,598 sq. ft.
|
Healthcare Portfolio - Various (2)
|
|
Jun-17
|
|
|
38,858
|
|
|
38,858
|
|
|
Floating
|
|
18,403 beds
|
Ski Resort - Big Sky, MT
|
|
Sept-20
|
|
|
15,000
|
|
|
14,758
|
|
|
Fixed
|
|
632 keys
|
Mixed Use - New York, NY (2)
|
|
Dec-17
|
|
|
96,856
|
|
|
96,758
|
|
|
Floating
|
|
363 units
|
Senior Housing - United Kingdom (2)
|
|
Dec-17
|
|
|
69,400
|
|
|
69,400
|
|
|
Floating
|
|
2,128 beds
|
Hotel - Burbank, CA
|
|
Jan-20
|
|
|
20,000
|
|
|
20,000
|
|
|
Fixed
|
|
488 keys
|
Multifamily Portfolio - Florida (3)
|
|
May-17
|
|
|
22,000
|
|
|
21,947
|
|
|
Floating
|
|
621 units
|
Multifamily Portfolio - Florida (3)
|
|
May-17
|
|
|
15,500
|
|
|
15,462
|
|
|
Floating
|
|
621 units
|
Mixed Use - Various (3)
|
|
May-17
|
|
|
45,000
|
|
|
45,076
|
|
|
Floating
|
|
3,535,774 sq. ft.
|
Hotel - Phoenix, AZ
|
|
Jul-25
|
|
|
25,000
|
|
|
25,000
|
|
|
Fixed
|
|
744 keys
|
Hotel - Washington, DC (2)
|
|
Jul-17
|
|
|
20,000
|
|
|
19,968
|
|
|
Floating
|
|
581 keys
|
Condo Development - New York, NY (6)
|
|
Jul-19
|
|
|
50,616
|
|
|
50,266
|
|
|
Floating
|
|
60 units
|
Condo Conversion - New York, NY (2)
|
|
Aug-18
|
|
|
57,750
|
|
|
57,459
|
|
|
Floating
|
|
223 units
|
Mixed Use - New York, NY (7)
|
|
Oct-18
|
|
|
30,000
|
|
|
29,896
|
|
|
Floating
|
|
363 units
|
Destination Resort - Various (8)
|
|
May-18
|
|
|
75,000
|
|
|
72,502
|
|
|
Floating
|
|
5,243 keys
|
Multifamily - New York, NY (9)(10)
|
|
Nov-18
|
|
|
55,000
|
|
|
54,696
|
|
|
Floating
|
|
185,000 sq. ft.
|
Hotel - New York, NY (4)(10)
|
|
Mar-17
|
|
|
50,000
|
|
|
49,956
|
|
|
Floating
|
|
468 keys
|
Condo Pre-development - United Kingdom
|
|
Sep-17
|
|
|
71,346
|
|
|
71,346
|
|
|
Floating
|
|
41 units
|
Condo Conversion - New York, NY (5)
|
|
Jul-19
|
|
|
37,646
|
|
|
36,991
|
|
|
Floating
|
|
139 units
|
Total - Subordinate to third party commercial mortgage loans
|
|
|
$
|
880,898
|
|
|
$
|
875,930
|
|
|
|
|
|
Total/Weighted Average
|
|
|
|
|
$
|
892,272
|
|
|
$
|
882,214
|
|
|
|
|
|
|
|
(1)
|
Includes
two
one
-year extension options subject to certain conditions and the payment of an extension fee. At
September 30, 2016
, the Company had
$8,699
of unfunded loan commitments related to this loan.
|
|
|
(2)
|
Includes
two
one
-year extension options subject to certain conditions and the payment of a fee for each extension.
|
|
|
(3)
|
Includes
three
one
-year extension options subject to certain conditions and the payment of an extension fee.
|
|
|
(4)
|
Includes a
three
-month extension option subject to certain conditions and the payment of a fee.
|
|
|
(5)
|
Includes a
one
-year extension option subject to certain conditions and the payment of an extension fee. At
September 30, 2016
, the Company had
$39,354
of unfunded loan commitments related to this loan.
|
|
|
(6)
|
Includes a
one
-year extension option subject to certain conditions and the payment of a fee for each extension. At
September 30, 2016
, the Company had
$35,633
of unfunded loan commitments related to this loan.
|
|
|
(7)
|
Includes a
one
-year extension option subject to certain conditions and the payment of an extension fee.
|
|
|
(8)
|
Includes
four
one
-year extension options subject to certain conditions and the payment of an extension fee.
|
|
|
(9)
|
Includes a
six
-month extension option subject to certain conditions and the payment of a fee.
|
|
|
(10)
|
At
September 30, 2016
, this loan was pledged to secure borrowings under the JPMorgan Facility or the Goldman Loan. See "Note 8 - Borrowings Under Repurchase Agreements" for a description of these agreements.
