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, 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, commercial mortgage-backed securities (“CMBS”) and other commercial real estate-related debt investments in the United States. These asset classes are referred to as the Company’s target assets.
The Company, organized in
Maryland
on
June 29, 2009
, commenced operations on
September 29, 2009
and is externally managed and advised by ACREFI Management, LLC (the “Manager”), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries, “Apollo”).
The Company 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 its tax qualification as a REIT, the Company is required to distribute at least
90%
of its net 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 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, 2016
, 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
March 31, 2017
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 “AMTG Merger Agreement”) acquired Apollo Residential Mortgage, Inc. (“AMTG”). AMTG merged with and into the Company (the “AMTG 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
December 31, 2016
all assets acquired from AMTG were 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 the Company's 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, the Company 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 17 - 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 does not anticipate that the adoption of this guidance will have a material impact on the Company's condensed consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” or ASU 2014-15. ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The adoption of ASU 2014-15 did not have a material 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 adopted this guidance and determined there was no material impact on the Company's 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),” 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): Classification of Certain Cash Receipts and Cash Payments,” 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 adopted ASU 2016-15 in the third quarter of 2016 and its adoption did not have a material impact on the Company's condensed consolidated financial statements
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” or ASU 2016-18. ASU 2016-18 is intended to clarify how entities present restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash and cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash and cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively. Upon the adoption of the new guidance, the Company will change the presentation of restricted cash in the Company's condensed consolidated statement of cash flows to conform to the new requirements.
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 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 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 Company's 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 the 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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2017
|
|
Fair Value as of December 31, 2016
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
CMBS (Fair Value Option)
|
$
|
—
|
|
|
$
|
261,841
|
|
|
$
|
—
|
|
|
$
|
261,841
|
|
|
$
|
—
|
|
|
$
|
331,076
|
|
|
$
|
—
|
|
|
$
|
331,076
|
|
Derivative instruments
|
—
|
|
|
3,009
|
|
|
—
|
|
|
3,009
|
|
|
—
|
|
|
5,906
|
|
|
—
|
|
|
5,906
|
|
Total
|
$
|
—
|
|
|
$
|
264,850
|
|
|
$
|
—
|
|
|
$
|
264,850
|
|
|
$
|
—
|
|
|
$
|
336,982
|
|
|
$
|
—
|
|
|
$
|
336,982
|
|
Note 4 – Securities
At
March 31, 2017
, 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 7 - 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
hotel 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
March 31, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Description
|
Face
Amount
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated Fair
Value
|
CMBS (Fair Value Option)
|
$
|
304,768
|
|
|
$
|
296,159
|
|
|
$
|
1,833
|
|
|
$
|
(36,151
|
)
|
|
$
|
261,841
|
|
CMBS (Held-to-Maturity)
|
145,780
|
|
|
145,780
|
|
|
—
|
|
|
—
|
|
|
145,780
|
|
Total
|
$
|
450,548
|
|
|
$
|
441,939
|
|
|
$
|
1,833
|
|
|
$
|
(36,151
|
)
|
|
$
|
407,621
|
|
During the three months ended
March 31, 2017
, the Company sold CMBS resulting in a net realized loss of
$1,001
.
The amortized cost and estimated fair value of the Company’s debt securities at
December 31, 2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Description
|
Face
Amount
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
CMBS (Fair Value Option)
|
$
|
375,861
|
|
|
$
|
368,247
|
|
|
$
|
292
|
|
|
$
|
(37,463
|
)
|
|
$
|
331,076
|
|
CMBS (Held-to-Maturity)
|
146,530
|
|
|
146,352
|
|
|
—
|
|
|
—
|
|
|
146,352
|
|
Total
|
$
|
522,391
|
|
|
$
|
514,599
|
|
|
$
|
292
|
|
|
$
|
(37,463
|
)
|
|
$
|
477,428
|
|
During 2016, the Company sold CMBS resulting in a net realized loss of
$1,470
.
The overall statistics for the Company’s CMBS (Fair Value Option) calculated on a weighted average basis as of
March 31, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Credit Ratings *
|
B-NR
|
|
|
B+-NR
|
|
Coupon
|
5.9
|
%
|
|
5.9
|
%
|
Yield
|
4.3
|
%
|
|
6.0
|
%
|
Weighted Average Life
|
2.4 years
|
|
|
2.5 years
|
|
|
|
*
|
Ratings per Fitch Ratings, Moody’s Investors Service or Standard & Poor's.
