Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the "Company," "ARI," "we," "us" and "our") is a corporation that has elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We were formed in Maryland on June 29, 2009, commenced operations on September 29, 2009 and are externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, Inc. (together with its subsidiaries, "Apollo").
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain our tax qualification as a REIT, we are required to distribute at least 90% of our taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates include loan loss allowances. 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, 2020 ("Annual Report"), 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, 2021 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.
Loans Held For Sale
Loans are classified as held for sale if there is a reasonable expectation to sell them in the short-term following the reporting date. Loans classified as held for sale are carried at the lower of amortized cost or fair value, unless the fair value election was made at origination. Due to the valuation methodology of held for sale loans there is no General CECL Allowance for these loans.
Risks and Uncertainties
During the first quarter of 2020, there was a global outbreak of a novel coronavirus ("COVID-19"), which was declared by the World Health Organization as a pandemic. The ongoing COVID-19 pandemic in many countries continues to adversely impact global economic activity and has contributed to significant volatility in financial markets. In response to COVID-19, the United States and numerous other countries and organizations have implemented a variety of actions to mobilize efforts to mitigate the ongoing and expected impact. These responses to COVID-19 have disrupted economic activities and could have a continued significant adverse effect on economic and market conditions. Although more normalized activities have resumed, we are not in a position to estimate the ultimate impact this will have on our business and the economy as a whole. We believe the estimates used in preparing our financial statements and related footnotes are reasonable and supportable based on the best information available to us as of September 30, 2021. The uncertainty surrounding COVID-19 may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and, as a result, actual results may vary significantly from estimates.
Real Estate Owned (and related debt)
In order to maximize recovery against a defaulted loan, we may assume legal title or physical possession of the underlying collateral through foreclosure or the execution of a deed in lieu of foreclosure. Foreclosed properties are generally recognized at fair value and the assets and liabilities are presented separately when legal title or physical possession is assumed. If the fair value of the real estate is lower than the carrying value of the loan, the difference, along with any previously recorded Specific CECL Allowances, are recorded as a realized loss on investments in the consolidated statement of operations.
Acquisition of real estate is accounted for using the acquisition method under Accounting Standards Codification ("ASC") Topic 805, "Business Combinations." We recognize and measure identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, if applicable, based on their relative fair values. If applicable, we recognize and measure intangible assets and expense acquisition-related costs in the periods in which the costs are incurred and the services are received.
We evaluate real estate owned, held for sale for subsequent decrease in fair value, which is recorded as an impairment. Real estate owned is classified as held for sale in the period in which the six criteria under ASC Topic 360, "Property, Plant, and Equipment" are met: (1) we commit to a plan and have the authority to sell the asset; (2) the asset is available for sale in its current condition; (3) we have initiated an active marketing plan to locate a buyer for the asset; (4) the sale of the asset is both probable and expected to qualify for full sales recognition within a period of 12 months; (5) the asset is being actively marketed for sale at a price that is reflective of its current fair value; and (6) we do not anticipate changes to our plan to sell the asset. Once a real estate asset is classified as held for sale, depreciation expense is no longer recorded.
Real estate assets that are acquired for investment are assumed at their estimated fair value at acquisition and presented net of accumulated depreciation and impairment charges, if any. Upon acquisition, we allocate the value of acquired real estate assets based on the fair value of the acquired land, building, furniture, fixtures and equipment, and intangible assets, if applicable. Real estate assets are depreciated using the straight-line method over estimated useful lives of up to 40 years for buildings and up to 8 years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the real estate asset are capitalized and depreciated over their estimated useful lives. The cost of ordinary repairs and maintenance are expensed as incurred.
Real estate assets are evaluated for impairment on a quarterly basis. We consider the following factors when performing our impairment analysis: (1) Management, having the authority to approve the action, commits to a plan to sell the asset; (2) significant negative industry and economic outlook or trends; (3) expected material costs necessary to extend the life or operate the real estate asset; and (4) our ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows to be generated by the real estate asset over the estimated remaining holding period is less than the carrying value of such real estate asset. An impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value. When determining the fair value of a real estate asset, we make certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon our estimate of a capitalization rate and discount rate.
Revenue Recognition
Interest income on our lending assets is accrued based on the actual coupon rate adjusted for accretion of any purchase discounts, the amortization of any purchase premiums and the accretion of any deferred fees, in accordance with GAAP. Loans that are significantly past due may be placed on non-accrual if we determine it is probable that we will not collect all payments which are contractually due. When a loan is placed on non-accrual, interest is only recorded as interest income when it's received. Under certain circumstances, we may apply cost recovery under which interest collected on a loan is a reduction to its amortized cost. The cost recovery method will no longer apply if collection of all principal and interest is reasonably assured. A loan may be placed back on accrual status if we determine it is probable that we will collect all payments which are contractually due.
Operating revenue from real estate owned that is a hotel property represents revenue associated with the operations of the hotel property. Revenue from the operation of the hotel property is recognized when guestrooms are occupied or services have been rendered. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales and other hotel revenues.
Gains or losses on the sale of real estate assets, including residential property, are recognized in accordance with ASC 610-20, "Gains and Losses from the Derecognition of Nonfinancial Assets". We primarily use specific identification method to allocate costs.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06 "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging – Contracts in Entity’s Own Equity" ("ASU 2020-06"). The intention of ASU 2020-06 is to address the complexities in accounting for certain financial instruments with a debt and equity component. Under ASU 2020-06, the number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for the computation of diluted "Earnings per share" under ASC 260. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. We are currently assessing the impact this guidance will have on our condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference London Interbank Offered Rate ("LIBOR") or other reference rates expected to be discontinued as a result of reference rate reform. This guidance is optional and may be elected through December 31, 2022 using a prospective application on all eligible contract modifications. We have loan agreements, debt agreements, and an interest rate cap that incorporate LIBOR as a referenced interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial markets. We have not adopted any of the optional expedients or exceptions through September 30, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions.
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 value. Market-based or observable inputs are the preferred source of values, followed by valuation models using management's assumptions in the absence of market-based or observable 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 valuation methods used by 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 instrument. Our derivative instruments are classified as Level II in the fair value hierarchy.
The fair values of foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries.
The fair value of our interest rate cap is determined by 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 interest rate cap. The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on a third party expert's expectation of future interest rates derived from observable market interest rate curves and volatilities.
The following table summarizes the levels in the fair value hierarchy into which our assets and liabilities with recurring fair value measurements were categorized as of September 30, 2021 and December 31, 2020 ($ in thousands):
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|
|
|
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|
|
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|
|
|
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|
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|
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|
|
Fair Value as of September 30, 2021
|
|
Fair Value as of December 31, 2020
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|
|
Level I
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|
Level II
|
|
Level III
|
|
Total
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
Recurring fair value measurements:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward, net
|
$
|
—
|
|
|
$
|
9,482
|
|
|
$
|
—
|
|
|
$
|
9,482
|
|
|
$
|
—
|
|
|
$
|
(31,375)
|
|
|
$
|
—
|
|
|
$
|
(31,375)
|
|
|
Interest rate cap asset
|
—
|
|
|
305
|
|
|
—
|
|
|
305
|
|
|
—
|
|
|
134
|
|
|
—
|
|
|
134
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|
|
Total financial instruments
|
$
|
—
|
|
|
$
|
9,787
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|
|
$
|
—
|
|
|
$
|
9,787
|
|
|
$
|
—
|
|
|
$
|
(31,241)
|
|
|
$
|
—
|
|
|
$
|
(31,241)
|
|
Non-recurring Fair Value Measurements
We are required to record real estate owned, a nonfinancial asset, at fair value on a non-recurring basis in accordance with GAAP. If the real estate is classified as held for sale, the fair value of our real estate owned and the related debt is determined by using the market approach, less costs to sell. The market approach utilizes the fair value of similar assets and liabilities in the marketplace as well as an internal analysis as to selling price of specific assets and liabilities, which we deem to be significant unobservable inputs. As such the fair value of real estate owned, held for sale and the related debt falls within Level III of the fair value hierarchy.
On May 24, 2021, we acquired legal title to a full-service luxury hotel through a deed-in-lieu of foreclosure, which is classified as real estate owned on our condensed consolidated balance sheet. We assumed the hotel’s assets and liabilities, including a $110.0 million mortgage loan. We repaid the mortgage loan at par and now hold the property unlevered.
At the time of acquisition, we determined the fair value of the real estate owned to be $154.3 million. No impairments have been recorded as of September 30, 2021.
Refer to "Note 5 - Real Estate Owned and Related Debt" for further discussion.
Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net
Our loan portfolio was comprised of the following at September 30, 2021 and December 31, 2020 ($ in thousands):
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Loan Type
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|
September 30, 2021
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|
December 31, 2020
|
|
Commercial mortgage loans, net (1)
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|
$
|
6,397,772
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|
|
$
|
5,451,084
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|
|
Subordinate loans and other lending assets, net
|
|
817,759
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|
|
1,045,893
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|
|
Subordinate loan, held for sale
|
|
41,773
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|
|
—
|
|
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Carrying value, net
|
|
$
|
7,257,304
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|
|
$
|
6,496,977
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|
———————
(1)Includes $152.5 million and $136.1 million in 2021 and 2020, respectively, of contiguous financing structured as subordinate loans.
Our loan portfolio consisted of 97% and 95% floating rate loans, based on amortized cost, as of September 30, 2021 and December 31, 2020, respectively.
Activity relating to our loan portfolio, for the nine months ended September 30, 2021, was as follows ($ in thousands):
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|
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|
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Principal
Balance
|
|
Deferred Fees/Other Items (1)
|
|
Specific CECL Allowance
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|
Carrying Value, Net(2)
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|
December 31, 2020
|
|
$
|
6,728,424
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|
|
$
|
(18,345)
|
|
|
$
|
(175,000)
|
|
|
$
|
6,535,079
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|
|
New loan fundings
|
|
1,463,619
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|
|
—
|
|
|
—
|
|
|
1,463,619
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|
|
Add-on loan fundings (3)
|
|
377,355
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|
|
—
|
|
|
—
|
|
|
377,355
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|
|
Loan repayments and sales
|
|
(1,021,777)
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|
|
—
|
|
|
—
|
|
|
(1,021,777)
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|
|
Gain (loss) on foreign currency translation
|
|
(74,289)
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|
|
812
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|
|
—
|
|
|
(73,477)
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|
|
Specific CECL Allowance
|
|
—
|
|
|
—
|
|
|
30,000
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|
|
30,000
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|
|
Realized loss on investment
|
|
(20,000)
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|
|
—
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|
|
—
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|
|
(20,000)
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|
|
Transfer to real estate owned
|
|
(45,448)
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|
|
159
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|
|
—
|
|
|
(45,289)
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|
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|
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|
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|
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|
|
|
|
|
|
|
|
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|
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|
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Deferred fees and other items
|
|
—
|
|
|
(21,218)
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|
|
—
|
|
|
(21,218)
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|
|
PIK interest and amortization of fees
|
|
47,353
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|
|
18,343
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|
|
—
|
|
|
65,696
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|
|
September 30, 2021
|
|
$
|
7,455,237
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|
|
$
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(20,249)
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|
|
$
|
(145,000)
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|
|
$
|
7,289,988
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|
|
General CECL Allowance (4)
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|
|
|
|
|
|
(32,684)
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Carrying value, net
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|
|
|
|
|
|
|
$
|
7,257,304
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———————
(1)Other items primarily consist of purchase discounts or premiums, cost recovery interest, exit fees, deferred origination expenses, and the activity of unconsolidated joint ventures.
