Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the “Company,” “ARI,” “we,” “us” and “our”) is a corporation that has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We were formed in
Maryland
on
June 29, 2009
, commenced operations on
September 29, 2009
and are externally managed and advised by ACREFI Management, LLC (the “Manager”), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries, "Apollo").
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain our tax qualification as a REIT, we are required to distribute at least
90%
of our taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates include loan loss reserves and impairment. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows have been included. Our results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year or any other future period.
We currently operate in
one
reporting segment.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). ASU 2018-13 changes the fair value measurement disclosure requirements of ASC 820 "Fair Value Measurement" by adding, eliminating, and modifying certain disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and requires application of the prospective method of transition. We are currently assessing the impact the guidance will have on our condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting" ("ASU 2018-07"). The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2019 and is applied retrospectively. We are currently assessing the impact the guidance will have on our condensed consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” ("ASU 2017-12"). The intention of ASU 2017-12 is to align an entity’s financial reporting for hedging activities with the economic objectives of those activities. Upon adoption of ASU 2017-12, the cumulative ineffectiveness previously recognized on existing cash flow and net investment hedges will be adjusted and removed from beginning retained earnings and placed in accumulated other comprehensive income (loss). We note that this guidance will not have a material impact on our condensed consolidated financial statements. ASU 2017-12 is effective for fiscal years beginning
after December 15, 2018 and is applied retrospectively.
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash” ("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. We early adopted ASU 2016-18 on June 30, 2017, which changed our condensed consolidated statement of cash flows and related disclosures for all periods presented. The following is a reconciliation of our cash, cash equivalents, and restricted cash to the total presented in our condensed consolidated statement of cash flows for the nine months ended
September 30, 2018
and
September 30, 2017
, respectively ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
Balance at September 30, 2017
|
Cash
|
$
|
99,188
|
|
|
$
|
140,229
|
|
Restricted cash
|
—
|
|
|
76
|
|
Total cash and restricted cash shown in the condensed consolidated statement of cash flows
|
$
|
99,188
|
|
|
$
|
140,305
|
|
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326)" ("ASU 2016-13"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance will replace the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While we are currently evaluating the impact ASU 2016-13 will have on our condensed consolidated financial statements, we expect that the adoption will result in higher provisions for potential loan losses.
Note 3 – Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair values. Market based, or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy as noted in ASC 820 "
Fair Value Measurements and Disclosures"
are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While we anticipate that our valuation methods will be appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
The estimated fair values of our derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate 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 (or payments) that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The fair values of foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries. Our derivative instruments are classified as Level II in the fair value hierarchy.
The following table summarizes the levels in the fair value hierarchy into which our financial instruments were categorized as of
September 30, 2018
and
December 31, 2017
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2018
|
|
Fair Value as of December 31, 2017
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Derivative assets (liabilities), net
|
$
|
—
|
|
|
$
|
15,341
|
|
|
$
|
—
|
|
|
$
|
15,341
|
|
|
$
|
—
|
|
|
$
|
(5,644
|
)
|
|
$
|
—
|
|
|
$
|
(5,644
|
)
|
Note 4 – Securities
We previously held CMBS, which were all sold in 2017. During the three and nine months ended
September 30, 2017
, we sold CMBS (Fair Value Option) resulting in a net realized loss of
$4.1
million and
$5.1
million, respectively.
During the three and nine months ended September 30, 2017, CMBS (Held-to-Maturity) of
$146.5 million
was fully repaid. We did not hold any CMBS (Held-to-Maturity) during the three and nine months ended September 30, 2018.
During the three and nine months ended September 30, 2017, we recorded interest income from securities of
$2.6
million and
$13.4
million, respectively. For the three months ended September 30, 2017, there was
no
interest income from CMBS (Held-to-Maturity) and
$2.6 million
of interest income from CMBS (Fair Value Option). For the nine months ended September 30, 2017, there was
$4.2 million
of interest income from CMBS (Held-to-Maturity) and
$9.2 million
of interest income from CMBS (Fair Value Option).
To conform to the 2018 presentation of the condensed consolidated statement of cash flows, we reclassified (i)
$146.5 million
of payments received on securities, held-to-maturity, (ii)
$128.9 million
of proceeds from sale of securities, and (iii)
$13.3 million
of payments received on securities, and combined the line items into payments and proceeds received on securities.
Note 5 – Commercial Mortgage and Subordinate Loans, Net
Our loan portfolio was comprised of the following at
September 30, 2018
and December 31, 2017 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
September 30, 2018
|
|
December 31, 2017
|
Commercial mortgage loans, net
|
|
$
|
3,723,550
|
|
|
$
|
2,653,826
|
|
Subordinate loans, net
|
|
1,104,496
|
|
|
1,025,932
|
|
Total loans, net
|
|
$
|
4,828,046
|
|
|
$
|
3,679,758
|
|
Our loan portfolio consisted of
90%
and
88%
floating rate loans, based on amortized cost, as of
September 30, 2018
and December 31, 2017, respectively.