|
The percentage vintage, property type and location of the collateral securing the Company's CMBS (Fair Value Option) calculated on a weighted average basis as of
March 31, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
Vintage
|
March 31, 2017
|
|
December 31, 2016
|
2005
|
2.5
|
%
|
|
2.0
|
%
|
2006
|
14.9
|
|
|
12.1
|
|
2007
|
67.4
|
|
|
73.5
|
|
2008
|
15.2
|
|
|
12.4
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Property Type
|
March 31, 2017
|
|
December 31, 2016
|
Office
|
31.7
|
%
|
|
34.6
|
%
|
Retail
|
32.5
|
|
|
29.0
|
|
Multifamily
|
11.3
|
|
|
12.4
|
|
Other
(1)
|
24.5
|
|
|
24.0
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
(1)
No other individual category comprises more than 10% of the total.
|
|
|
|
|
|
|
Location
|
March 31, 2017
|
|
December 31, 2016
|
South Atlantic
|
26.7
|
%
|
|
23.8
|
%
|
Middle Atlantic
|
15.7
|
|
|
16.7
|
|
Pacific
|
13.9
|
|
|
15.3
|
|
East North Central
|
12.1
|
|
|
10.8
|
|
Other
(1)
|
31.6
|
|
|
33.4
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
(1)
No other individual category comprises more than 10% of the total.
Note 5 – Loans, Held for Investment
The Company’s loans receivable are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
March 31, 2017
|
|
December 31, 2016
|
Commercial mortgage loans, held for investment, net
|
|
$
|
1,955,816
|
|
|
$
|
1,641,856
|
|
Subordinate loans, held for investment, net
|
|
1,195,570
|
|
|
1,051,236
|
|
Total loans, held for investment, net
|
|
$
|
3,151,386
|
|
|
$
|
2,693,092
|
|
Activity relating to our loans, held for investment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance
|
|
Deferred Fees/Other Items
(1)
|
|
Provision for Loan Loss
|
|
Carrying Value
|
December 31, 2016
|
|
2,720,344
|
|
|
(12,252
|
)
|
|
(15,000
|
)
|
|
2,693,092
|
|
Loan fundings
|
|
492,282
|
|
|
—
|
|
|
—
|
|
|
492,282
|
|
Loan repayments
|
|
(44,075
|
)
|
|
—
|
|
|
—
|
|
|
(44,075
|
)
|
Unrealized gain (loss) on foreign currency translation
|
|
2,808
|
|
|
—
|
|
|
—
|
|
|
2,808
|
|
Deferred fees and other items
(1)
|
|
—
|
|
|
(6,294
|
)
|
|
—
|
|
|
(6,294
|
)
|
Amortization of fees and other items
(1)
|
|
7,854
|
|
|
5,718
|
|
|
—
|
|
|
13,573
|
|
March 31, 2017
|
|
3,179,213
|
|
|
(12,828
|
)
|
|
(15,000
|
)
|
|
3,151,386
|
|
|
|
(1)
|
Other items primarily consist of purchase discounts or premiums, exit fees, and deferred origination expenses.
|
The following table details overall statistics for our loans receivable portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Number of loans
|
|
51
|
|
|
45
|
|
Principal balance
|
|
$
|
3,179,213
|
|
|
$
|
2,720,344
|
|
Carrying value
|
|
$
|
3,151,386
|
|
|
$
|
2,693,092
|
|
Unfunded loan commitments
(1)
|
|
$
|
121,470
|
|
|
$
|
170,365
|
|
Weighted-average cash coupon
(2)
|
|
8.82
|
%
|
|
8.88
|
%
|
|
|
(1)
|
Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
|
|
|
(2)
|
For floating rate loans, assumes one-month LIBOR of
0.98%
and
0.77%
, as of
March 31, 2017
and
December 31, 2016
, respectively.
|
The tables below detail the property type and geographic distribution of the properties securing the loans in our portfolio:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Property Type
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Hotel
|
|
$694,045
|
|
22.0%
|
|
$408,428
|
|
15.2%
|
Residential - for sale
|
|
522,707
|
|
16.6%
|
|
469,997
|
|
17.5%
|
Urban Retail Predevelopment
|
|
498,830
|
|
15.8%
|
|
491,187
|
|
18.2%
|
Office
|
|
256,177
|
|
8.1%
|
|
255,031
|
|
9.5%
|
Residential Rental
|
|
270,912
|
|
8.6%
|
|
309,243
|
|
11.5%
|
Mixed Use
|
|
252,132
|
|
8.0%
|
|
134,797
|
|
4.9%
|
Retail Center
|
|
240,296
|
|
7.6%
|
|
209,401
|
|
7.8%
|
Healthcare
|
|
171,306
|
|
5.5%
|
|
170,549
|
|
6.3%
|
Industrial
|
|
156,941
|
|
5.0%
|
|
156,809
|
|
5.8%
|
Other
|
|
88,040
|
|
2.8%
|
|
87,650
|
|
3.3%
|
|
|
$3,151,386
|
|
100%
|
|
$2,693,092
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Geographic Location
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
New York City
|
|
$1,232,256
|
|
39.1%
|
|
$1,034,303
|
|
38.4%
|
Midwest
|
|
505,769
|
|
16.0%
|
|
405,992
|
|
15.1%
|
Southeast
|
|
490,354
|
|
15.6%
|
|
332,276
|
|
12.3%
|
International (U.K.)