|
The Company’s subordinate commercial loan portfolio was comprised of the following at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Maturity
Date
|
|
|
Current Principal Balance
|
|
Carrying
Value
|
|
Fixed/Floating
|
|
Subordinate to the Company's commercial mortgage loans
|
|
|
|
|
|
|
|
|
Condominium – New York, NY (1)
|
|
Sept-16
|
|
|
$
|
6,386
|
|
|
$
|
6,415
|
|
|
Floating
|
|
Mixed Use - Brooklyn, NY (1)
|
|
Mar-17
|
|
|
12,347
|
|
|
12,222
|
|
|
Floating
|
|
Hotel - New York, NY (1)(2)
|
|
Sept-18
|
|
|
2,595
|
|
|
2,458
|
|
|
Floating
|
|
Multifamily - Williston, ND (1)(3)
|
|
Nov-17
|
|
|
5,000
|
|
|
5,000
|
|
|
Floating
|
|
Total - Subordinate to the Company's commercial mortgage loans
|
|
|
$
|
26,328
|
|
|
$
|
26,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate to third party commercial mortgage loans
|
|
|
|
|
|
|
|
|
|
|
Office - Michigan
|
|
Jun-20
|
|
|
$
|
8,753
|
|
|
$
|
8,753
|
|
|
Fixed
|
|
Mixed Use – North Carolina
|
|
Aug-22
|
|
|
6,525
|
|
|
6,525
|
|
|
Fixed
|
|
Office Complex - Missouri
|
|
Oct-22
|
|
|
9,566
|
|
|
9,566
|
|
|
Fixed
|
|
Hotel Portfolio – Rochester, MN
|
|
Feb-18
|
|
|
24,182
|
|
|
24,182
|
|
|
Fixed
|
|
Warehouse Portfolio - Various
|
|
May-23
|
|
|
32,000
|
|
|
32,000
|
|
|
Fixed
|
|
Office Condo - New York, NY
|
|
Jul-22
|
|
|
14,000
|
|
|
13,631
|
|
|
Fixed
|
|
Mixed Use - Various (3)
|
|
Dec-16
|
|
|
19,500
|
|
|
19,377
|
|
|
Fixed
|
|
Mixed Use - London, England
|
|
Jan-16
|
|
|
50,676
|
|
|
50,676
|
|
|
Fixed
|
|
Healthcare Portfolio - Various (4)
|
|
Jun-16
|
|
|
39,223
|
|
|
39,223
|
|
|
Floating
|
|
Ski Resort - Big Sky, MT
|
|
Sept-20
|
|
|
15,000
|
|
|
14,878
|
|
|
Fixed
|
|
Mixed Use - New York, NY (5)
|
|
Dec-17
|
|
|
88,368
|
|
|
87,818
|
|
|
Floating
|
|
Senior Housing - United Kingdom (3)
|
|
Dec-17
|
|
|
79,735
|
|
|
79,735
|
|
|
Floating
|
|
Hotel - Burbank, CA
|
|
Jan-20
|
|
|
20,000
|
|
|
20,000
|
|
|
Fixed
|
|
Multifamily Portfolio - Florida (4)
|
|
May-17
|
|
|
22,000
|
|
|
21,895
|
|
|
Floating
|
|
Multifamily Portfolio - Florida (4)
|
|
May-17
|
|
|
15,500
|
|
|
15,426
|
|
|
Floating
|
|
Mixed Use - Various (4)
|
|
May-17
|
|
|
45,000
|
|
|
44,854
|
|
|
Floating
|
|
Hotel - Phoenix, AZ
|
|
Jul-25
|
|
|
25,000
|
|
|
25,000
|
|
|
Fixed
|
|
Hotel - Washington, DC (3)
|
|
Jul-17
|
|
|
20,000
|
|
|
19,934
|
|
|
Floating
|
|
Condo Development - New York, NY (6)
|
|
Jul-19
|
|
|
34,184
|
|
|
33,567
|
|
|
Floating
|
|
Condo Conversion - New York, NY (3)
|
|
Aug-18
|
|
|
52,418
|
|
|
51,941
|
|
|
Floating
|
|
Mixed Use - New York, NY (7)
|
|
Oct-18
|
|
|
30,000
|
|
|
29,785
|
|
|
Floating
|
|
Destination Resort - Various (8)
|
|
May-18
|
|
|
75,000
|
|
|
71,362
|
|
|
Floating
|
|
Multifamily - New York, NY (9)
|
|
Nov-18
|
|
|
55,000
|
|
|
54,558
|
|
|
Floating
|
|
Hotel - New York, NY (10)
|
|
Mar-17
|
|
|
50,000
|
|
|
49,522
|
|
|
Floating
|
|
Condo Pre-development - United Kingdom (10)
|
|
Sept-16
|
|
|
81,048
|
|
|
81,048
|
|
|
Floating
|
|
Total - Subordinate to third party commercial mortgage loans
|
|
|
$
|
912,678
|
|
|
$
|
905,256
|
|
|
|
|
Total/Weighted Average
|
|
|
$
|
939,006
|
|
|
$
|
931,351
|
|
|
|
|
|
|
(1)
|
At
December 31, 2015
, this loan was pledged to secure borrowings under the JPMorgan Facility. See "Note 8 –Borrowings Under Repurchase Agreements" for a description of this facility.
|
|
|
(2)
|
Includes
two
one
-year extension options subject to certain conditions and the payment of an extension fee. As of
December 31, 2015
, the Company had
$12,478
of unfunded loan commitments related to this loan.
|
|
|
(3)
|
Includes
two
one
-year extension options subject to certain conditions and the payment of an extension fee.
|
|
|
(4)
|
Includes
three
one
-year extension options subject to certain conditions and the payment of an extension fee.
|
|
|
(5)
|
Includes
two
one
-year extension options subject to certain conditions and the payment of an extension fee. As of
December 31, 2015
, the Company had
$785
of unfunded loan commitments related to this loan.
|
|
|
(6)
|
Includes a
one
-year extension option subject to certain conditions and the payment of an extension fee. As of
December 31, 2015
, the Company had
$41,160
of unfunded loan commitments related to this loan.
|
|
|
(7)
|
Includes a
one
-year extension option subject to certain conditions and the payment of an extension fee.
|
|
|
(8)
|
Includes
four
one
-year extension options subject to certain conditions and the payment of an extension fee.
|
|
|
(9)
|
Includes a
six
-month extension option subject to certain conditions and the payment of a fee.
|
|
|
(10)
|
Includes a
three
-month extension option subject to certain conditions and the payment of a fee.
|
The Company evaluates its loans for possible impairment on a quarterly basis. See “Note 5 – Commercial Mortgage Loans” for a summary of the metrics reviewed. During the three and nine months ended
September 30, 2016
, respectively, the Company recorded a loan loss provision of
$0
and
$5,000
on a multifamily subordinate loan in Williston, ND. As of
September 30, 2016
, the aggregate loan loss provision was
$5,000
. The Company has ceased accruing PIK interest associated with the loan. As of
December 31, 2015
, there was
no
provision for loan loss.
