UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
(Mark One)
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2018March 31, 2019
or
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¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-34452
__________________________________
Apollo Commercial Real Estate Finance, Inc.
(Exact name of registrant as specified in its charter)
__________________________________
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| | |
Maryland | | 27-0467113 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number)No.) |
Apollo Commercial Real Estate Finance, Inc.
c/o Apollo Global Management, LLC
9 West 57th Street, 43rd Floor,
New York, New York 10019
(Address of registrant’s principal executive offices) (Zip Code)
(212) 515–3200
(Registrant’s telephone number, including area code)
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer | | x | | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)
| | Smaller reporting company | | ¨ |
| | | | | | |
Emerging growth company | | ¨ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicalpracticable date.
As of July 24, 2018,April 23, 2019, there were 123,020,656136,281,597 shares, par value $0.01, of the registrant’s common stock issued and outstanding.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands—except share data)
| | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
Assets: | | | | | | |
Cash | $ | 76,384 |
| | $ | 77,671 |
| |
Commercial mortgage loans, net (includes $3,115,916 and $2,148,368 pledged as collateral under secured debt arrangements in 2018 and 2017, respectively) | 3,724,221 |
| | 2,653,826 |
| |
Cash and cash equivalents | | $ | 109,343 |
| | $ | 109,806 |
|
Commercial mortgage loans, net (includes $3,679,993 and $3,197,900 pledged as collateral under secured debt arrangements in 2019 and 2018, respectively) | | 4,003,089 |
| | 3,878,981 |
|
Subordinate loans, net | 1,142,514 |
| | 1,025,932 |
| 1,183,910 |
| | 1,048,612 |
|
Loan proceeds held by servicer | — |
| | 302,756 |
| — |
| | 1,000 |
|
Other assets | 27,584 |
| | 28,420 |
| 36,540 |
| | 33,720 |
|
Derivative assets, net | 10,297 |
| | — |
| 8,715 |
| | 23,700 |
|
Total Assets | $ | 4,981,000 |
| | $ | 4,088,605 |
| $ | 5,341,597 |
| | $ | 5,095,819 |
|
Liabilities and Stockholders' Equity | | | | | | |
Liabilities: | | | | | | |
Secured debt arrangements, net (net of deferred financing costs of $20,307 and $14,348 in 2018 and 2017, respectively) | $ | 1,960,874 |
| | $ | 1,330,847 |
| |
Secured debt arrangements, net (net of deferred financing costs of $17,828 and $17,555 in 2019 and 2018, respectively) | | $ | 2,141,939 |
| | $ | 1,879,522 |
|
Convertible senior notes, net | 587,063 |
| | 584,897 |
| 558,664 |
| | 592,000 |
|
Derivative liabilities, net | — |
| | 5,644 |
| |
Accounts payable, accrued expenses and other liabilities | 81,397 |
| | 70,906 |
| 91,557 |
| | 104,746 |
|
Payable to related party | 9,013 |
| | 8,168 |
| 9,613 |
| | 9,804 |
|
Total Liabilities | 2,638,347 |
| | 2,000,462 |
| 2,801,773 |
| | 2,586,072 |
|
Commitments and Contingencies (see Note 15) |
|
| |
|
| |
Commitments and Contingencies (see Note 14) | |
|
| |
|
|
Stockholders’ Equity: | | | | | | |
Preferred stock, $0.01 par value, 50,000,000 shares authorized: | | | | | | |
Series B preferred stock, 6,770,393 shares issued and outstanding ($169,260 aggregate liquidation preference) in 2018 and 2017 | 68 |
| | 68 |
| |
Series C preferred stock, 6,900,000 shares issued and outstanding ($172,500 aggregate liquidation preference) in 2018 and 2017 | 69 |
| | 69 |
| |
Common stock, $0.01 par value, 450,000,000 shares authorized, 123,020,301 and 107,121,235 shares issued and outstanding in 2018 and 2017, respectively | 1,230 |
| | 1,071 |
| |
Series B preferred stock, 6,770,393 shares issued and outstanding ($169,260 liquidation preference) | | 68 |
| | 68 |
|
Series C preferred stock, 6,900,000 shares issued and outstanding ($172,500 liquidation preference) | | 69 |
| | 69 |
|
Common stock, $0.01 par value, 450,000,000 shares authorized, 136,254,352 and 133,853,565 shares issued and outstanding in 2019 and 2018, respectively | | 1,363 |
| | 1,339 |
|
Additional paid-in-capital | 2,447,973 |
| | 2,170,078 |
| 2,671,100 |
| | 2,638,441 |
|
Accumulated deficit | (106,687 | ) | | (83,143 | ) | (132,776 | ) | | (130,170 | ) |
Total Stockholders’ Equity | 2,342,653 |
| | 2,088,143 |
| 2,539,824 |
| | 2,509,747 |
|
Total Liabilities and Stockholders’ Equity | $ | 4,981,000 |
| | $ | 4,088,605 |
| $ | 5,341,597 |
| | $ | 5,095,819 |
|
See notes to unaudited condensed consolidated financial statements.
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Operations (Unaudited)
(in thousands—except share and per share data)
| | | Three months ended June 30, | | Six months ended June 30, | Three months ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
Net interest income: | | | | | | | | | | |
Interest income from commercial mortgage loans | $ | 65,141 |
| | $ | 37,089 |
| | $ | 117,255 |
| | $ | 71,487 |
| $ | 78,286 |
| | $ | 52,114 |
|
Interest income from subordinate loans | 34,075 |
| | 39,640 |
| | 67,928 |
| | 74,030 |
| 40,839 |
| | 33,853 |
|
Interest income from securities | — |
| | 4,700 |
| | — |
| | 10,754 |
| |
Interest expense | (28,437 | ) | | (19,205 | ) | | (51,177 | ) | | (36,235 | ) | (36,295 | ) | | (22,740 | ) |
Net interest income | 70,779 |
| | 62,224 |
| | 134,006 |
| | 120,036 |
| 82,830 |
| | 63,227 |
|
Operating expenses: | | | | |
| |
| | | |
General and administrative expenses (includes equity-based compensation of $4,014 and $7,356 in 2018 and $3,461 and $7,252 of equity-based compensation in 2017, respectively) | (5,652 | ) | | (5,200 | ) | | (10,650 | ) | | (10,958 | ) | |
General and administrative expenses (includes equity-based compensation of $3,901 and $3,342 in 2019 and 2018, respectively) | | (6,151 | ) | | (4,998 | ) |
Management fees to related party | (9,013 | ) | | (7,742 | ) | | (17,105 | ) | | (15,175 | ) | (9,613 | ) | | (8,092 | ) |
Total operating expenses | (14,665 | ) | | (12,942 | ) | | (27,755 | ) | | (26,133 | ) | (15,764 | ) | | (13,090 | ) |
Loss from unconsolidated joint venture | — |
| | (3,305 | ) | | — |
| | (2,847 | ) | |
Other income | 343 |
| | 244 |
| | 546 |
| | 352 |
| 518 |
| | 203 |
|
Provision for loan losses and impairments | (5,000 | ) | | (5,000 | ) | | (5,000 | ) | | (5,000 | ) | |
Realized loss on sale of assets | — |
| | — |
| | — |
| | (1,042 | ) | |
Unrealized loss on securities | — |
| | (4,510 | ) | | — |
| | (1,658 | ) | |
Foreign currency gain (loss) | (29,649 | ) | | 6,913 |
| | (19,524 | ) | | 10,085 |
| |
Gain (loss) on derivative instruments (includes unrealized gains (losses) of $24,796 and $15,941 in 2018 and $(7,435) and $(10,324) in 2017, respectively) | 33,538 |
| | (7,389 | ) | | 22,506 |
| | (10,434 | ) | |
Foreign currency gain | | 6,894 |
| | 10,125 |
|
Loss on derivative instruments (includes unrealized losses of $14,985 and $8,855 in 2019 and 2018, respectively) | | (6,720 | ) | | (11,032 | ) |
Net income | 55,346 |
| | 36,235 |
| | 104,779 |
| | 83,359 |
| $ | 67,758 |
| | $ | 49,433 |
|
Preferred dividends | $ | (6,834 | ) | | $ | (9,310 | ) | | $ | (13,669 | ) | | $ | (18,620 | ) | (6,835 | ) | | (6,835 | ) |
Net income available to common stockholders | 48,512 |
| | 26,925 |
| | 91,110 |
| | 64,739 |
| $ | 60,923 |
| | $ | 42,598 |
|
Net income per share of common stock | $ | 0.39 |
| | $ | 0.28 |
| | $ | 0.78 |
| | $ | 0.68 |
| |
Basic weighted average shares of common stock outstanding | 123,019,993 |
| | 95,428,134 |
| | 116,651,305 |
| | 93,530,831 |
| |
Diluted weighted average shares of common stock outstanding | 124,629,317 |
| | 96,796,289 |
| | 118,281,153 |
| | 94,907,762 |
| |
Net income per share of common stock: | | | | |
Basic | | $ | 0.45 |
| | $ | 0.38 |
|
Diluted | | $ | 0.43 |
| | $ | 0.38 |
|
Basic weighted-average shares of common stock outstanding | | 134,607,107 |
| | 110,211,853 |
|
Diluted weighted-average shares of common stock outstanding | | 164,683,086 |
| | 111,871,429 |
|
Dividend declared per share of common stock | $ | 0.46 |
| | $ | 0.46 |
| | $ | 0.92 |
| | $ | 0.92 |
| $ | 0.46 |
| | $ | 0.46 |
|
See notes to unaudited condensed consolidated financial statements.
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Comprehensive IncomeChanges in Stockholders’ Equity (Unaudited)
(in thousands)thousands—except share and per share data)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income available to common stockholders | $ | 48,512 |
| | $ | 26,925 |
| | $ | 91,110 |
| | $ | 64,739 |
|
Foreign currency translation adjustment | — |
| | 3,560 |
| | — |
| | 3,811 |
|
Comprehensive income | $ | 48,512 |
| | $ | 30,485 |
| | $ | 91,110 |
| | $ | 68,550 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-In-Capital | | Accumulated Deficit | | Total |
| Shares | | Par | | Shares | | Par | |
Balance at January 1, 2018 | 13,670,393 |
| | $ | 137 |
| | 107,121,235 |
| | $ | 1,071 |
| | $ | 2,170,078 |
| | $ | (83,143 | ) | | $ | 2,088,143 |
|
Capital increase (decrease) related to Equity Incentive Plan | — |
| | — |
| | 345,996 |
| | 4 |
| | (1,389 | ) | | — |
| | (1,385 | ) |
Issuance of common stock | — |
| | — |
| | 15,525,000 |
| | 155 |
| | 275,724 |
| | — |
| | 275,879 |
|
Offering costs | — |
| | — |
| | — |
| | — |
| | (377 | ) | | — |
| | (377 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 49,433 |
| | 49,433 |
|
Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (6,835 | ) | | (6,835 | ) |
Dividends declared on common stock - $0.46 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (57,328 | ) | | (57,328 | ) |
Balance at March 31, 2018 | 13,670,393 | | $ | 137 |
| | 122,992,231 | | $ | 1,230 |
| | $ | 2,444,036 |
| | $ | (97,873 | ) | | $ | 2,347,530 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-In-Capital | | Accumulated Deficit | | Total |
| Shares | | Par | | Shares | | Par | |
Balance at January 1, 2019 | 13,670,393 |
| | $ | 137 |
| | 133,853,565 |
| | $ | 1,339 |
| | $ | 2,638,441 |
| | $ | (130,170 | ) | | $ | 2,509,747 |
|
Capital decrease related to Equity Incentive Plan | — |
| | — |
| | 433,426 |
| | 4 |
| | (1,099 | ) | | — |
| | (1,095 | ) |
Conversions of convertible senior notes for common stock | — |
| | — |
| | 1,967,361 |
| | 20 |
| | 33,758 |
| | — |
| | 33,778 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 67,758 |
| | 67,758 |
|
Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (6,835 | ) | | (6,835 | ) |
Dividends declared on common stock - $0.46 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (63,529 | ) | | (63,529 | ) |
Balance at March 31, 2019 | 13,670,393 |
| | $ | 137 |
| | 136,254,352 |
| | $ | 1,363 |
| | $ | 2,671,100 |
| | $ | (132,776 | ) | | $ | 2,539,824 |
|
See notes to unaudited condensed consolidated financial statements.
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ EquityCash Flows (Unaudited)
(in thousands—except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-In-Capital | | Accumulated Deficit | | Total |
| Shares | | Par | | Shares | | Par | |
Balance at January 1, 2018 | 13,670,393 |
| | $ | 137 |
| | 107,121,235 |
| | $ | 1,071 |
| | $ | 2,170,078 |
| | $ | (83,143 | ) | | $ | 2,088,143 |
|
Capital increase related to Equity Incentive Plan | — |
| | — |
| | 374,066 |
| | 4 |
| | 2,624 |
| | — |
| | 2,628 |
|
Issuance of common stock | — |
| | — |
| | 15,525,000 |
| | 155 |
| | 275,724 |
| | — |
| | 275,879 |
|
Offering costs | — |
| | — |
| | — |
| | — |
| | (453 | ) | | — |
| | (453 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 104,779 |
| | 104,779 |
|
Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | (13,669 | ) | | (13,669 | ) |
Dividends declared on common stock - $0.46 per share | — |
| | — |
| | — |
| | — |
| | — |
| | (114,654 | ) | | (114,654 | ) |
Balance at June 30, 2018 | 13,670,393 | | $ | 137 |
| | 123,020,301 | | $ | 1,230 |
| | $ | 2,447,973 |
| | $ | (106,687 | ) | | $ | 2,342,653 |
|
|
| | | | | | | |
| For the three months ended March 31, |
| 2019 | | 2018 |
Cash flows (used in) provided by operating activities: | | | |
Net income | $ | 67,758 |
| | $ | 49,433 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Amortization of discount/premium and PIK | (19,611 | ) | | (15,695 | ) |
Amortization of deferred financing costs | 3,461 |
| | 2,545 |
|
Equity-based compensation | (1,095 | ) | | (1,385 | ) |
Foreign currency gain | (5,828 | ) | | (9,853 | ) |
Unrealized loss on derivative instruments | 14,985 |
| | 8,855 |
|
Changes in operating assets and liabilities: | | | |
Proceeds received from PIK | — |
| | 55,000 |
|
Other assets | (2,898 | ) | | (2,620 | ) |
Accounts payable, accrued expenses and other liabilities | 620 |
| | 2,075 |
|
Payable to related party | (191 | ) | | (76 | ) |
Net cash (used in) provided by operating activities | 57,201 |
| | 88,279 |
|
Cash flows used in investing activities: | | | |
New funding of commercial mortgage loans | (197,000 | ) | | (476,951 | ) |
Add-on funding of commercial mortgage loans | (105,452 | ) | | (13,185 | ) |
New funding of subordinate loans | (244,844 | ) | | (11,687 | ) |
Add-on funding of subordinate loans | (4,879 | ) | | (5,208 | ) |
Proceeds and payments received on commercial mortgage loans | 191,317 |
| | 90,547 |
|
Proceeds and payments received on subordinate loans | 130,010 |
| | 257,548 |
|
Origination and exit fees received on commercial mortgage and subordinate loans | 6,069 |
| | 19,085 |
|
Decrease in collateral held related to derivative contracts | (18,180 | ) | | (15,220 | ) |
Net cash (used in) provided by investing activities | (242,959 | ) | | (155,071 | ) |
Cash flows from financing activities: | | | |
Proceeds from issuance of common stock | — |
| | 275,879 |
|
Payment of offering costs | — |
| | (38 | ) |
Proceeds from secured debt arrangements | 412,434 |
| | 416,549 |
|
Repayments of secured debt arrangements | (156,747 | ) | | (538,562 | ) |
Exchanges and conversions of convertible senior notes | (704 | ) | | — |
|
Payment of deferred financing costs | (91 | ) | | (2,234 | ) |
Dividends on common stock | (62,762 | ) | | (57,328 | ) |
Dividends on preferred stock | (6,835 | ) | | (6,835 | ) |
Net cash (used in) provided by financing activities | 185,295 |
| | 87,431 |
|
Net increase (decrease) in cash and cash equivalents | (463 | ) | | 20,639 |
|
Cash and cash equivalents, beginning of period | 109,806 |
| | 77,671 |
|
Cash and cash equivalents, end of period | $ | 109,343 |
| | $ | 98,310 |
|
Supplemental disclosure of cash flow information: | | | |
Interest paid | $ | 32,428 |
| | $ | 26,517 |
|
Supplemental disclosure of non-cash financing activities: | | | |
Exchange of convertible senior notes for common stock | $ | 33,778 |
| | $ | — |
|
Dividend declared, not yet paid | $ | 70,364 |
| | $ | 63,598 |
|
Offering costs payable | $ | — |
| | $ | 339 |
|
Loan proceeds held by servicer | $ | — |
| | $ | 1,000 |
|
Deferred financing costs, not yet paid | $ | 3,643 |
| | $ | — |
|
See notes to unaudited condensed consolidated financial statements.