|
|
246,820
|
|
7.8%
|
|
244,756
|
|
9.1%
|
West
|
|
197,068
|
|
6.3%
|
|
219,664
|
|
8.2%
|
Mid Atlantic
|
|
261,076
|
|
8.3%
|
|
263,717
|
|
9.8%
|
Southwest
|
|
79,636
|
|
2.5%
|
|
54,614
|
|
2%
|
Northeast
|
|
138,407
|
|
4.4%
|
|
137,770
|
|
5.1%
|
Total
|
|
$3,151,386
|
|
100%
|
|
$2,693,092
|
|
100%
|
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 2016, the Company recorded a loan loss provision of
$10,000
on a multifamily commercial mortgage loan and
$5,000
on a multifamily 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 are the terminal capitalization rate and discount rate which were
11%
and
10%
, respectively. As of
March 31, 2017
and
December 31, 2016
, the aggregate loan loss provision was
$10,000
and
$5,000
for commercial mortgage loan and subordinate loan, respectively. The Company has ceased accruing payment in kind ("PIK") interest associated with the loan.
Note 6 – Unconsolidated Joint Venture
In September 2014, the Company, through a wholly owned subsidiary, acquired a
59%
ownership interest in Champ L.P. (“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 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, reducing its unfunded commitment to Champ LP to
€2,802
(or
$2,985
). Through its interest in Champ LP, as of
March 31, 2017
, the Company held an indirect ownership interest of approximately
9.34%
in BKB.
The Company evaluated Champ LP to determine if it met the definition of a variable interest entity ("VIE") in accordance with ASC 810,
Consolidation
. The Company determined that Champ LP met the definition of a VIE, however, the Company was not the primary beneficiary; therefore, the Company is not required to consolidate the assets and liabilities of the partnership in accordance with the authoritative guidance. Additionally, Champ LP is an Investment Company under GAAP, and is therefore reflected at fair value. The Company's investment in Champ LP is accounted for as an equity method investment and therefore the Company records its proportionate share of the net asset value in accordance with ASC 323,
Investments - Equity Method and Joint Ventures
.
Note 7 – Borrowings Under Repurchase Agreements
At
March 31, 2017
and
December 31, 2016
, the Company’s borrowings had the following outstanding balances, maturities and weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Lender
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity
(1)
|
|
Weighted
Average
Rate
(2)
|
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity
(1)
|
|
Weighted
Average
Rate
(2)
|
JPMorgan Facility
(3)
|
$
|
1,118,000
|
|
|
$
|
894,031
|
|
|
March 2020
|
|
L+2.27%
|
|
|
$
|
943,000
|
|
|
$
|
657,452
|
|
|
January 2019
|
|
L+2.25%
|
|
DB Repurchase Facility
(4)
|
355,200
|
|
|
308,730
|
|
|
September 2019
|
|
L+2.57%
|
|
|
300,000
|
|
|
137,355
|
|
|
September 2019
|
|
L+2.66%
|
|
Goldman Loan
|
N/A
|
|
|
39,001
|
|
|
April 2019
|
|
L+3.50%
|
|
|
N/A
|
|
|
40,657
|
|
|
April 2019
|
|
L+3.50%
|
|
Sub-total
|
|
|
|
1,241,762
|
|
|
|
|
L+2.38%
|
|
|
|
|
835,464
|
|
|
|
|
L+2.38%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UBS Facility
|
N/A
|
|
|
100,798
|
|
|
September 2018
|
|
2.77
|
%
|
|
N/A
|
|
|
133,899
|
|
|
September 2018
|
|
2.79
|
%
|
DB Facility
(5)
|
N/A
|
|
|
144,675
|
|
|
April 2018
|
|
3.59
|
%
|
|
N/A
|
|
|
177,203
|
|
|
April 2018
|
|
3.63
|
%
|
Sub-total
|
|
|
245,473
|
|
|
|
|
3.25
|
%
|
|
|
|
311,102
|
|
|
|
|
3.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less: deferred financing costs
|
|
|
(9,954
|
)
|
|
|
|
|
|
|
|
(6,763
|
)
|
|
|
|
|
Total / Weighted Average
|
|
|
|
$
|
1,477,281
|
|
|
|
|
3.35
|
%
|
|
|
|
$
|
1,139,803
|
|
|
|
|
3.18
|
%
|
(1) Maturity date assumes all extensions are exercised.