(2)December 31, 2020 carrying value excludes General CECL Allowance.
(3)Represents fundings for loans closed prior to 2021.
(4)$2.2 million of the General CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheet.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
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September 30, 2021
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December 31, 2020
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Number of loans
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66
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|
|
67
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|
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Principal balance
|
|
$
|
7,455,237
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|
|
$
|
6,728,424
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Carrying value, net
|
|
$
|
7,257,304
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|
|
$
|
6,496,977
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Unfunded loan commitments (1)
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|
$
|
1,182,992
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|
|
$
|
1,399,989
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Weighted-average cash coupon (2)
|
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4.8
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%
|
|
5.7
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%
|
|
Weighted-average remaining fully-extended term (3)
|
|
2.7 years
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|
2.8 years
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|
Weighted-average expected term (4)
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|
1.9 years
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|
2.1 years
|
———————
(1)Unfunded loan commitments are funded to finance construction costs, tenant improvements, leasing commissions, or carrying costs. 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. For loans placed on non-accrual or cost recovery the interest rate used in calculating weighted-average cash coupon is 0%.
(3)Assumes all extension options are exercised.
(4)Expected term represents our estimated timing of repayments as of September 30, 2021 and December 31, 2020, respectively. Excludes risk-rated 5 loans.
Property Type
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
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|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Property Type
|
|
Carrying
Value
|
|
% of
Portfolio(1)
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|
Carrying
Value
|
|
% of
Portfolio(1)
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Office
|
|
$
|
1,798,964
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|
|
24.7
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%
|
|
$
|
1,911,145
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|
|
29.2
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%
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|
Hotel
|
|
1,642,935
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|
|
22.5
|
|
|
1,576,369
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|
|
24.1
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|
Residential-for-sale
|
|
859,749
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|
|
11.8
|
|
|
982,838
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|
|
15.0
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|
|
Urban Retail
|
|
710,597
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|
|
9.7
|
|
|
655,456
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|
|
10.0
|
|
|
Industrial
|
|
584,492
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|
|
8.0
|
|
|
228,918
|
|
|
3.5
|
|
|
Healthcare
|
|
319,638
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|
|
4.4
|
|
|
369,676
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|
|
5.7
|
|
|
Mixed Use
|
|
241,655
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|
|
3.3
|
|
|
217,160
|
|
|
3.3
|
|
|
Urban Predevelopment
|
|
120,000
|
|
|
1.6
|
|
|
298,909
|
|
|
4.6
|
|
|
Other
|
|
1,011,958
|
|
|
14.0
|
|
|
294,608
|
|
|
4.6
|
|
|
Total
|
|
$
|
7,289,988
|
|
|
100.0
|
%
|
|
$
|
6,535,079
|
|
|
100.0
|
%
|
|
General CECL Allowance (2)
|
|
(32,684)
|
|
|
|
|
(38,102)
|
|
|
|
|
Carrying value, net
|
|
$
|
7,257,304
|
|
|
|
|
$
|
6,496,977
|
|
|
|
———————
(1)Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.
(2)$2.2 million and $3.4 million of the General CECL Allowance for 2021 and 2020, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheet.
Geography
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Geographic Location
|
|
Carrying
Value
|
|
% of
Portfolio(1)
|
|
Carrying
Value
|
|
% of
Portfolio(1)
|
|
New York City
|
|
$
|
2,189,492
|
|
|
30.0
|
%
|
|
$
|
2,370,337
|
|
|
36.3
|
%
|
|
United Kingdom
|
|
1,519,089
|
|
|
20.8
|
|
|
1,263,264
|
|
|
19.3
|
|
|
Southeast
|
|
708,395
|
|
|
9.7
|
|
|
581,301
|
|
|
8.9
|
|
|
Midwest
|
|
736,100
|
|
|
10.1
|
|
|
552,537
|
|
|
8.5
|
|
|
West
|
|
493,049
|
|
|
6.8
|
|
|
749,985
|
|
|
11.5
|
|
|
Northeast
|
|
140,115
|
|
|
1.9
|
|
|
103,567
|
|
|
1.6
|
|
|
Other
|
|
1,503,748
|
|
|
20.7
|
|
|
914,088
|
|
|
13.9
|
|
|
Total
|
|
$
|
7,289,988
|
|
|
100.0
|
%
|
|
$
|
6,535,079
|
|
|
100.0
|
%
|
|
General CECL Allowance (2)
|
|
(32,684)
|
|
|
|
|
(38,102)
|
|
|
|
|
Carrying value, net
|
|
$
|
7,257,304
|
|
|
|
|
$
|
6,496,977
|
|
|
|
———————
(1)Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.
(2)$2.2 million and $3.4 million of the General CECL Allowance for 2021 and 2020, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheet.
Risk Rating
We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan to value ("LTV") ratio, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:
1. Very low risk
2. Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or an impairment has been recorded
The following tables allocate the carrying value of our loan portfolio based on our internal risk ratings and date of origination at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Year Originated
|
|
Risk Rating
|
|
Number of Loans
|
|
Total
|
|
% of Portfolio
|
|
|
2021
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
Prior
|
|
1
|
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
|
1
|
|
|
32,000
|
|
|
0.4
|
%
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,000
|
|
|
3
|
|
61
|
|
|
6,776,238
|
|
|
93.0
|
%
|
|
|
1,335,670
|
|
|
621,486
|
|
|
2,607,658
|
|
|
1,037,008
|
|
|
531,930
|
|
|
642,486
|
|
|
4
|
|
1
|
|
|
81,980
|
|
|
1.1
|
%
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81,980
|
|
|
—
|
|
|
5
|
|
3
|
|
|
399,770
|
|
|
5.5
|
%
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
174,525
|
|
|
225,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
66
|
|
|
$
|
7,289,988
|
|
|
100.0
|
%
|
|
|
$
|
1,335,670
|
|
|
$
|
621,486
|
|
|
$
|
2,607,658
|
|
|
$
|
1,037,008
|
|
|
$
|
788,435
|
|
|
$
|
899,731
|
|
|
General CECL Allowance
|
|
(32,684)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value, net
|
$
|
7,257,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Risk Rating
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Year Originated
|
|
Risk Rating
|
|
Number of Loans
|
|
Total
|
|
% of Portfolio
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
1
|
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
|
1
|
|
|
32,000
|
|
|
0.5
|
%
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,000
|
|
|
3
|
|
62
|
|
|
6,129,541
|
|
|
93.8
|
%
|
|
|
469,586
|
|
|
2,661,017
|
|
|
1,398,479
|
|
|
868,514
|
|
|
88,710
|
|
|
643,235
|
|
|
4
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
4
|
|
|
373,538
|
|
|
5.7
|
%
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
131,050
|
|
|
115,419
|
|
|
127,069
|
|
|
Total
|
|
67
|
|
|
$
|
6,535,079
|
|
|
100.0
|
%
|
|
|
$
|
469,586
|
|
|
$
|
2,661,017
|
|
|
$
|
1,398,479
|
|
|
$
|
999,564
|
|
|
$
|
204,129
|
|
|
$
|
802,304
|
|
|
General CECL Allowance
|
|
(38,102)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value, net
|
$
|
6,496,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Risk Rating
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Expected Credit Losses ("CECL")
In accordance with ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which we refer to as the "CECL Standard," we record allowances for held-to-maturity debt securities that are deducted from the carrying amount of the assets to preset the net carrying value of the amounts expected to be collected on the assets. We record loan specific allowances as a practical expedient under the CECL Standard ("Specific CECL Allowance"), which we apply to assets that are collateral dependent and where the borrower or sponsor is experiencing financial difficulty. For the remainder of the portfolio, we record a general allowance ("General CECL Allowance", and together with the Specific CECL Allowance, "CECL Allowances") in accordance with the CECL Standard on a collective basis by assets with similar risk characteristics. We have elected to use the weighted average remaining maturity ("WARM") method in determining a General CECL Allowance for a majority of our portfolio. In the future, we may use other acceptable methods, such as a probability-of-default/loss-given-default method.
Specific CECL Allowance
For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we have elected to apply a practical expedient in accordance with the CECL Standard in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a Specific CECL Allowance. The Specific CECL Allowance is determined as the difference between the fair value of the underlying collateral and the carrying value of the loan (prior to the Specific CECL Allowance). When the repayment or satisfaction of a loan is dependent on a sale, rather than operations, of the collateral, the fair value is adjusted for the estimated cost to sell the collateral. The fair value of the underlying collateral is determined by using method(s) such as discounted cash flow, the market approach, or direct capitalization approach. The key unobservable inputs used to determine the fair value of the underlying collateral may vary depending on the information available to us and market conditions as of the valuation date.
We regularly evaluate the extent and impact of any credit migration 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 liquidation value of the underlying collateral. 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 impairment 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.
The following table summarizes the loans with Specific CECL Allowances that have been recorded on our portfolio as of September 30, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Property type
|
Location
|
Amortized cost prior to Specific CECL Allowance
|
Specific CECL Allowance(1)
|
Amortized cost
|
Interest recognition status/ as of date
|
|
Mortgage
|
|
|
|
|
|
|
|
Multifamily Development(2)(3)
|
Brooklyn, NY
|
$184,525
|
$10,000
|
$174,525
|
Cost Recovery/ 3/1/2020
|
|
|
Urban Predevelopment(2)(4)
|
Miami, FL
|
188,000
|
68,000
|
120,000
|
Cost Recovery/ 3/1/2020
|
|
|
Retail Center(5)(6)
|
Cincinnati, OH
|
172,245
|
67,000
|
105,245
|
Cost Recovery/ 10/1/2019
|
|
Mortgage total:
|
|
$544,770
|
$145,000
|
$399,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
———————
(1)During the three months ended September 30, 2021 there was no change to our Specific CECL Allowances. For the nine months ended September 30, 2021 we reversed $30.0 million of previously recorded Specific CECL Allowances. This is comprised of $20.0 million of CECL reversals as discussed below and the realization of $10.0 million of previously recorded Specific CECL Allowance as a realized loss.
(2)The fair value of this collateral was determined by assuming rent per square foot ranging from $48 to $215 and a capitalization rate ranging from 5.5% to 5.0%.
(3)During the three and nine months ended September 30, 2021, $0 and $20.0 million of previously recorded Specific CECL Allowance was reversed primarily related to a more favorable market outlook as compared to when the Specific CECL Allowance was first recorded with respect to the loan.