Note 7 – Unconsolidated Joint Venture
In September 2014, the Company, through a wholly owned subsidiary, acquired a
59%
ownership interest in Champ Limited Partnership (“Champ LP”) following which a wholly-owned subsidiary of Champ LP then acquired a
35%
ownership interest in Bremer Kreditbank AG ("BKB"). The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately
€30,724
(or
$39,477
). The Company committed to invest up to approximately
€38,000
(or
$50,000
). The Company together with certain other affiliated investors and unaffiliated third party investors, in aggregate, own
100%
of Champ LP. Champ LP together with certain unaffiliated third party investors, in aggregate, own
100%
of BKB.
BKB specializes in corporate banking and financial services for medium-sized German companies. It also provides professional real estate financing, acquisition finance, institutional asset management and private wealth management services for German high-net-worth individuals.
In January 2015, the Company funded an additional investment of €
3,331
(or
$3,929
) related to its investment in Champ LP. In February 2015, the Company sold approximately
48%
of its ownership interest in Champ LP at cost to an investment fund managed by Apollo Global Management, LLC (together with its subsidiaries, "Apollo") for
€16,314
(or
$20,794
) (of which
$2,614
related to foreign exchange losses which were previously included in accumulated other comprehensive loss). In June 2016, the Company transferred
€427
of its unfunded commitment to Apollo. As of
September 30, 2016
, the Company’s unfunded commitment to Champ LP was
€2,802
(or
$3,149
). Through its interest in Champ LP, as of
September 30, 2016
, the Company held an indirect ownership interest of approximately
9.34%
in BKB.
The Company determined that Champ LP met the definition of a variable interest entity ("VIE") and that it was not the primary beneficiary; therefore, the Company did not consolidate the assets and liabilities of the partnership. Additionally, Champ LP is an Investment Company under GAAP, and is therefore reflected at fair value. Our investment in Champ LP is accounted for as an equity method investment and therefore we record our proportionate share of the net asset value.
Note 8 – Borrowings Under Repurchase Agreements
At
September 30, 2016
and
December 31, 2015
, the Company’s borrowings had the following outstanding balances, maturities and weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Lender
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity (1)
|
|
Weighted
Average
Rate (2)
|
|
Maximum Facility Size
|
|
Borrowings Outstanding
|
|
Maturity (1)
|
|
Weighted
Average
Rate (2)
|
JPMorgan Facility (3)
|
$
|
943,000
|
|
|
$
|
648,086
|
|
|
January 2019
|
|
L+2.26%
|
|
|
$
|
600,000
|
|
|
$
|
445,942
|
|
|
January 2019
|
|
L+2.25%
|
|
DB Repurchase Facility
|
300,000
|
|
|
—
|
|
|
September 2019
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
Goldman Loan
|
N/A
|
|
|
42,796
|
|
|
April 2019
|
|
L+3.50%
|
|
|
N/A
|
|
|
45,928
|
|
|
April 2019
|
|
L+3.50%
|
|
Sub-total
|
|
|
|
690,882
|
|
|
|
|
L+2.33%
|
|
|
|
|
491,870
|
|
|
|
|
L+2.37%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UBS Facility
|
N/A
|
|
|
133,899
|
|
|
September 2018
|
|
2.79
|
%
|
|
N/A
|
|
|
133,899
|
|
|
September 2018
|
|
2.79
|
%
|
DB Facility (4)
|
N/A
|
|
|
196,256
|
|
|
April 2018
|
|
3.66
|
%
|
|
N/A
|
|
|
300,005
|
|
|
April 2018
|
|
3.69
|
%
|
Sub-total
|
|
|
330,155
|
|
|
|
|
3.31
|
%
|
|
|
|
433,904
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less: deferred financing costs
|
|
|
(7,875
|
)
|
|
|
|
|
|
|
|
(7,353
|
)
|
|
|
|
|
Total / Weighted Average
|
|
|
|
$
|
1,013,162
|
|
|
|
|
3.01
|
%
|
|
|
|
$
|
918,421
|
|
|
|
|
2.92
|
%
|
(1) Maturity date assumes all extensions are exercised.
(2) Assumes
one
-month LIBOR at
September 30, 2016
and December 31, 2015 was
0.53%
and
0.43%
, respectively.
(3) As of
September 30, 2016
, the JP Morgan Facility provided for maximum total borrowings comprised of the
$800.0 million
repurchase facility and a
$143.0 million
asset specific financing.
(4) Advances under the DB Facility accrue interest at a per annum pricing rate based on the rate implied by the fixed rate bid under a fixed for floating interest rate swap for the receipt of payments indexed to three-month U.S. dollar LIBOR, plus a financing spread ranging from
1.80%
to
2.32%
based on the rating of the collateral pledged.
At
September 30, 2016
, the Company’s borrowings had the following remaining maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1 to 3
years
|
|
3 to 5
years
|
|
More than
5 years
|
|
Total
|
JPMorgan Facility
|
$
|
313,547
|
|
|
$
|
334,539
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
648,086
|
|
DB Repurchase Facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goldman Loan
|
5,290
|
|
|
37,506
|
|
|
—
|
|
|
—
|
|
|
42,796
|
|
UBS Facility *
|
260
|
|
|
133,639
|
|
|
—
|
|
|
—
|
|
|
133,899
|
|
DB Facility
|
185
|
|
|
174,718
|
|
|
8,643
|
|
|
12,710
|
|
|
196,256
|
|
Total
|
$
|
319,282
|
|
|
$
|
680,402
|
|
|
$
|
8,643
|
|
|
$
|
12,710
|
|
|
$
|
1,021,037
|
|
*
Assumes extension option is exercised.
At
September 30, 2016
, the Company’s collateralized financings were comprised of borrowings outstanding under the JPMorgan Facility, the Goldman Loan, the UBS Facility and the DB Facility.