(2) Assumes
one
-month LIBOR was
0.98%
and
0.77%
as of
March 31, 2017
and December 31, 2016, respectively.
(3) As of
March 31, 2017
, the Company's master repurchase agreement with JPMorgan Chase Bank, National Association
(the "JPMorgan Facility") provided for maximum total borrowings comprised of the
$975,000
repurchase facility and a
$143,000
asset specific financing.
(4) As of
March 31, 2017
, the Company's master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch (the "DB Repurchase Facility") provided for maximum total borrowings comprised of the
$300,000
repurchase facility and a
$55,200
asset specific financing.
(5) 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
March 31, 2017
, 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
|
$
|
29,251
|
|
|
$
|
864,780
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
894,031
|
|
DB Repurchase Facility
|
—
|
|
|
308,730
|
|
|
—
|
|
|
—
|
|
|
308,730
|
|
Goldman Loan
|
5,290
|
|
|
33,711
|
|
|
—
|
|
|
—
|
|
|
39,001
|
|
UBS Facility
|
100,798
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,798
|
|
DB Facility
|
1,540
|
|
|
143,135
|
|
|
—
|
|
|
—
|
|
|
144,675
|
|
Total
|
$
|
136,879
|
|
|
$
|
1,350,356
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,487,235
|
|
At
March 31, 2017
, the Company’s collateralized financings were comprised of borrowings outstanding under the JPMorgan Facility, the DB Repurchase Facility, the Company's repurchase agreement with Goldman Sachs Bank USA (the" Goldman Loan"), the UBS Facility and the DB Facility. The table below summarizes the outstanding balances at
March 31, 2017
, as well as the maximum and average month-end balances for the
three
months ended
March 31, 2017
for the Company's borrowings under repurchase agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017
|
|
Balance at March 31, 2017
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
JPMorgan Facility borrowings
|
$
|
894,031
|
|
|
$
|
894,031
|
|
|
$
|
767,774
|
|
DB Repurchase Facility
|
308,730
|
|
|
308,730
|
|
|
223,012
|
|
Goldman Loan
|
39,001
|
|
|
40,657
|
|
|
39,976
|
|
UBS Facility borrowings
|
100,798
|
|
|
133,899
|
|
|
125,623
|
|
DB Facility borrowings
|
144,675
|
|
|
157,500
|
|
|
149,257
|
|
Total
|
$
|
1,487,235
|
|
|
|
|
|
JPMorgan Facility
On March 31, 2017, the Company, through
two
indirect wholly owned subsidiaries, amended and restated the JPMorgan Facility, which currently provides for maximum total borrowings of
$1,118,000
, comprised of the
$975,000
repurchase facility and a
$143,000
asset specific financing, and a term expiring in March 2019 plus a
one
-year extension option available at the Company's option, subject to certain conditions. Amounts borrowed under the JPMorgan Facility bear interest at spreads ranging from
2.25%
to
4.75%
over one-month LIBOR. Maximum advance rates under the JPMorgan Facility range from
25%
to
80%
on the estimated fair value of the pledged collateral depending on its LTV. Margin calls may occur any time the aggregate repurchase price exceeds the agreed upon advance rate multiplied by the market value of the assets by more than
$250
. The Company has agreed to provide a limited guarantee of the obligations of its indirect wholly-owned subsidiaries under the JPMorgan Facility.
As of
March 31, 2017
, the Company had
$894,031
of borrowings outstanding under the JPMorgan Facility secured by certain of the Company's commercial mortgage and subordinate loans.
DB Repurchase Facility
On September 29, 2016, the Company, through indirect wholly-owned subsidiaries, entered into the DB Repurchase Facility to provide up to
$355,200
of advances comprised of the
$300,000
repurchase facility and a
$55,200
asset specific financing in connection with financing first mortgage loans secured by real estate. The DB Repurchase Facility matures in March 2018 with
two
one
-year extension options available at the Company's option, subject to certain conditions, and accrues interest at per annum pricing equal to the sum of one-month LIBOR plus an applicable spread. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company has agreed to provide a guarantee of the obligations its indirect wholly-owned subsidiaries under this facility.
As of
March 31, 2017
, the Company had
$308,730
borrowings outstanding under the DB Repurchase Facility secured by certain of the Company's commercial mortgage loans.