Activity relating to our loan investment portfolio, for the
nine months ended
September 30, 2018
, was as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance
|
|
Deferred Fees/Other Items
(1)
|
|
Provision for Loan Loss
(2)
|
|
Carrying Value
|
December 31, 2017
|
|
$
|
3,706,169
|
|
|
$
|
(9,430
|
)
|
|
$
|
(16,981
|
)
|
|
$
|
3,679,758
|
|
New loan fundings
|
|
1,590,123
|
|
|
—
|
|
|
—
|
|
|
1,590,123
|
|
Add-on loan fundings
(3)
|
|
175,053
|
|
|
—
|
|
|
—
|
|
|
175,053
|
|
Loan repayments
|
|
(601,041
|
)
|
|
—
|
|
|
—
|
|
|
(601,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on foreign currency translation
|
|
(35,412
|
)
|
|
(21
|
)
|
|
—
|
|
|
(35,433
|
)
|
Provision for loan loss
(2)
|
|
—
|
|
|
—
|
|
|
(5,000
|
)
|
|
(5,000
|
)
|
Deferred fees and other items
(1)
|
|
—
|
|
|
(24,596
|
)
|
|
—
|
|
|
(24,596
|
)
|
PIK interest, amortization of fees and other items
(1)
|
|
29,944
|
|
|
19,238
|
|
|
—
|
|
|
49,182
|
|
September 30, 2018
|
|
$
|
4,864,836
|
|
|
$
|
(14,809
|
)
|
|
$
|
(21,981
|
)
|
|
$
|
4,828,046
|
|
———————
(1) Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses.
(2)
In addition to the
$22.0
million provision for loan loss, we recorded an impairment of
$3.0
million against an investment previously recorded under other assets on our condensed consolidated balance sheet.
(3) Represents fundings for loans closed prior to 2018.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Number of loans
|
|
68
|
|
|
59
|
|
Principal balance
|
|
$
|
4,864,836
|
|
|
$
|
3,706,169
|
|
Carrying value
|
|
$
|
4,828,046
|
|
|
$
|
3,679,758
|
|
Unfunded loan commitments
(1)
|
|
$
|
884,178
|
|
|
$
|
435,627
|
|
Weighted-average cash coupon
(2)
|
|
8.2
|
%
|
|
8.4
|
%
|
———————
|
|
(1)
|
Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
|
|
|
(2)
|
For floating rate loans, based on applicable benchmark rates as of the specified dates.
|
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Property Type
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Hotel
|
|
$
|
1,229,460
|
|
|
25.5
|
%
|
|
$
|
645,056
|
|
|
17.6
|
%
|
Residential-for-sale: inventory
(1)
|
|
602,826
|
|
|
12.5
|
%
|
|
92,438
|
|
|
2.5
|
%
|
Residential-for-sale: construction
(1)
|
|
385,303
|
|
|
8.0
|
%
|
|
349,739
|
|
|
9.5
|
%
|
Urban Predevelopment
|
|
677,440
|
|
|
14.0
|
%
|
|
654,736
|
|
|
17.8
|
%
|
Office
|
|
520,926
|
|
|
10.8
|
%
|
|
513,830
|
|
|
14.0
|
%
|
Multifamily
|
|
450,017
|
|
|
9.3
|
%
|
|
465,057
|
|
|
12.6
|
%
|
Mixed Use
|
|
320,984
|
|
|
6.6
|
%
|
|
354,640
|
|
|
9.6
|
%
|
Healthcare
|
|
255,588
|
|
|
5.3
|
%
|
|
173,870
|
|
|
4.7
|
%
|
Retail Center
|
|
202,031
|
|
|
4.2
|
%
|
|
198,913
|
|
|
5.4
|
%
|
Other
|
|
151,471
|
|
|
3.1
|
%
|
|
154,141
|
|
|
4.2
|
%
|
Industrial
|
|
32,000
|
|
|
0.7
|
%
|
|
77,338
|
|
|
2.1
|
%
|
Total
|
|
$
|
4,828,046
|
|
|
100.0
|
%
|
|
$
|
3,679,758
|
|
|
100.0
|
%
|
|
|
(1)
|
To conform to the current period’s presentation, loans with a combined carrying value of
$442.2 million
classified as residential-for-sale as of December 31, 2017 were broken out into
$349.8 million
of residential-for-sale: construction and
$92.4 million
of residential-for-sale: inventory.
|
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Geographic Location
|
|
Carrying
Value
|
|
% of
Portfolio
|
|
Carrying
Value
|
|
% of
Portfolio
|
Manhattan, NY
|
|
$
|
1,365,211
|
|
|
28.3
|
%
|
|
$
|
1,173,833
|
|
|
31.9
|
%
|
Brooklyn, NY
|
|
332,372
|
|
|
6.9
|
%
|
|
357,611
|
|
|
9.7
|
%
|
Northeast
|
|
37,410
|
|
|
0.8
|
%
|
|
100,536
|
|
|
2.7
|
%
|
Midwest
|
|
800,196
|
|
|
16.6
|
%
|
|
683,380
|
|
|
18.6
|
%
|
Southeast
|
|
608,925
|
|
|
12.6
|
%
|
|
531,582
|
|
|
14.4
|
%
|
West
|
|
522,818
|
|
|
10.8
|
%
|
|
227,024
|
|
|
6.2
|
%
|
Mid Atlantic
|
|
213,881
|
|
|
4.4
|
%
|
|
191,976
|
|
|
5.2
|
%
|
Southwest
|
|
115,683
|
|
|
2.4
|
%
|
|
33,615
|
|
|
0.9
|
%
|
United Kingdom
|
|
706,342
|
|
|
14.6
|
%
|
|
303,488
|
|
|
8.3
|
%
|
Other International
|
|
125,208
|
|
|
2.6
|
%
|
|
76,713
|
|
|
2.1
|
%
|
Total
|
|
$
|
4,828,046
|
|
|
100.0
|
%
|
|
$
|
3,679,758
|
|
|
100.0
|
%
|
We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio ("LTV"), debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:
1. Very low risk
2. Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or has been impaired
The following table allocates the carrying value of our loan portfolio based on our internal risk ratings at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Risk Rating
|
|
Number of Loans
|
|
Carrying Value
|
|
% of Loan Portfolio
|
|
Number of Loans
|
|
Carrying Value
|
|
% of Loan Portfolio
|
1
|
|
—
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
|
$
|
—
|
|
|
—
|
%
|
2
|
|
5
|
|
340,237
|
|
|
7
|
%
|
|
5
|
|
399,326
|
|
|
10
|
%
|
3
|
|
60
|
|
4,254,383
|
|
|
88
|
%
|
|
51
|
|
3,034,358
|
|
|
83
|
%
|
4
|
|
1
|
|
171,127
|
|
|
4
|
%
|
|
1
|
|
168,208
|
|
|
5
|
%
|
5
|
|
2
|
|
62,299
|
|
|
1
|
%
|
|
2
|
|
77,866
|
|
|
2
|
%
|
|
|
68
|
|
$
|
4,828,046
|
|
|
100
|
%
|
|
59
|
|
$
|
3,679,758
|
|
|
100
|
%
|
We evaluate our loans for possible impairment on a quarterly basis. We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization
and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.