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
|
| | | | | | | |
| For the six months ended June 30, |
| 2018 | | 2017 |
Cash flows (used in) provided by operating activities: | | | |
Net income | $ | 104,779 |
| | $ | 83,359 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Amortization of discount/premium and PIK | (30,192 | ) | | (7,934 | ) |
Amortization of deferred financing costs | 5,355 |
| | 2,761 |
|
Equity-based compensation | 2,628 |
| | 4,921 |
|
Unrealized loss on securities | — |
| | 1,658 |
|
Provision for loan losses and impairment | 5,000 |
| | 5,000 |
|
Loss from unconsolidated joint venture | — |
| | 2,259 |
|
Foreign currency (gain) loss | 17,371 |
| | (10,014 | ) |
Unrealized (gain) loss on derivative instruments | (15,941 | ) | | 10,433 |
|
Realized loss on derivative instruments | — |
| | 110 |
|
Realized loss on sale of assets | — |
| | 1,042 |
|
Changes in operating assets and liabilities: | | | |
Proceeds received from PIK | 75,652 |
| | — |
|
Other assets | (4,069 | ) | | (17,734 | ) |
Accounts payable, accrued expenses and other liabilities | 10,190 |
| | (5,127 | ) |
Payable to related party | 845 |
| | 728 |
|
Net cash (used in) provided by operating activities | 171,618 |
| | 71,462 |
|
Cash flows used in investing activities: | | | |
New funding of commercial mortgage loans | (1,275,507 | ) | | (339,394 | ) |
Add-on funding of commercial mortgage loans | (60,500 | ) | | (61,296 | ) |
New funding of subordinate loans | (201,966 | ) | | (146,738 | ) |
Add-on funding of subordinate loans | (43,284 | ) | | (76,796 | ) |
Payments received on commercial mortgage loans | 227,913 |
| | 10,199 |
|
Payments received on subordinate loans | 367,143 |
| | 58,615 |
|
Funding of derivative instruments | — |
| | (201 | ) |
Origination and exit fees received on commercial mortgage and subordinate loans | 28,362 |
| | 7,129 |
|
Funding of unconsolidated joint venture | — |
| | (726 | ) |
Funding of other assets | — |
| | (1,379 | ) |
(Increase) decrease in collateral held related to derivative contracts | 4,930 |
| | (22 | ) |
Payments and proceeds received on securities | — |
| | 217,708 |
|
Proceeds from sale of investments in unconsolidated joint venture | — |
| | 24,498 |
|
Net cash (used in) provided by investing activities | (952,909 | ) | | (308,403 | ) |
Cash flows from financing activities: | | | |
Proceeds from issuance of common stock | 275,879 |
| | 249,021 |
|
Payment of offering costs | (188 | ) | | (359 | ) |
Proceeds from secured debt arrangements | 1,367,211 |
| | 464,153 |
|
Repayments of secured debt arrangements | (723,260 | ) | | (272,878 | ) |
Repayments of participations sold | — |
| | (85,081 | ) |
Payment of deferred financing costs | (11,314 | ) | | (5,343 | ) |
Dividends on common stock | (114,655 | ) | | (85,724 | ) |
Dividends on preferred stock | (13,669 | ) | | (18,620 | ) |
Net cash (used in) provided by financing activities | 780,004 |
| | 245,169 |
|
Net increase (decrease) in cash and cash equivalents | (1,287 | ) | | 8,228 |
|
Cash and restricted cash, beginning of period | 77,671 |
| | 263,453 |
|
Cash and restricted cash, end of period | $ | 76,384 |
| | $ | 271,681 |
|
Supplemental disclosure of cash flow information: | | | |
Interest paid | $ | 43,420 |
| | $ | 11,916 |
|
Supplemental disclosure of non-cash financing activities: | | | |
Dividend declared, not yet paid | $ | 64,162 |
| | $ | 57,464 |
|
Offering costs payable | $ | 265 |
| | $ | 41 |
|
See notes to unaudited condensed consolidated financial statements.
Apollo Commercial Real Estate Finance Inc. and Subsidiaries
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”"Company," "ARI," "we," "us" and “our”"our") is a corporation that has elected to be taxed as a real estate investment trust (“REIT”("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 the Company’sour target assets.
The Company, organizedWe were formed in Maryland on June 29, 2009, commenced operations on September 29, 2009 and isare externally managed and advised by ACREFI Management, LLC (the “Manager”"Manager"), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries, "Apollo").
The CompanyWe 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 itsour tax qualification as a REIT, the Company iswe are required to distribute at least 90% of itsour 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 the Company’sour accounts and those of itsour 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”("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’sOur most significant estimates include loan loss reserves and impairment. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission (the “SEC”"SEC"). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’sour financial position, results of operations and cash flows have been included. The Company'sOur results of operations for the three and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results to be expected for the full year or any other future period.
The CompanyWe currently operatesoperate in one reporting segment.
Recent Accounting Pronouncements
In June 2018, the FASBFinancial Accounting Standards Board ("FASB") issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting" ("ASU 2018-07"). The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions in exchange for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 20192018 and is applied retrospectively. The Company is currently assessingWe adopted ASU 2018-07 in the first quarter of 2019 and it did not have any impact if any, the guidance will have on the Company'sour condensed consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” ("ASU 2017-12"). The intention of ASU 2017-12 is to align an entity’s financial reporting for hedging activities with the economic objectives of those activities. Upon adoption of ASU 2017-12, the cumulative ineffectiveness previously recognized on existing cash flow and net investment hedges will be adjusted and removed from beginning retained earnings and placed in accumulated other comprehensive income (loss). The Company notes that this guidance will not have a material impact on the Company's condensed consolidated financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively.
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash” ("ASU 2016-18"). ASU 2016-18 is intended to clarify how entities present restricted cash in the statement of cash flows. The guidance
requires entities to show the changes in the total of cash and cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash and cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively. The Company early adopted ASU 2016-18 on June 30, 2017, which changed the Company's condensed consolidated statement of cash flows and related disclosures for all periods presented. The following is a reconciliation of the Company's cash, cash equivalents, and restricted cash to the total presented in the Company's condensed consolidated statement of cash flows for the six months ended June 30, 2018 and June 30, 2017, respectively ($ in thousands):
|
| | | | | | | |
| Balance at June 30, 2018 | | Balance at June 30, 2017 |
Cash | $ | 76,384 |
| | $ | 214,016 |
|
Restricted cash | — |
| | 57,665 |
|
Total cash and restricted cash shown in the condensed consolidated statement of cash flows | $ | 76,384 |
| | $ | 271,681 |
|
In June 2016, the FASB issued ASU 2016-13 “Financial"Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326)" ("ASU 2016-13"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance will replace the “incurred loss”"incurred loss" approach under existing guidance with an “expected loss”"expected loss" model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While the Company iswe are currently evaluating the impact ASU 2016-13 will have on itsour condensed consolidated financial statements, we expect that the adoption will result in higher provisions for potential loan losses.
Note 3 – Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair values. Market based, or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy as noted in ASC 820 "Fair Value Measurements and DisclosuresDisclosures", are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While the Company anticipateswe anticipate that itsour valuation methods will be appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The CompanyWe 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 the Company’sour derivative instruments are determined using a discounted cash flow analysis on the
expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The fair values of interest rate caps are determined using the market standard
methodology of discounting the future expected cash receipts (or payments) that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an
expectation of future interest rates derived from observable market interest rate curves and volatilities. The fair values of
foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange
rate. The current market
exchange rates are determined by using market spot rates, forward rates and interest rate curves for
the underlying countries. The Company’sOur derivative instruments are classified as Level II in the fair value hierarchy.
The following table summarizes the levels in the fair value hierarchy into which the Company’sour financial instruments were categorized as of June 30, 2018March 31, 2019 and December 31, 20172018 ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of June 30, 2018 | | Fair Value as of December 31, 2017 |
| Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
Derivative assets (liabilities), net | $ | — |
| | $ | 10,297 |
| | $ | — |
| | $ | 10,297 |
| | $ | — |
| | $ | (5,644 | ) | | $ | — |
| | $ | (5,644 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of March 31, 2019 | | Fair Value as of December 31, 2018 |
| Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
Derivative assets, net | $ | — |
| | $ | 8,715 |
| | $ | — |
| | $ | 8,715 |
| | $ | — |
| | $ | 23,700 |
| | $ | — |
| | $ | 23,700 |
|
Total | $ | — |
| | $ | 8,715 |
| | $ | — |
| | $ | 8,715 |
| | $ | — |
| | $ | 23,700 |
| | $ | — |
| | $ | 23,700 |
|
Note 4 – Securities
The Company previously held CMBS, all of which were sold in 2017. During the six months ended June 30, 2017, the Company sold CMBS (Fair Value Option) resulting in a net realized loss of $1.0 million. The Company did not sell CMBS (Fair Value Option) during the three months ended June 30, 2017.
During the three and six months ended June 30, 2017, CMBS (Held-to-Maturity) of $146.5 million was fully repaid. The Company did not hold any CMBS (Held-to-Maturity) during the three and six months ended June 30, 2018.
During the three and six months ended June 30, 2017, the Company recorded interest income from securities of $4.7 million and $10.8 million, respectively, of which $1.3 million and $4.2 million was interest income from CMBS (Held-to-Maturity), respectively, and $3.4 million and $6.6 million of CMBS (Fair Value Option), respectively.
To conform to the 2018 presentation of the condensed consolidated statement of cash flows, the Company reclassified the combination of $146.5 million of payments received on securities, held-to-maturity, $69.2 million of proceeds from sale of securities and $1.9 million of payments received on securities into payments and proceeds received on securities.
Note 54 – Commercial Mortgage and Subordinate Loans, Net
The Company’sOur loan portfolio was comprised of the following at June 30, 2018March 31, 2019 and December 31, 20172018 ($ in thousands):
| | Loan Type | | June 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
Commercial mortgage loans, net | | $ | 3,724,221 |
| | $ | 2,653,826 |
| | $ | 4,003,089 |
| | $ | 3,878,981 |
|
Subordinate loans, net | | 1,142,514 |
| | 1,025,932 |
| | 1,183,910 |
| | 1,048,612 |
|
Total loans, net | | $ | 4,866,735 |
| | $ | 3,679,758 |
| | $ | 5,186,999 |
| | $ | 4,927,593 |
|
The Company'sOur loan portfolio consisted of 91%93% and 88%91% floating rate loans, based on amortized cost, as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
Activity relating to our loan investment portfolio, for the three months ended March 31, 2019, was as follows ($ in thousands):
|
| | | | | | | | | | | | | | | | |
| | Principal Balance | | Deferred Fees/Other Items (1) | | Provision for Loan Loss (2) | | Carrying Value |
December 31, 2017 | | $ | 3,706,169 |
| | $ | (9,430 | ) | | $ | (16,981 | ) | | $ | 3,679,758 |
|
New loan fundings | | 1,477,473 |
| | — |
| | — |
| | 1,477,473 |
|
Add-on loan fundings (3) | | 103,784 |
| | — |
| | — |
| | 103,784 |
|
Loan repayments | | (375,708 | ) | | — |
| | — |
| | (375,708 | ) |
Unrealized gain (loss) on foreign currency translation | | (25,539 | ) | | 216 |
| | — |
| | (25,323 | ) |
Provision for loan loss (2) | | — |
| | — |
| | (5,000 | ) | | (5,000 | ) |
Deferred fees and other items (1) | | — |
| | (20,607 | ) | | — |
| | (20,607 | ) |
PIK interest, amortization of fees and other items (1) | | 19,695 |
| | 12,663 |
| | — |
| | 32,358 |
|
June 30, 2018 | | $ | 4,905,874 |
| | $ | (17,158 | ) | | $ | (21,981 | ) | | $ | 4,866,735 |
|
|
| | | | | | | | | | | | | | | | |
| | Principal Balance | | Deferred Fees/Other Items (1) | | Provision for Loan Loss (2) | | Carrying Value |
December 31, 2018 | | $ | 4,982,514 |
| | $ | (17,940 | ) | | $ | (36,981 | ) | | $ | 4,927,593 |
|
New loan fundings | | 441,844 |
| | — |
| | — |
| | 441,844 |
|
Add-on loan fundings (3) | | 110,331 |
| | — |
| | — |
| | 110,331 |
|
Loan repayments | | (322,354 | ) | | — |
| | — |
| | (322,354 | ) |
Gain (loss) on foreign currency translation | | 15,033 |
| | (136 | ) | | — |
| | 14,897 |
|
Deferred fees | | — |
| | (6,069 | ) | | — |
| | (6,069 | ) |
PIK interest and amortization of fees | | 14,321 |
| | 6,436 |
| | — |
| | 20,757 |
|
March 31, 2019 | | $ | 5,241,689 |
| | $ | (17,709 | ) | | $ | (36,981 | ) | | $ | 5,186,999 |
|
———————
(1)Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses.