(4)In October 2020, we entered into a joint venture which owns the underlying properties that secure our $185.3 million first mortgage loan. The entity in which we own an interest, and which owns the underlying properties was deemed to be a variable interest entity ("VIE") and we determined that we are not the primary beneficiary of that VIE. The related profit and loss from the joint venture was immaterial for the three and nine months ended September 30, 2021.
(5)The fair value of retail collateral was determined by applying a capitalization rate of 8.3%.
(6)The entity, in which we own an interest and which owns the underlying property, was deemed to be a VIE and we determined that we are not the primary beneficiary of that VIE. As of September 30, 2021 we had recorded $67.0 million of Specific CECL Allowance. During the three and nine months ended September 30, 2021, $0.2 million and $1.0 million, respectively, of interest paid was applied towards reducing the carrying value of the loan.
General CECL Allowance
In determining the General CECL Allowance using the WARM method, an annual historical loss rate, adjusted for macroeconomic estimates, is applied to the amortized cost of an asset, or pool of assets, over each subsequent period for the assets' remaining expected life. We considered various factors including (i) historical loss experience in the commercial real estate lending market, (ii) timing of expected repayments and satisfactions, (iii) expected future funding, (iv) capital subordinate to us when we are the senior lender, (v) capital senior to us when we are the subordinate lender, and (vi) our current and future view of the macroeconomic environment for a reasonable and supportable forecast period. The CECL Standard requires the use of significant judgment to arrive at an estimated credit loss. There is significant uncertainty related to future macroeconomic conditions as the result of COVID-19.
We derived an annual historical loss rate based on a commercial mortgage backed securities ("CMBS") database with historical losses from 1998 through the third quarter of 2021 provided by a third party, Trepp LLC. We applied various filters to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. The annual historical loss rate was further adjusted to reflect our expectations of the macroeconomic environment for a reasonable and supportable forecast period which we have determined to be one year. In assessing the macroeconomic environment, we consider macroeconomic factors, including unemployment rate, commercial real estate prices, and market liquidity. We compared the historical data for each metric to historical commercial real estate losses in order to determine the correlation of the data. We used projections, obtained from third-party service providers, of each factor to approximate the impact the macroeconomic outlook may have on our loss rate.
The General CECL Allowance on subordinate loans is calculated by incorporating both the loan balance of the position(s) of the structurally senior third-party lender(s) and the balance of our subordinate loan(s). The subordinate loans, by virtue of being the first loss position, are required to absorb losses prior to the senior position(s) being impacted, resulting in a higher percentage allowance attributable to the subordinate loan. The General CECL Allowance on unfunded loan commitments is time-weighted based on our expected commitment to fund such obligations. The General CECL Allowance on unfunded commitments is recorded as a liability on our condensed consolidated balance sheet within accounts payable, accrued expenses and other liabilities.
Although our secured debt obligations and senior secured term loan financing have a minimum tangible net worth maintenance covenant, the General CECL Allowance has no impact on these covenants as we are permitted to add back the
General CECL Allowance for the computation of tangible net worth as defined in the respective agreements.
The following schedule sets out our General CECL Allowance as of September 30, 2021 and December 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Commercial mortgage loans, net
|
|
$
|
18,071
|
|
|
$
|
17,012
|
|
|
Subordinate loans and other lending assets, net
|
|
14,613
|
|
|
21,090
|
|
|
Unfunded commitments(1)
|
|
2,193
|
|
|
3,365
|
|
|
Total General CECL Allowance
|
|
$
|
34,877
|
|
|
$
|
41,467
|
|
———————
(1)The General CECL Allowance on unfunded commitments is recorded as a liability on our condensed consolidated balance sheet within accounts payable, accrued expenses and other liabilities
We have made an accounting policy election to exclude $35.4 million accrued interest receivable, included in Other Assets on our condensed consolidated balance sheet, from the amortized cost basis of the related commercial mortgage loans and subordinate loans and other lending assets in determining the General CECL Allowance as any uncollectible accrued interest receivable is written off in a timely manner. We discontinue accruing interest on loans if we deem the interest to be uncollectible with any previously accrued uncollected interest on the loan charged to interest income in the same period. Under certain circumstances, we may apply the cost recovery method under which interest collected on a loan reduces the loan's amortized cost. The amortized cost basis for loans on cost recovery was $399.8 million and $373.5 million as of September 30, 2021 and December 31, 2020, respectively. For the three and nine months ended September 30, 2021 and 2020, we received $0.2 million and $1.0 million and $0.3 million and $1.6 million, respectively, in interest that reduced amortized cost under the cost recovery method.
In November 2020, the borrower under a £309.2 million commercial mortgage loan ($422.7 million assuming conversion into U.S. Dollars ("USD")), of which we own £247.5 million ($338.4 million assuming conversion into USD), secured by an urban retail property located in London, United Kingdom, entered into administration triggering an event of default. In accordance with the loan agreement, we are entitled to collect default interest in addition to the contractual interest we had been earning. We evaluated the loan for collectability and determined that, as of September 30, 2021, no Specific CECL Allowance was warranted and have continued to accrue all interest owed to us, including default interest. As of September 30, 2021, the loan had an amortized cost basis of £260.6 million ($351.1 million assuming conversion into USD).
We own three mezzanine loans which had an aggregate amortized cost at September 30, 2021 of $451.2 million (inclusive of $318.6 million of principal and $130.5 million of payment-in-kind ("PIK") interest) and are secured by the same residential-for-sale property currently under construction in Manhattan, NY. These loans include (i) a $234.3 million senior mezzanine loan (“Senior Mezzanine Loan”), (ii) a $134.9 million junior mezzanine loan ("Junior Mezzanine A Loan"), and (iii) an $82.0 million junior mezzanine loan (“Junior Mezzanine B Loan", Junior Mezzanine A Loan and Junior Mezzanine B Loan, collectively referred to as "Junior Mezzanine Loan”). The Senior Mezzanine Loan and Junior Mezzanine A Loan are risk rated 3 and the Junior Mezzanine B Loan is risk rated 4.
During the third quarter of 2021, a vehicle (the "Seller") managed by an affiliate of the Manager transferred its Junior Mezzanine B Loan position to the Company and in connection with this transfer, one of the property’s subordinate capital providers paid the Seller a price representing the Seller’s original principal balance on the Junior Mezzanine B Loan position with the Seller agreeing to forego its accrued interest on the Junior Mezzanine B Loan.
In conjunction with this transaction, the Company and the subordinate capital provider have agreed to a waterfall sharing arrangement pursuant to which, rather than the Company receiving interest it otherwise would have been entitled to after July 1, 2021 on the Junior Mezzanine Loan, proceeds received from the sale or refinance of the underlying collateral, after repayment to priority lenders under the waterfall, will be shared between the Company and the subordinate capital provider at an agreed upon allocation. As such, we opted to cease accruing interest on the Junior Mezzanine Loan as of July 1, 2021 and will resume doing so when we deem appropriate.
Accrued interest is past due 90 or more days for loans with an amortized cost basis of $750.9 million as of September 30, 2021. As of December 31, 2020, the amortized cost basis for loans with interest between 30 and 59 days past due was $19.0 million and the amortized cost basis for loans with 90 or more days past due was $711.9 million.
The following schedule illustrates the quarterly changes in CECL Allowances for the nine months ended September 30, 2021 and 2020, respectively ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific CECL Allowance
|
|
General CECL Allowance
|
|
Total CECL Allowance
|
|
CECL Allowance as % of Amortized Cost
|
|
|
|
|
Funded
|
Unfunded
|
Total
|
|
|
General
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
$
|
175,000
|
|
|
$
|
38,102
|
|
$
|
3,365
|
|
$
|
41,467
|
|
|
$
|
216,467
|
|
|
0.67
|
%
|
3.23
|
%
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 Allowance (Reversals)
|
—
|
|
|
(1,667)
|
|
429
|
|
(1,238)
|
|
|
(1,238)
|
|
|
|
|
|
March 31, 2021
|
$
|
175,000
|
|
|
$
|
36,435
|
|
$
|
3,794
|
|
$
|
40,229
|
|
|
$
|
215,229
|
|
|
0.62
|
%
|
3.06
|
%
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 Allowance (Reversals)
|
(20,000)
|
|
|
1,764
|
|
(1,350)
|
|
414
|
|
|
(19,586)
|
|
|
|
|
|
|
Write-offs
|
(10,000)
|
|
|
—
|
|
—
|
|
—
|
|
|
(10,000)
|
|
|
|
|
|
June 30, 2021
|
$
|
145,000
|
|
|
$
|
38,199
|
|
$
|
2,444
|
|
$
|
40,643
|
|
|
$
|
185,643
|
|
|
0.62
|
%
|
3.06
|
%
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 (Reversals)
|
—
|
|
|
(5,515)
|
|
(251)
|
|
(5,766)
|
|
|
(5,766)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
$
|
145,000
|
|
|
$
|
32,684
|
|
$
|
2,193
|
|
$
|
34,877
|
|
|
$
|
179,877
|
|
|
0.51
|
%
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific CECL Allowance(1)
|
|
General CECL Allowance
|
|
Total CECL Allowance
|
|
CECL Allowance as % of Amortized Cost
|
|
|
|
|
Funded
|
Unfunded
|
Total
|
|
|
General
|
Total
|
|
December 31, 2019
|
$
|
56,981
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
56,981
|
|
|
—
|
%
|
—
|
%
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020 - Adoption of CECL Standard
|
—
|
|
|
27,779
|
|
3,088
|
|
30,867
|
|
|
30,867
|
|
|
|
|
|
|
Q1 Allowances
|
150,000
|
|
|
30,494
|
|
2,971
|
|
33,465
|
|
|
183,465
|
|
|
|
|
|
March 31, 2020
|
$
|
206,981
|
|
|
$
|
58,273
|
|
$
|
6,059
|
|
$
|
64,332
|
|
|
$
|
271,313
|
|
|
1.08
|
%
|
4.05
|
%
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 Allowances (Reversals)
|
5,500
|
|
|
(13,729)
|
|
(1,940)
|
|
(15,669)
|
|
|
(10,169)
|
|
|
|
|
|
|
Write-offs
|
(15,000)
|
|
|
—
|
|
—
|
|
—
|
|
|
(15,000)
|
|
|
|
|
|
June 30, 2020
|
$
|
197,481
|
|
|
$
|
44,544
|
|
$
|
4,119
|
|
$
|
48,663
|
|
|
$
|
246,144
|
|
|
0.81
|
%
|
3.71
|
%
|
|
Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 Reversals
|
(550)
|
|
|
(5,268)
|
|
(524)
|
|
(5,792)
|
|
|
(6,342)
|
|
|
|
|
|
September 30, 2020
|
$
|
196,931
|
|
|
$
|
39,276
|
|
$
|
3,595
|
|
$
|
42,871
|
|
|
$
|
239,802
|
|
|
0.71
|
%
|
3.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
———————
(1)As of December 31, 2019, amount represents specific loan loss provisions recorded on assets before the adoption of the CECL Standard. After the adoption of the CECL Standard on January 1, 2020, amounts represent Specific CECL Allowances.