No
borrowings were outstanding under the master repurchase agreement with Deutsche Bank AG (the "DB Repurchase Facility"), which the Company entered into on September 29, 2016. The table below summarizes the outstanding balances at
September 30, 2016
, as well as the maximum and average month-end balances for the
nine
months ended
September 30, 2016
for the Company's borrowings under repurchase agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2016
|
|
Balance at September 30, 2016
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
JPMorgan Facility borrowings
|
$
|
648,086
|
|
|
$
|
800,917
|
|
|
$
|
675,061
|
|
DB Repurchase Facility
|
—
|
|
|
—
|
|
|
—
|
|
Goldman Loan
|
42,796
|
|
|
45,928
|
|
|
44,105
|
|
UBS Facility borrowings
|
133,899
|
|
|
133,899
|
|
|
133,899
|
|
DB Facility borrowings
|
196,256
|
|
|
300,005
|
|
|
266,056
|
|
Total
|
$
|
1,021,037
|
|
|
|
|
|
The Company was in compliance with the financial covenants under its borrowing agreements at
September 30, 2016
and
December 31, 2015
.
Note 9 – Convertible Senior Notes
On March 17, 2014, the Company issued
$143,750
aggregate principal amount of
5.50%
Convertible Senior Notes due 2019 (the "March 2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately
$139,037
. At
September 30, 2016
, the March 2019 Notes had a carrying value of
$141,299
and an unamortized discount of
$2,451
.
On August 18, 2014, the Company issued an additional
$111,000
aggregate principal amount of
5.50%
Convertible Senior Notes due 2019 (the "August 2019 Notes," and together with the March 2019 Notes, the "2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately
$109,615
. At
September 30, 2016
, the August 2019 Notes had a carrying value of
$108,229
and an unamortized discount of
$2,771
.
The following table summarizes the terms of the 2019 Notes.
|
|
|
|
|
|
|
|
|
Principal Amount
|
Coupon Rate
|
Effective Rate (1)
|
Conversion Rate (2)
|
Maturity Date
|
Remaining Period of Amortization
|
March 2019 Notes
|
$143,750
|
5.50%
|
6.25%
|
56.5584
|
3/15/2019
|
2.46 years
|
August 2019 Notes
|
$111,000
|
5.50%
|
6.50%
|
56.5584
|
3/15/2019
|
2.46 years
|
|
|
(1)
|
Effective rate includes the effect of the adjustment for the conversion option (see footnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital.
|
|
|
(2)
|
The Company has 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
$1,000
principal amount of 2019 Notes converted, as adjusted as of October 11, 2016, in accordance with the applicable supplemental indenture as a result of cash dividend payments. The if-converted value of the 2019 Notes does not exceed their principal amount at September 28, 2016 since the closing market price of the Company’s common stock does not exceed the implicit conversion prices of
$17.68
at September 30, 2016 for the 2019 Notes.
|
GAAP requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) 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 2019 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 the Company at such time. The Company measured the fair value of the debt components of the 2019 Notes as of their issuance date based on effective interest rates. As a result, the Company attributed approximately
$11,445
of the proceeds to the equity component of the 2019 Notes, which represents the excess proceeds received over the fair value of the liability component of the 2019 Notes at the date of issuance. The equity component of the 2019 Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of
September 30, 2016
. The resulting debt discount is being amortized over the period during which the 2019 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 2019 Notes will increase in subsequent reporting periods through the maturity date as the 2019 Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately
$3,503
and
$10,508
for the
three and nine
months ended
September 30, 2016
, respectively. The aggregate contractual interest expense was approximately
$3,503
and
$10,508
for the three and nine months ended
September 30, 2015
, respectively. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately
$895
and
$2,654
for the
three and nine
months ended
September 30, 2016
, respectively. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately
$867
and
$2,566
for the three and nine months ended
September 30, 2015
, respectively.
As of
September 30, 2016
, potential shares of common stock contingently issuable upon the conversion of the 2019 Notes were excluded from the calculation of diluted income per share of common stock because it is management's intent and the Company currently has the ability to settle the obligation in cash.
Note 10 - Federal Home Loan Bank of Indianapolis Membership
In February 2015, the Company's wholly owned subsidiary, ACREFI Insurance Services, LLC, was accepted for membership in the Federal Home Loan Bank of Indianapolis (“FHLBI”). As a member of the FHLBI, ACREFI Insurance Services, LLC has access to a variety of products and services offered by the FHLBI, including secured advances. As of
September 30, 2016
, ACREFI Insurance Services, LLC had not requested any advances from the FHLBI.
On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) adopted a final rule revising its regulations governing Federal Home Loan Bank membership. As a result, the FHLBI may not make any advances to ACREFI Insurance Services, LLC and is required to terminate the membership of ACREFI Insurance Services, LLC no later than February 19, 2017 (one year after the effective date of the final rule).
Upon termination of ACREFI Insurance Services, LLC's membership, FHLBI will be required to redeem at par value the FHLBI stock that had been purchased and held by ACREFI Insurance Services, LLC as a condition to membership in the FHLBI. At
September 30, 2016
, the Company had stock in the FHLBI totaling
$8
, which is included in other assets on the condensed consolidated balance sheet at
September 30, 2016
.
Note 11 – Participations Sold
Participations sold represent the interests in loans the Company originated and subsequently partially sold. The Company presents the participations sold as both assets and non-recourse liabilities because the participation does not qualify as a sale according to GAAP. The income earned on the participation sold is recorded as interest income and an identical amount is recorded as interest expense on the Company's condensed consolidated statements of operations.
During January 2015, the Company closed a
£34,519
(or
$51,996
) floating-rate mezzanine loan secured by a portfolio of
44
senior housing facilities located throughout the United Kingdom. During February 2015, closed an additional
£20,000
(or
$30,672
) and participated that balance to an investment fund affiliated with Apollo. At
September 30, 2016
, the participation had a face amount of
£19,626
(or
$25,459
), a carrying amount of
£19,626
(or
$25,459
) and a cash coupon of LIBOR plus 825 basis points.
During May 2014, the Company closed a
$155,000
floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. During June 2014, the Company syndicated a
$90,000
senior participation in the loan and retained a
$65,000
junior participation in the loan. During August 2014, both the
$90,000
senior participation and the Company's
$65,000
junior participation were contributed to a CMBS securitization. In exchange for contributing its
$65,000
junior participation, the Company received a CMBS secured solely by the
$65,000
junior participation and classified it as CMBS (Held-to-Maturity) on its condensed consolidated financial statements. At
September 30, 2016
, the participation had a face amount of
$85,517
, a carrying amount of
$85,465
and a cash coupon of LIBOR plus
440
basis points.