(2) In addition to the $22.0$37.0 million provision for loan loss, the Companywe recorded an impairment of $3.0 million against an investment previously recorded under other assets on the Company'sour condensed consolidated balance sheet.
(3) Represents fundings for loans closed prior to 2018.2019.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
| | | | June 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
Number of loans | | 70 |
| | 59 |
| | 69 |
| | 69 |
|
Principal balance | | $ | 4,905,874 |
| | $ | 3,706,169 |
| | $ | 5,241,689 |
| | $ | 4,982,514 |
|
Carrying value | | $ | 4,866,735 |
| | $ | 3,679,758 |
| | $ | 5,186,999 |
| | $ | 4,927,593 |
|
Unfunded loan commitments (1) | | $ | 818,095 |
| | $ | 435,627 |
| | $ | 1,039,089 |
| | $ | 1,095,598 |
|
Weighted-average cash coupon (2) | | 8.1 | % | | 8.4 | % | | 8.4 | % | | 8.4 | % |
Weighted-average remaining term (3) | | | 2.9 years |
| | 2.8 years |
|
———————
| |
(1) | Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date. |
| |
(2) | For floating rate loans, based on applicable benchmark rates as of the specified dates. |
| |
(3) | Assumes all extension options are exercised. |
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
| | | | June 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
Property Type | | Carrying Value | | % of Portfolio | | Carrying Value | | % of Portfolio | | Carrying Value | | % of Portfolio | | Carrying Value | | % of Portfolio |
Hotel | | $1,137,737 | | 23.4% | | $645,056 | | 17.6% | | $ | 1,330,842 |
| | 25.7 | % | | $ | 1,286,590 |
| | 26.1 | % |
Residential-for-sale: inventory (1) | | 616,608 | | 12.7% | | 92,438 | | 2.5% | |
Residential-for-sale: construction (1) | | 333,884 | | 6.8% | | 349,739 | | 9.5% | |
Residential-for-sale: construction | | | 631,501 |
| | 12.1 | % | | 528,510 |
| | 10.7 | % |
Residential-for-sale: inventory | | | 421,815 |
| | 8.1 | % | | 577,053 |
| | 11.7 | % |
Office | | | 956,989 |
| | 18.5 | % | | 832,620 |
| | 16.9 | % |
Urban Predevelopment | | 724,366 | | 14.9% | | 654,736 | | 17.8% | | 610,888 |
| | 11.8 | % | | 683,886 |
| | 13.9 | % |
Office | | 603,947 | | 12.4% | | 513,830 | | 14.0% | |
Multifamily | | 449,414 | | 9.2% | | 465,057 | | 12.6% | | 521,087 |
| | 10.0 | % | | 448,899 |
| | 9.1 | % |
Industrial | | | 227,206 |
| | 4.4 | % | | 32,000 |
| | 0.6 | % |
Retail Center | | | 156,008 |
| | 3.0 | % | | 156,067 |
| | 3.2 | % |
Healthcare | | | 144,310 |
| | 2.8 | % | | 156,814 |
| | 3.2 | % |
Mixed Use | | 356,703 | | 7.3% | | 354,640 | | 9.6% | | 114,284 |
| | 2.2 | % | | 73,957 |
| | 1.5 | % |
Healthcare | | 256,372 | | 5.3% | | 173,870 | | 4.7% | |
Retail Center | | 201,551 | | 4.1% | | 198,913 | | 5.4% | |
Other | | 154,153 | | 3.2% | | 154,141 | | 4.2% | | 72,069 |
| | 1.4 | % | | 151,197 |
| | 3.1 | % |
Industrial | | 32,000 | | 0.7% | | 77,338 | | 2.1% | |
Total | | $4,866,735 | | 100.0% | | $3,679,758 | | 100.0% | | $ | 5,186,999 |
| | 100.0 | % | | $ | 4,927,593 |
| | 100.0 | % |
| |
(1) | To conform to the current period’s presentation, loans with a combined carrying value of $442.0 million classified as residential-for-sale as of December 31, 2017 were broken out into $349.8 million of residential-for-sale: construction and $92.4 million of residential-for-sale: inventory. |
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
| | | | June 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
Geographic Location | | Carrying Value | | % of Portfolio | | Carrying Value | | % of Portfolio | | Carrying Value | | % of Portfolio | | Carrying Value | | % of Portfolio |
Manhattan, NY | | $1,445,389 | | 29.7% | | $1,173,833 | | 31.9% | | $ | 1,825,136 |
| | 35.2 | % | | $ | 1,669,145 |
| | 33.9 | % |
Brooklyn, NY | | 388,814 | | 8.0% | | 357,611 | | 9.7% | | 547,139 |
| | 10.5 | % | | 346,056 |
| | 7.0 | % |
Northeast | | 37,956 | | 0.8% | | 100,536 | | 2.7% | | 18,751 |
| | 0.4 | % | | 23,479 |
| | 0.5 | % |
West | | | 635,733 |
| | 12.3 | % | | 614,160 |
| | 12.5 | % |
Midwest | | 718,600 | | 14.8% | | 683,380 | | 18.6% | | 617,599 |
| | 11.9 | % | | 631,710 |
| | 12.8 | % |
Southeast | | 608,884 | | 12.5% | | 531,582 | | 14.4% | | 567,794 |
| | 10.9 | % | | 559,043 |
| | 11.3 | % |
West | | 500,102 | | 10.2% | | 227,024 | | 6.2% | |
Southwest | | | 120,127 |
| | 2.3 | % | | 96,345 |
| | 2.0 | % |
Mid Atlantic | | 214,521 | | 4.4% | | 191,976 | | 5.2% | | 110,754 |
| | 2.1 | % | | 211,775 |
| | 4.3 | % |
Southwest | | 115,639 | | 2.4% | | 33,615 | | 0.9% | |
United Kingdom | | 711,324 | | 14.6% | | 303,488 | | 8.3% | | 668,507 |
| | 12.9 | % | | 700,460 |
| | 14.2 | % |
Other International | | | 75,459 |
| | 1.5 | % | | 75,420 |
| | 1.5 | % |
Total | | | $ | 5,186,999 |
| | 100.0 | % | | $ | 4,927,593 |
| | 100.0 | % |
|
| | | | | | | | |
Other International | | 125,506 | | 2.6% | | 76,713 | | 2.1% |
Total | | $4,866,735 | | 100.0% | | $3,679,758 | | 100.0% |
The Company assessesWe assess the risk factors of each loan and assignsassign a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio ("LTV"), debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated “1”"1" through “5,”"5," from less risk to greater risk, which ratings are defined as follows:
1. Very low risk
2. Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or has been impaired
The following table allocates the carrying value of our loan portfolio based on the Company'sour internal risk ratings at the dates indicated ($ in thousands):
| | | | June 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
Risk Rating | | Number of Loans | | Carrying Value | | % of Loan Portfolio | | Number of Loans | | Carrying Value | | % of Loan Portfolio | | Number of Loans | | Carrying Value | | % of Loan Portfolio | | Number of Loans | | Carrying Value | | % of Loan Portfolio |
1 | | — | | $ | — |
| | — | % | | — | | $ | — |
| | — | % | | — | | $ | — |
| | — | % | | — | | $ | — |
| | — | % |
2 | | 4 | | 263,216 |
| | 5 | % | | 5 | | 399,326 |
| | 10 | % | | 2 | | 58,847 |
| | 1 | % | | 3 | | 138,040 |
| | 3 | % |
3 | | 63 | | 4,367,766 |
| | 90 | % | | 51 | | 3,034,358 |
| | 83 | % | | 64 | | 4,915,843 |
| | 95 | % | | 63 | | 4,573,930 |
| | 93 | % |
4 | | 1 | | 170,685 |
| | 4 | % | | 1 | | 168,208 |
| | 5 | % | | — | | — |
| | — | % | | — | | — |
| | — | % |
5 | | 2 | | 65,068 |
| | 1 | % | | 2 | | 77,866 |
| | 2 | % | | 3 | | 212,309 |
| | 4 | % | | 3 | | 215,623 |
| | 4 | % |
| | 70 | | $ | 4,866,735 |
| | 100 | % | | 59 | | $ | 3,679,758 |
| | 100 | % | | 69 | | $ | 5,186,999 |
| | 100 | % | | 69 | | $ | 4,927,593 |
| | 100 | % |
| | | | | | | | | |
Weighted-average risk rating | | Weighted-average risk rating | | | | 3.1 |
| | | | 3.1 |
|
The Company evaluates itsWe evaluate our loans for possible impairment on a quarterly basis. The CompanyWe regularly evaluatesevaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service
requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the property’s liquidation value. The CompanyWe also evaluatesevaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considerswe consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that the Companywe will not be able to collect all amounts due according to the contractual terms of the loan.
We evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR") and/or substantial modification, under ASC Topic 310, "Receivables." During the second quarter of 2018, we determined that a modification of one commercial mortgage loan, secured by a retail center in Cincinnati, OH, with a principal balance of $169.0 million constituted a TDR as the interest rate spread was reduced from 5.5% over LIBOR to 3.0% over LIBOR. The Companyentity in which we own an interest and which owns the underlying property was deemed to be a variable interest entity ("VIE") and it was determined that we are not the primary beneficiary of that VIE. During the fourth quarter of 2018, we recorded a $15.0 million loan loss provision against this loan. After the loan loss provision, the amortized cost of the loan was $156.0 million as of March 31, 2019 and December 31, 2018. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using the direct capitalization method. The significant unobservable inputs used in determining the collateral value were in-place net operating income and capitalization rate which were $10.5 million and 6.8%, respectively. The loan is on accrual status and we continue to receive contractual interest due. As of March 31, 2019 and 2018, this loan was assigned a risk rating of 5.
We recorded a $10.0 million loan loss provision and impairment against a commercial mortgage loan secured by a fully-built, for-sale residential condominium units located in Bethesda, MD. This was comprised of (i) $5.0 million loan loss recorded during the second quarter of 2018, and (ii) $2.0 million loan loss provision and $3.0 million of impairment recorded during the second quarter of 2017. The impairment was recorded on an investment previously recorded under other assets on the Company'sour condensed consolidated balance sheet. After the loan loss provisions and related impairment, the amortized cost balance of the loan was $24.2 million and $27.2 million as of March 31, 2019 and December 31, 2018, respectively. The loan loss provision and impairment were based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of $662 dollars per square foot across properties and 15%, respectively. Effective April 1, 2017, the Companywe ceased accruing all interest associated with the loan and accountsaccount for the loan on a cost-recovery basis (all proceeds are applied
towards the loan balance). As of June 30, 2018March 31, 2019 and December 31, 2017,2018, this loan was assigned a risk rating of 5.
During 2016, the Companywe recorded a loan loss provision of $10.0 million on a commercial mortgage loan and $5.0 million on a contiguous subordinate loan secured by a multifamily property located in Williston, ND. After the loan loss provisions, the amortized cost of the loan was $32.1 million and $32.4 million as of March 31, 2019 and December 31, 2018, respectively. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were 11% and 10%, respectively. The Companyentity in which we own an interest and which owns the underlying property was deemed to be a VIE and it was determined that we are not the primary beneficiary of the VIE. We ceased accruing payment in kind ("PIK") interest associated with the loan and recognizingonly recognize interest income upon receipt of cash. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, this loan was assigned a risk rating of 5.
The Company evaluates modificationsDuring the year ended December 31, 2018, we sold a $75.0 million ($17.7 million funded) subordinate position of our $265.0 million loans for the construction of an office campus in Renton, Washington. As of March 31, 2019, our exposure to its loan portfoliothe property is limited to determine if the modifications constitute a troubled debt restructuring ("TDR"),$190.0 million ($96.1 million funded) mortgage loan. This transaction was evaluated under ASC Topic 310, “Receivables." During the second quarter of 2018, the Company860 - Transfers and Servicing and we determined that it qualifies as a modification of one commercial mortgage loan with a principal balance of $169.0 million constituted a TDRsale and accounted for as the interest rate spread was reduced from 5.5% over LIBOR to 3.0% over LIBOR. such.
As of June 30, 2018March 31, 2019 and December 31, 2017, this loan was assigned a risk rating of 4.
As of June 30, 2018, and December 31, 2017, the aggregate loan loss provision was $17.0 million and $5.0$37.0 million for commercial mortgage loans and subordinate loans, respectively.loans.
The CompanyWe recognized PIKpayment-in-kind ("PIK") interest of $9.1$14.5 million and $19.7$10.6 million for the three and six months ended June 30,March 31, 2019 and 2018, respectively, and $6.1 million and $14.0 million for the three and six months ended June 30, 2017, respectively.
The Company
We recognized pre-payment penalties and accelerated fees of $1.6$3.7 million for the three and six months ended June 30, 2018March 31, 2019. There were no pre-payment penalties and $0.6 millionaccelerated fees for the three and six months ended June 30, 2017.March 31, 2018.
Note 65 – Loan Proceeds Held by Servicer
Loan proceeds held by servicer represents principal payments held by the Company'sour third-party loan servicer as of the balance sheet date which were remitted to us subsequent to the balance sheet date. Loan proceeds held by servicer was $302.8$1.0 million as of December 31, 2017.2018. There were no loan proceeds held by servicer as of June 30, 2018.March 31, 2019.