Goldman Loan
On January 26, 2015, the Company, through an indirect wholly-owned subsidiary, entered into the Goldman Loan. The Goldman Loan provides for a purchase price of
$52,524
and a repurchase date of the earliest of: (1) April 30, 2019, (2) an early repurchase date as a result of repayment or sale of the purchased loan, or (3) an accelerated repurchase date as a result of certain events of default. Subject to the terms and conditions thereof, the Goldman Loan provides for the purchase and sale of certain participation interests in a mortgage loan secured by single-family and condominium properties. Prior to an event of default, amounts borrowed under the Goldman Loan bear interest at a spread of
3.5%
plus one-month LIBOR. In addition, the Goldman Loan provides that margin calls may occur during the continuance of certain credit events if the market value of the mortgaged properties drop below an agreed upon percentage. The Goldman Loan contains affirmative and negative covenants and provisions regarding events of default that are normal and customary for similar repurchase agreements. The Company has agreed to the following restrictive covenants, among others: (1) continuing to operate in a manner that allows the Company to qualify as a REIT and (2) financial covenants, including (A) a minimum consolidated tangible net worth covenant (
$750,000
), (B) maximum total indebtedness to consolidated tangible net worth (
3
:1), (C) minimum liquidity (
$15,000
), (D) minimum sum of (i) cash liquidity and (ii) “near cash liquidity” (
5.0%
of the Company’s total recourse indebtedness), (E) minimum net income (
one
U.S. dollar during any four consecutive fiscal quarters) and (F) a minimum ratio of EBITDA to interest expense (
1.5
to 1.0). The Company has also agreed to provide a guarantee of the obligations under the Goldman Loan.
As of
March 31, 2017
, the Company had
$39,001
of borrowings outstanding under the Goldman Loan secured by one commercial mortgage loan held by the Company.
UBS Facility
In September 2013, the Company, through an indirect wholly-owned subsidiary, entered into the UBS Facility, which currently provides that the Company may borrow up to
$133,899
in order to finance the acquisition of CMBS. The UBS
Facility matures in September 2017, with a
one
-year extension available at the Company's option, subject to certain conditions. Advances under the UBS Facility accrue interest at a per annum pricing rate equal to a spread of
1.55%
per annum over the rate implied by the fixed rate bid under a fixed-for-floating interest rate swap for the receipt of payments indexed to six-month U.S. dollar LIBOR. The Company borrows
100%
of the estimated fair value of the collateral pledged and posts margin equal to
22.5%
of that borrowing amount in cash. The margin posted is classified as restricted cash on the Company's condensed consolidated balance sheets. Additionally, depending on the utilization rate of the facility, a portion of the undrawn amount may be subject to non-use fees. The UBS Facility contains customary terms and conditions for facilities of this type and financial covenants to be met by the Company, including a minimum net asset value covenant (which shall not be less than an amount equal to
$500,000
and a maximum total debt to consolidated tangible net worth covenant (
3
:1). The Company has agreed to provide a full guarantee of the obligations of its indirect wholly-owned subsidiary under the UBS Facility.
As of
March 31, 2017
, the Company had
$100,798
of borrowings outstanding under the UBS Facility secured by CMBS held by the Company.
DB Facility
In April 2014, the Company, through an indirect wholly-owned subsidiary, entered into the DB Facility, which currently provides that the Company may borrow up to
$300,000
in order to finance the acquisition of CMBS. The DB Facility matures in April 2018. 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.
Additionally, the undrawn amount is subject to a
1.8%
non-use fee. The DB Facility contains customary terms and conditions for facilities of this type and financial covenants to be met by the Company, including minimum shareholder's equity of
50%
of the gross capital proceeds of its initial public offering and any subsequent public or private offerings.
As of
March 31, 2017
, the Company had
$144,675
of borrowings outstanding under the DB Facility secured by CMBS held by the Company.
The Company was in compliance with the financial covenants under its borrowing agreements at
March 31, 2017
and
December 31, 2016
.
Note 8 – 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
March 31, 2017
, the March 2019 Notes had a carrying value of
$141,768
and an unamortized discount of
$1,982
.
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
March 31, 2017
, the August 2019 Notes had a carrying value of
$108,700
and an unamortized discount of
$2,300
.
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%
|
56.9391
|
3/15/2019
|
1.96 years
|
August 2019 Notes
|
$111,000
|
5.50%
|
6.50%
|
56.9391
|
3/15/2019
|
1.96 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, and includes adjustments relating to cash dividend payments made by the Company 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.
|
The Company may not redeem the 2019 Notes prior to maturity. The sale price of the Company's common stock on March 31, 2017 of
$18.81
was greater than the per share conversion price of the 2019 Notes. The Company has the intent and
ability to settle the 2019 Notes in cash and, as a result, the 2019 Notes did not have any impact on the Company's diluted earnings per share.