Note 12 – Derivative Instruments
The Company uses forward currency contracts to economically hedge interest and principal payments due under its loans denominated in currencies other than U.S. dollars.
The Company has entered into a series of forward contracts to sell an amount of foreign currency (British pound ("GBP")) for an agreed upon amount of U.S. dollars at various dates through September 2017. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by the Company related to foreign denominated loan investments.
The following table summarizes our non-designated foreign exchange (“Fx”) forwards as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
Type of Derivative
|
September 30, 2016
|
|
Number of Contracts
|
|
Aggregate Notional Amount
|
|
Notional Currency
|
|
Maturity
|
Fx Contracts - GBP
|
5
|
|
97,732
|
|
|
GBP
|
|
October 2016- September 2017
|
The following table summarizes our non-designated Fx forwards as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
Type of Derivative
|
December 31, 2015
|
|
Number of Contracts
|
|
Aggregate Notional Amount
|
|
Notional Currency
|
|
Maturity
|
Fx Contracts - GBP
|
5
|
|
130,272
|
|
|
GBP
|
|
January 2016- October 2016
|
The Company has not designated any of its derivative instruments as hedges under GAAP and therefore, changes in the fair value of the Company's derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to the Company’s derivative instruments for the
three and nine
months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Location of Loss Recognized in Income
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Forward currency contract
|
Gain (loss) on derivative instruments - unrealized
|
$
|
(10,304
|
)
|
|
$
|
2,240
|
|
|
$
|
1,812
|
|
|
$
|
(3,938
|
)
|
Forward currency contract
|
Gain (loss) on derivative instruments - realized
|
15,112
|
|
|
—
|
|
|
21,100
|
|
|
—
|
|
Interest rate caps
|
Loss on derivative instruments - unrealized
|
7
|
|
|
(144
|
)
|
|
(81
|
)
|
|
(206
|
)
|
Total
|
|
$
|
4,815
|
|
|
$
|
2,096
|
|
|
$
|
22,831
|
|
|
$
|
(4,144
|
)
|
The following table summarizes the gross asset amounts related to the Company's derivative instruments at
September 30, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the
Consolidated Balance Sheet
|
|
Net Amounts
of Assets
Presented in
the Consolidated Balance Sheet
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the
Consolidated Balance Sheet
|
|
Net Amounts
of Assets
Presented in
the Consolidated Balance Sheet
|
Interest rate caps
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
106
|
|
|
$
|
—
|
|
|
$
|
106
|
|
Forward currency contract
|
5,029
|
|
|
—
|
|
|
5,029
|
|
|
3,221
|
|
|
—
|
|
|
3,221
|
|
Total derivative instruments
|
$
|
5,037
|
|
|
$
|
—
|
|
|
$
|
5,037
|
|
|
$
|
3,327
|
|
|
$
|
—
|
|
|
$
|
3,327
|
|
Note 13 – Related Party Transactions
Management Agreement
In connection with the Company’s initial public offering in September 2009, the Company entered into a management agreement (the “Management Agreement”) with ACREFI Management, LLC (the “Manager”), which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing the Company’s day-to-day operations, subject to the direction and oversight of the Company’s 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 the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The current term of the Management Agreement expires on September 29, 2017 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 the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company 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 the Company’s 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 the Company’s independent directors in February 2016, which included a discussion of the Manager’s performance and the level of the management fees thereunder, the Company determined not to seek termination of the Management Agreement. As described in "Note 16 - Commitments and Contingencies," the Company also made payments to the Manager in accordance with its letter agreement with the Manager.
For the
three and nine
months ended
September 30, 2016
, respectively, the Company incurred approximately
$5,903
and
$16,374
in base management fees under the Management Agreement. For the
three and nine
months ended
September 30, 2015
, respectively, the Company incurred approximately
$4,097
and
$11,325
in base management fees under the Management Agreement. In addition to the base management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company or for certain services provided by the Manager to the Company. For the
three and nine
months ended
September 30, 2016
, respectively, the Company paid expenses totaling
$517
and
$1,359
related to reimbursements for certain expenses paid by the Manager on behalf of the Company under the Management Agreement. For the
three and nine
months ended
September 30, 2015
, respectively, the Company recorded expenses totaling
$78
and
$1,011
related to reimbursements for certain expenses paid by the Manager on behalf of the Company under the Management Agreement. Expenses incurred by the Manager and reimbursed by the Company 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
September 30, 2016
and
December 31, 2015
, respectively, are approximately
$5,903
and
$4,100
for base management fees incurred but not yet paid under the Management Agreement.
Unconsolidated Joint Venture
In September 2014, the Company, through a wholly owned subsidiary, acquired a
59%
ownership interest in Champ LP following which a wholly-owned subsidiary of Champ LP then acquired a
35%
ownership interest in BKB. The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately
€30,724
(or
$39,477
). The Company committed to invest up to approximately
€38,000
(or
$50,000
).
In January 2015, the Company funded an additional investment of €
3,331
(or
$3,929
) related to its investment in Champ LP. In February 2015, the Company sold approximately
48%
of its ownership interest in Champ LP at cost to an account managed by Apollo for approximately
€16,314
(or
$20,794
). In June 2016, the Company transferred
€427
of its unfunded commitment to Apollo, reducing its unfunded commitment to Champ LP to
€2,802
(or
$3,149
). Through its interest in Champ LP, as of
September 30, 2016
, the Company, held an indirect ownership interest of approximately
9.34%
in BKB. The Company together with certain other affiliated investors and unaffiliated third party investors, in aggregate, own
100%
of BKB.
Note 14 – Share-Based Payments
On September 23, 2009, the Company’s board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (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 the Company’s common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of the Company’s board of directors (the “Compensation Committee”) and all grants under the LTIP must be approved by the Compensation Committee.