We recorded a
$10.0 million
loan loss provision and impairment against a commercial mortgage loan secured by a fully-built, for-sale residential condominium units located in Bethesda, MD. This was comprised of (i)
$5.0 million
loan loss recorded during the second quarter of 2018, and (ii)
$2.0 million
loan loss provision and
$3.0 million
of impairment recorded during the second quarter of 2017. The impairment was recorded on an investment previously recorded under other assets on our condensed consolidated balance sheet. The loan loss provision and impairment were based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of
$662
dollars per square foot across properties and
15%
, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and accounts for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance). As of
September 30, 2018
and
December 31, 2017
, this loan was assigned a risk rating of 5.
During 2016, we recorded a loan loss provision of
$10.0
million on a commercial mortgage loan and
$5.0 million
on a contiguous subordinate loan secured by a multifamily property located in Williston, ND. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were
11%
and
10%
, respectively. We ceased accruing interest associated with the loan and only recognize interest income upon receipt of cash. As of
September 30, 2018
and
December 31, 2017
, this loan was assigned a risk rating of 5.
We evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR"), under ASC Topic 310, “Receivables." During the second quarter of 2018, we determined that a modification of
one
commercial mortgage loan with a principal balance of
$169.0 million
constituted a TDR as the interest rate spread was reduced from
5.5%
over LIBOR to
3.0%
over LIBOR. As of September 30, 2018 and December 31, 2017, this loan was assigned a risk rating of 4. The entity that we are a part of and owns the underlying property was deemed to be a variable interest entity ("VIE") and it was determined that we are not the primary beneficiary of that VIE.
During the three months ended September 30, 2018, we sold a
$75.0 million
(
$17.7 million
funded) subordinate position of our
$265.0 million
loans for the construction of an office campus in Renton, Washington. As of September 30, 2018, our exposure to the property is limited to a
$190.0 million
(
$65.5 million
funded) mortgage loan. This transaction was evaluated under ASC 860 - Transfers and Servicing and we determined that it qualifies as a sale and accounted for as such.
As of
September 30, 2018
and
December 31, 2017
, the aggregate loan loss provision was
$17.0
million and
$5.0
million for commercial mortgage loans and subordinate loans, respectively.
We recognized payment-in-kind ("PIK") interest of
$10.2 million
and
$29.9 million
for the three and
nine months ended
September 30, 2018
, respectively, and
$5.3 million
and
$19.3 million
for the three and
nine months ended
September 30, 2017
, respectively.
We recognized pre-payment penalties and accelerated fees of
$0.2 million
and
$1.8 million
for the three and nine months ended
September 30, 2018
, respectively. For the three and
nine months ended
September 30, 2017
, we recognized pre-payment penalties of
$3.6 million
and
$4.0 million
, respectively.
Note 6 – Loan Proceeds Held by Servicer
Loan proceeds held by servicer represents principal payments held by our third-party loan servicer as of the balance sheet date which were remitted to us subsequent to the balance sheet date. Loan proceeds held by servicer was
$302.8 million
as of
December 31, 2017
. There were
no
loan proceeds held by servicer as of
September 30, 2018
.
Note 7 – Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Interest receivable
|
$
|
31,255
|
|
|
$
|
23,101
|
|
Collateral deposited under derivative agreements
|
—
|
|
|
4,930
|
|
Other
|
639
|
|
|
389
|
|
Total
|
$
|
31,894
|
|
|
$
|
28,420
|
|
Note 8 – Secured Debt Arrangements, Net
At
September 30, 2018
and
December 31, 2017
, our borrowings had the following secured debt arrangements, maturities and weighted average interest rates ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
(2)
|
|
December 31, 2017
|
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity
(1)
|
|
Maximum Amount of Borrowings
|
|
Borrowings Outstanding
|
|
Maturity
(1)
|
|
Weighted
Average
Rate
|
JPMorgan Facility (USD)
|
$
|
1,332,450
|
|
|
$
|
950,635
|
|
|
June 2021
|
|
$
|
1,393,000
|
|
|
$
|
944,529
|
|
|
March 2020
|
|
USD L + 2.30%
|
JPMorgan Facility (GBP)
|
49,550
|
|
|
49,550
|
|
|
June 2021
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
DB Repurchase Facility (USD)
|
900,905
|
|
|
389,525
|
|
|
March 2021
|
|
472,090
|
|
|
225,367
|
|
|
March 2020
|
|
USD L + 2.56%
|
DB Repurchase Facility (GBP)
|
154,095
|
|
|
154,095
|
|
|
March 2021
|
|
93,919
|
|
|
93,919
|
|
|
March 2020
|
|
GBP L + 2.60%
|
Goldman Facility
|
300,000
|
|
|
205,982
|
|
|
November 2020
|
|
331,130
|
|
|
81,380
|
|
|
November 2020
|
|
USD L + 2.73%
|
CS Facility (USD)
|
69,941
|
|
|
69,941
|
|
|
March 2019
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
CS Facility (GBP)
|
143,993
|
|
|
143,993
|
|
|
March 2019
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
HSBC Facility (GBP)
|
49,896
|
|
|
49,896
|
|
|
September 2019
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Sub-total
|
3,000,830
|
|
|
2,013,617
|
|
|
|
|
2,290,139
|
|
|
1,345,195
|
|
|
|
|
|
less: deferred financing costs
|
N/A
|
|
|
(16,746
|
)
|
|
|
|
N/A
|
|
|
(14,348
|
)
|
|
|
|
N/A
|
Total / Weighted Average
|
$
|
3,000,830
|
|
|
$
|
1,996,871
|
|
|
$2,290,139
|
|
$1,330,847
|
|
USD L + 2.37% /
|
|
GBP L + 2.60%
|
———————
(1) Maturity date assumes extensions at our option are exercised.