In accordance with ASC 470 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
March 31, 2017
. 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
$3,503
for the
three
months ended
March 31, 2017
and 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
$900
and
$876
for the
three
months ended
March 31, 2017
and 2016, respectively.
Note 9 – 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 ASC 860,
Transfers and Servicing
. 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, the Company closed an additional
£20,000
(or
$30,672
) and participated that balance to an investment fund affiliated with Apollo. During December 2016, the Company qualified for sale accounting with respect to the previous participation sold that was converted to a discrete financial instrument, and therefore deconsolidated the participation sold.
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
March 31, 2017
, the participation had a face amount of
$84,647
, a carrying amount of
$84,647
and a cash coupon of LIBOR plus
440
basis points.
Note 10 – 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 March 2018. 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 the Company's non-designated foreign exchange (“Fx”) forwards as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
Type of Derivative
|
March 31, 2017
|
|
Number of Contracts
|
|
Aggregate Notional Amount
|
|
Notional Currency
|
|
Maturity
|
Fx Contracts - GBP
|
13
|
|
161,061
|
|
GBP
|
|
June 2017- March 2018
|
The following table summarizes the Company's non-designated Fx forwards as of December 31, 2016:
|
|
|
|
|
|
|
|
|
Type of Derivative
|
December 31, 2016
|
|
Number of Contracts
|
|
Aggregate Notional Amount
|
|
Notional Currency
|
|
Maturity
|
Fx Contracts - GBP
|
11
|
|
148,310
|
|
GBP
|
|
January 2017- December 2017
|
The Company has not designated any of its derivative instruments as hedges as defined in ASC 815,
Derivatives and Hedging
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
months ended
March 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Location of Loss Recognized in Income
|
2017
|
|
2016
|
Forward currency contract
|
(Loss) on derivative instruments - unrealized
|
$
|
(2,883
|
)
|
|
$
|
(1,310
|
)
|
Forward currency contract
|
Gain (loss) on derivative instruments - realized
|
(156
|
)
|
|
6,083
|
|
Interest rate caps
(1)
|
(Loss) on derivative instruments - unrealized
|
(6
|
)
|
|
(70
|
)
|
Total
|
|
$
|
(3,045
|
)
|
|
$
|
4,703
|
|
|
|
(1)
|
With a notional amount of
$44,153
and
$48,722
at
March 31, 2017
and
2016
, respectively.
|
The following table summarizes the gross asset amounts related to the Company's derivative instruments at
March 31, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
|
|
Net Amounts
of Assets
Presented in Condensed
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
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
Forward currency contract
|
4,144
|
|
|
(1,144
|
)
|
|
3,000
|
|
|
5,883
|
|
|
—
|
|
|
5,883
|
|
Total derivative instruments
|
$
|
4,153
|
|
|
$
|
(1,144
|
)
|
|
$
|
3,009
|
|
|
$
|
5,906
|
|
|
$
|
—
|
|
|
$
|
5,906
|
|
Note 11 – Related Party Transactions
AMTG Merger
As fully described in "Note 17- Business Combination", in August 2016, the Company acquired AMTG, an entity managed by an affiliate of Apollo.
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, 2018 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 2017, 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.
For the
three
months ended
March 31, 2017
and 2016, the Company incurred approximately
$7,432
and
$5,229
, respectively, 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
months ended
March 31, 2017
and 2016, the Company paid expenses totaling
$117
and
$798
, respectively, 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
March 31, 2017
and
December 31, 2016
, respectively, are approximately
$7,432
and
$7,015
for base management fees incurred but not yet paid under the Management Agreement.
Concurrently with the execution of the AMTG Merger Agreement, the Company entered into a Letter Agreement with the Manager, pursuant to which the Manager agreed to perform such services and activities as may be necessary to enable the Company to consummate the AMTG Merger. In consideration of the services provided by the Manager in connection with the AMTG Merger and the process leading to the AMTG Merger, the Company paid the Manager an aggregate amount of
$500,000
, in monthly installments of
$150,000
payable on the first of each calendar month between the execution of the Merger Agreement and the closing of the AMTG Merger.