Note 76 – Other Assets
The following table details the components of the Company'sour other assets at the dates indicated ($ in thousands):
| | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
Interest receivable | $ | 27,195 |
| | $ | 23,101 |
| $ | 36,085 |
| | $ | 33,399 |
|
Collateral deposited under derivative agreements | — |
| | 4,930 |
| |
Other | 389 |
| | 389 |
| 455 |
| | 321 |
|
Total | $ | 27,584 |
| | $ | 28,420 |
| $ | 36,540 |
| | $ | 33,720 |
|
Note 87 – Secured Debt Arrangements, Net
At June 30, 2018March 31, 2019 and December 31, 2017, the Company’s2018, our borrowings had the following secured debt arrangements, maturities and weighted averageweighted-average interest rates ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 (2) | | December 31, 2017 |
| Maximum Amount of Borrowings | | Borrowings Outstanding | | Maturity (1) | | Maximum Amount of Borrowings | | Borrowings Outstanding | | Maturity (1) | | Weighted Average Rate (2) |
JPMorgan Facility (USD) (3) | $ | 1,331,780 |
| | $ | 950,634 |
| | June 2021 | | $ | 1,393,000 |
| | $ | 944,529 |
| | March 2020 | | USD L + 2.30% |
JPMorgan Facility (GBP) (3) | 50,220 |
| | 50,220 |
| | June 2021 | | N/A |
| | N/A |
| | N/A | | N/A |
DB Repurchase Facility (USD) (4)
| 698,824 |
| | 469,200 |
| | March 2021 | | 472,090 |
| | 225,367 |
| | March 2020 | | USD L + 2.56% |
DB Repurchase Facility (GBP) (4)
| 156,176 |
| | 156,176 |
| | March 2021 | | 93,919 |
| | 93,919 |
| | March 2020 | | GBP L + 2.60% |
Goldman Facility | 300,000 |
| | 209,014 |
| | November 2020 | | 331,130 |
| | 81,380 |
| | November 2020 | | USD L + 2.73% |
CS Facility | 145,937 |
| | 145,937 |
| | December 2018 | | N/A |
| | N/A |
| | N/A | | N/A |
Sub-total | 2,682,937 |
| | 1,981,181 |
| | | | 2,290,139 |
| | 1,345,195 |
| | | |
|
less: deferred financing costs | N/A |
| | (20,307 | ) | | | | N/A |
| | (14,348 | ) | | | | N/A |
Total / Weighted Average | $ | 2,682,937 |
| | $ | 1,960,874 |
| | $ | 2,290,139 |
| | $ | 1,330,847 |
| | USD L + 2.37% / |
| GBP L + 2.60% |
|
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 (2) | | December 31, 2018 (2) |
| | Maximum Amount of Borrowings | | Borrowings Outstanding | | Maturity (1) | | Maximum Amount of Borrowings | | Borrowings Outstanding | | Maturity (1) |
| JPMorgan Facility (USD) | $ | 1,305,435 |
| | $ | 873,771 |
| | June 2021 | | $ | 1,333,503 |
| | $ | 680,141 |
| | June 2021 |
| JPMorgan Facility (GBP) | 49,565 |
| | 49,565 |
| | June 2021 | | 48,497 |
| | 48,497 |
| | June 2021 |
| DB Repurchase Facility (USD) | 858,919 |
| | 475,871 |
| | March 2021 | | 904,181 |
| | 419,823 |
| | March 2021 |
| DB Repurchase Facility (GBP) | 141,081 |
| | 141,081 |
| | March 2021 | | 150,819 |
| | 150,819 |
| | March 2021 |
| Goldman Facility | 500,000 |
| | 233,312 |
| | November 2021 | | 300,000 |
| | 210,072 |
| | November 2020 |
| CS Facility (USD) | 188,037 |
| | 188,037 |
| | September 2019 | | 187,117 |
| | 187,117 |
| | June 2019 |
| CS Facility (GBP) | 148,219 |
| | 148,219 |
| | September 2019 | | 151,773 |
| | 151,773 |
| | June 2019 |
| HSBC Facility (GBP) | 49,911 |
| | 49,911 |
| | December 2019 | | 48,835 |
| | 48,835 |
| | December 2019 |
| Sub-total | 3,241,167 |
| | 2,159,767 |
| |
| | 3,124,725 |
| | 1,897,077 |
| | |
| less: deferred financing costs | N/A |
| | (17,828 | ) | | | | N/A |
| | (17,555 | ) | | |
| Total / Weighted-Average | $ | 3,241,167 |
| | $ | 2,141,939 |
| | $ | 3,124,725 |
| | $ | 1,879,522 |
| |
|
———————
(1) Maturity date assumes extensions at the Company'sour option are exercised.
(2) Weighted average rateWeighted-average rates as of June 30,March 31, 2019 and December 31, 2018 waswere USD L + 2.27%2.19% / GBP L + 2.30%. and USD L + 2.17% / GBP L + 2.28%, respectively.
(3)As of June 30, 2018, the Company's secured debt arrangements with JPMorgan Chase Bank, National Association (the "JPMorgan Facility") provided
for maximum total borrowings comprised of a $1.3 billion repurchase facility and $132.0 millionof an asset specific financing.
(4)As of June 30, 2018, the Company's secured debt arrangements with Deutsche Bank AG, Cayman Islands Branch and Deutsche Bank AG, London Branch (the "DB Repurchase Facility") provided for maximum total borrowings comprised of a $800.0 million repurchase facility and a $55.0 million asset specific financing.
At June 30, 2018, the Company’s borrowings had the following remaining maturities ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Less than 1 year (1) | | 1 to 3 years (1) | | 3 to 5 years | | More than 5 years | | Total |
JPMorgan Facility | $ | 115,615 |
| | $ | 885,239 |
| | $ | — |
|
| $ | — |
| | $ | 1,000,854 |
|
DB Repurchase Facility | 123,816 |
| | 501,560 |
| | — |
|
| — |
| | 625,376 |
|
Goldman Facility | — |
| | 209,014 |
| | — |
| | — |
| | 209,014 |
|
CS Facility | 145,937 |
| | — |
| | — |
| | — |
| | 145,937 |
|
Total | $ | 385,368 |
| | $ | 1,595,813 |
| | $ | — |
| | $ | — |
| | $ | 1,981,181 |
|
———————
(1)Assumes underlying assets are financed through the fully extended maturity date of the facility.
The table below summarizes the outstanding balances at June 30, 2018, as well as the maximum and average month-end balances for the six months ended June 30, 2018 for the Company's borrowings under secured debt arrangements ($ in thousands).
|
| | | | | | | | | | | | | | | |
| | | | | For the six months ended June 30, 2018 |
| Balance at June 30, 2018 | | Amortized Cost of Collateral at June 30, 2018 | | Maximum Month-End Balance | | Average Month-End Balance |
JPMorgan Facility | $ | 1,000,854 |
| | $ | 1,601,812 |
| | $ | 1,000,854 |
| | $ | 865,101 |
|
DB Repurchase Facility | 625,376 |
| | 1,010,503 |
| | 632,990 |
| | 446,571 |
|
Goldman Facility | 209,014 |
| | 280,699 |
| | 236,764 |
| | 135,123 |
|
CS Facility | 145,937 |
| | 222,902 |
| | 145,937 |
|
| 24,323 |
|
Total | $ | 1,981,181 |
| | $ | 3,115,916 |
| | | | |
JPMorgan Facility
In June 2018, the Company,May 2017, through two indirect wholly ownedwholly-owned subsidiaries, we entered into an amendment to thea Fifth Amended and Restated Master Repurchase Agreement forwith JPMorgan Chase Bank, National Association (as amended, the JPMorgan Facility, which extended the term to June 2020, plus a one-year extension option available at the Company's option, subject to certain conditions."JPMorgan Facility"). The JPMorgan Facility provides for maximum total borrowing capacity of $1.4 billion, comprised of a $1.25 billion repurchase facility and a $132.0$105.0 million asset specific financing and enables the Companyus to elect to receive advances in either U.S. dollars, British pounds ("GBP"), or Euros ("EUR"). The repurchase facility matures in June 2020, plus a one-year extension available at our option, subject to certain conditions. The asset specific financing matures in FebruaryMay 2019. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company hasWe have agreed to provide a limited guarantee of the obligations of itsour indirect wholly-owned subsidiaries under the JPMorgan Facility.
As of June 30, 2018, the CompanyMarch 31, 2019, we had $1.0 billion$923.3 million (including £38.0 million assuming conversion into U.S. dollars) of borrowings outstanding under the JPMorgan Facility secured by certain of the Company'sour commercial mortgage loans.
DB Repurchase Facility
In April 2018, the Company, through an indirect wholly-owned subsidiary, we entered into a Second Amended and Restated Master Repurchase Agreement (the "Second Amendment and Restatement") with Deutsche Bank AG, Cayman Islands Branch and Deutsche Bank AG, London Branch. The Second AmendmentBranch (as amended, the "DB Repurchase Facility"), which was upsized in September 2018, and Restatement provides for advances of up to $800.0 million$1.0 billion for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties located in the United States, United Kingdom and the European Union, and enables the Companyus to elect to receive advances in either U.S. dollars, British pounds, or Euros. Additionally, the Company has $55.0 million of asset specific financings with Deutsche BankThe repurchase facility matures in connection with financing first mortgage loans secured by real estate. The Second Amendment and Restatement has a maturity date of March 31, 2020, plus onea one-year extension available at the Company'sour option, subject to certain conditions. The asset specific financings mature in September 2018. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company hasWe have agreed to provide a limited guarantee of the obligations of itsour indirect wholly-owned subsidiaries under this facility.
As of June 30, 2018, the CompanyMarch 31, 2019, we had $625.4$617.0 million (including £118.3£108.2 million assuming conversion into U.S. dollars) of borrowings outstanding under the DB Repurchase Facility secured by certain of the Company'sour commercial mortgage loans.
Goldman Facility
In November 2017, the Company, through an indirect wholly-owned subsidiary, we entered into a master repurchase and securities contract agreement with Goldman Sachs Bank USA (the "Goldman Facility)Facility"), which provides for advances of upwas upsized in March 2019 from $300.0 million to $300.0$500.0 million and matures in November 2020.2019, plus two one-year extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified margin deficit thresholds. The Company hasWe have agreed to provide a limited guarantee of the obligations of the seller under the Goldman Facility.
As of June 30, 2018, the CompanyMarch 31, 2019, we had total borrowings of $209.0$233.3 million of borrowings outstanding under the Goldman Facility.
CS Facility - USD
In JuneJuly 2018, the Company, through an indirect wholly-owned subsidiary, we entered into a master repurchase agreementMaster Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility"Facility - USD"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - USD matures six months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company hasWe have agreed to provide a guarantee of the obligations of itsour indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $188.0 million of borrowings outstanding under the CS Facility - USD secured by certain of our commercial mortgage loans.
CS Facility - GBP
In June 30, 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - GBP"), which provides for advances for the Companysale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - GBP matures six months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had total borrowings of $145.9$148.2 million (£110.5113.7 million assuming conversion into U.S. dollars) of borrowings outstanding under the CS Facility - GBP secured by one of the Company'sour commercial mortgage loans.
HSBC Facility
In September 2018, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc (the "HSBC Facility"), which provides for a single asset financing. The Company wasfacility matures in December 2019 and unless terminated by either party, automatically extends for further periods prior to maturity. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $49.9 million (£38.3 million assuming conversion into U.S. dollars) of borrowings outstanding under the HSBC Facility secured by one of our commercial mortgage loans.
At March 31, 2019, our borrowings had the following remaining maturities ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Less than 1 year (1) | | 1 to 3 years (1) | | 3 to 5 years | | More than 5 years | | Total |
JPMorgan Facility | $ | 159,854 |
| | $ | 763,482 |
| | $ | — |
|
| $ | — |
| | $ | 923,336 |
|
DB Repurchase Facility | 109,142 |
| | 507,810 |
| | — |
|
| — |
| | 616,952 |
|
Goldman Facility | — |
| | 233,312 |
| | — |
| | — |
| | 233,312 |
|
CS Facility - USD | 188,037 |
| | — |
| | — |
| | — |
| | 188,037 |
|
CS Facility - GBP | 148,219 |
| | — |
| | — |
| | — |
| | 148,219 |
|
HSBC Facility | 49,911 |
| | — |
| | — |
| | — |
| | 49,911 |
|
Total | $ | 655,163 |
| | $ | 1,504,604 |
| | $ | — |
| | $ | — |
| | $ | 2,159,767 |
|
———————
(1)Assumes underlying assets are financed through the fully extended maturity date of the facility.
The table below summarizes the outstanding balances at March 31, 2019, as well as the maximum and average month-end balances for the three months ended March 31, 2019 for our borrowings under secured debt arrangements ($ in thousands).
|
| | | | | | | | | | | | | | | |
| As of March 31, 2019 | | For the three months ended March 31, 2019 |
| Balance | | Amortized Cost of Collateral | | Maximum Month-End Balance | | Average Month-End Balance |
JPMorgan Facility | $ | 923,336 |
| | $ | 1,612,510 |
| | $ | 929,496 |
| | $ | 925,679 |
|
DB Repurchase Facility | 616,952 |
| | 1,013,662 |
| | 672,477 |
| | 636,283 |
|
Goldman Facility | 233,312 |
| | 517,122 |
| | 259,167 |
| | 250,286 |
|
CS Facility - USD | 188,037 |
| | 254,090 |
| | 188,037 |
| | 187,424 |
|
CS Facility - GBP | 148,219 |
| | 211,468 |
| | 150,811 |
| | 145,814 |
|
HSBC Facility | 49,911 |
| | 71,141 |
| | 50,784 |
| | 50,296 |
|
Total | $ | 2,159,767 |
| | $ | 3,679,993 |
| | | | |
We were in compliance with the financial covenants under each of itsour secured debt arrangements at June 30, 2018March 31, 2019 and December 31, 2017.2018.
Note 98 – Convertible Senior Notes, Net
On March 17,In two separate offerings during 2014, the Companywe issued $143.8 millionan aggregate principal amount of $254.8 million of 5.50% Convertible Senior Notes due 2019 (the "March 2019"2019 Notes"), for which the Companywe received net proceeds,$248.6 million, after deducting the underwriting discount and estimated offering expense payable by the Company, of approximately $139.0 million. At June 30, 2018, the Marchexpenses. The 2019 Notes had a carrying valuewere exchanged or converted for shares of $143.0 millionour common stock and an unamortized discount of $0.8 million.cash as follows:
(i) On August 18, 2014,2, 2018, we entered into privately negotiated exchange agreements with a limited number of holders of the Company2019 Notes pursuant to which we exchanged $206.2 million of the 2019 Notes for an aggregate of (a) 10,020,328 newly issued shares of our common stock, and (b) $39.3 million in cash. We recorded $166.0 million of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions,
(ii) Certain holders elected to convert $47.9 million of the 2019 Notes, which were settled for an aggregate of (a) 2,775,509 newly issued shares of our common stock, and (b) $0.2 million in cash. We recorded $13.9 million of additional $111.0paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions. These conversions occurred from August 2018 through maturity.
The remaining $0.7 million aggregatein principal amount of 5.50% Convertible Seniorthe 2019 Notes due 2019 (the "August 2019 Notes," and togetherwere repaid at maturity on March 15, 2019.
During the year ended December 31, 2018, we recorded a loss on early extinguishment of debt of $2.6 million, in connection with the Marchexchanges and conversions of the 2019 Notes, the "2019 Notes"), for which theNotes. This includes fees and accelerated amortization of
Company received net proceeds, after deductingcapitalized costs. There was no such loss related to the underwriting discount and estimated offering expense payable by the Company, of approximately $109.6 million. At June 30, 2018, the August 2019 Notes had a carrying value of $110.0 million and an unamortized discount of $1.0 million.during the three months ended March 31, 2019.