(2) Weighted average rate as of
September 30, 2018
was USD L +
2.26%
/ GBP L +
2.27%
.
JPMorgan Facility
In May 2017, through
two
indirect wholly-owned subsidiaries, we entered into the Fifth Amended and Restated Master Repurchase Agreement with JPMorgan Chase Bank, National Association (as amended, the "JPMorgan Facility"). The JPMorgan Facility provides for maximum total borrowing capacity of $
1.4
billion, comprised of a $
1.25
billion repurchase facility and a $
132.0
million asset specific financing and enables us to elect to receive advances in either U.S. dollars, British pounds ("GBP"), or Euros ("EUR"). The repurchase facility matures in June 2020, plus a
one
-year extension available at our option, subject to certain conditions. The asset specific financing matures in February 2019. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of our indirect wholly-owned subsidiaries under the JPMorgan Facility.
As of
September 30, 2018
, we had
$1.0
billion (including £
38.0
million assuming conversion into U.S. dollars) of borrowings outstanding under the JPMorgan Facility secured by certain of our commercial mortgage loans.
DB Repurchase Facility
In April 2018, through an indirect wholly-owned subsidiary, we entered into a Second Amended and Restated Master Repurchase Agreement with Deutsche Bank AG, Cayman Islands Branch and Deutsche Bank AG, London Branch (as amended, the "DB Repurchase Facility"), which was upsized in September 2018, and provides for advances of up to
$1.0
billion for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties located in the United States, United Kingdom and the European Union, and enables us to elect to receive advances in either U.S. dollars, British pounds, or Euros. Additionally, we have a
$55.0
million of asset specific financing with Deutsche Bank in connection with financing a first mortgage loan secured by real estate. The repurchase facility matures in March 2020, plus a
one
-year extension available at our option, subject to certain conditions. The asset specific financing matures in August 2019. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
September 30, 2018
, we had $
543.6
million (including £
118.3
million assuming conversion into U.S. dollars) of borrowings outstanding under the DB Repurchase Facility secured by certain of our commercial mortgage loans.
Goldman Facility
In November 2017, through an indirect wholly-owned subsidiary, we entered into a master repurchase and securities contract agreement with Goldman Sachs Bank USA (the "Goldman Facility"), which provides for advances of up to
$300.0
million and matures in November 2019, plus a
one
-year extension available at our option, subject to certain conditions. Margin calls may occur any time at specified margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of the seller under the Goldman Facility.
As of
September 30, 2018
, we had total borrowings of
$206.0
million of borrowings outstanding under the Goldman Facility.
CS Facility - USD
In July 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - USD"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - USD matures
six
months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
September 30, 2018
, we had total borrowings of
$69.9
million of borrowings outstanding under the CS Facility - USD secured by one of our commercial mortgage loans.
CS Facility - GBP
In June 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - GBP"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - GBP matures
six
months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
September 30, 2018
, we had total borrowings of
$144.0
million (£
110.5
million assuming conversion into U.S. dollars) of borrowings outstanding under the CS Facility - GBP secured by one of our commercial mortgage loans.
HSBC Facility
In September 2018, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc (the "HSBC Facility"), which provides for a single asset financing. The facility matures in September 2019 and unless terminated by either party, automatically extends for further periods prior to maturity. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of
September 30, 2018
, we had total borrowings of
$49.9
million (
£38.3 million
assuming conversion into U.S. dollars) of borrowings outstanding under the HSBC Facility secured by one of our commercial mortgage loans.
At
September 30, 2018
, our borrowings had the following remaining maturities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
(1)
|
|
1 to 3
years
(1)
|
|
3 to 5
years
|
|
More than
5 years
|
|
Total
|
JPMorgan Facility
|
$
|
334,884
|
|
|
$
|
665,301
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000,185
|
|
DB Repurchase Facility
|
177,164
|
|
|
366,456
|
|
|
—
|
|
|
—
|
|
|
543,620
|
|
Goldman Facility
|
—
|
|
|
205,982
|
|
|
—
|
|
|
—
|
|
|
205,982
|
|
CS Facility - USD
|
69,941
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
69,941
|
|
CS Facility - GBP
|
143,993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
143,993
|
|
HSBC Facility
|
49,896
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,896
|
|
Total
|
$
|
775,878
|
|
|
$
|
1,237,739
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,013,617
|
|
———————
(1)
Assumes underlying assets are financed through the fully extended maturity date of the facility.