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
$2,985
). Through its interest in Champ LP, as of
March 31, 2017
, 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 12 – 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
$3,791
and
$1,668
for the
three
months ended
March 31, 2017
and
March 31, 2016
, respectively, related to restricted common stock and RSU vesting. The following table summarizes the activity related to restricted common stock and RSUs during the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Date
|
|
Restricted Stock
|
|
RSUs
|
|
Estimated Fair Value
on Grant Date
|
|
Initial Vesting
|
|
Final Vesting
|
Outstanding at December 31, 2016
|
|
432,120
|
|
|
1,703,775
|
|
|
|
|
|
|
|
|
Cancelled upon delivery
|
January 2017
|
|
—
|
|
|
(332,349
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Forfeiture
|
March 2017
|
|
—
|
|
|
(1,971
|
)
|
|
n/a
|
|
n/a
|
|
n/a
|
Outstanding at March 31, 2017
|
|
432,120
|
|
|
1,369,455
|
|
|
|
|
|
|
|
Below is a summary of restricted stock and RSU vesting dates as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Date
|
Shares Vesting
|
|
RSU Vesting
|
|
Total Awards
|
April 2017
|
$
|
5,164
|
|
|
$
|
—
|
|
|
$
|
5,164
|
|
June 2017
|
—
|
|
|
544
|
|
|
544
|
|
July 2017
|
4,004
|
|
|
—
|
|
|
4,004
|
|
October 2017
|
3,997
|
|
|
—
|
|
|
3,997
|
|
December 2017
|
53,923
|
|
|
603,189
|
|
|
657,112
|
|
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
|
41,670
|
|
|
484,066
|
|
|
525,736
|
|
January 2019
|
1,419
|
|
|
—
|
|
|
1,419
|
|
April 2019
|
1,424
|
|
|
—
|
|
|
1,424
|
|
December 2019
|
25,000
|
|
|
281,112
|
|
|
306,112
|
|
|
144,949
|
|
|
1,369,455
|
|
|
1,514,404
|
|
At
March 31, 2017
, the Company had unrecognized compensation expense of approximately
$2,128
and
$23,539
, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.
RSU Deliveries
During the
three
months ended
March 31, 2017
, the Company delivered
198,598
shares of common stock for
332,349
vested RSUs. The Company allows 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
$2,330
for the
three
months ended
March 31, 2017
, and is included as a reduction of capital increase related to the Company's equity incentive plan in the condensed consolidated statement of changes in stockholders’ equity.
Note 13 – Stockholders’ Equity
The Company's authorized capital stock consists of
450,000,000
shares of common stock,
$0.01
par value per share and
50,000,000
shares of preferred stock,
$0.01
par value per share. As of
March 31, 2017
,
91,621,274
shares of common stock
were issued and outstanding and there were
3,450,000
shares of
8.625%
Series A Cumulative Redeemable Perpetual Preferred
Stock ("Series A Preferred Stock") issued and outstanding,
8,000,000
shares of
8.00%
Fixed-to-Floating Series B Cumulative
Redeemable Perpetual Preferred Stock ("Series B Preferred Stock") issued and outstanding and
6,900,000
shares of
8.00%
Fixed-to-Floating Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") issued and
outstanding.
Dividends.
During
2017
, the Company declared the following dividends on its common stock:
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Per Share
|
March 14, 2017
|
March 31, 2017
|
April 17, 2017
|
$0.46
|
During
2017
, the Company declared the following dividends on its Series A Preferred Stock:
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Per Share
|
March 14, 2017
|
March 31, 2017
|
April 17, 2017
|
$0.5391
|
During
2017
, the Company declared the following dividends on its Series B Preferred Stock:
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Per Share
|
March 14, 2017
|
March 31, 2017
|
April 17, 2017
|
$0.5000
|
During
2017
, the Company declared the following dividends on its Series C Preferred Stock:
|
|
|
|
|
Declaration Date
|
Record Date
|
Payment Date
|
Per Share
|
March 14, 2017
|
March 31, 2017
|
April 28, 2017
|
$0.5000
|
Common Stock Offerings.
During the fourth quarter of 2016, the Company completed a follow-on public offering of
10,500,000
shares of its common stock, at a price of
$16.97
per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately
$177,796
after deducting estimated offering expenses payable by the Company.
AMTG Merger.
In addition, in 2016 the Company issued common and preferred equity in connection with the AMTG Merger as described in "Note 17 - Business Combination."
Note 14 – 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 AMTG Merger Agreement,
two
putative class action lawsuits challenging the proposed First Merger (as defined in the AMTG 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, Arrow Merger Sub Inc., Apollo and Athene Holding Ltd. 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 Holding Ltd. 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. Defendants’ motions to dismiss have been fully briefed, and oral argument was held on December 8, 2016.