The General CECL Allowance decreased by $5.8 million during the three months ended September 30, 2021. The decrease is primarily related to portfolio seasoning.
We recognized PIK interest of $10.2 million and $40.7 million for the three and nine months ended September 30, 2021, respectively, and $12.5 million and $37.3 million for the three and nine months ended September 30, 2020, respectively.
We recognized $0.6 million and $1.2 million in pre-payment penalties and accelerated fees for the three and nine months ended September 30, 2021, respectively. We recognized $0 and $0.2 million in pre-payment penalties and accelerated fees for the three and nine months ended September 30, 2020, respectively.
We recognized $3.7 million of shared appreciation fees for the three and nine months ended September 30, 2021 related to a first mortgage loan secured by a portfolio of multifamily assets located in the United States, which is recorded in other income in the condensed consolidated statement of operations.
Our portfolio includes two other lending assets, which are subordinate risk retention interests in securitization vehicles. The underlying mortgages related to our subordinate risk retention interests are secured by a portfolio of properties located throughout the United States. Our maximum exposure to loss from the subordinate risk retention interests is limited to the book
value of such interests of $64.6 million as of September 30, 2021. These interests have a weighted average maturity of 4.7 years. We are not obligated to provide, and do not intend to provide financial support to these subordinate risk retention interests. Both interests are accounted for as held-to-maturity and recorded at carrying value on our condensed consolidated balance sheet.
Loan Sales
In the first quarter of 2020, we sold £62.2 million ($81.3 million assuming conversion into USD) in a mezzanine loan and £50.0 million ($65.3 million assuming conversion into USD) unfunded commitment of a senior mortgage secured by a mixed-use property in London, United Kingdom to a fund managed by an affiliate of the Manager, that was originated by us in December 2019. We recorded no gain or loss related to this sale.
In the second quarter of 2020, we sold interests in three construction loans, with aggregate commitments of $376.9 million (of which approximately $127.0 million was funded at the time of sale). The sales were made to entities managed by affiliates of the Manager. We recorded a loss of approximately $1.4 million in connection with these sales.
These transactions were evaluated under ASC 860, "Transfers and Servicing," and we determined that they qualify as sales and accounted for them as such.
Held for Sale
Due to our expectation to sell one of our subordinate loans, we reclassified it to held for sale. The loan is collateralized by a mixed use property located in Cleveland, OH, and had an amortized cost of $41.8 million as of September 30, 2021. The loan has a risk rating of 3.
Note 5 – Real Estate Owned and Related Debt
Real Estate Held for Sale
In 2017, we originated a subordinate loan junior to a $33.0 million third-party mortgage, secured by a hotel in Anaheim, CA. In December 2020, due to non-performance, we assumed legal title through the execution of a deed-in-lieu of foreclosure. We intended to sell the hotel and, as such, as of the date of the title assumption, we recorded the hotel property on our condensed consolidated balance sheet at its fair market value less costs to sell.
As of March 31, 2021 there was an increase in our expected costs to sell the property, and therefore, we recorded a $0.6 million loss during the three months ended March 31, 2021, as realized losses and impairments on real estate owned in our condensed consolidated statement of operations. During the second quarter of 2021 the property was sold at our cost basis and no additional gain or loss was recorded. The $33.0 million first mortgage was repaid upon the sale of the property.
Real Estate Owned
In 2017, we originated a $20.0 million junior mezzanine loan which was subordinate to: (i) a $110.0 million mortgage loan, and (ii) a $24.5 million senior mezzanine loan, secured by a full-service luxury hotel in Washington, D.C. During the first quarter of 2020, we recorded a $10.0 million Specific CECL Allowance and placed our junior mezzanine loan on non-accrual status.
On May 24, 2021, we purchased the $24.5 million senior mezzanine loan at par and acquired legal title to the hotel through a deed-in-lieu of foreclosure. We assumed the hotel’s assets and liabilities (including the $110.0 million mortgage loan) and recorded an additional $10.0 million charge reflecting the difference between the fair value of the hotel’s net assets and the carrying amount of the loan. This $10.0 million loss on title assumption plus the previously recorded Specific CECL Allowance of $10.0 million represents the $20.0 million recorded as a realized loss on investments in our condensed consolidated statement of operations.
On May 24, 2021, in accordance with ASC 805, "Business Combinations," we allocated the fair value of the hotel’s assets and liabilities. On June 29, 2021, we repaid the $110.0 million mortgage loan against the property. Below are the hotel's assets and liabilities as of May 24 and September 30, 2021, which are designated as real estate owned on our condensed consolidated balance sheet ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
May 24, 2021
|
|
Assets:
|
|
|
|
|
Cash
|
$
|
3,581
|
|
|
$
|
4,148
|
|
|
Land
|
58,742
|
|
|
58,742
|
|
|
Buildings
|
86,916
|
|
|
86,871
|
|
|
Furniture, fixtures, and equipment
|
8,707
|
|
|
8,687
|
|
|
Accumulated depreciation
|
(1,548)
|
|
|
—
|
|
|
Other Assets
|
1,651
|
|
|
1,555
|
|
|
Total Assets
|
$
|
158,049
|
|
|
$
|
160,003
|
|
|
Liabilities:
|
|
|
|
|
Debt related to real estate owned(1)
|
$
|
—
|
|
|
$
|
110,073
|
|
|
Accounts payable, accrued expenses and other liabilities
|
5,543
|
|
|
4,641
|
|
|
Total Liabilities
|
$
|
5,543
|
|
|
$
|
114,714
|
|
|
Net Real Estate Assets
|
$
|
152,506
|
|
|
$
|
45,289
|
|
———————
(1)$110 million first mortgage loan was repaid on June 29, 2021.Upon consolidation we assumed other hotel's assets and liabilities such as cash, operating receivables, accrued operating expenses, and unearned revenue, which have been recorded on our condensed consolidated balance sheet within cash, other assets, and accounts payable, accrued expenses and other liabilities.
For the three and nine months ended September 30, 2021, we recorded the operating revenue, expenses and fixed asset depreciation and amortization in its condensed consolidated income statement as shown below ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Nine months ended
|
|
|
|
|
September 30, 2021
|
September 30, 2021
|
|
|
|
Operations related to real estate owned:
|
|
|
|
|
|
Revenue from operations
|
$
|
5,896
|
|
$
|
7,270
|
|
|
|
|
Operating expenses
|
(6,914)
|
|
(8,908)
|
|
|
|
|
Depreciation and amortization
|
(1,096)
|
|
(1,548)
|
|
|
|
|
Net loss from real estate owned
|
$
|
(2,114)
|
|
$
|
(3,186)
|
|
|
|
Note 6 – Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Interest receivable
|
$
|
35,446
|
|
|
$
|
40,559
|
|
|
Collateral deposited under derivative agreements
|
8,600
|
|
|
28,320
|
|
|
Loan proceeds held by servicer
|
8,732
|
|
|
5,649
|
|
|
Other(1)
|
1,732
|
|
|
112
|
|
|
Total
|
$
|
54,510
|
|
|
$
|
74,640
|
|
———————
(1)Includes $1.7 million of other assets on the balance sheet of the real estate owned at September 30, 2021. Refer to "Note 5 – Real Estate Owned and Related Debt" for additional information.
Note 7 – Secured Debt Arrangements, Net
At September 30, 2021 and December 31, 2020, our borrowings included the following secured debt arrangements, maturities and weighted-average interest rates ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
Maximum Amount of Borrowings(1)
|
|
Borrowings Outstanding(1)
|
|
Maturity (2)
|
|
Maximum Amount of Borrowings(1)
|
|
Borrowings Outstanding(1)
|
|
Maturity (2)
|
|
JPMorgan (USD)
|
$
|
1,344,044
|
|
|
$
|
912,228
|
|
|
September 2026
|
|
$
|
1,113,156
|
|
|
$
|
984,125
|
|
|
June 2024
|
|
JPMorgan (GBP)
|
86,476
|
|
|
86,476
|
|
|
September 2026
|
|
113,548
|
|
|
113,548
|
|
|
June 2024
|
|
JPMorgan (EUR)
|
69,480
|
|
|
69,480
|
|
|
September 2026
|
|
73,296
|
|
|
73,296
|
|
|
June 2024
|
|
DB (USD)
|
700,000
|
|
|
398,452
|
|
|
March 2023
|
|
1,000,000
|
|
|
520,457
|
|
|
March 2023
|
|
Goldman (USD)
|
500,000
|
|
|
142,771
|
|
|
November 2023(3)
|
|
500,000
|
|
|
332,352
|
|
|
November 2023(3)
|
|
CS Facility - USD
|
189,220
|
|
|
189,220
|
|
|
July 2024(4)(5)
|
|
374,251
|
|
|
369,182
|
|
|
December 2023(4)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Facility - EUR
|
165,947
|
|
|
165,947
|
|
|
July 2022
|
|
163,785
|
|
|
163,785
|
|
|
July 2021
|
|
Barclays (USD)
|
200,000
|
|
|
32,693
|
|
|
March 2024
|
|
200,000
|
|
|
35,192
|
|
|
March 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Secured Credit Facilities
|
3,255,167
|
|
|
1,997,267
|
|
|
|
|
3,538,036
|
|
|
2,591,937
|
|
|
|
|
Barclays Private Securitization
|
1,453,591
|
|
|
1,453,591
|
|
|
October 2023(5)
|
|
857,728
|
|
|
857,728
|
|
|
September 2023(5)
|
|
Total Secured Debt Arrangements
|
4,708,758
|
|
|
3,450,858
|
|
|
|
|
4,395,764
|
|
|
3,449,665
|
|
|
|
|
Less: deferred financing costs
|
N/A
|
|
(11,556)
|
|
|
|
|
N/A
|
|
(12,993)
|
|
|
|
|
Total Secured Debt Arrangements, net(6)(7)(8)
|
$
|
4,708,758
|
|
|
$
|
3,439,302
|
|
|
|
|
$
|
4,395,764
|
|
|
$
|
3,436,672
|
|
|
|
|
———————
(1)As of September 30, 2021, British Pound Sterling ("GBP"), Euros ("EUR"), and Swedish Krona ("SEK") borrowings were converted to USD at a rate of 1.35, 1.16, and 0.11, respectively. As of December 31, 2020, GBP and EUR borrowings were converted to USD at a rate of 1.37 and 1.22, respectively.
(2)Maturity date assumes extensions at our option are exercised with consent of financing providers, where applicable.
(3)Assumes facility enters the amortization period described below.
(4)Assumes financings are extended in line with the underlying loans.
(5)Represents weighted average maturity across various financings with the counterparty. See below for additional details.
(6)Weighted-average borrowing costs as of September 30, 2021 and December 31, 2020 were USD L+1.97% / GBP L+2.04% / EUR L+1.41% / SEK L+1.50% and USD L+2.16% / GBP L+1.83% / EUR L+1.46%, respectively.
(7)Weighted average advance rates based on cost as of September 30, 2021 and December 31, 2020 were 61.7% (54.8% (USD) / 69.4% (GBP) / 67.4% (EUR) / 80.7% (SEK)) and 63.7% (62.5% (USD) / 68.7% (GBP) / 60.8% (EUR)).