The table below summarizes the outstanding balances at
September 30, 2018
, as well as the maximum and average month-end balances for the nine months ended
September 30, 2018
for our borrowings under secured debt arrangements ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2018
|
|
Balance at September 30, 2018
|
|
Amortized Cost of collateral at September 30, 2018
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
JPMorgan Facility
|
$
|
1,000,185
|
|
|
$
|
1,621,477
|
|
|
$
|
1,000,854
|
|
|
$
|
910,138
|
|
DB Repurchase Facility
|
543,620
|
|
|
955,460
|
|
|
707,405
|
|
|
511,259
|
|
Goldman Facility
|
205,982
|
|
|
278,490
|
|
|
236,764
|
|
|
159,010
|
|
CS Facility - USD
|
69,941
|
|
|
99,013
|
|
|
69,941
|
|
|
69,941
|
|
CS Facility - GBP
|
143,993
|
|
|
220,397
|
|
|
145,937
|
|
|
144,540
|
|
HSBC Facility
|
49,896
|
|
|
70,763
|
|
|
49,896
|
|
|
49,896
|
|
Total
|
$
|
2,013,617
|
|
|
$
|
3,245,600
|
|
|
|
|
|
We were in compliance with the covenants under each of our secured debt arrangements at
September 30, 2018
and
December 31, 2017
.
Note 9 – Convertible Senior Notes, Net
In
two
separate offerings during 2014, we issued an aggregate principal amount of
$254.8
million of
5.50%
Convertible Senior Notes due 2019 (the "2019 Notes"), for which we received aggregate net proceeds of approximately
$248.6 million
, after deducting the underwriting discount and estimated offering expenses payable by us.
During the three months ended September 30, 2018, we exchanged or converted
$218.8 million
in aggregate principal of the 2019 Notes as follows:
(i) on August 2, 2018, we entered into privately negotiated exchange agreements with a limited number of holders of the 2019 Notes pursuant to which we exchanged
$206.2 million
of the 2019 Notes for an aggregate of (a)
10,020,328
newly issued shares of our common stock, and (b)
$39.3 million
in cash. We recorded
$166.0 million
of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions,
(ii) certain holders elected to convert
$12.6 million
of the 2019 Notes through multiple transactions for an aggregate of (a)
724,250
newly issued shares of our common stock, and (b)
$0.2 million
in cash. We recorded
$12.4 million
of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions.
During the three and nine months ended September 30, 2018, in connection with the exchanges and conversions of the
2019 Notes, we recorded a loss on early extinguishment of debt of
$2.6 million
, which includes fees and accelerated amortization of capitalized costs. There was no such loss during the three and nine months ended September 30, 2017.
At September 30, 2018, the outstanding 2019 Notes had a carrying value of
$35.5 million
and an unamortized discount of
$0.5 million
.
In
two
separate offerings during 2017, we issued an aggregate principal amount of
$345.0
million of
4.75%
Convertible Senior Notes due 2022 (the "2022 Notes," and together with the 2019 Notes, the "Notes"), for which we received aggregate net proceeds of approximately
$337.5 million
, after deducting the underwriting discount and estimated offering expenses.
At September 30, 2018, the 2022 Notes had a carrying value of
$334.7 million
and an unamortized discount of
$10.3 million
.
The following table summarizes the terms of the Notes ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
Coupon Rate
|
Effective Rate
(1)
|
Conversion Rate
(2)
|
Maturity Date
|
Remaining Period of Amortization
|
2019 Notes
|
$
|
35,932
|
|
5.50
|
%
|
6.50
|
%
|
58.0421
|
|
3/15/2019
|
0.45 years
|
2022 Notes
|
345,000
|
|
4.75
|
%
|
5.61
|
%
|
50.2260
|
|
8/23/2022
|
3.90 years
|
Total
|
$
|
380,932
|
|
|
|
|
|
|
———————
|
|
(1)
|
Effective rate includes the effect of the adjustment for the conversion option (See endnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital.
|
|
|
(2)
|
We have the option to settle any conversions in cash, shares of common stock or a combination thereof. The conversion rate represents the number of shares of common stock issuable per
one thousand
principal amount of the Notes converted, and includes adjustments relating to cash dividend payments made by us to stockholders that have been deferred and carried-forward in accordance with, and are not yet required to be made pursuant to, the terms of the applicable supplemental indenture.
|
We may not redeem the Notes prior to maturity except in limited circumstances. The closing price of our common stock on September 30, 2018 of
$18.87
was greater than the per share conversion price of the 2019 Notes and less than the per share conversion price of the 2022 Notes. As of September 30, 2018, we no longer assert our intent to fully settle the principal amount of the Notes in cash.
In accordance with ASC 470 - Debt, the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) is to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. GAAP requires that the initial proceeds from the sale of the Notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by us at such time. We measured the fair value of the debt components of the Notes as of their issuance date based on effective interest rates. As a result, we attributed approximately
$22.4
million of the proceeds to the equity component of the Notes (
$11.4
million to the 2019 Notes and
$11.0
million to the 2022 Notes), which represents the excess proceeds received over the fair value of the liability component of the Notes at the date of issuance. The equity component of the Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of
September 30, 2018
. The resulting debt discount is being amortized over the period during which the Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the Notes will increase in subsequent reporting periods through the maturity date as the Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately
$5.5
million and
$20.7
million for the three and nine months ended
September 30, 2018
, respectively, as compared to approximately
$4.7
million and
$11.7
million for the three and nine months ended
September 30, 2017
, respectively. With respect to the amortization of the discount on the liability component of the Notes as well as the amortization of deferred financing costs, we reported additional non-cash interest expense of approximately
$1.2
million and
$4.9
million for the three and nine months ended
September 30, 2018
, respectively, as compared to approximately
$1.2
million and
$3.0
million for the three and nine months ended
September 30, 2017
, respectively.
Note 10 – Derivatives, Net
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than U.S. dollars.
We have entered into a series of forward contracts to sell an amount of foreign currency (British pound and Euro) for an agreed upon amount of U.S. dollars at various dates through November 2020. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by us related to foreign
denominated loan investments.