On August 21,In two separate offerings during 2017, the Companywe issued an aggregate principal amount of $230.0$345.0 million of 4.75% Convertible Senior Notes due 2022 (the "August 2022"2022 Notes"), for which the Companywe received net proceeds,$337.5 million, after deducting the underwriting discount and estimated offering expense payable byexpenses. At March 31, 2019, the Company, of approximately $224.8 million. At June 30, 2018, the August 2022 Notes had a carrying value of $221.8$335.9 million and an unamortized discount of $8.2$9.1 million.
On November 9, 2017,During the Companyfourth quarter of 2018, we issued an aggregate principal amount of $115.0$230.0 million of 4.75%5.375% Convertible Senior Notes due 2022 (the "November 20222023 ("2023 Notes," and together with the August2019 Notes and 2022 Notes, the "2022 Notes" and the 2022 Notes together with the 2019 Notes, "the Notes""Notes"), for which the Companywe received net proceeds,$223.7 million after deducting the underwriting discount and estimated offering expense payable byexpenses. At March 31, 2019, the Company of approximately $112.7 million. At June 30, 2018, the November 20222023 Notes had a carrying value of $112.3$222.8 million and an unamortized discount of $2.7$7.2 million.
The following table summarizes the terms of the Notes ($ in thousands):
| | | Principal Amount | Coupon Rate | Effective Rate (1) | Conversion Rate (2) | Maturity Date | Remaining Period of Amortization | Principal Amount | Coupon Rate | Effective Rate (1) | Conversion Rate (2) | Maturity Date | Remaining Period of Amortization |
2019 Notes | $ | 254,750 |
| 5.50 | % | 6.36 | % | 57.8613 |
| 3/15/2019 | 0.70 years | |
2022 Notes | 345,000 |
| 4.75 | % | 5.61 | % | 50.2260 |
| 8/23/2022 | 4.15 years | $ | 345,000 |
| 4.75 | % | 5.60 | % | 50.226 |
| 8/23/2022 | 3.4 |
2023 Notes | | 230,000 |
| 5.38 | % | 6.16 | % | 48.7187 |
| 10/15/2023 | 4.55 |
Total | $ | 599,750 |
| | | $ | 575,000 |
| | |
———————
| |
(1) | Effective rate includes the effect of the adjustment for the conversion option (See endnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital. |
| |
(2) | The Company hasWe 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 $1.0 millionone thousand principal amount of the Notes converted, and includes adjustments relating to cash dividend payments made by the Companyus to stockholders that have been deferred and carried-forward in accordance with, and are not yet required to be made pursuant to, the terms of the applicable supplemental indenture. |
The Company may not redeem the Notes prior to maturity. The closing price of the Company's common stock on June 27, 2018 of $18.58 was greater than the per share conversion price of the 2019 Notes and less than the per share conversion price of the 2022 Notes. The Company has the intent and ability to settle the Notes in cash and, as a result, the Notes did not have any impact on the Company's diluted earnings per share.
In accordance with ASC 470 - Debt, the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) is to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. GAAP requires that the initial proceeds from the sale of the Notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Companyus at such time. The CompanyWe measured the fair value of the debt components of the Notes as of their issuance date based on effective interest rates. As a result, the Companywe attributed approximately $22.4$15.4 million of the proceeds to the equity component of the Notes ($11.411.0 million to the 20192022 Notes and $11.0$4.4 million to the 20222023 Notes), which represents the excess proceeds received over the fair value of the liability component of the Notes at the date of issuance. The equity component of the Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of June 30, 2018.March 31, 2019. The resulting debt discount is being amortized over the period during which the Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the Notes will increase in subsequent reporting periods through the maturity date as the Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately $7.6 million and $15.2$7.6 million for the three and six months ended June 30,March 31, 2019 and 2018, respectively, as compared to approximately $3.5 million and $7.0 million for the three and six months ended June 30, 2017, respectively. With respect to the amortization of the discount on the liability component of the Notes as well as the amortization of deferred financing costs, the Companywe reported additional non-cash interest expense of approximately $1.8 million and $3.7 million for the three and six months ended June 30, 2018, respectively, as compared to approximately $0.9$1.7 million and $1.8 million for the three and six months ended June 30, 2017,March 31, 2019 and 2018, respectively.
Note 109 – Derivatives, Net
The Company usesWe use forward currency contracts to economically hedge interest and principal payments due under itsour loans denominated in currencies other than U.S. dollars.
The Company hasWe have entered into a series of forward contracts to sell an amount of foreign currency (British pound and Euro) for an agreed upon amount of U.S. dollars at various dates through November 2020.December 2021. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by the Companyus related to foreign denominated loan investments.
The following table summarizes the Company's non-designated foreign exchange (“Fx”) forwards as of June 30, 2018:
|
| | | | | | | |
Type of Derivative | June 30, 2018 |
| Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity |
Fx Contracts - GBP | 40 | | 314,226 | | GBP | | July 2018 - November 2020 |
Fx Contracts - EUR | 1 | | 42,247 | | EUR | | October 2018 |
The following table summarizes the Company'sour non-designated foreign exchange ("Fx") forwards as of March 31, 2019:
|
| | | | | | | | | |
| March 31, 2019 |
| Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity | | Weighted-Average Years to Maturity |
Fx Contracts - GBP | 78 | | 259,604 | | GBP | | April 2019- December 2021 | | 1.07 |
The following table summarizes our non-designated Fx forwards as of December 31, 2017:2018:
|
| | | | | | | |
Type of Derivative | December 31, 2017 |
| Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity |
Fx Contracts - GBP | 24 | | 177,077 | | GBP | | January 2018- November 2020 |
|
| | | | | | | | | |
| December 31, 2018 |
| Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity | | Weighted-Average Years to Maturity |
Fx Contracts - GBP | 43 | | 270,161 | | GBP | | January 2019 - November 2020 | | 0.69 |
The Company hasWe have not designated any of itsour derivative instruments as hedges as defined in ASC 815 "Derivatives and HedgingHedging" and, therefore, changes in the fair value of the Company'sour derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to the Company’sour derivatives for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 ($ in thousands):
| | | | | Amount of gain (loss) recognized in income | | Amount of gain (loss) recognized in income | | | Amount of gain (loss) recognized in income |
| | | Three months ended June 30, | | Six months ended June 30, | | Three months ended March 31, |
| Location of Gain (Loss) Recognized in Income | | 2018 | | 2017 | | 2018 | | 2017 | Location of Gain (Loss) Recognized in Income | | 2019 | | 2018 |
Forward currency contracts | Gain (loss) on derivative instruments - unrealized | | $ | 24,800 |
| | $ | (7,438 | ) | | $ | 15,941 |
| | $ | (10,321 | ) | Loss on derivative instruments - unrealized | | $ | (14,985 | ) | | $ | (8,859 | ) |
Forward currency contracts | Gain (loss) on derivative instruments - realized | | 8,742 |
| | 46 |
| | 6,565 |
| | (110 | ) | Gain (loss) on derivative instruments - realized | | 8,265 |
| | (2,177 | ) |
Interest rate caps (1) | Gain (loss) on derivative instruments - unrealized | | (4 | ) | | 3 |
| | — |
| | (3 | ) | Gain on derivative instruments - unrealized | | — |
| | 4 |
|
Total | | $ | 33,538 |
| | $ | (7,389 | ) | | $ | 22,506 |
| | $ | (10,434 | ) | | $ | (6,720 | ) | | $ | (11,032 | ) |
———————
| |
(1) | With a notional amount of $37.5$33.6 million and $42.8$38.9 million at June 30,March 31, 2019, and 2018, and 2017, respectively. |
The following table summarizes the gross asset and liability amounts related to the Company’sour derivatives at June 30, 2018March 31, 2019 and December 31, 20172018 ($ in thousands).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | | Gross Amount of Recognized Assets | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet |
Forward currency contracts | 9,852 |
| | (1,137 | ) | | 8,715 |
| | 23,753 |
| | (53 | ) | | 23,700 |
|
Total derivative instruments | $ | 9,852 |
| | $ | (1,137 | ) | | $ | 8,715 |
| | $ | 23,753 |
|
| $ | (53 | ) |
| $ | 23,700 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | | Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheet |
Interest rate caps | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Forward currency contracts | 11,409 |
| | (1,113 | ) | | 10,296 |
| | (5,645 | ) | | — |
| | (5,645 | ) |
Total derivative instruments | $ | 11,410 |
| | $ | (1,113 | ) | | $ | 10,297 |
| | $ | (5,645 | ) |
| $ | 1 |
|
| $ | (5,644 | ) |
Note 1110 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of the Company'sour accounts payable, accrued expense and other liabilities ($ in thousands):
| | | June 30, 2018 |
| | December 31, 2017 |
| March 31, 2019 | | December 31, 2018 |
Accrued dividends payable | $ | 63,604 |
| | $ | 56,576 |
| $ | 69,799 |
| | $ | 69,033 |
|
Collateral deposited under derivative agreements | | 1,820 |
| | 20,000 |
|
Accrued interest payable | 14,339 |
| | 12,796 |
| 13,488 |
| | 14,208 |
|
Accounts payable and other liabilities | 3,454 |
| | 1,534 |
| 6,450 |
| | 1,505 |
|
Total | $ | 81,397 |
| | $ | 70,906 |
| $ | 91,557 |
| | $ | 104,746 |
|
Note 1211 – Related Party Transactions
Management Agreement
In connection with the Company’sour initial public offering in September 2009, the Companywe entered into a management agreement (the “Management Agreement”"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 the Company’sour day-to-day operations, subject to the direction and oversight of the Company’sour board of directors.
Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to 1.5% per annum of the Company’sour stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The current term of the Management Agreement was renewed during the period and expires on September 29, 20182019 and is automatically renewed for successive one-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of the Company’sour independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the CompanyARI or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’sour independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by the Company’sour independent directors in February 2018,2019, which included a discussion of the Manager’s performance and the level of the management fees thereunder, the Companywe determined not to seek termination of the Management Agreement.
The CompanyWe incurred approximately $9.0 million and $17.1$9.6 million in base management fees under the Management Agreement for the three and six months ended June 30, 2018, respectively,March 31, 2019 as compared to approximately $7.7 million and $15.2$8.1 million for the three and six months ended June 30, 2017, respectively.March 31, 2018.
In addition to the base management fee, the Company iswe are also responsible for reimbursing the Manager for certain expenses paid by the Manager on our behalf of the Company or for certain services provided by the Manager to the Company.us.
For the three and six months ended June 30,March 31, 2019 and 2018, the Companywe paid expenses totaling $0.6$0.7 million and $1.2 million,
respectively, related to reimbursements for certain expenses paid by the Manager on behalf of the Company under the Management Agreement. For the three and six months ended June 30, 2017, the Company paid expenses totaling $0.1 million and $0.2$0.6 million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf of the Company under the Management Agreement. Expenses incurred by the Manager and reimbursed by the Companyus are reflected in the respective condensed consolidated statement of operations expense category or the condensed consolidated balance sheet based on the nature of the item.
Included in payable to related party on the condensed consolidated balance sheet at June 30, 2018March 31, 2019 and December 31, 20172018 are approximately $9.0$9.6 million and $8.2$9.8 million, respectively, for base management fees incurred but not yet paid under the Management Agreement.
Unconsolidated Joint Venture
In September 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ Limited Partnership ("Champ LP") following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in Bremer Kreditbank AG ("BKB"). In May 2017, the Company sold its remaining ownership interest in Champ LP, to unaffiliated third parties. As such, in 2018 the Company no longer held any interest in Champ LP.
Loans receivable
In June 2017, the Companywe increased itsour outstanding loan commitment through the acquisition of an additional $25.0 million of interests in an existing subordinate loan from a fund managed by an affiliate of the Manager, increasing the Company'sour total outstanding loan commitment to $100.0 million. Furthermore, in September 2017 the Companywe funded an additional $25.0 million to acquire a portion of the same pre-development subordinate loan from a fund managed by an affiliate of the Manager, increasing the Company'sour total outstanding loan commitment to $125.0 million. In May 2018, the Companywe increased itsour outstanding principal balance through the
acquisition of an additional $28.2 million interest in the same subordinate loan from a fund managed by an affiliate of the Manager. The pre-development subordinate loan is for the construction of a residential condominium building in New York, New York and is part of a $300.0 million subordinate loan.
In June 2018, the Companywe increased itsour outstanding loan commitment through the acquisition of £4.8 million ($6.4 million assuming conversion into U.S. dollars) pari-passu interest in an existing subordinate loan from a fund managed by an affiliate of the Manager. The subordinate loan is secured by a healthcare portfolio located in the United Kingdom.
Note 1312 – Share-Based Payments
On September 23, 2009, the Company’sour board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (as amended from time to time, the “LTIP”"LTIP"). The LTIP provides for grants of restricted common stock, restricted stock units (“RSUs”("RSUs") and other equity-based awards up to an aggregate of 7.5% of the issued and outstanding shares of the Company’sour common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of the Company’sour board of directors (the “Compensation Committee”"Compensation Committee") and all grants under the LTIP must be approved by the Compensation Committee.
The CompanyWe recognized stock-based compensation expense of $4.0$3.9 million and $7.4$3.3 million for the three and six months ended June 30,March 31, 2019 and 2018, respectively, related to restricted stock and RSU vesting, as comparedvesting. We adopted ASU 2018-07 on January 1, 2019 and the stock-based compensation expense for grants before the adoption of ASU 2018-07 is based on the closing price of our common stock of $16.66 on December 31, 2018, which was the last business day before we adopted ASU 2018-07. Refer to $3.5 million and $7.3 million"Note 2 - Summary of Significant Accounting Policies" for the three and six months ended June 30, 2017, respectively, related to restricted stock and RSU vesting.further discussion on our adoption of ASU 2018-07.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the sixthree months ended June 30, 2018:March 31, 2019:
|
| | | | | | | | | | |
| Type | | Restricted Stock | | RSUs | | Grant Date Fair Value ($ in thousands) |
Outstanding at December 31, 2017 | | 105,561 |
| | 1,632,746 |
| | |
| Grant | | 28,070 |
| | — |
| | 500 |
|
| Vested | | (10,394 | ) | | — |
| | N/A |
|
| Forfeiture | | — |
| | (29,410 | ) | | N/A |
|
Outstanding at June 30, 2018 | | 123,237 |
| | 1,603,336 |
| | |
|
| | | | | | | | | |
| Type | | Restricted Stock | | RSUs | | Grant Date Fair Value ($ in thousands) |
Outstanding at December 31, 2018 | | 65,697 |
| | 1,852,957 |
| | |
| Vested | | (1,419 | ) | | — |
| | N/A |
| Forfeiture | | — |
| | (4,174 | ) | | N/A |
Outstanding at March 31, 2019 | | 64,278 |
| | 1,848,783 |
| | |
Below is a summary of restricted stock and RSU vesting dates as of June 30, 2018March 31, 2019:
| | Vesting Year | Restricted Stock | | RSU | | Total Awards | | Restricted Stock | | RSU | | Total Awards |
2018 | 57,540 |
| | 744,497 |
| | 802,037 |
| |
2019 | 60,803 |
| | 560,138 |
| | 620,941 |
| | 40,671 |
| | 887,222 |
| | 927,893 |
|
2020 | 4,894 |
| | 298,701 |
| | 303,595 |
| | 14,251 |
| | 626,738 |
| | 640,989 |
|
2021 | | | 9,356 |
| | 334,823 |
| | 344,179 |
|
Total | 123,237 |
| | 1,603,336 |
| | 1,726,573 |
| | 64,278 |
| | 1,848,783 |
| | 1,913,061 |
|
At June 30, 2018March 31, 2019, the Companywe had unrecognized compensation expense of approximately $1.4$0.6 million and $22.6$27.1 million, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.