(8)As of September 30, 2021 and December 31, 2020, approximately 53% and 55% of the outstanding balance under these secured borrowings were recourse to us.
Each of our existing secured debt arrangements include "credit based and other mark-to-market" features. "Credit mark-to-market" provisions in repurchase facilities are designed to keep the lenders' credit exposure generally constant as a percentage of the underlying collateral value of the assets pledged as security to them. If the credit of the underlying collateral value decreases, the amount of leverage available to us will be reduced as our assets are marked-to-market, which would reduce our liquidity. Generally, the lender under the applicable secured debt arrangement calls for and/or sets the valuation and any revaluation of the collateral assets in its sole, good faith discretion. If it is determined (subject to certain conditions) that the market value of the underlying collateral has decreased by more than a defined minimum amount, the lender may require us to provide additional collateral or may make margin calls, which may require us to repay all or a portion of the funds advanced. We closely monitor our liquidity and intend to maintain sufficient liquidity on our condensed consolidated balance sheet in order to meet any margin calls in the event of any significant decreases in asset values. As of September 30, 2021 and December 31, 2020, the weighted average haircut under our secured debt arrangements was approximately 38.3% and 36.3%, respectively. In addition, our existing secured debt arrangements are not entirely term-matched financings and may mature before our commercial real estate debt investments that represent underlying collateral to those financings. We are in frequent dialogue with the lenders under our secured debt arrangements regarding our management of their collateral assets and as we negotiate renewals and extensions of these liabilities, we may experience lower advance rates and higher pricing under the renewed or extended agreements.
JPMorgan Facility
In November 2019, through wholly-owned subsidiaries, we entered into a Sixth Amended and Restated Master Repurchase Agreement with JPMorgan Chase Bank, National Association (the "JPMorgan Facility"). During the third quarter of 2021, we amended the JPMorgan Facility to allow for $1.5 billion of maximum borrowings and maturity in September 2024, plus two one-year extensions available at our option, which are subject to certain conditions. The JPMorgan Facility enables us to elect to receive advances in USD, GBP, or EUR. Margin calls may occur any time at specified aggregate margin deficit thresholds.
As of September 30, 2021, we had $1.1 billion (including £64.2 million and €60.0 million assuming conversion into USD) of borrowings outstanding under the JPMorgan Facility secured by certain of our commercial mortgage loans.
DB Facility
In March 2020, through an indirect wholly-owned subsidiary, we entered into a Third Amended and Restated Master Repurchase Agreement with Deutsche Bank AG, Cayman Islands Branch, London Branch (the "DB Facility"). During the first quarter 2021, we amended the DB Facility to reduce the commitment from $1.0 billion to $700.0 million ($398.5 million drawn at September 30, 2021) for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties, located in the United States, United Kingdom and the European Union, and enables us to elect to receive advances in USD, GBP, or EUR. The DB Facility matures in March 2022, and has a one-year extension available at our option, subject to certain conditions. Margin calls may occur any time at specified aggregate margin deficit thresholds.
As of September 30, 2021, we had $398.5 million of borrowings outstanding under the DB 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 advances up to $500.0 million and matures in November 2021. In addition, the Goldman Facility contains a two-year amortization period subsequent to the November 2021 maturity, which allows for the refinancing or pay down of assets under the facility. Margin calls may occur any time at specified margin deficit thresholds.
As of September 30, 2021, we had $142.8 million of borrowings outstanding under the Goldman Facility secured by certain of our commercial mortgage loans.
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" has an "evergreen" feature such that the facility continues unless terminated at any time by Credit Suisse with six months' notice. Margin calls may occur any time at specified aggregate margin deficit thresholds.
As of September 30, 2021, we had $189.2 million of borrowings outstanding under the CS Facility — USD secured by certain of our commercial mortgage loans.
HSBC Facility - EUR
In July 2019, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc, which provides for a single asset financing (the "HSBC Facility — EUR"). The HSBC Facility — EUR was extended during the first quarter 2021 and matures in July 2022. Margin calls may occur any time at specified aggregate margin deficit thresholds.
As of September 30, 2021, we had $165.9 million (€143.3 million assuming conversion into USD) of borrowings outstanding under the HSBC Facility - EUR secured by one commercial mortgage loan.
Barclays Facility - USD
In March 2020, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement pursuant to a Master Repurchase Agreement with Barclays Bank plc (the "Barclays Facility – USD"). The Barclays Facility — USD allows for $200.0 million of maximum borrowings and initially matures in March 2023 with extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified aggregate margin deficit thresholds.
As of September 30, 2021, we had $32.7 million of borrowings outstanding under the Barclays Facility - USD secured by one commercial mortgage loan.
Barclays Private Securitization
In June 2020, through a newly formed entity, we entered into a private securitization with Barclays Bank plc, of which Barclays Bank plc retained $782.0 million of senior notes (the "Barclays Private Securitization"). The Barclays Private Securitization finances the loans that were previously financed under a Global Master Repurchase Agreement with Barclays Bank plc (the "Barclays Facility - GBP/EUR"). In June 2020, we pledged an additional commercial mortgage loan with an outstanding principal balance of £26.0 million and pledged additional collateral of a financed loan of €5.3 million as of June 30, 2020. During the first quarter 2021, we pledged two additional commercial mortgage loans with outstanding principal balances of $227.4 million (£165.0 million assuming conversion into USD) and $187.4 million (kr1.6 billion assuming conversion into USD). During the second quarter of 2021, we pledged an additional commercial mortgage loan with an outstanding principal balance of $281.7 million (€237.6 million assuming conversion into USD), and pledged additional collateral of a financed loan of $114.7 million (kr1.0 billion assuming conversion into USD).
The Barclays Private Securitization eliminates daily margining provisions and grants us significant discretion to modify certain terms of the underlying collateral including waiving certain loan-level covenant breaches and deferring or waiving of debt service payments for up to 18 months. The securitization includes LTV based covenants with significant headroom to previous levels included in the Barclays Facility - GBP/EUR. These deleveraging requirements are based on significant declines in the value of the collateral as determined by an annual third-party (engaged by us) appraisal process tied to the provisions of the underlying loan agreements. We believe this provides us with both cushion and predictability to avoid sudden unexpected outcomes and material repayment requirements. In addition to the pledge of the additional collateral noted above, we paid down the previous financing by €16.5 million (totaling $18.5 million in USD) and agreed to increase the financing spreads by 0.25%.
The table below provides the borrowings outstanding (on an as converted basis) and weighted-average fully-extended maturities by currency for the assets financed under the Barclays Private Securitization as of September 30, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding
|
|
Fully-Extended Maturity(1)
|
|
Total/Weighted-Average GBP
|
$854,768
|
|
August 2024
|
|
Total/Weighted-Average EUR
|
361,713
|
|
August 2022(2)
|
|
Total/Weighted-Average SEK
|
237,110
|
|
August 2022
|
|
Total/Weighted-Average Securitization
|
$1,453,591
|
|
October 2023
|
———————
(1)Assumes underlying loans extend to fully extended maturity and extensions at our option are exercised.
(2)The EUR portion of the Barclays Private Securitization has an "evergreen" feature such that the facility continues for one year and can be terminated by either party on certain dates with, depending on the date of notice, a minimum of nine to twelve months' notice.
The table below provides the assets and liabilities of the Barclays Private Securitization VIE included in our condensed consolidated balance sheet ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Assets:
|
|
|
|
|
Cash
|
$
|
2,500
|
|
|
$
|
2,020
|
|
|
Commercial mortgage loans, net(1)
|
2,067,012
|
|
|
1,290,393
|
|
|
Other Assets
|
10,700
|
|
|
15,831
|
|
|
Total Assets
|
$
|
2,080,212
|
|
|
$
|
1,308,244
|
|
|
Liabilities:
|
|
|
|
|
Secured debt arrangements, net (net of deferred financing costs of $2.1 million and $0.7 million in 2021 and 2020, respectively)
|
$
|
1,451,486
|
|
|
$
|
857,043
|
|
|
Accounts payable, accrued expenses and other liabilities(2)
|
2,345
|
|
|
1,307
|
|
|
Total Liabilities
|
$
|
1,453,831
|
|
|
$
|
858,350
|
|
———————
(1)Net of the General CECL Allowance of $8.5 million and $4.4 million as of September 30, 2021 and December 31, 2020, respectively.
(2)Represents General CECL Allowance related to unfunded commitments on commercial mortgage loans, net of $0.4 million and $0.3 million as of
September 30, 2021 and December 31, 2020, respectively.
The table below provides the net income of the Barclays Private Securitization VIE included in our condensed consolidated statement of operations ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net Interest Income:
|
|
|
|
|
|
|
|
|
Interest income from commercial mortgage loans
|
$
|
23,446
|
|
|
$
|
15,075
|
|
|
$
|
60,482
|
|
|
$
|
15,075
|
|
|
Interest expense
|
(7,014)
|
|
|
(4,278)
|
|
|
(18,000)
|
|
|
(4,278)
|
|
|
Net interest income
|
$
|
16,432
|
|
|
$
|
10,797
|
|
|
$
|
42,482
|
|
|
$
|
10,797
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses and impairments
|
1,819
|
|
|
(2,318)
|
|
|
(3,849)
|
|
|
(2,318)
|
|
|
Foreign currency (loss)
|
(15,866)
|
|
|
17,078
|
|
|
(13,976)
|
|
|
17,078
|
|
|
Net Income
|
$
|
2,385
|
|
|
$
|
25,557
|
|
|
$
|
24,657
|
|
|
$
|
25,557
|
|
As of September 30, 2021, we had $1.5 billion (£634.4 million, €312.4 million, and kr2.1 billion assuming conversion into USD) of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans.
At September 30, 2021, our borrowings had the following remaining maturities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1 to 3
years
|
|
3 to 5
years
|
|
More than
5 years
|
|
Total
|
|
JPMorgan Facility
|
$
|
144,303
|
|
|
$
|
595,800
|
|
|
$
|
328,081
|
|
|
$
|
—
|
|
|
$
|
1,068,184
|
|
|
DB Facility
|
—
|
|
|
398,452
|
|
|
—
|
|
|
—
|
|
|
398,452
|
|
|
Goldman Facility
|
142,771
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142,771
|
|
|
CS Facility - USD
|
40,500
|
|
|
—
|
|
|
148,720
|
|
|
—
|
|
|
189,220
|
|
|
HSBC Facility - EUR
|
165,947
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
165,947
|
|
|
Barclays Facility - USD
|
—
|
|
|
32,693
|
|
|
—
|
|
|
—
|
|
|
32,693
|
|
|
Barclays Private Securitization
|
598,823
|
|
|
532,777
|
|
|
321,991
|
|
|
—
|
|
|
1,453,591
|
|
|
Total
|
$
|
1,092,344
|
|
|
$
|
1,559,722
|
|
|
$
|
798,792
|
|
|
$
|
—
|
|
|
$
|
3,450,858
|
|
The table above reflects the fully extended maturity date of the facility and assumes facilities with an "evergreen" feature continue to extend through the fully-extended maturity of the underlying asset and assumes underlying loans are extended with consent of financing providers.