The following table summarizes our non-designated foreign exchange (“Fx”) forwards as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
Type of Derivative
|
September 30, 2018
|
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
Fx Contracts - GBP
|
35
|
|
274,309
|
|
GBP
|
|
October 2018 - November 2020
|
Fx Contracts - EUR
|
1
|
|
42,247
|
|
EUR
|
|
October 2018
|
The following table summarizes our non-designated Fx forwards as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Type of Derivative
|
December 31, 2017
|
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
Fx Contracts - GBP
|
24
|
|
177,077
|
|
GBP
|
|
January 2018- November 2020
|
We have not designated any of our derivative instruments as hedges as defined in ASC 815 "
Derivatives and Hedging"
and, therefore, changes in the fair value of our derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to our derivatives for the three and
nine months ended
September 30, 2018
and
2017
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss)
recognized in income
|
|
Amount of gain (loss)
recognized in income
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Location of Gain (Loss) Recognized in Income
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Forward currency contracts
|
Gain (loss) on derivative instruments - unrealized
|
|
$
|
5,046
|
|
|
$
|
(7,308
|
)
|
|
$
|
20,987
|
|
|
$
|
(17,629
|
)
|
Forward currency contracts
|
Gain (loss) on derivative instruments - realized
|
|
1,246
|
|
|
(179
|
)
|
|
7,811
|
|
|
(290
|
)
|
Interest rate caps
(1)
|
Gain (loss) on derivative instruments - unrealized
|
|
(1
|
)
|
|
6
|
|
|
(1
|
)
|
|
3
|
|
Total
|
|
|
$
|
6,291
|
|
|
$
|
(7,481
|
)
|
|
$
|
28,797
|
|
|
$
|
(17,916
|
)
|
———————
|
|
(1)
|
With a notional amount of
$36.2
million and
$41.5
million at
September 30, 2018
, and
2017
, respectively.
|
The following table summarizes the gross asset and liability amounts related to our derivatives at
September 30, 2018
and
December 31, 2017
($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
|
|
Net Amounts
of Assets
Presented in
the Condensed Consolidated Balance Sheet
|
|
Gross
Amount of
Recognized
Liabilities
|
|
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
|
|
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheet
|
Interest rate caps
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Forward currency contracts
|
15,708
|
|
|
(368
|
)
|
|
15,340
|
|
|
(5,645
|
)
|
|
—
|
|
|
(5,645
|
)
|
Total derivative instruments
|
$
|
15,709
|
|
|
$
|
(368
|
)
|
|
$
|
15,341
|
|
|
$
|
(5,645
|
)
|
|
$
|
1
|
|
|
$
|
(5,644
|
)
|
Note 11 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accrued dividends payable
|
$
|
68,544
|
|
|
$
|
56,576
|
|
Accrued interest payable
|
6,540
|
|
|
12,796
|
|
Accounts payable and other liabilities
|
4,454
|
|
|
1,534
|
|
Total
|
$
|
79,538
|
|
|
$
|
70,906
|
|
Note 12 – Related Party Transactions
Management Agreement
In connection with our initial public offering in September 2009, we entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing our day-to-day operations, subject to the direction and oversight of our board of directors.
Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to
1.5%
per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The current term of the Management Agreement was renewed during the period and expires on September 29, 2019 and is automatically renewed for successive
one
-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the
one
-year extension term only upon the affirmative vote of at least two-thirds of our independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to ARI or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least
180 days
prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the
24
-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by our independent directors in February 2018, which included a discussion of the Manager’s performance and the level of the management fees thereunder, we determined not to seek termination of the Management Agreement.
We incurred approximately
$9.5
million and
$26.6
million in base management fees under the Management Agreement for the three and nine months ended
September 30, 2018
, respectively, as compared to approximately
$8.3 million
and
$23.5 million
for the three and nine months ended
September 30, 2017
, respectively.
In addition to the base management fee, we are also responsible for reimbursing the Manager for certain expenses paid by the Manager on our behalf or for certain services provided by the Manager to us.
For the three and
nine months ended
September 30, 2018
, we paid expenses totaling
$0.6 million
and
$1.8
million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement. For the three and nine months ended
September 30, 2017
, we paid expenses totaling
$0.1
million and
$0.2
million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement. Expenses incurred by the Manager and reimbursed by us are reflected in the respective condensed consolidated statement of operations expense category or the condensed consolidated balance sheet based on the nature of the item.
Included in payable to related party on the condensed consolidated balance sheet at
September 30, 2018
and
December 31, 2017
are approximately
$9.5
million and
$8.2
million, respectively, for base management fees incurred but not yet paid under the Management Agreement.
Unconsolidated Joint Venture
In September 2014, through a wholly owned subsidiary, we 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"). In May 2017, we sold our remaining ownership interest in Champ LP, to unaffiliated third
parties. As such, in 2018 we no longer held any interest in Champ LP.
Loans receivable
In June, 2017, we increased our outstanding loan commitment through the acquisition of an additional
$25.0 million
of interests in an existing subordinate loan from a fund managed by an affiliate of the Manager, increasing our total outstanding loan commitment to
$100.0 million
. Furthermore, in September 2017 we funded an additional
$25.0 million
to acquire a portion of the same pre-development subordinate loan from a fund managed by an affiliate of the Manager, increasing our total outstanding loan commitment to
$125.0 million
. In May 2018, we increased our outstanding principal balance through the acquisition of an additional
$28.2
million interest in the same subordinate loan from a fund managed by an affiliate of the Manager. The pre-development subordinate loan is for the construction of a residential condominium building in New York, New York and is part of a
$300.0 million
subordinate loan.