RSU Deliveries
During the sixthree months ended June 30,March 31, 2019 and 2018, the Companywe delivered 345,996433,426 and 354,996 shares of common stock for 730,717 and 603,677 vested RSUs. The Company did not deliver any common stock for the three months ended June 30, 2018. The Company allowsRSUs, respectively. We allow RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on the condensed consolidated statement of changes in stockholders' equity. The adjustment was $5.0 million and $4.7 million for the sixthree months ended June 30,March 31, 2019 and 2018, andrespectively. The adjustment is included as a reduction of capital related to the Company'sour equity incentive plan and is presented net of increases of capital related to our equity incentive plan in the condensed consolidated statement of changes in stockholders' equity. There was no adjustment for the three months ended June 30, 2018.
Note 1413 – Stockholders’ Equity
The Company’sOur 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 June 30, 2018March 31, 2019, 123,020,301136,254,352 shares of common stock were issued and outstanding, 6,770,393 shares of 8.00% Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock ("Series B Preferred Stock") were issued and outstanding and 6,900,000$6,900,000 shares of 8.00% Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") were issued and outstanding.
Dividends. During 2018, the Company2019, we declared the following dividends:
| | | Three months ended | | Three months ended |
Dividend declared per share of: | June 30, 2018 | | March 31, 2018 | | March 31, 2019 | | March 31, 2018 |
Common Stock | $0.46 | | $0.46 | | $0.46 | | $0.46 |
Series B Preferred Stock | 0.50 | | 0.50 | | 0.50 | | 0.50 |
Series C Preferred Stock | 0.50 | | 0.50 | | 0.50 | | 0.50 |
Common Stock Offerings. During the first quarter of 2018, the Companywe completed a follow-on public offering of 15,525,000 shares of itsour common stock, at a price of $17.77 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $275.9 million after deducting estimated offering expenses.
During the first quarter of 2019, we issued 1,967,361 shares of our common stock, at a per share conversion price of $17.17, related to conversions of the 2019 Notes, the remainder of which matured on March 15, 2019. We recorded a $33.8 million increase in additional paid in capital in the condensed consolidated statement of changes in stockholders' equity. Refer to "Note 8 - Convertible Senior Notes, Net" for a further discussion on the conversions of the 2019 Notes.
Note 1514 – Commitments and Contingencies
Legal Proceedings. From time to time, the Companywe may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced an action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No. 653251/2018) in New York Supreme Court. The complaint names as defendants (i) ACREFI Mortgage Lending, LLC, a subsidiary of the Company, (ii) the Company, and (iii) certain funds managed by Apollo, who are co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs allege that the defendants tortiously interfered with the contractual equity put right in the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project. The plaintiffs allege the loss of a $70.0 million investment as part of total damages of $700.0 million, which includes punitive damages. The Company believesdefendants moved to dismiss the complaint on August 17, 2018, and the motion was fully briefed in October 2018. Oral argument took place on March 12, 2019, and the court’s decision is pending. We believe the claims are without merit and willplan to vigorously defend the case.
On January 4, 2017, the United States Department of Justice served We do not believe this will have a Request for Information and Documents (the “Request”)material adverse effect on the Company, in connection with a preliminary investigation into certain aspects of the Company's former residential real estate portfolio, which the Company acquired in connection with the merger of Apollo Residential Mortgage, Inc. with and into the Company and subsequently sold in 2016. The Request sought a range of information in connection with the residential real estate portfolio, including, among other things, information concerning policies, procedures, and practices related to advertising, marketing, identifying, or acquiring residential properties for sale or rent, and various data for all rental and sales contracts executed since January 1, 2012. The Company fully cooperated with the Department of Justice, and was advised, by a letter dated May 2, 2018, that the Department of Justice did not intend to take any further actions in this matter as it relates to the Company.our condensed consolidated financial statements.
Loan Commitments. As described in "Note 54 - Commercial Mortgage and Subordinate Loans, Net," at June 30, 2018, the CompanyMarch 31, 2019, we had $818.1$1,039.1 million of unfunded commitments related to itsour commercial mortgage and subordinate loan portfolios.
Note 1615 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of the Company’sour financial instruments not carried at fair value on the condensed consolidated balance sheet at June 30, 2018March 31, 2019 and December 31, 20172018 ($ in thousands):
| | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Cash | $ | 76,384 |
| | $ | 76,384 |
| | $ | 77,671 |
| | $ | 77,671 |
| |
Cash and cash equivalents | | $ | 109,343 |
| | $ | 109,343 |
| | $ | 109,806 |
| | $ | 109,806 |
|
Commercial first mortgage loans, net | 3,724,221 |
| | 3,722,116 |
| | 2,653,826 |
| | 2,657,262 |
| 4,003,089 |
| | 4,025,760 |
| | 3,878,981 |
| | 3,894,947 |
|
Subordinate loans, net | 1,142,514 |
| | 1,140,501 |
| | 1,025,932 |
| | 1,029,390 |
| 1,183,910 |
| | 1,187,128 |
| | 1,048,612 |
| | 1,047,854 |
|
Secured debt arrangements | (1,981,181 | ) | | (1,981,181 | ) | | (1,345,195 | ) | | (1,345,195 | ) | (2,159,767 | ) | | (2,159,767 | ) | | (1,897,077 | ) | | (1,897,077 | ) |
2019 Notes | (252,952 | ) | | (270,753 | ) | | (251,935 | ) | | (267,506 | ) | — |
| | — |
| | (34,278 | ) | | (35,276 | ) |
2022 Notes | (334,111 | ) | | (345,000 | ) | | (332,962 | ) | | (350,175 | ) | (335,894 | ) | | (337,762 | ) | | (335,291 | ) | | (326,025 | ) |
2023 Notes | | (222,770 | ) | | (225,770 | ) | | (222,431 | ) | | (221,964 | ) |
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount the Companywe could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and convertible senior notes, net are measured using observable Level I inputs as defined in "Note 3 - Fair Value Disclosure." Estimates of fair value for all other financial instruments in the table above are measured using significant estimates, or unobservable Level III inputs as defined in "Note 3 - Fair Value Disclosure."
Note 1716 – Net Income (Loss) per Share
ASC 260 Earnings"Earnings per share,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 (loss) per share of common stock using the two-class method for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 ($ in thousands except per share data):
|
| | | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June, 30 |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | |
Net income | $ | 55,346 |
| | $ | 36,235 |
| | $ | 104,779 |
| | $ | 83,359 |
|
Preferred dividends | (6,834 | ) | | (9,310 | ) | | (13,669 | ) | | (18,620 | ) |
Net income available to common stockholders | 48,512 |
| | 26,925 |
| | 91,110 |
| | 64,739 |
|
Dividends declared on common stock | (56,588 | ) | | (48,501 | ) | | (113,165 | ) | | (90,647 | ) |
Dividends on participating securities | (738 | ) | | (630 | ) | | (1,489 | ) | | (1,259 | ) |
Net loss attributable to common stockholders | $ | (8,814 | ) | | $ | (22,206 | ) | | $ | (23,544 | ) | | $ | (27,167 | ) |
Denominator: | | | | | | | |
Basic weighted average shares of common stock outstanding | 123,019,993 |
| | 95,428,134 |
| | 116,651,305 |
| | 93,530,831 |
|
Diluted weighted average shares of common stock outstanding | 124,629,317 |
| | 96,796,289 |
| | 118,281,153 |
| | 94,907,762 |
|
Net income per weighted average share of common stock |
| |
| |
| | |
Distributable earnings per share of common stock | $ | 0.46 |
| | $ | 0.51 |
| | $ | 0.98 |
| | $ | 0.97 |
|
Undistributed loss per share of common stock | $ | (0.07 | ) | | $ | (0.23 | ) | | $ | (0.20 | ) | | $ | (0.29 | ) |
Basic and diluted net income per share of common stock | $ | 0.39 |
| | $ | 0.28 |
| | $ | 0.78 |
| | $ | 0.68 |
|
|
| | | | | | | |
| For the three months ended March 31, |
| 2019 | | 2018 |
Basic Earnings | | | |
Net Income | $ | 67,758 |
| | $ | 49,433 |
|
Less: Preferred dividends | (6,835 | ) | | (6,835 | ) |
Net income available to common stockholders | $ | 60,923 |
| | $ | 42,598 |
|
Less: Dividends on participating securities | (851 | ) | | (751 | ) |
Basic Earnings | $ | 60,072 |
| | $ | 41,847 |
|
| | | |
Diluted Earnings | | | |
Net Income | $ | 67,758 |
| | $ | 49,433 |
|
Less: Preferred dividends | (6,835 | ) | | (6,835 | ) |
Net income available to common stockholders | $ | 60,923 |
| | $ | 42,598 |
|
Add: Interest expense on Notes | 9,262 |
| | N/A |
|
Diluted Earnings | $ | 70,185 |
| | $ | 42,598 |
|
| | | |
Number of Shares: | | | |
Basic weighted-average shares of common stock outstanding | 134,607,107 |
| | 110,211,853 |
|
Diluted weighted-average shares of common stock outstanding | 164,683,086 |
| | 111,871,429 |
|
| | |
|
|
Earnings Per Share Attributable to Common Stockholders | | | |
Basic | $ | 0.45 |
| | $ | 0.38 |
|
Diluted | $ | 0.43 |
| | $ | 0.38 |
|
Prior to the three months ended September 30, 2018, we asserted our intent and ability to settle the principal amount of the Notes in cash and, as a result, the Notes did not have any impact on our diluted earnings per share. As of September 30, 2018, we no longer asserted our intent to fully settle the principal amount of the Notes in cash upon conversion. Accordingly, the dilutive effect to earnings per share for the current year periods is determined using the "if-converted" method whereby interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three months ended March 31, 2019, 30,093,312 weighted-average potentially issuable shares from the Notes were included in the dilutive earnings per share denominator. Refer to "Note 8 - Convertible Senior Notes, Net" for further discussion.
For the three and six months ended June 30,March 31, 2019 and 2018, 1,609,3241,849,564 and 1,629,848 weighted average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive. For the three and six months ended June 30, 2017, 1,368,155 and 1,376,930 weighted average1,659,576 weighted-average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 1817 – Subsequent Events
Investment activityactivity.. Subsequent to the end of the quarter the Companyended March 31, 2019, we committed capital of $87.0$75.6 million all of which was funded at closing, of(£58.0 million) to a first mortgage loans.loan.
In addition, the Companywe funded approximately $18.9$41.3 million for loans closed prior to the quarter.
Loan Repayments. Subsequent to the end of the quarter, the Companywe received approximately $52.3$13.1 million from loan repayments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING INFORMATION
The Company makesWe make forward-looking statements herein and will make forward-looking statements in future filings with the SEC, press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of
1933, as amended (the “Securities Act”"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"). For these statements, the Company claimswe claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’sour control. These forward-looking statements include information about possible or assumed future results of the Company’sour business, financial condition, liquidity, results of operations, plans and objectives. When the Company useswe use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may”"believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’sour industry, interest rates, real estate values, the debt securities markets or the general economy; the demand for commercial real estate loans; the Company’sour business and investment strategy; the Company’sour operating results; actions and initiatives of the U.S. government and governments outside of the United States, changes to government policies and the execution and impact of these actions, initiatives and policies; the state of the economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’sour ability to obtain and maintain financing arrangements, including secured debt arrangements and securitizations; the availability of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which the Company participates;we participate; changes in the value of the Company’sour assets; the scope of the Company’sour target assets; interest rate mismatches between the Company’sour target assets and any borrowings used to fund such assets; changes in interest rates and the market value of the Company’sour target assets; changes in prepayment rates on the Company’sour target assets; effects of hedging instruments on the Company’sour target assets; rates of default or decreased recovery rates on the Company’sour target assets; the degree to which hedging strategies may or may not protect the Companyus from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting, legal or regulatory issues or guidance and similar matters; the Company’sour continued maintenance of itsour qualification as a REIT for U.S. federal income tax purposes; the Company’sour continued exclusion from registration under the Investment Company Act of 1940, as amended; the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to the Company’sour ability to make distributions to itsour stockholders in the future; the Company'sour present and potential future competition; and unexpected costs or unexpected liabilities, including those related to litigation.
The forward-looking statements are based on the Company’sour beliefs, assumptions and expectations of itsour future performance, taking into account all information currently available to it.us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company.us. See “Item"Item 1A. Risk Factors”Factors" of the Company’sour Annual Report on Form 10-K for the year ended December 31, 2017.2018. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company fileswe file with the SEC, could cause itsour actual results to differ materially from those included in any forward-looking statements the Company makes.we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, the Company iswe are not obligated to, and doesdo not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company isWe are a Maryland corporation that hasand have elected to be taxed as a REIT for U.S. federal income tax purposes. The CompanyWe primarily originates, acquires, investsoriginate, acquire, invest in and managesmanage performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as the Company’sour target assets.
The Company isWe are externally managed and advised by the Manager, an indirect subsidiary of Apollo, a leading global alternative investment manager with a contrarian and value-oriented investment approach in private equity, credit and real estate with assets under management of approximately $247.4$280.3 billion as of MarchDecember 31, 2018.
The Manager is led by an experienced team of senior real estate professionals who have significant expertise in underwriting and structuring commercial real estate financing transactions. The Company benefitsWe benefit from Apollo’s global infrastructure and operating platform, through which the Company iswe are able to source, evaluate and manage potential investments in the Company’sour target assets.
Market Overview
Based on the current market dynamics, including significant upcoming commercial real estate debt maturities, we believe there remains compelling opportunities for the Companyus to invest capital in itsour target assets at attractive risk adjusted returns. The Company continuesWe continue to focus on underlying real estate value, and transactions that benefit from the Company’sour ability to execute complex and sophisticated transactions.