The table below summarizes the outstanding balances at September 30, 2021, as well as the maximum and average month-end balances for the nine months ended September 30, 2021 for our borrowings under secured debt arrangements ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2021
|
|
For the nine months ended September 30, 2021
|
|
|
Balance
|
|
Amortized Cost of Collateral
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
|
JPMorgan Facility
|
$
|
1,068,184
|
|
|
$
|
2,111,256
|
|
|
$
|
1,359,053
|
|
|
$
|
1,177,128
|
|
|
DB Facility
|
398,452
|
|
|
617,745
|
|
|
520,217
|
|
|
443,190
|
|
|
Goldman Facility
|
142,771
|
|
|
288,320
|
|
|
331,154
|
|
|
241,145
|
|
|
CS Facility - USD
|
189,220
|
|
|
277,828
|
|
|
369,182
|
|
|
240,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Facility - EUR
|
165,947
|
|
|
209,407
|
|
|
174,717
|
|
|
166,717
|
|
|
Barclays Facility - USD
|
32,693
|
|
|
50,186
|
|
|
35,193
|
|
|
33,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclays Private Securitization
|
1,453,591
|
|
|
2,038,763
|
|
|
1,499,314
|
|
|
1,286,587
|
|
|
Total
|
$
|
3,450,858
|
|
|
$
|
5,593,505
|
|
|
|
|
|
The table below summarizes the outstanding balances at December 31, 2020, as well as the maximum and average month-end balances for the year ended December 31, 2020 for our borrowings under secured debt arrangements ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
For the year ended December 31, 2020
|
|
|
Balance
|
|
Amortized Cost of Collateral
|
|
Maximum Month-End
Balance
|
|
Average Month-End
Balance
|
|
JPMorgan Facility
|
$
|
1,170,969
|
|
|
$
|
2,009,249
|
|
|
$
|
1,192,288
|
|
|
$
|
1,119,997
|
|
|
DB Facility
|
520,457
|
|
|
814,715
|
|
|
526,743
|
|
|
506,831
|
|
|
Goldman Facility
|
332,352
|
|
|
510,371
|
|
|
362,139
|
|
|
343,621
|
|
|
CS Facility - USD
|
369,182
|
|
|
524,139
|
|
|
378,781
|
|
|
348,464
|
|
|
CS Facility - GBP
|
—
|
|
|
—
|
|
|
90,111
|
|
|
43,094
|
|
|
HSBC Facility - USD
|
—
|
|
|
—
|
|
|
50,625
|
|
|
44,000
|
|
|
HSBC Facility - GBP
|
—
|
|
|
—
|
|
|
34,500
|
|
|
20,563
|
|
|
HSBC Facility - EUR
|
163,785
|
|
|
215,509
|
|
|
163,788
|
|
|
154,725
|
|
|
Barclays Facility - USD
|
35,192
|
|
|
49,993
|
|
|
35,193
|
|
|
29,327
|
|
|
Barclays Facility - GBP
|
—
|
|
|
—
|
|
|
666,810
|
|
|
260,692
|
|
|
Barclays Facility - EUR
|
—
|
|
|
—
|
|
|
180,595
|
|
|
70,521
|
|
|
Barclays Private Securitization
|
857,728
|
|
|
1,295,023
|
|
|
857,728
|
|
|
823,915
|
|
|
Total
|
$
|
3,449,665
|
|
|
$
|
5,418,999
|
|
|
|
|
|
We were in compliance with the covenants under each of our secured debt arrangements at September 30, 2021 and December 31, 2020.
Note 8 – Senior Secured Term Loans, Net
In May 2019, we entered into a $500.0 million senior secured term loan (the "2026 Term Loan"), which matures in May 2026 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The 2026 Term Loan bears interest at LIBOR plus 2.75% and was issued at a price of 99.5%.
In March 2021, we entered into an additional $300.0 million in senior secured term loan with substantially the same terms as the 2026 Term Loan (the "2028 Term Loan" and, together with the 2026 Term Loan, the "Term Loans"), which matures in March 2028 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The 2028 Term Loan bears interest at LIBOR (with a floor of 0.50%) plus 3.50% and was issued at a price of 99.0%.
During the three and nine months ended September 30, 2021 and 2020, we repaid $1.3 million and $3.8 million of principal related to the 2026 Term Loan, respectively. During the three and nine months ended September 30, 2021, we repaid $0.8 million and $1.5 million of principal related to the 2028 Term Loan.
The following table summarizes the terms of our Term Loans as of September 30, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
Unamortized Issuance Discount
|
Deferred Financing Costs
|
Carrying Value
|
Spread
|
Maturity Date
|
|
2026 Term Loan
|
$
|
488,750
|
|
$
|
(1,637)
|
|
$
|
(5,881)
|
|
$
|
481,232
|
|
2.75
|
%
|
5/15/2026
|
|
2028 Term Loan
|
298,500
|
|
(2,750)
|
|
(3,585)
|
|
292,165
|
|
3.50
|
%
|
3/11/2028
|
|
Total
|
$
|
787,250
|
|
$
|
(4,387)
|
|
$
|
(9,466)
|
|
$
|
773,397
|
|
|
|
The following table summarizes the terms of our Term Loans as of December 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
Unamortized Issuance Discount
|
Deferred Financing Costs
|
Carrying Value
|
Spread
|
Maturity Date
|
|
2026 Term Loan
|
$
|
492,500
|
|
$
|
(1,905)
|
|
$
|
(7,130)
|
|
$
|
483,465
|
|
2.75
|
%
|
5/15/2026
|
Covenants
The Term Loans include the following financial covenants: (i) our ratio of total recourse debt to tangible net worth cannot be greater than 3:1; and (ii) our ratio of total unencumbered assets to total pari-passu indebtedness must be at least 1.25:1.
We were in compliance with the covenants under the Term Loans at September 30, 2021 and December 31, 2020.
Interest Rate Swap
In connection with the 2026 Term Loan, we previously entered into an interest rate swap to fix LIBOR at 2.12% effectively fixing our all-in coupon on the senior secured term loan at 4.87%. During the year ended December 31, 2020 we terminated the interest rate swap and recognized a realized loss of $53.9 million.
Interest Rate Cap
During the second quarter of 2020, we entered into a three-year interest rate cap to cap LIBOR at 0.75%. This effectively limits the maximum all-in coupon on our 2026 Term Loan to 3.50%. In connection with the interest rate cap, we incurred up-front fees of $1.1 million for the year ended December 31, 2020, which we recorded as a deferred financing cost on our condensed consolidated balance sheet and interest expense will be recognized over the duration of the interest rate cap in our condensed consolidated statement of operations.
Note 9 – Senior Secured Notes, Net
In June 2021, we issued $500.0 million of 4.625% Senior Secured Notes due 2029 (the "2029 Notes"), for which we received net proceeds of $495.0 million, after offering expenses. The 2029 Notes will mature on June 15, 2029, unless earlier repurchased or redeemed. The 2029 Notes are secured by a first-priority lien, and rank pari passu in right of payment with all of our existing and future first lien obligations, including indebtedness under the Term Loans. The 2029 Notes were issued at par and contain covenants relating to liens, indebtedness, and investments in non-wholly owned entities. As of September 30, 2021, the 2029 Notes had a carrying value of $493.9 million net of deferred financing costs of $6.1 million.
Covenants
The 2029 Notes include certain covenants including a requirement that we maintain a ratio of total unencumbered assets to total pari-passu indebtedness of at least 1.20:1. As of September 30, 2021, we were in compliance with all covenants.
Note 10 – Convertible Senior Notes, Net
In two separate offerings during 2017, we issued an aggregate principal amount of $345.0 million of 4.75% Convertible Senior Notes due 2022 (the "2022 Notes"), for which we received $337.5 million, after deducting the underwriting discount and offering expenses. At September 30, 2021, the 2022 Notes had a carrying value of $342.4 million and an unamortized discount of $2.6 million.
During the fourth quarter of 2018, we issued $230.0 million of 5.375% Convertible Senior Notes due 2023 (the "2023 Notes" and, together with the 2022 Notes, the "Convertible Notes"), for which we received $223.7 million after deducting the underwriting discount and offering expenses. At September 30, 2021, the 2023 Notes had a carrying value of $226.5 million and an unamortized discount of $3.5 million.
The following table summarizes the terms of the Convertible Notes as of September 30, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
Coupon Rate
|
Effective Rate (1)
|
Conversion Rate (2)
|
Maturity Date
|
Remaining Period of Amortization
|
|
2022 Notes
|
$
|
345,000
|
|
4.75
|
%
|
5.60
|
%
|
50.2260
|
|
8/23/2022
|
0.90
|
|
2023 Notes
|
230,000
|
|
5.38
|
%
|
6.16
|
%
|
48.7187
|
|
10/15/2023
|
2.04
|
|
Total
|
$
|
575,000
|
|
|
|
|
|
|
The following table summarizes the terms of the Convertible Notes as of December 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
Coupon Rate
|
Effective Rate (1)
|
Conversion Rate (2)
|
Maturity Date
|
Remaining Period of Amortization
|
|
2022 Notes
|
$
|
345,000
|
|
4.75
|
%
|
5.60
|
%
|
50.2260
|
|
8/23/2022
|
1.65
|
|
2023 Notes
|
230,000
|
|
5.38
|
%
|
6.16
|
%
|
48.7187
|
|
10/15/2023
|
2.79
|
|
Total
|
$
|
575,000
|
|
|
|
|
|
|
———————
(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)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 Convertible 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 Convertible Notes prior to maturity except in limited circumstances. The closing price of our common stock on September 30, 2021 of $14.83 was less than the per share conversion price of the Convertible Notes.
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) are 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 Convertible 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 Convertible Notes as of their issuance date based on effective interest rates. As a result, we attributed approximately $15.4 million of the proceeds to the equity component of the Convertible Notes ($11.0 million to the 2022 Notes and $4.4 million to the 2023 Notes), which represents the excess proceeds received over the fair value of the liability component of the Convertible Notes at the date of issuance. The equity component of the Convertible Notes has been reflected within additional paid-in capital in our condensed consolidated balance sheet as of September 30, 2021. The resulting debt discount is being amortized over the period during which the Convertible 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 Convertible Notes will increase in subsequent reporting periods through the maturity date as the Convertible Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately $7.2 million and $21.6 million for the three and nine months ended September 30, 2021 and September 30, 2020. With respect to the amortization of the discount on the liability component of the Convertible Notes as well as the amortization of deferred financing costs, we reported additional non-cash interest expense of approximately $1.6 million and $4.7 million for the three and nine months ended September 30, 2021, as compared to $1.5 million and $4.5 million for the three and nine months ended September 30, 2020, respectively.
Note 11 – Derivatives
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD.
We have entered into a series of forward contracts to sell an amount of foreign currency (GBP, EUR and SEK) for an agreed upon amount of USD at various dates through May 2026. These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments.