In June, 2018, we increased our outstanding loan commitment through the acquisition of
£4.8
million (
$6.4
million assuming conversion into U.S. dollars) pari-passu interest in an existing subordinate loan from a fund managed by an affiliate of the Manager. The subordinate loan is secured by a healthcare portfolio located in the United Kingdom.
Note 13 – Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (as amended from time to time, the “LTIP”). The LTIP provides for grants of restricted common stock, restricted stock units (“RSUs”) and other equity-based awards up to an aggregate of
7.5%
of the issued and outstanding shares of our common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of our board of directors (the “Compensation Committee”) and all grants under the LTIP must be approved by the Compensation Committee.
We recognized stock-based compensation expense of
$4.0
million and
$11.4
million for the three and nine months ended
September 30, 2018
, respectively, related to restricted stock and RSU vesting, as compared to
$2.6
million and
$9.9
million for the three and nine months ended
September 30, 2017
, respectively, related to restricted stock and RSU vesting.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the
nine months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Restricted Stock
|
|
RSUs
|
|
Grant Date Fair Value ($ in thousands)
|
Outstanding at December 31, 2017
|
|
105,561
|
|
|
1,632,746
|
|
|
|
|
Grant
|
|
28,070
|
|
|
7,100
|
|
|
634
|
|
|
Vested
|
|
(24,840
|
)
|
|
(807
|
)
|
|
N/A
|
|
|
Forfeiture
|
|
—
|
|
|
(44,739
|
)
|
|
N/A
|
|
Outstanding at September 30, 2018
|
|
108,791
|
|
|
1,594,300
|
|
|
|
Below is a summary of restricted stock and RSU vesting dates as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
Vesting Year
|
Restricted Stock
|
|
RSU
|
|
Total Awards
|
2018
|
43,094
|
|
|
738,581
|
|
|
781,675
|
|
2019
|
60,803
|
|
|
557,394
|
|
|
618,197
|
|
2020
|
4,894
|
|
|
295,957
|
|
|
300,851
|
|
2021
|
—
|
|
|
2,368
|
|
|
2,368
|
|
Total
|
108,791
|
|
|
1,594,300
|
|
|
1,703,091
|
|
At
September 30, 2018
, we had unrecognized compensation expense of approximately
$1.1
million and
$19.6
million, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.
RSU Deliveries
During the three and
nine months ended
September 30, 2018
, we delivered
514
and
346,510
shares of common stock for
807
and
604,484
vested RSUs, respectively. We allow RSU participants to settle their tax liabilities with a reduction of their
share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on the condensed consolidated statement of changes in stockholders' equity. The adjustment was
$4.7
million for the
nine months ended
September 30, 2018
, and is included as a reduction of capital related to our equity incentive plan in the condensed consolidated statement of changes in stockholders' equity. There was
no
adjustment for the three months ended
September 30, 2018
.
Note 14 – Stockholders’ Equity
Our authorized capital stock consists of
450,000,000
shares of common stock,
$0.01
par value per share and
50,000,000
shares of preferred stock,
$0.01
par value per share. As of
September 30, 2018
,
133,765,392
shares of common stock were issued and outstanding,
6,770,393
shares of
8.00%
Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock ("Series B Preferred Stock") were issued and outstanding and
6,900,000
shares of
8.00%
Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") were issued and outstanding.
Dividends.
During
2018
, we declared the following dividends:
|
|
|
|
|
|
|
|
Three months ended
|
Dividend declared per share of:
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
Common Stock
|
$0.46
|
|
$0.46
|
|
$0.46
|
Series B Preferred Stock
|
0.50
|
|
0.50
|
|
0.50
|
Series C Preferred Stock
|
0.50
|
|
0.50
|
|
0.50
|
Common Stock Offerings.
During the first quarter of 2018, we completed a follow-on public offering of
15,525,000
shares of our common stock, at a price of
$17.77
per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately
$275.9
million after deducting the underwriting discount and estimated offering expenses.
During the third quarter of 2018, we issued
10,744,577
shares of our common stock related to exchanges and conversions of the 2019 Notes. Refer to "Note 9 - Convertible Senior Notes, Net" for a further discussion on the exchanges and conversions of the 2019 Notes.
Note 15 – Commitments and Contingencies
Legal Proceedings.
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced an action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No. 653251/2018) in New York Supreme Court. The complaint names as defendants (i) ACREFI Mortgage Lending, LLC, a subsidiary of the Company, (ii) the Company, and (iii) certain funds managed by Apollo, who are co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs allege that the defendants tortiously interfered with the contractual equity put right in the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project. The plaintiffs allege the loss of a
$70.0 million
investment as part of total damages of
$700.0 million
, which includes punitive damages. The defendants moved to dismiss the complaint on August 17, 2018, and the motion was fully briefed in October 2018. Oral argument is scheduled for February 2019. We believe the claims are without merit and plan to vigorously defend the case.
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 our former residential real estate portfolio, which we acquired in connection with the merger of Apollo Residential Mortgage, Inc. with and into the Company and subsequently sold in 2016. The Request sought 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. We fully cooperated with the Department of Justice, and were advised, by a letter dated May 2, 2018, that the Department of Justice did not intend to take any further actions in this matter as it relates to us.
Loan Commitments.
As described in "Note 5 - Commercial Mortgage and Subordinate Loans, Net," at
September 30, 2018
, we had
$884.2
million of unfunded commitments related to our commercial mortgage and subordinate loan portfolios.