The Company believes
We believe the challenges faced by conduit lenders and the general uncertainty around value and pricing could create attractive risk adjusted investment opportunities for the Company.us. As a result, the Company expectswe expect to continue to see opportunities to originate first mortgage and subordinate financings in transactions which benefit from the Company’sour ability to source, structure and execute complex transactions.
Critical Accounting Policies
A summary of the Company’sour critical accounting policies is set forth in itsour Annual Report on Form 10-K for the year ended December 31, 20172018 under “Item"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates.”" There have been no material changes to the Company'sour critical accounting policies described in the Company'sour Annual Report on Form 10-K filed with the SEC on February 14, 2018.13, 2019.
Results of Operations
All non-U.S. dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.
InvestmentsLoan Portfolio Overview
The following table sets forth certain information regarding the Company’sour commercial real estate debt portfolio as of June 30, 2018March 31, 2019 ($ in thousands):
| | Description | | Amortized Cost | | Weighted Average Coupon (1) | | Weighted Average All-in Yield (1)(2) | | Secured Debt (3) | | Cost of Funds | | Equity at cost(4) | | Amortized Cost | | Weighted-Average Coupon (1) | | Weighted Average All-in Yield (1)(2) | | Secured Debt (3) | | Cost of Funds | | Equity at cost(4) |
Commercial mortgage loans, net | | $ | 3,724,221 |
| | 6.9 | % | | 7.8 | % | | $ | 1,981,181 |
| | 4.1 | % | | $ | 1,743,040 |
| | $ | 4,003,089 |
| | 7.0 | % | | 7.8 | % | | $ | 2,159,767 |
| | 4.1 | % | | $ | 1,843,322 |
|
Subordinate loans, net | | 1,142,514 |
| | 12.1 | % | | 13.4 | % | | — |
| | — |
| | 1,142,514 |
| | 1,183,910 |
| | 12.9 | % | | 14.3 | % | | — |
| | — |
| | 1,183,910 |
|
Total/Weighted Average | | $ | 4,866,735 |
| | 8.1 | % | | 9.1 | % | | $ | 1,981,181 |
| | 4.1 | % | | $ | 2,885,554 |
| |
Total/Weighted-Average | | | $ | 5,186,999 |
|
| 8.4 | % |
| 9.3 | % |
| $ | 2,159,767 |
|
| 4.1 | % |
| $ | 3,027,232 |
|
———————
| |
(1) | Weighted-Average Coupon and Weighted Average All-in-YieldWeighted-Average All-in Yield are based on the applicable benchmark rates as of June 30, 2018March 31, 2019 on the floating rate loans. |
| |
(2) | Weighted-Average All-in-YieldAll-in Yield includes the amortization of deferred origination fees, loan origination costs and accrual of both extension and exit fees. |
| |
(3) | Gross of deferred financing costs of $20.3$17.8 million. |
| |
(4) | Represents loan portfolio at amortized cost less secured debt outstanding. |
Loan Portfolio Overview
The following table provides details of our commercial mortgage and subordinate loan portfolios, on a loan-by-loan basis, as of June 30, 2018March 31, 2019 ($ in millions):
| | Commercial Mortgage Loan Portfolio | Property Type | Risk Rating | Origination Date | Amortized Cost | Unfunded Commitment | Construction Loan | Fully-extended Maturity | Location | Risk Rating | Origination Date | Amortized Cost | Unfunded Commitment | Construction Loan(4) | Fully-extended Maturity | Location |
Urban Predevelopment | | 3 | 01/2016 | $213 | — | | 07/2019 | Miami, FL |
Residential-for-sale: inventory | 3 | 3/2018 | $223 | — |
| 3/2021 | London, UK | 3 | 03/2018 | 211 | — | | 03/2021 | London, UK |
Hotel | | 3 | 09/2016 | 210 | — | | 01/2022 | Manhattan, NY |
Industrial | | 3 | 01/2019 | 195 | 7 | | 02/2024 | Brooklyn, NY |
Urban Predevelopment | 3 | 1/2016 | 221 | — |
| 7/2019 | Miami, FL | 3 | 04/2017 | 182 | — | | 09/2019 | London, UK |
Office | | 3 | 10/2018 | 178 | 21 | | 10/2021 | Manhattan, NY |
Office | | 3 | 11/2017 | 169 | — | | 01/2023 | Chicago, IL |
Office | | 3 | 11/2017 | 157 | 91 | Y | 12/2022 | Manhattan, NY |
Retail Center (3) | | 5 | 11/2014 | 156 | — | | 09/2020 | Cincinnati, OH |
Hotel | 3 | 9/2016 | 215 | — |
| 8/2021 | Manhattan, NY | 3 | 04/2018 | 151 | 2 | | 04/2023 | Honolulu, HI |
Urban Predevelopment | 3 | 4/2017 | 183 | — |
| 3/2019 | London, UK | 3 | 03/2017 | 144 | 20 | | 12/2020 | Brooklyn, NY |
Office | 3 | 11/2017 | 176 | — |
| 1/2023 | Chicago, IL | |
Hotel (1) | | 3 | 09/2015 | 140 | — | | 06/2023 | Manhattan, NY |
Hotel | | 3 | 05/2018 | 139 | — | | 06/2023 | Miami, FL |
| | Retail Center | 4 | 11/2014 | 171 | — |
| 9/2018 | Cincinnati, OH | |
Hotel | 3 | 4/2018 | 151 | 2 |
| 4/2023 | Honolulu, HI | |
Hotel(1) | 3 | 9/2015 | 140 | — |
| 6/2023 | Manhattan, NY | |
Hotel | 3 | 5/2018 | 139 | — |
| 6/2023 | Miami, FL | |
Mixed Use | 3 | 9/2016 | 133 | — |
| 10/2020 | Chicago, IL | |
Urban Predevelopment | 3 | 3/2017 | 128 | — |
| 9/2018 | Brooklyn, NY | |
Mixed Use | 2 | 7/2017 | 125 | — |
| 6/2019 | Manhattan, NY | |
Office | 3 | 11/2017 | 120 | 127 | Y | 12/2022 | Manhattan, NY | |
Residential-for-sale: inventory | 3 | 6/2018 | 113 | — |
| 6/2020 | Manhattan, NY | |
Multifamily | 3 | 4/2014 | 80 | — |
| 7/2023 | Various | |
Other | 2 | 10/2016 | 80 | — |
| 8/2019 | Manassas, VA | |
Hotel | 3 | 3/2017 | 77 | — |
| 3/2022 | Atlanta, GA | 3 | 03/2017 | 105 | — | | 03/2022 | Atlanta, GA |
Office | 3 | 12/2017 | 76 | 59 |
| 3/2022 | London, UK | 3 | 10/2018 | 101 | 84 | Y | 10/2023 | Manhattan, NY |
Hotel | | 3 | 11/2018 | 99 | — | | 12/2023 | Vail, CO |
Office | | 3 | 01/2018 | 94 | Y | 01/2022 | Renton, WA |
Hotel | | 3 | 12/2017 | 90 | — | | 12/2022 | Manhattan, NY |
Hotel | | 3 | 07/2018 | 86 | — | | 08/2021 | Detroit, MI |
Residential-for-sale: construction | | 3 | 05/2018 | 78 | 5 | Y | 06/2020 | Brooklyn, NY |
Office | | 3 | 12/2017 | 76 | 57 | | 03/2022 | London, UK |
Multifamily | | 3 | 04/2014 | 76 | — | | 07/2023 | Various |
Residential-for-sale: inventory | 3 | 5/2018 | 75 | 4 |
| 6/2020 | Brooklyn, NY | 3 | 06/2018 | 76 | — | | 06/2020 | Manhattan, NY |
Residential-for-sale: inventory | 3 | 6/2018 | 71 | — |
| 6/2020 | London, UK | |
Urban Predevelopment | | 3 | 12/2016 | 73 | — | | 12/2020 | Los Angeles, CA |
Multifamily | 3 | 10/2017 | 67 | — |
| 11/2021 | Brooklyn, NY | 3 | 06/2018 | 71 | — | | 06/2020 | London, UK |
Urban Predevelopment | 3 | 11/2016 | 65 | — |
| 12/2018 | Manhattan, NY | |
Urban Predevelopment | 3 | 7/2017 | 64 | 16 |
| 4/2019 | London, UK | |
Multifamily | | 3 | 10/2017 | 67 | — | | 11/2021 | Brooklyn, NY |
Hotel | 3 | 4/2018 | 63 | — |
| 5/2023 | Scottsdale, AZ | 3 | 04/2018 | 63 | — | | 05/2023 | Scottsdale, AZ |
Urban Predevelopment | 3 | 12/2016 | 62 | 19 |
| 12/2020 | Los Angeles, CA | |
Office | | 3 | 03/2018 | 63 | 25 | | 04/2023 | Chicago, IL |
Residential-for-sale: construction | | 3 | 12/2018 | 60 | 92 | Y | 12/2023 | Manhattan, NY |
Hotel | 2 | 1/2017 | 60 | — |
| 1/2022 | Miami, FL | 2 | 01/2017 | 60 | — | | 01/2022 | Miami, FL |
Multifamily | 3 | 11/2014 | 59 | — |
| 11/2021 | Various | 3 | 11/2014 | 57 | — | | 11/2021 | Various |
Office | 3 | 3/2018 | 58 | 29 |
| 4/2023 | Chicago, IL | |
Hotel | 3 | 12/2017 | 57 | 32 | Y | 12/2022 | Manhattan, NY | |
Office(2) | 3 | 1/2018 | 55 | 158 | Y | 1/2022 | Renton, WA | |
Multifamily | | 3 | 05/2016 | 50 | 2 | | 06/2019 | Brooklyn, NY |
Residential-for-sale: inventory | 3 | 5/2018 | 50 | — |
| 4/2021 | Manhattan, NY | 3 | 05/2018 | 50 | — | | 04/2021 | Manhattan, NY |
Multifamily | 3 | 5/2016 | 44 | 8 |
| 6/2019 | Brooklyn, NY | |
Multifamily | 3 | 10/2017 | 43 | — |
| 10/2022 | London, UK | 3 | 10/2017 | 43 | — | | 10/2022 | London, UK |
Hotel | 3 | 12/2015 | 42 | 1 |
| 12/2020 | St. Thomas, USVI | 3 | 12/2015 | 42 | 2 | | 12/2020 | St. Thomas, USVI |
Multifamily | 3 | 12/2017 | 39 | 1 |
| 1/2020 | Manhattan, NY | 3 | 12/2017 | 42 | — | | 01/2020 | Manhattan, NY |
Hotel | 3 | 2/2018 | 38 | — |
| 3/2023 | Pittsburgh, PA | 3 | 02/2018 | 38 | — | | 03/2023 | Pittsburgh, PA |
Residential-for-sale: construction | | 3 | 01/2018 | 33 | 47 | Y | 01/2023 | Manhattan, NY |
Multifamily(3) | 5 | 11/2014 | 37 | — |
| 11/2019 | Williston, ND | 5 | 11/2014 | 32 | — | | 11/2019 | Williston, ND |
Mixed Use | 3 | 7/2017 | 36 | — |
| 2/2019 | Manhattan, NY | |
Retail Center | 3 | 2/2017 | 31 | 3 |
| 9/2020 | Miami, FL | |
Residential-for-sale: inventory(3) | 5 | 2/2014 | 28 | — |
| 4/2019 | Bethesda, MD | 5 | 02/2014 | 24 | — | | 04/2020 | Bethesda, MD |
Residential-for-sale: construction | 3 | 1/2018 | 16 | 64 | Y | 1/2023 | Manhattan, NY | |
Mixed Use | 3 | 7/2017 | 14 | — |
| 2/2019 | Manhattan, NY | 3 | 07/2017 | 14 | — | | 08/2019 | Manhattan, NY |
Residential-for-sale: construction | 2 | 3/2018 | (1) | 115 | Y | 3/2023 | San Francisco, CA | 3 | 12/2018 | (1) | 103 | Y | 01/2024 | Hallandale Beach, FL |
Commercial mortgage loans | | $3,724 | $638 | 7% | 2.7 Years | | |
Residential-for-sale: construction | | 2 | 03/2018 | (1) | 115 | Y | 03/2023 | San Francisco, CA |
Office | | 3 | 08/2018 | (2) | 201 | Y | 12/2022 | London, UK |
Sub-total / Weighted Average Commercial mortgage loans | | 3.1 | | $4,003 | $968 | 13% | 2.7 Years | |
|
| | | | | | | |
Subordinate Loan Portfolio |
Property Type | Risk Rating | Origination Date | Amortized Cost | Unfunded Commitment | Construction Loan(4) | Fully-extended Maturity | Location |
Residential-for-sale: construction (2) | 3 | 06/2015 | $189 | — | Y | 02/2021 | Manhattan, NY |
Office | 3 | 01/2019 | 99 | — | | 12/2025 | Manhattan, NY |
Healthcare | 3 | 01/2019 | 95 | — | | 01/2024 | Various |
Residential-for-sale: construction | 3 | 12/2017 | 86 | 24 | Y | 06/2022 | Manhattan, NY |
Residential-for-sale: construction | 3 | 01/2016 | 83 | — | Y | 02/2021 | Manhattan, NY |
Other | 3 | 09/2017 | 72 | — | | 09/2022 | Various |
Multifamily | 3 | 10/2015 | 63 | — | | 07/2019 | Manhattan, NY |
Residential-for-sale: construction | 3 | 12/2017 | 61 | — | Y | 04/2023 | Los Angeles, CA |
Healthcare | 3 | 01/2015 | 49 | — | | 12/2019 | Various |
| | Subordinate Loan Portfolio | |
Property Type | Risk Rating | Origination Date | Amortized Cost | Unfunded Commitment | Construction Loan | Fully-extended Maturity | Location | |
Residential-for-sale: construction(4) | 3 | 6/2015 | $171 | — | Y | 7/2020 | Manhattan, NY | |
Healthcare | 3 | 10/2016 | 112 | — |
| 10/2021 | Various | |
Healthcare | 3 | 6/2018 | 94 | — |
| 5/2019 | Various | |
Residential-for-sale: construction | 3 | 2/2016 | 77 | — | Y | 2/2021 | Manhattan, NY | |
Office | 3 | 3/2017 | 75 | — |
| 10/2018 | Brooklyn, NY | |
Other | 3 | 9/2017 | 74 | — |
| 9/2022 | Various | |
Multifamily | 3 | 10/2015 | 60 | 4 |
| 7/2019 | Manhattan, NY | |
Healthcare | 3 | 1/2015 | 50 | — |
| 12/2019 | Various | |
Hotel | 3 | 6/2018 | 48 | — |
| 2/2023 | Various | |
Residential-for-sale: construction (2) | | 3 | 11/2017 | 43 | — | Y | 02/2021 | Manhattan, NY |
Mixed Use | 3 | 1/2017 | 42 | — |
| 2/2027 | Cleveland, OH | 3 | 01/2017 | 42 | — | | 02/2027 | Cleveland, OH |
Residential-for-sale: construction(4) | 3 | 11/2017 | 37 | — | Y | 7/2020 | Manhattan, NY | |
Mixed Use | | 3 | 02/2019 | 38 | — | Y | 12/2022 | London, UK |
Residential-for-sale: inventory | 3 | 10/2016 | 34 | — |
| 11/2020 | Manhattan, NY | 3 | 10/2016 | 36 | — | | 10/2020 | Manhattan, NY |
Industrial | 3 | 5/2013 | 32 | — |
| 5/2023 | Various | 3 | 05/2013 | 32 | — | | 05/2023 | Various |
Residential-for-sale: construction | 3 | 12/2017 | 31 | 25 | Y | 4/2023 | Los Angeles, CA | |
Residential-for-sale: inventory | | 3 | 06/2017 | 25 | — | | 12/2020 | Manhattan, NY |
Hotel | 3 | 6/2015 | 25 | — |
| 7/2025 | Phoenix, AZ | 3 | 06/2015 | 25 | — | | 07/2025 | Phoenix, AZ |
Residential-for-sale: inventory | 3 | 6/2017 | 23 | — |
| 12/2020 | Manhattan, NY | |
Multifamily | 3 | 5/2018 | 21 | — |
| 5/2028 | Cleveland, OH | 3 | 05/2018 | 20 | — | | 05/2028 | Cleveland, OH |
Hotel | 3 | 6/2015 | 20 | — |
| 7/2019 | Washington, DC | 3 | 06/2015 | 20 | — | | 12/2022 | Washington, DC |
Hotel | 3 | 2/2015 | 20 | — |
| 1/2020 | Burbank, CA | 3 | 06/2018 | 20 | — | | 06/2023 | Las Vegas, NV |
Hotel | 3 | 6/2018 | 20 | — |
| 6/2023 | Las Vegas, NV | 3 | 02/2015 | 20 | — | | 01/2020 | Burbank, CA |
Hotel(1) | 3 | 9/2015 | 15 | 9 |
| 6/2023 | Manhattan, NY | 3 | 09/2015 | 15 | 9 | | 06/2023 | Manhattan, NY |
Office | 3 | 7/2013 | 14 | — |
| 7/2022 | Manhattan, NY | 3 | 07/2013 | 14 | — | | 07/2022 | Manhattan, NY |
Office(2) | 3 | 1/2018 | 13 | 36 | Y | 1/2022 | Renton, WA | |
Office | 3 | 9/2012 | 9 | — |
| 10/2022 | Kansas City, MO | |
Mixed Use | | 3 | 12/2018 | 14 | 38 | Y | 12/2023 | Brooklyn, NY |
Hotel | 3 | 5/2017 | 8 | — |
| 6/2027 | Anaheim, CA | 3 | 05/2017 | 8 | — | | 06/2027 | Anaheim, CA |
Office | 3 | 8/2017 | 8 | — |
| 9/2024 | Troy, MI | 3 | 08/2017 | 8 | — | | 09/2024 | Troy, MI |
Mixed Use | 3 | 7/2012 | 7 | — |
| 8/2022 | Chapel Hill, NC | 3 | 07/2012 | 7 | — | | 08/2022 | Chapel Hill, NC |
Residential-for-sale: construction | 3 | 12/2017 | 3 | 106 | Y | 6/2022 | Manhattan, NY | |
Sub total- Subordinate loans | | $1,143 | $180 | 29% | 3.0 Years | | |
Sub total / Weighted-Average- Subordinate loans | | 3.0 | | $1,184 | $71 | 43% | 3.4 Years | |
| | |
Total Loan Portfolio | | $4,867 | $818 | 12% | 2.8 Years | | |
Total / Weighted-Average Loan Portfolio | | 3.1 | | $5,187 | $1,039 | 20% | 2.9 Years | |
———————
(1) Both loans are secured by the same property.