The Company recognized stock-based compensation expense of
$1,828
and
$5,434
for the
three and nine
months ended
September 30, 2016
, related to restricted stock and RSU vesting. The Company recognized stock-based compensation expense of
$756
and
$2,695
for the
three and nine
months ended
September 30, 2015
, related to restricted stock and RSU vesting. The following table summarizes the activity related to restricted common stock and RSUs during the
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Date
|
|
Restricted Stock
|
|
RSUs
|
|
Estimate Fair Value
on Grant Date
|
|
Initial Vesting
|
|
Final Vesting
|
Outstanding at December 31, 2015
|
|
340,064
|
|
|
1,242,810
|
|
|
|
|
|
|
|
|
Cancelled upon delivery
|
January 2016
|
|
—
|
|
|
(318,160
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Forfeiture
|
January 2016
|
|
—
|
|
|
(1,667
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Grant
|
February 2016
|
|
—
|
|
|
47,028
|
|
|
$729
|
|
(1)
|
|
(1)
|
|
Grant
|
March 2016
|
|
—
|
|
|
5,095
|
|
|
$81
|
|
December 2016
|
|
December 2017
|
|
Grant
|
April 2016
|
|
17,056
|
|
|
—
|
|
|
$275
|
|
July 2016
|
|
April 2019
|
|
Forfeiture
|
June 2016
|
|
—
|
|
|
(14,972
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Cancelled upon delivery
|
July 2016
|
|
—
|
|
|
(543
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Forfeiture
|
July 2016
|
|
—
|
|
|
(12,792
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Grant
|
July 2016
|
|
—
|
|
|
1,528
|
|
|
$25
|
|
September 2016
|
|
September 2016
|
|
Forfeiture
|
August 2016
|
|
—
|
|
|
(15,642
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Grant
|
September 2016
|
|
—
|
|
|
6,146
|
|
|
$101
|
|
October 2016
|
|
October 2016
|
|
Cancelled upon delivery
|
September 2016
|
|
—
|
|
|
(41,281
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
Outstanding at September 30, 2016
|
|
357,120
|
|
|
897,550
|
|
|
|
|
|
|
|
(1) These awards vest based upon the achievement of certain conditions.
Below is a summary of expected restricted common stock and RSU vesting dates as of
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
Vesting Date
|
Shares Vesting
|
|
RSU Vesting
|
|
Total Awards
|
October 2016
|
5,578
|
|
|
37,046
|
|
|
42,624
|
|
December 2016
|
28,920
|
|
|
325,513
|
|
|
354,433
|
|
January 2017
|
5,161
|
|
|
—
|
|
|
5,161
|
|
April 2017
|
5,164
|
|
|
—
|
|
|
5,164
|
|
June 2017
|
—
|
|
|
544
|
|
|
544
|
|
July 2017
|
4,004
|
|
|
—
|
|
|
4,004
|
|
October 2017
|
3,997
|
|
|
—
|
|
|
3,997
|
|
December 2017
|
28,923
|
|
|
322,113
|
|
|
351,036
|
|
January 2018
|
2,749
|
|
|
—
|
|
|
2,749
|
|
April 2018
|
2,755
|
|
|
—
|
|
|
2,755
|
|
June 2018
|
—
|
|
|
544
|
|
|
544
|
|
July 2018
|
1,420
|
|
|
—
|
|
|
1,420
|
|
October 2018
|
1,424
|
|
|
—
|
|
|
1,424
|
|
December 2018
|
16,670
|
|
|
204,954
|
|
|
221,624
|
|
January 2019
|
1,419
|
|
|
—
|
|
|
1,419
|
|
April 2019
|
1,424
|
|
|
—
|
|
|
1,424
|
|
|
109,608
|
|
|
890,714
|
|
|
1,000,322
|
|
At
September 30, 2016
, the Company had unrecognized compensation expense of approximately
$1,402
and
$10,470
, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.
RSU Deliveries
During the
nine
months ended
September 30, 2016
, the Company delivered
215,672
shares of common stock for
359,984
vested RSUs. The Company allows holders of RSUs 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 holder, 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
$2,626
for the
nine
months ended
September 30, 2016
, and is
included as a component of the capital decrease related to the Company's equity incentive plan in the condensed consolidated statement of changes in stockholders’ equity.
Note 15 – Stockholders’ Equity
Common Stock Offerings.
During the first quarter of 2015, the Company completed a follow-on public offering of
11,500,000
shares of its common stock, including the full exercise of the underwriters’ option to purchase additional shares, at a price of
$16.82
per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately
$193,148
after deducting estimated offering expenses payable by the Company.
Dividends.
For
2016
, the Company declared the following dividends on its common stock:
|
|
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Amount
|
March 15, 2016
|
March 31, 2016
|
April 15, 2016
|
$
|
0.46
|
|
June 17, 2016
|
June 30, 2016
|
July 15, 2016
|
$
|
0.46
|
|
September 14, 2016
|
September 30, 2016
|
October 17, 2016
|
$
|
0.46
|
|
For
2016
, the Company declared the following dividends on its
8.625%
Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”):
|
|
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Amount
|
March 15, 2016
|
March 31, 2016
|
April 15, 2016
|
$
|
0.5391
|
|
June 17, 2016
|
June 30, 2016
|
July 15, 2016
|
$
|
0.5391
|
|
September 14, 2016
|
September 30, 2016
|
October 17, 2016
|
$
|
0.5391
|
|
For
2016
, the Company declared the following dividends on its
8.00%
Fixed to Floating Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”):
|
|
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Amount
|
March 15, 2016
|
March 31, 2016
|
April 15, 2016
|
$
|
0.5000
|
|
June 17, 2016
|
June 30, 2016
|
July 15, 2016
|
$
|
0.5000
|
|
September 14, 2016
|
September 30, 2016
|
October 17, 2016
|
$
|
0.5000
|
|
For
2016
, the Company declared the following dividends on its
8.00%
Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”):
|
|
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Amount
|
September 14, 2016
|
September 30, 2016
|
October 31, 2016
|
$
|
0.5000
|
|
Note 16 – Commitments and Contingencies
Legal Proceedings.