Note 16 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of our financial instruments not carried at fair value on the condensed consolidated balance sheet at
September 30, 2018
and
December 31, 2017
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Cash
|
$
|
99,188
|
|
|
$
|
99,188
|
|
|
$
|
77,671
|
|
|
$
|
77,671
|
|
Commercial first mortgage loans, net
|
3,723,550
|
|
|
3,720,475
|
|
|
2,653,826
|
|
|
2,657,262
|
|
Subordinate loans, net
|
1,104,496
|
|
|
1,098,632
|
|
|
1,025,932
|
|
|
1,029,390
|
|
Secured debt arrangements
|
(2,013,617
|
)
|
|
(2,013,617
|
)
|
|
(1,345,195
|
)
|
|
(1,345,195
|
)
|
2019 Notes
|
(35,477
|
)
|
|
(39,660
|
)
|
|
(251,935
|
)
|
|
(267,506
|
)
|
2022 Notes
|
(334,697
|
)
|
|
(345,863
|
)
|
|
(332,962
|
)
|
|
(350,175
|
)
|
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and convertible senior notes, net are measured using observable Level I inputs as defined in "Note 3 - Fair Value Disclosure." Estimates of fair value for all other financial instruments in the table above are measured using significant estimates, or unobservable Level III inputs as defined in "Note 3 - Fair Value Disclosure."
Note 17 – Net Income per Share
ASC 260 "Earnings per share" requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.
The table below presents the computation of basic and diluted net income per share of common stock for the three and
nine months ended
September 30, 2018
and
2017
($ in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Basic Earnings
|
|
|
|
|
|
|
|
Net income
|
$
|
62,217
|
|
|
$
|
68,356
|
|
|
$
|
166,996
|
|
|
$
|
151,714
|
|
Less: Preferred dividends
|
(6,836
|
)
|
|
(11,148
|
)
|
|
(20,505
|
)
|
|
(29,768
|
)
|
Net income available to common stockholders
|
$
|
55,381
|
|
|
$
|
57,208
|
|
|
$
|
146,491
|
|
|
$
|
121,946
|
|
Less: Dividends on participating securities
|
(733
|
)
|
|
(620
|
)
|
|
(2,215
|
)
|
|
(1,884
|
)
|
Basic Earnings
|
$
|
54,648
|
|
|
$
|
56,588
|
|
|
$
|
144,276
|
|
|
$
|
120,062
|
|
|
|
|
|
|
|
|
|
Diluted Earnings
|
|
|
|
|
|
|
|
Net income
|
$
|
62,217
|
|
|
$
|
68,356
|
|
|
$
|
166,996
|
|
|
$
|
151,714
|
|
Less: Preferred dividends
|
(6,836
|
)
|
|
(11,148
|
)
|
|
(20,505
|
)
|
|
(29,768
|
)
|
Net income available to common stockholders
|
$
|
55,381
|
|
|
$
|
57,208
|
|
|
$
|
146,491
|
|
|
$
|
121,946
|
|
Add: Interest expense on Notes
|
6,746
|
|
|
N/A
|
|
|
25,607
|
|
|
N/A
|
|
Diluted Earnings
|
$
|
62,127
|
|
|
$
|
57,208
|
|
|
$
|
172,098
|
|
|
$
|
121,946
|
|
|
|
|
|
|
|
|
|
Number of Shares:
|
|
|
|
|
|
|
|
Basic weighted average shares of common stock outstanding
|
129,188,343
|
|
|
105,446,704
|
|
|
120,876,240
|
|
|
97,546,437
|
|
Diluted weighted average shares of common stock outstanding
|
153,918,435
|
|
|
106,812,721
|
|
|
150,424,889
|
|
|
98,919,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Attributable to common stockholders
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.42
|
|
|
$
|
0.54
|
|
|
$
|
1.19
|
|
|
$
|
1.23
|
|
Diluted
|
$
|
0.40
|
|
|
$
|
0.54
|
|
|
$
|
1.14
|
|
|
$
|
1.23
|
|
Prior to the three months ended
September 30, 2018
, we asserted our intent and ability to settle the principal amount of the Notes in cash and, as a result, the Notes did not have any impact on our diluted earnings per share. As of September 30, 2018, we no longer assert our intent to fully settle the principal amount of the Notes in cash upon conversion. Accordingly, the dilutive effect to earnings per share for the current year periods is determined using the "if-converted" method whereby interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three and
nine months ended
September 30, 2018
,
24,730,092
and
29,548,649
weighted average potentially issuable shares from the Notes, respectively, were included in the dilutive earnings per share denominator. Refer to "Note 9 - Convertible Senior Notes, Net" for further discussion.
For the three and
nine months ended
September 30, 2018
,
1,593,070
and
1,617,398
weighted average unvested RSUs, respectively, 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, 2017
,
1,366,017
and
1,373,252
weighted average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 18 – Subsequent Events
Investment activity
. Subsequent to the end of the quarter, we committed capital of
$387.0 million
,
$273.2 million
of which was funded at closing, of first mortgage loans.
In addition, we funded approximately
$23.9 million
for loans closed prior to the quarter.
Loan Repayments. S
ubsequent to the end of the quarter, we received approximately
$180.9
million from loan repayments.
On October 5, 2018, we completed a public offering of
$230.0 million
aggregate principal amount of
5.375%
Convertible Senior Notes due 2023 (the "2023 Notes"), which included
$30.0 million
due to underwriters’ exercise in full of their option to purchase additional 2023 Notes. The public offering generated net proceeds of approximately
$223.7 million
, after deducting the underwriting discount and offering expenses. The 2023 Notes bear interest at a rate of
5.375%
per annum. The conversion rate is initially equal to
48.7187
shares of common stock per
$1,000
principal amount of notes, which is equivalent to a conversion price of approximately
$20.53
per share of common stock, representing an approximate
10%
conversion premium to the closing price of our common stock of
$18.66
per share on October 2, 2018.