The following table summarizes our non-designated foreign exchange ("Fx") forwards and our interest rate cap as of September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
Type of Derivatives
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
|
Weighted-Average Years to Maturity
|
|
Fx contracts - GBP
|
106
|
|
476,682
|
|
GBP
|
|
October 2021 - February 2026
|
|
1.95
|
|
Fx contracts - EUR
|
73
|
|
285,511
|
|
EUR
|
|
November 2021 - November 2025
|
|
2.00
|
|
Fx contracts - SEK
|
21
|
|
778,431
|
|
SEK
|
|
November 2021 - May 2026
|
|
3.93
|
|
Interest rate cap
|
1
|
|
500,000
|
|
USD
|
|
June 2023
|
|
1.71
|
The following table summarizes our non-designated Fx forwards and our interest rate cap as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Type of Derivatives
|
Number of Contracts
|
|
Aggregate Notional Amount (in thousands)
|
|
Notional Currency
|
|
Maturity
|
|
Weighted-Average Years to Maturity
|
|
Fx contracts - GBP
|
93
|
|
428,493
|
|
GBP
|
|
January 2021 - December 2024
|
|
2.04
|
|
Fx contracts - EUR
|
69
|
|
239,466
|
|
EUR
|
|
February 2021 - August 2024
|
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap
|
1
|
|
500,000
|
|
USD
|
|
June 2023
|
|
2.49
|
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 our condensed consolidated statements of operations related to our derivatives for the three and nine months ended September 30, 2021, and 2020 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss)
recognized in income
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
Location of Gain (Loss) Recognized in Income
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Forward currency contracts
|
Unrealized gain (loss) on derivative instruments
|
|
$
|
32,376
|
|
|
$
|
(35,076)
|
|
|
$
|
40,857
|
|
|
$
|
18,356
|
|
|
Forward currency contracts
|
Realized gain (loss) on derivative instruments
|
|
571
|
|
|
539
|
|
|
(1,204)
|
|
|
14,603
|
|
|
Total
|
|
|
$
|
32,947
|
|
|
$
|
(34,537)
|
|
|
$
|
39,653
|
|
|
$
|
32,959
|
|
In connection with our senior secured term loan, in May 2019, we entered into an interest rate swap to fix LIBOR at 2.12% or an all-in interest rate of 4.87%. We used our interest rate swap to manage exposure to variable cash flows on our borrowings under our senior secured term loan. Our interest rate swap allowed us to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure. However during the second quarter of 2020, we terminated our interest rate swap due to a significant decrease in LIBOR and recognized a realized loss on the accompanying condensed consolidated statement of operations.
In June 2020, we entered into an interest rate cap for approximately $1.1 million. We use our interest rate cap to manage exposure to variable cash flows on our borrowings under our senior secured term loan by effectively limiting LIBOR from exceeding 0.75%. This effectively limits the maximum all-in coupon on our senior secured term loan to 3.50%. Unrealized gains or losses related to the interest rate swap and cap were recorded net under gain (loss) on interest rate hedging instruments in our condensed consolidated statement of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss)
recognized in income
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
Location of Gain (Loss) Recognized in Income
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap(1)
|
Unrealized (loss) gain on interest rate cap
|
|
$
|
(75)
|
|
|
$
|
(564)
|
|
|
$
|
171
|
|
|
$
|
174
|
|
|
Interest rate swap(2)
|
Unrealized gain on interest rate swap
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,470
|
|
|
Interest rate swap(2)
|
Realized loss on interest rate swap
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,851)
|
|
|
Total
|
|
|
$
|
(75)
|
|
|
$
|
(564)
|
|
|
$
|
171
|
|
|
$
|
(39,207)
|
|
———————
(1)With a notional amount of $500 million at September 30, 2021 and 2020.
(2)With a notional amount of $0 at September 30, 2021 and 2020.
The following tables summarize the gross asset and liability amounts related to our derivatives at September 30, 2021 and December 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
Gross
Amount of
Recognized
Asset
|
|
Gross
Amounts
Offset in our
Condensed Consolidated Balance Sheet
|
|
Net Amounts
of Assets
Presented in
our Condensed Consolidated Balance Sheet
|
|
Gross Amount of Recognized Liabilities
|
|
Gross
Amounts
Offset in our
Condensed Consolidated Balance Sheet
|
|
Net Amounts of Liabilities Presented in our Condensed Consolidated Balance Sheet
|
|
Forward currency contracts
|
$
|
19,640
|
|
|
$
|
(10,158)
|
|
|
$
|
9,482
|
|
|
$
|
(32,172)
|
|
|
$
|
797
|
|
|
$
|
(31,375)
|
|
|
Interest rate cap
|
305
|
|
|
—
|
|
|
305
|
|
|
—
|
|
|
134
|
|
|
134
|
|
|
Total derivative asset (liability)
|
$
|
19,945
|
|
|
$
|
(10,158)
|
|
|
$
|
9,787
|
|
|
$
|
(32,172)
|
|
|
$
|
931
|
|
|
$
|
(31,241)
|
|
Note 12 – Participations Sold
Participations sold represents the subordinate interests in loans we originated and subsequently partially sold. We account for participations sold as secured borrowings on our condensed consolidated balance sheet with both assets and non-recourse liabilities because the participations do not qualify as a sale under ASC 860, "Transfers and Servicing." The income earned on the participations sold is recorded as interest income and an identical amount is recorded as interest expense on our condensed consolidated statements of operations.
In October 2020, we sold a $25.0 million interest, at par, in a mezzanine loan collateralized by a ground-up condominium development in New York City that we originated in December 2017. The participation interest sold accrued payment-in-kind interest, was accounted for as a secured borrowing on our condensed consolidated balance sheet, and was subordinate to our remaining mezzanine loan. The mezzanine loan was repaid at par in June 2021, and therefore, we de-recognized the related participating interest of $27.7 million, which included $2.7 million in payment-in-kind interest.
In December 2020, we sold a £6.7 million ($8.9 million assuming conversion into USD) interest, at par, in a first mortgage loan collateralized by an office building located in London, United Kingdom that was originated by us in December 2017. In connection with this sale, we transferred our remaining unfunded commitment of £19.1 million ($25.3 million assuming conversion into USD). The participation interest sold is subordinate to our remaining £70.2 million ($94.6 million assuming conversion into USD) first mortgage loan and is accounted for as a secured borrowing on our condensed consolidated balance sheet.
The table below details participations sold included in our condensed consolidated balance sheet ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Participation sold on Commercial mortgage loans
|
$
|
26,948
|
|
|
$
|
9,217
|
|
|
Participation sold on Subordinate loans and other lending assets (1)
|
—
|
|
|
25,757
|
|
|
Total Participations sold
|
$
|
26,948
|
|
|
$
|
34,974
|
|
———————
(1)Includes $0 and $0.8 million of PIK interest in 2021 and 2020, respectively.
Note 13 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Accrued dividends payable
|
$
|
52,398
|
|
|
$
|
52,768
|
|
|
Accrued interest payable
|
19,215
|
|
|
13,979
|
|
|
Accounts payable and other liabilities(1)
|
15,857
|
|
|
4,775
|
|
|
Collateral held under derivative agreements
|
9,730
|
|
|
—
|
|
|
General CECL Allowance on unfunded commitments(2)
|
2,193
|
|
|
3,365
|
|
|
Total
|
$
|
99,393
|
|
|
$
|
74,887
|
|
———————
(1)Includes $5.5 million of accounts payable and other liabilities on the balance sheet of the real estate owned at September 30, 2021. Refer to "Note 5 – Real Estate Owned and Related Debt" for additional information.
(2)Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional disclosure related to the General CECL Allowance on unfunded commitments for the nine months ended September 30, 2021 and 2020, respectively.
Note 14 – 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 term of the Management Agreement was automatically renewed for a successive one-year term on September 29, 2021, and will automatically renew 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 2021, which included a discussion of the Manager’s performance and the level of the management fees thereunder, we determined not to seek termination of the Management Agreement.
We incurred approximately $9.6 million and $28.4 million in base management fees under the Management Agreement for the three and nine months ended September 30, 2021, respectively, as compared to $9.9 million and $30.2 million for the three and nine months ended September 30, 2020, 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, 2021 we paid expenses totaling $0.5 million and $1.7 million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement as compared to $0.6 million and $1.7 million for the three and nine months ended September 30, 2020, respectively. Expenses incurred by the Manager and reimbursed by us are reflected in the respective condensed consolidated statement of operations expense category or our condensed consolidated balance sheet based on the nature of the item.
Included in payable to related party on our condensed consolidated balance sheet at September 30, 2021 and December 31, 2020 is approximately $9.6 million for base management fees incurred but not yet paid under the Management Agreement.
Loans receivable
In June 2015, we originated a $20.0 million mezzanine loan secured by pledges of equity interests in the property
recorded as real estate owned on our condensed consolidated balance sheet at September 30, 2021. The mezzanine loan was subordinate to (i) a $110.0 million mortgage loan, originated by a third party, and (ii) a $24.5 million senior mezzanine loan, originated by an affiliate of the Manager. On May 24, 2021, we purchased the $24.5 million senior mezzanine loan at par from the affiliate and acquired legal title to the hotel through a deed-in-lieu of foreclosure. Refer to "Note 5 – Real Estate Owned and Related Debt" for additional information.
In January 2020, we sold £62.2 million ($81.3 million assuming conversion into USD) in a mezzanine loan and £50.0 million ($65.3 million assuming conversion into USD) unfunded commitment of a senior mortgage secured by a mixed-use property in London, United Kingdom to a fund managed by an affiliate of the Manager, that was originated by us in December 2019. This transaction was evaluated under ASC 860, "Transfers and Servicing," and we determined that it qualifies as a sale and accounted for as such (see "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net").
As described in Note 4 above, we own three mezzanine loans, including Junior Mezzanine B Loan, that are secured by the same residential-for-sale property currently under construction in Manhattan, NY. During the third quarter of 2021, the Seller transferred its Junior Mezzanine B Loan position to the Company and in connection with this transfer, one of the property’s subordinate capital providers paid the Seller a price representing the Seller’s original principal balance on the Junior Mezzanine B Loan position with the Seller agreeing to forego its accrued interest on the Junior Mezzanine B Loan.
Term Loan
In March 2021, Apollo Global Funding, LLC, an affiliate of the Manager, served as one of the eight arrangers for the issuance of our 2028 Term Loan and received $0.2 million of arrangement fees. In addition, funds managed by an affiliate of the Manager invested in $30.0 million of the 2028 Term Loan.
Senior Secured Notes
In June 2021, Apollo Global Securities, LLC, an affiliate of the Manager, served as one of the eight initial purchasers in the issuance of our 2029 Notes and received $0.4 million of initial purchasers' discounts and commissions.