From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business.
After the announcement of the execution of the Merger Agreement, two putative class action lawsuits challenging the proposed First Merger (as defined in the Merger Agreement), captioned Aivasian v. Apollo Residential Mortgage, Inc., et al., No. 24-C-16-001532 and Wiener v. Apollo Residential Mortgage, Inc., et al., No. 24-C-16-001837, were filed in the Circuit Court for Baltimore City, (the “Court”). A putative class and derivative lawsuit was later filed in the Court captioned Crago v. Apollo Residential Mortgage, Inc., No. 24-C-16-002610. Following a hearing on May 6, 2016, the Court entered orders among other things, consolidating the three actions under the caption In Re Apollo Residential Mortgage, Inc. Shareholder Litigation, Case No.: 24-C-16-002610. The plaintiffs have designated the Crago complaint as the operative complaint. The operative complaint includes both direct and derivative claims, names as defendants AMTG, the board of directors of AMTG (the “AMTG Board”), ARI, Merger Sub, Apollo and Athene and alleges, among other things, that the members of the AMTG Board breached their fiduciary duties to the AMTG stockholders and that the other corporate defendants aided and abetted such
fiduciary breaches. The operative complaint further alleges, among other things, that the proposed First Merger involves inadequate consideration, was the result of an inadequate and conflicted sales process, and includes unreasonable deal protection devices that purportedly preclude competing offers. It also alleges that the transactions with Athene are unfair and that the registration statement on Form S-4 filed with the SEC on April 6, 2016 contains materially misleading disclosures and omits certain material information. The operative complaint seeks, among other things, certification of the proposed class, declaratory relief, preliminary and permanent injunctive relief, including enjoining or rescinding the First Merger, unspecified damages, and an award of other unspecified attorneys’ and other fees and costs. On May 6, 2016, counsel for the plaintiffs filed with the Court a stipulation seeking the appointment of interim co-lead counsel, which stipulation was approved by the Court on June 9, 2016. On August 18, 2016, the defendants filed motions to dismiss the consolidated action, and the plaintiffs filed an opposition brief on October 6, 2016. The Company believes that the claims asserted in the complaints are without merit and intend to vigorously defend the lawsuits.
Bremer Kreditbank AG
. In September 2013, the Company, together with other affiliates of Apollo, reached an agreement to make an investment in an entity that agreed to acquire a minority participation in Bremer Kreditbank AG (“BKB”). The Company committed to invest up to approximately €
38,000
(or
$50,000
), representing approximately
21%
of the ownership in BKB. In September 2014, the Company, through a wholly owned subsidiary, acquired a
59%
ownership interest in Champ LP following which a wholly-owned subsidiary of Champ LP then acquired a
35%
ownership interest in BKB.
In February 2015, the Company sold approximately
48%
of its ownership interest in Champ LP at cost to an account managed by Apollo for approximately
€16,314
(or
$20,794
). In June 2016, the Company transferred
€427
of its unfunded commitment to Apollo, reducing its unfunded commitment to Champ LP to
€2,802
(or
$3,149
). Through its interest in Champ LP, the Company now holds an indirect ownership interest of approximately
9.34%
in BKB.
Loan Commitments.
As described in "Note 5 - Commercial Mortgage Loans" and "Note 6 - Subordinate Loans," respectively, at
September 30, 2016
, the Company had $173,680 of unfunded commitments related to its commercial mortgage loan portfolio and subordinate loan portfolio.
Note 17 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the condensed consolidated balance sheet at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Cash and cash equivalents
|
$
|
254,643
|
|
|
$
|
254,643
|
|
|
$
|
67,415
|
|
|
$
|
67,415
|
|
Restricted cash
|
62,324
|
|
|
62,324
|
|
|
30,127
|
|
|
30,127
|
|
Securities, held-to-maturity
|
147,190
|
|
|
147,263
|
|
|
153,193
|
|
|
153,230
|
|
Commercial first mortgage loans
|
1,426,990
|
|
|
1,433,349
|
|
|
994,301
|
|
|
999,517
|
|
Subordinate loans
|
882,214
|
|
|
892,053
|
|
|
931,351
|
|
|
939,545
|
|
Borrowings under repurchase agreements
|
(1,021,037
|
)
|
|
(1,021,362
|
)
|
|
(925,774
|
)
|
|
(925,920
|
)
|
Convertible senior notes, net
|
(249,528
|
)
|
|
(263,985
|
)
|
|
(248,173
|
)
|
|
(253,986
|
)
|
Participations sold
|
(110,924
|
)
|
|
(110,967
|
)
|
|
(118,201
|
)
|
|
(118,226
|
)
|
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 the Company 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. The Company’s securities, held-to-maturity, commercial first mortgage loans, subordinate loans, borrowings under repurchase agreements, convertible senior notes and participations sold are carried at amortized cost on the condensed consolidated financial statements and are classified as Level III in the fair value hierarchy.