On January 4, 2017, the United States Department of Justice served a Request for Information and Documents (the “Request”) on the Company, in connection with a preliminary investigation into certain aspects of the Company's former residential real estate portfolio, which the Company acquired in connection with the AMTG Merger and subsequently sold in 2016. The Request seeks a range of information in connection with the residential real estate portfolio, including, among other things, information concerning policies, procedures, and practices related to advertising, marketing, identifying, or acquiring residential properties for sale or rent, and various data for all rental and sales contracts executed since January 1, 2012. The Company is cooperating with the Department of Justice and fully complying with the Request.
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 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 (
$2,985
). 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 - Loans, Held for Investment", at
March 31, 2017
, the Company had
$121,470
of unfunded commitments related to its commercial mortgage loan portfolio and subordinate loan portfolio.
Note 15 – 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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Cash and cash equivalents
|
$
|
142,905
|
|
|
$
|
142,905
|
|
|
$
|
200,996
|
|
|
$
|
200,996
|
|
Restricted cash
|
54,702
|
|
|
54,702
|
|
|
62,457
|
|
|
62,457
|
|
Securities, held-to-maturity
|
145,780
|
|
|
146,026
|
|
|
146,352
|
|
|
146,489
|
|
Commercial mortgage loans
|
1,955,816
|
|
|
1,953,073
|
|
|
1,641,856
|
|
|
1,648,896
|
|
Subordinate loans
|
1,195,570
|
|
|
1,199,865
|
|
|
1,051,236
|
|
|
1,060,882
|
|
Borrowings under repurchase agreements
|
(1,487,235
|
)
|
|
(1,485,831
|
)
|
|
(1,146,566
|
)
|
|
(1,146,807
|
)
|
Convertible senior notes, net
|
(250,468
|
)
|
|
(274,262
|
)
|
|
(249,994
|
)
|
|
(268,124
|
)
|
Participations sold
|
(84,647
|
)
|
|
(84,811
|
)
|
|
(84,979
|
)
|
|
(85,072
|
)
|
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 16 – Net Income per Share
ASC 260,
Earnings per share
, requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.
The table below presents basic and diluted net (loss) income per share of common stock using the two-class method for the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
For the three
months ended
March 31,
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
Net income
|
$
|
47,125
|
|
|
$
|
18,616
|
|
Preferred dividends
|
(9,310
|
)
|
|
(5,815
|
)
|
Net income available to common stockholders
|
37,815
|
|
|
12,801
|
|
Dividends declared on common stock
|
(42,146
|
)
|
|
(30,997
|
)
|
Dividends on participating securities
|
(630
|
)
|
|
(449
|
)
|
Net income (loss) attributable to common stockholders
|
$
|
(4,961
|
)
|
|
$
|
(18,645
|
)
|
Denominator:
|
|
|
|
Basic weighted average shares of common stock outstanding
|
91,612,447
|
|
|
67,385,191
|
|
Diluted weighted average shares of common stock outstanding
|
92,998,250
|
|
|
68,327,718
|
|
Basic and diluted net income per weighted average share of common stock
|
|
|
|
Distributable Earnings
|
$
|
0.46
|
|
|
$
|
0.46
|
|
Undistributed income (loss)
|
$
|
(0.05
|
)
|
|
$
|
(0.28
|
)
|
Basic and diluted net income per share of common stock
|
$
|
0.41
|
|
|
$
|
0.18
|
|
For the
three
months ended
March 31, 2017
and 2016, respectively,
1,385,803
and
942,526
unvested RSUs were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 17 – Business Combination
On August 31, 2016, the Company, pursuant to the terms and conditions of the AMTG 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 AMTG 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 AMTG 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.
All of the assets acquired from AMTG were sold during 2016. The AMTG 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 AMTG Merger was accounted for as a business combination in accordance with ASC 805, Business Combinations. The transactions pursuant to the Athene Loan Agreement and the Asset Purchase Agreement were contemporaneous with and contingent on the AMTG 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
$11,350
of transaction-related expenses related to the AMTG Merger during 2016. Transaction-related expenses are comprised primarily of transaction fees and AMTG 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 AMTG Merger had occurred on January 1, 2016:
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share data)
|
March 31, 2016
|
Total revenue
|
|
$
|
96,308
|
|
Net income attributable to common shareholders
|
(233
|
)
|
|
|
|
Common shares outstanding at March 31, 2016
|
67,385,255
|
|
Net income per common share, basic and diluted
|
|
$
|
—
|
|
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
AMTG 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 does not include the impact of any synergies that may be achieved from the AMTG Merger or any strategies that management may consider in order to continue to efficiently manage operations.
Note 18 – Subsequent Events
In April 2017, the Company amended and restated the DB Repurchase Facility, which is used to finance first mortgage loans. The amendment increases the borrowing capacity from
$300,000
to
$450,000
, plus
£45,000
, and extends the maturity date, including extension options, from September 2019, to March 2020.