Note 15 – Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc. 2009 Equity Incentive Plan ("2009 LTIP") and on April 16, 2019, our board of directors approved the Amended and Restated Apollo Commercial Real Estate Finance, Inc. 2019 Equity Incentive Plan ("2019 LTIP," and together with the 2009 LTIP, the "LTIPs"), which amended and restated the 2009 LTIP. Following the approval of the 2019 LTIP by our stockholders at our 2019 annual meeting of stockholders on June 12, 2019, no additional awards have been or will be granted under the 2009 LTIP and all outstanding awards granted under the 2009 LTIP remain in effect in accordance with the terms in the 2009 LTIP.
The 2019 LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7,000,000 shares of our common stock. The LTIPs are administered by the compensation committee of our board of directors (the "Compensation Committee") and all grants under the LTIPs must be approved by the Compensation Committee.
We recognized stock-based compensation expense of $4.4 million and $13.1 million during the three and nine months ended September 30, 2021, respectively, related to restricted stock and RSU vesting, as compared to $4.2 million and $12.7 million for the three and nine months ended September 30, 2020, respectively.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Restricted Stock
|
|
RSUs
|
|
Grant Date Fair Value ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
82,235
|
|
|
2,455,853
|
|
|
|
|
|
Granted
|
|
45,185
|
|
|
84,842
|
|
|
$
|
1.3
|
|
|
|
Vested
|
|
(82,235)
|
|
|
—
|
|
|
N/A
|
|
|
Forfeiture
|
|
—
|
|
|
(44,205)
|
|
|
N/A
|
|
Outstanding at September 30, 2021
|
|
45,185
|
|
|
2,496,490
|
|
|
|
Below is a summary of restricted stock and RSU vesting dates as of September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Year
|
|
Restricted Stock
|
|
RSU
|
|
Total Awards
|
|
2021
|
|
—
|
|
|
1,136,525
|
|
|
1,136,525
|
|
|
2022
|
|
38,517
|
|
|
849,015
|
|
|
887,532
|
|
|
2023
|
|
3,334
|
|
|
482,668
|
|
|
486,002
|
|
|
2024
|
|
3,334
|
|
|
28,282
|
|
|
31,616
|
|
|
Total
|
|
45,185
|
|
|
2,496,490
|
|
|
2,541,675
|
|
At September 30, 2021, we had unrecognized compensation expense of approximately $0.5 million and $26.8 million related to the vesting of restricted stock awards and RSUs, respectively, noted in the table above.
RSU Deliveries
During the nine months ended September 30, 2021 and 2020, we delivered 553,008 and 503,411 shares of common stock for 953,397 and 868,421 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 our condensed consolidated statement of changes in stockholders' equity. The adjustment was $4.4 million and $6.5 million for the nine months ended September 30, 2021 and 2020, respectively. The adjustment is a reduction of capital related to our equity incentive plan and is presented net of increases of capital related to our equity incentive plan in our condensed consolidated statement of changes in stockholders' equity.
Note 16 – 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, 2021, 139,894,060 shares of common stock were issued and outstanding, and 6,770,393 shares of 7.25% Series B-1 Cumulative Redeemable Perpetual Preferred Stock ("Series B-1 Preferred Stock") were issued and outstanding.
On July 15, 2021, we exchanged all 6,770,393 shares outstanding of our Series B Preferred Stock for 6,770,393 shares of 7.25% Series B-1 Preferred Stock, par value $0.01 per share, with a liquidation preference of $25.00 per share, pursuant to an exchange agreement with the two existing holders of the Series B Preferred Stock.
Dividends. The following table details our dividend activity:
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Three months ended
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Nine months ended
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Dividends declared per share of:
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September 30, 2021
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September 30, 2020
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September 30, 2021
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September 30, 2020
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Common Stock
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$0.35
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$0.35
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$1.05
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$1.10
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Series B Preferred Stock
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—
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0.50
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1.00
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1.50
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Series B-1 Preferred Stock
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0.45
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—
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0.45
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—
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Common Stock Repurchases. As of September 30, 2021 there was $172.2 million remaining authorized under our stock repurchase program. The following table details our common stock repurchase activity during the three and nine months ended September 30, 2021 and 2020:
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Three months ended
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Nine months ended
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September 30, 2021
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September 30, 2020
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September 30, 2021
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September 30, 2020
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Shares Repurchased
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—
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5,038,619
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—
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10,834,595
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Weighted Average Price
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—
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$9.01
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—
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$8.45
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Note 17 – 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 a now-dismissed action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No 653251/2018) in New York Supreme Court (the "Apollo Action"). The complaint named as defendants (i) a wholly owned subsidiary of the Company ("Subsidiary"), (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 alleged that the defendants tortiously interfered with 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 alleged the loss of a $70.0 million investment plus punitive damages. The defendants' motion to dismiss was granted on October 23, 2019 and the Court entered judgment dismissing the complaint in its entirety on November 8, 2019. Plaintiffs appealed, the parties fully briefed the appeal, and then Plaintiffs dropped the appeal, and the case remains dismissed.
Plaintiffs have now amended the complaint in a separate action, 111 West 57th Investment LLC v. 111W57 Mezz Investor LLC (No. 655031/2017) also in New York Supreme Court (the "April 2021 Action") to name Apollo Global Management, Inc., the Subsidiary, the Company, and certain funds managed by Apollo as defendants. The April 2021 Action concerns overlapping claims and the same condominium development project that the Apollo Action concerned. We believe the claims in this action are without merit, including as barred by the dismissal of the Apollo Action. Dismissal motion briefing has not yet commenced. Because this action is in the early stages, no reasonable estimate of possible loss, if any, can be made at this time.
Loan Commitments. As described in "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" at September 30, 2021, we had $1.2 billion of unfunded commitments related to our commercial mortgage and subordinate loans. The timings and amounts of fundings are uncertain as these commitments relate to loans for construction costs, capital expenditures, leasing costs, interest and carry costs, among others. As such, the timings and amounts of future fundings depend on the progress and performance of the underlying assets of our loans. Certain of our lenders are contractually obligated to fund their ratable portion of these loan commitments over time, while other lenders have some degree of discretion over future loan funding obligations. The total unfunded commitment is expected to be funded over the remaining 3.5 years weighted average tenor of these loans.
COVID-19. The COVID-19 global pandemic has brought forth uncertainty and disruption to the global economy. The magnitude and duration of the COVID-19 pandemic and its impact on our borrowers and their tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic, the success of actions taken to contain or treat the pandemic, and reactions by consumers, companies, governmental entities and capital markets. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and impact our financial performance.
As of September 30, 2021, we have not recorded any contingencies on our condensed consolidated balance sheet related to COVID-19. To the extent COVID-19 continues to cause dislocations in the global economy, our financial condition, results of operations, and cash flows may continue to be adversely impacted. Refer to “Note 2 - Summary of Significant Accounting Policies” for further discussion regarding COVID-19.
Note 18 – 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 our condensed consolidated balance sheet at September 30, 2021 and December 31, 2020 ($ in thousands):
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September 30, 2021
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December 31, 2020
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Carrying
Value
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Estimated
Fair Value
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Carrying
Value
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Estimated
Fair Value
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Cash and cash equivalents
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$
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243,414
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$
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243,414
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$
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325,498
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$
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325,498
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Commercial mortgage loans, net
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6,397,772
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6,283,550
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5,451,084
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5,361,948
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Subordinate loans and other lending assets, net(1)
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817,759
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705,683
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1,045,893
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1,027,582
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Subordinate loan held-for-sale
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41,773
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42,001
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—
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—
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Secured debt arrangements, net
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(3,439,302)
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(3,439,302)
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(3,436,672)
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(3,436,672)
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Senior secured term loans, net
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(773,397)
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(779,410)
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(483,465)
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(475,263)
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Senior secured notes, net
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(493,893)
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(486,005)
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—
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—
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2022 Notes
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(342,414)
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(345,511)
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(340,361)
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(327,381)
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2023 Notes
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(226,460)
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(234,600)
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(225,293)
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(214,875)
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Participations sold
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(26,948)
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(26,929)
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(34,974)
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(34,919)
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Debt related to real estate owned, held for sale
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—
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—
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(33,000)
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(33,000)
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———————
(1)Includes subordinate risk retention interests in securitization vehicles with an estimated fair value that approximates their carrying value.
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and cash equivalents, convertible senior notes, net, secured debt arrangements net and senior secured term loan, 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 19 – Net Income (Loss) 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, 2021 and 2020 ($ in thousands except per share data):
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For the three months ended September 30,
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For the nine months ended September 30,
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2021
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2020
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2021
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2020
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Basic Earnings
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Net income (loss)
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$
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60,392
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$
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49,338
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$
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186,418
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$
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(18,303)
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Less: Preferred dividends
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(3,126)
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(3,385)
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(9,896)
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(10,155)
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Net income (loss) available to common stockholders
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$
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57,266
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$
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45,953
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$
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176,522
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$
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(28,458)
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Less: Dividends on participating securities
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(874)
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(717)
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(2,570)
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(2,238)
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Basic Earnings
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$
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56,392
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$
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45,236
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$
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173,952
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$
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(30,696)
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Diluted Earnings
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Basic Earnings
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$
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56,392
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$
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45,236
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$
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173,952
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$
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(30,696)
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Add: Dividends on participating securities
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874
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—
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2,570
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—
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Add: Interest expense on Convertible Notes
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8,277
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—
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24,783
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—
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Diluted Earnings
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$
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65,543
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$
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45,236
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$
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201,305
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$
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(30,696)
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Number of Shares:
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Basic weighted-average shares of common stock outstanding
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139,891,777
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146,612,313
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139,860,882
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150,679,773
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Diluted weighted-average shares of common stock outstanding
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170,884,172
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146,612,313
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170,836,682
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150,679,773
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Earnings Per Share Attributable to Common Stockholders
|
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Basic
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$
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0.40
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$
|
0.31
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$
|
1.24
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$
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(0.20)
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Diluted
|
$
|
0.38
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$
|
0.31
|
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$
|
1.18
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$
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(0.20)
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The dilutive effect to earnings per share is determined using the "if-converted" method whereby interest expense on the outstanding Convertible 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, 2021, 28,533,271 weighted-average potentially issuable shares with respect to the Convertible Notes were included in the dilutive earnings per share denominator. For the three and nine months ended September 30, 2020, 28,533,271 weighted-average potentially issuable shares with respect to the Notes were excluded from the calculation of diluted net income
per share because the effect was anti-dilutive. Refer to "Note 10 - Convertible Senior Notes, Net" for further discussion.
For the three and nine months ended September 30, 2021, 2,459,124 and 2,442,530 weighted-average unvested RSUs, respectively, were included in the dilutive earnings per share denominator. For the three and nine months ended September 30, 2020, 2,051,311 and 2,028,573 weighted-average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 20 – Subsequent Events
Subsequent to the quarter ended September 30, 2021, the following events took place:
Investment activity: We committed capital of $309.6 million ($262.0 million of which was funded at closing) for two first mortgage loans and $31.2 million (all of which was funded at closing) for a subordinate loan secured by a residential-for-sale: inventory property located in Boston, MA. In addition, we funded approximately $31.8 million for previously closed loans.
Loan Repayments: We received approximately $177.1 million from loan repayments, including a full repayment on one first mortgage loan.