Note 18 – Net Income per Share
GAAP requires 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 basic and diluted net (loss) income per share of common stock using the two-class method for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three
months ended
September 30,
|
|
For the nine
months ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
69,893
|
|
|
$
|
25,847
|
|
|
$
|
98,849
|
|
|
$
|
76,016
|
|
Preferred dividends
|
(9,310
|
)
|
|
(2,304
|
)
|
|
(20,985
|
)
|
|
(6,023
|
)
|
Net income available to common stockholders
|
60,583
|
|
|
23,543
|
|
|
77,864
|
|
|
69,993
|
|
Dividends declared on common stock
|
(37,180
|
)
|
|
(29,544
|
)
|
|
(99,182
|
)
|
|
(80,955
|
)
|
Dividends on participating securities
|
(413
|
)
|
|
(258
|
)
|
|
(1,298
|
)
|
|
(779
|
)
|
Net income (loss) attributable to common stockholders
|
$
|
22,990
|
|
|
$
|
(6,259
|
)
|
|
$
|
(22,616
|
)
|
|
$
|
(11,741
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares of common stock outstanding
|
71,919,549
|
|
|
59,355,613
|
|
|
68,913,362
|
|
|
55,818,731
|
|
Diluted weighted average shares of common stock outstanding
|
72,861,611
|
|
|
59,934,008
|
|
|
69,865,603
|
|
|
56,415,082
|
|
Basic and diluted net income per weighted average share of common stock
|
|
|
|
|
|
|
|
Distributable Earnings
|
$
|
0.52
|
|
|
$
|
0.50
|
|
|
$
|
1.44
|
|
|
$
|
1.45
|
|
Undistributed income (loss)
|
$
|
0.31
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.21
|
)
|
Basic and diluted net income per share of common stock
|
$
|
0.83
|
|
|
$
|
0.39
|
|
|
$
|
1.11
|
|
|
$
|
1.24
|
|
For the
three and nine
months ended
September 30, 2016
, respectively,
942,062
and
952,241
unvested RSUs were excluded from the calculation of diluted net income per share because the effect was anti-dilutive. For the
three and nine
months ended
September 30, 2015
, respectively,
578,395
and
596,351
unvested RSUs were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 19 – Business Combination
On August 31, 2016, the Company, pursuant to the terms and conditions of the Merger Agreement, acquired AMTG for consideration of common stock and preferred stock, as applicable and cash. AMTG merged with and into the Company with the Company continuing as the surviving entity. As a result, all operations of AMTG and its former subsidiaries are consolidated with the operations of the Company. In connection with financing the Merger, on August 31, 2016, the Company entered into a Loan Agreement (the “Athene Loan Agreement”) with Athene USA Corporation, a subsidiary of Athene Holding Ltd., as lender (“Athene USA”), pursuant to which the Company borrowed
$175,000
in order to fund a portion of the Company’s obligations under the Merger Agreement. The Athene Loan Agreement was repaid in full and terminated on September 1, 2016. On August 31, 2016, pursuant to an Asset Purchase and Sale Agreement, dated February 26, 2016 (as amended, the “Asset Purchase Agreement”) by and among Athene Annuity & Life Assurance Company and Athene Annuity and Life Company (collectively, “Athene Annuity”) and the Company, the Company sold primarily non-agency residential mortgage backed securities previously held by AMTG to Athene Annuity for cash consideration of approximately
$1,100,000
. Proceeds from the sale were used to repay approximately
$804,000
in associated financing,
$175,000
to satisfy the Athene Loan Agreement and for general corporate purposes.
As of September 30, 2016, substantially all of the assets acquired from AMTG have been sold. This Merger provided the Company with the ability to expand the balance sheet in a cost effective and accretive manner at a time when ARI’s management believes there is significant opportunity to deploy capital into commercial real estate debt investments at attractive returns.
The Merger was accounted for as a business combination in accordance with ASC 805.
T
he transactions pursuant to the Athene Loan Agreement and the Asset Purchase Agreement were contemporaneous with and contingent on the Merger, therefore the Company recorded the transaction net. The Company was designated as the accounting acquirer. The total purchase price has been allocated based upon management’s estimates of fair value. The difference between the fair value of net assets of AMTG and the consideration was recorded as a bargain purchase gain.
The bargain purchase gain was computed as follows:
|
|
|
|
|
|
Consideration Paid:
|
$ (in thousands)
|
|
Cash
|
$
|
220,159
|
|
|
Common stock issued
|
218,397
|
|
|
Preferred stock assumed
|
172,500
|
|
|
Total consideration paid
|
$
|
611,056
|
|
|
|
|
Assets acquired:
|
|
|
Cash and cash equivalents
|
399,402
|
|
|
Restricted cash
|
10,552
|
|
|
Investments
|
1,491,484
|
|
|
Other assets
|
34,822
|
|
|
|
|
Liabilities assumed:
|
|
|
Borrowings under repurchase agreements
|
(1,254,518
|
)
|
|
Other liabilities
|
(30,665
|
)
|
|
|
|
|
Net assets acquired
|
651,077
|
|
|
|
|
|
|
Bargain purchase gain
|
$
|
40,021
|
|
The Company incurred
$4,925
and
$11,350
of transaction-related expenses related to the Merger during the three and nine months ended September 30, 2016. Transaction-related expenses are comprised primarily of transaction fees and Merger costs, including legal, finance, consulting, professional fees and other third-party costs.
The following table provides the pro forma consolidated operational data as if the Merger had occurred on January 1, 2016:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(in thousands, except per share data)
|
|
September 30, 2016
|
Total revenue
|
|
|
$
|
280,230
|
|
Net income attributable to common shareholders
|
40,161
|
|
|
|
|
|
Common shares outstanding at September 30, 2016
|
80,826,566
|
|
Net income per common share, basic and diluted
|
|
|
$
|
0.50
|
|
The pro forma consolidated operational data is based on assumptions and estimates considered appropriate by our management; however, these pro forma results are not necessarily indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the period presented, nor do they purport to represent the consolidated results of operations for future periods. The pro forma consolidated operational data do not include the impact of any synergies that may be achieved from the Merger or any strategies that management may consider in order to continue to efficiently manage operations.
Note 20 – Subsequent Events
Investment Activity.
Subsequent to quarter end, the Company closed an
$80,000
first mortgage loan (all of which is expected to be funded by year end) secured by a to-be-developed data center in Manassas, Virginia which has been substantially pre-leased on a long-term basis to a credit tenant.
The Company closed a
$130,000
junior mezzanine loan secured by the equity interests in a portfolio of
155
healthcare properties representing
18,662
licensed beds across
20
states.
The Company closed a
$30,000
preferred equity interest for the development of a
247,130
square foot
30
-story condominium tower with ground-floor retail space on the Upper East Side of New York City.
The Company entered into a
twelve
month extension and upsized the Company’s outstanding loan amount through the acquisition of an additional
£45,000
(or approximately
$57,400
) of pari passu interests in an existing pre-development mezzanine loan for the development of a luxury condominium project in Mayfair, London, bringing ARI’s total outstanding loan balance to
£100,000
.
During October 2016, the Company funded approximately
$6,228
related to previously closed loans and received approximately
$34,500
from loan repayments.