(2) Both loans are secured by the same propertyproperty.
(3) Amortized cost for these loans is net of the recorded provisions for loan losses and impairmentsimpairments.
(4) Both loans are secured byWeighted-average construction loan % is based on the same propertyamortized cost of the loans.
The Company'sOur average asset and debt balances for the sixthree months ended June 30, 2018,March 31, 2019, were ($ in thousands):
| | | | Average month-end balances for the six months ended June 30, 2018 | | Average month-end balances for the three months ended March 31, 2019 |
Description | | Assets | | Related debt | | Assets | | Related debt |
Commercial mortgage loans, net | | $ | 3,149,629 |
| | $ | 1,471,118 |
| | $ | 4,038,172 |
| | $ | 2,195,782 |
|
Subordinate loans, net | | 1,026,702 |
| | — |
| | 1,169,429 |
| | — |
|
Investment Activity
During the sixthree months ended June 30, 2018, the CompanyMarch 31, 2019, we committed $1.9 billion$448.7 million of capital to loans ($1.5 billion441.8 million of which was funded during the sixthree months ended June 30, 2018)March 31, 2019). In addition, during the sixthree months ended June 30, 2018, the CompanyMarch 31, 2019, we funded $103.8$110.3 million for loans closed prior to 2018,2019, and received $375.7$322.4 million in repayments.
Net Income Available to Common Stockholders
For the three months ended June 30,March 31, 2019 and 2018, and June 30, 2017, respectively, the Company’sour net income available to common stockholders was $48.5$60.9 million, or $0.39$0.43 per diluted share of common stock, and $26.9$42.6 million, or $0.28$0.38 per share. For the six months ended June 30, 2018 and June 30, 2017, respectively, the Company’s net income available todiluted share of common stockholders was $91.1 million, or $0.78 per share, and $64.7 million, or $0.68 per share.stock.
Operating Results
The following table sets forth information regarding our consolidated results of operations and certain key operating metrics ($ in thousands):
| | | Three months ended June 30, | | 2018 vs. 2017 | | Six months ended June 30, | | 2018 vs. 2017 | Three months ended March 31, | | 2019 vs 2018 |
| 2018 | | 2017 | | | | 2018 | | 2017 | | | 2019 | | 2018 | | |
Net interest income: | | | | | | | | | | | | | | | | |
Interest income from commercial mortgage loans | $ | 65,141 |
| | $ | 37,089 |
| | $ | 28,052 |
| | $ | 117,255 |
| | $ | 71,487 |
| | $ | 45,768 |
| $ | 78,286 |
| | $ | 52,114 |
| | $ | 26,172 |
|
Interest income from subordinate loans | 34,075 |
| | 39,640 |
| | (5,565 | ) | | 67,928 |
| | 74,030 |
| | (6,102 | ) | 40,839 |
| | 33,853 |
| | 6,986 |
|
Interest income from securities | — |
| | 4,700 |
| | (4,700 | ) | | — |
| | 10,754 |
| | (10,754 | ) | |
Interest expense | (28,437 | ) | | (19,205 | ) | | (9,232 | ) | | (51,177 | ) | | (36,235 | ) | | (14,942 | ) | (36,295 | ) | | (22,740 | ) | | (13,555 | ) |
Net interest income | 70,779 |
| | 62,224 |
| | 8,555 |
| | 134,006 |
| | 120,036 |
| | 13,970 |
| 82,830 |
| | 63,227 |
| | 19,603 |
|
Operating expenses: | | | | | | | | | | | | | | | | |
General and administrative expenses | (5,652 | ) | | (5,200 | ) | | (452 | ) | | (10,650 | ) | | (10,958 | ) | | 308 |
| (6,151 | ) | | (4,998 | ) | | (1,153 | ) |
Management fees to related party | (9,013 | ) | | (7,742 | ) | | (1,271 | ) | | (17,105 | ) | | (15,175 | ) | | (1,930 | ) | (9,613 | ) | | (8,092 | ) | | (1,521 | ) |
Total operating expenses | (14,665 | ) | | (12,942 | ) | | (1,723 | ) | | (27,755 | ) | | (26,133 | ) | | (1,622 | ) | (15,764 | ) | | (13,090 | ) | | (2,674 | ) |
Loss from unconsolidated joint venture | — |
| | (3,305 | ) | | 3,305 |
| | — |
| | (2,847 | ) | | 2,847 |
| |
Other income | 343 |
| | 244 |
| | 99 |
| | 546 |
| | 352 |
| | 194 |
| 518 |
| | 203 |
| | 315 |
|
Provision for loan losses and impairments | (5,000 | ) | | (5,000 | ) | | — |
| | (5,000 | ) | | (5,000 | ) | | — |
| |
Realized loss on sale of assets | — |
| | — |
| | — |
| | — |
| | (1,042 | ) | | 1,042 |
| |
Unrealized loss on securities | — |
| | (4,510 | ) | | 4,510 |
| | — |
| | (1,658 | ) | | 1,658 |
| |
Foreign currency gain (loss) | (29,649 | ) | | 6,913 |
| | (36,562 | ) | | (19,524 | ) | | 10,085 |
| | (29,609 | ) | |
Gain (loss) on derivative instruments | 33,538 |
| | (7,389 | ) | | 40,927 |
| | 22,506 |
| | (10,434 | ) | | 32,940 |
| |
Foreign currency gain | | 6,894 |
| | 10,125 |
| | (3,231 | ) |
Loss on derivative instruments | | (6,720 | ) | | (11,032 | ) | | 4,312 |
|
Net income | $ | 55,346 |
| | $ | 36,235 |
| | $ | 19,111 |
| | $ | 104,779 |
| | $ | 83,359 |
| | $ | 21,420 |
| $ | 67,758 |
| | $ | 49,433 |
| | $ | 18,325 |
|
Net Interest Income
Net interest income increased by $8.6 million and $14.0$19.6 million during the three and six months ended June 30, 2018, respectively,March 31, 2019 as compared to the same periodsperiod in 2017.2018. The increase was primarily due to (i) a net increase in the principal balance of the Company'sour loan portfolio by $1.6$1.1 billion, partially offset byand (ii) a decrease in the principal balance of the Company's securities by $300.1 million, and a 0.87%0.79% increase in average one-month LIBOR as of June 30, 2018for the three months ended March 31, 2019 compared to June 30, 2017.March 31, 2018. This
was offset by (i) an increase in interest expense due to an increase in the Company'sour net debt balance of $985.9$907.9 million as of June 30, 2018March 31, 2019 compared to June 30, 2017,March 31, 2018, and (ii) a 0.87%the increase in average one-month LIBOR asdiscussed above.
We recognized payment-in-kind ("PIK") interest of June 30,$14.5 million and $10.6 million for the three months ended March 31, 2019 and 2018, compared to June 30, 2017.respectively.
The CompanyWe recognized pre-payment penalties and accelerated fees of $1.6$3.7 million for the three and six months ended June 30, 2018March 31, 2019. There were no pre-payment penalties and $0.6 millionaccelerated fees for the three and six months ended June 30, 2017.March 31, 2018.
Operating Expenses
General and administrative expenses
General and administrative expenses increased by $0.5$1.2 million for the three months ended June 30, 2018March 31, 2019 compared to the same period in 2017.2018. The increase was primarily driven by an increase of $0.6 million of non-cash restricted stock and RSU amortization related to shares of common stock awarded under the Company's long-term incentive plans offset by $0.1LTIP and a $0.6 million decreaseincrease in general operating expenses.
General and administrative expenses decreased by $0.3 million for the six months ended June 30, 2018 compared to the same period in 2017. The decrease was primarily driven by a $0.4 million decrease in general operating expenses offset by an increase of $0.1 million of non-cash restricted stock and RSU amortization related to shares of common stock awarded under the Company's long-term incentive plans.
Management fees to related party
Management fee expense increased by $1.3 million and $1.9$1.5 million during the three and six months ended June 30, 2018, respectively,March 31, 2019 as compared to the same periodsperiod in 2017.2018. The increase is primarily attributable to an increase in the Company’sour stockholders’ equity (as defined in the Management Agreement) as a result of the Company completing follow-on public offeringsissuance of 13,800,000 and 15,525,0002,775,509 shares of itsour common stock related to exchanges and conversions of the 2019 Notes, which are described in June 2017 and March 2018, respectively. This increase was partially offset due"Note 8 - Convertible Senior Notes, Net" to the redemption of our 8.625% Series A Cumulative Redeemable Perpetual Preferred Stock ("Series A Preferred Stock") inaccompanying condensed consolidated financial statements, from August 2017.2018 through March 2019.
Management fees and the relationship between the Companyus and the Manager under the Management Agreement are discussed further in the accompanying condensed consolidated financial statements, in “Note 12—"Note 11 - Related Party Transactions.”
Income from unconsolidated joint venture
Income from unconsolidated joint ventures consists of activity related to our ownership interest in Champ LP. In September 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ LP following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in BKB. In May 2017, the Company sold its remaining ownership interest in Champ LP, to unaffiliated third parties. As such, in 2018 the Company no longer held any interest in Champ LP.
Net unrealized and realized gain (loss) on sale of assets"
During the three and six months ended June 30, 2017, the Company sold securities resulting in a net realized loss of $0 and $1.0 million, respectively. The Company has not held any securities since December 2017.
Foreign currency gain and (loss) on derivative instruments
The Company usesWe use forward currency contracts to economically hedge interest and principal payments due under itsour loans denominated in currencies other than U.S. dollars. The CompanyWe also usesuse interest rate swaps and caps to manage exposure to variable cash flows on portions of itsour borrowings under secured debt arrangements. Interest rate swap and cap agreements allow the Companyus to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure. When foreign currency gain and (loss) on derivative instruments are evaluated on a combined basis, the net impact for the three and six months ended June 30,March 31, 2019 and 2018 were $3.9$0.2 million and $3.0 million, respectively, and the net impact for the three and six months ended June 30, 2017 were $(0.5) million and $(0.3)$(0.9) million, respectively.
Dividends
The Company hasWe have declared the following dividends in 2018:2019:
| | | Three months ended | Three months ended |
Dividends declared per share of: | June 30, 2018 | March 31, 2018 | |
Dividend declared per share of: | | March 31, 2019 | March 31, 2018 |
Common Stock
| $ | 0.46 |
| $ | 0.46 |
| $0.46 |
Series B Preferred Stock
| 0.50 |
| 0.50 |
| 0.50 |
Series C Preferred Stock | 0.50 |
| 0.50 |
| 0.50 |
Subsequent Events
Refer to "Note 1817 - Subsequent Events" to the unauditedaccompanying condensed consolidated financial statements for disclosure regarding significant transactions that occurred subsequent to June 30, 2018.March 31, 2019.
Liquidity and Capital Resources
Liquidity is a measure of the Company’sour ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain itsour assets and operations, make distributions to itsour stockholders and other general business needs. The Company’sOur cash is used to purchase or originate target assets, repay principal and interest on borrowings, make distributions to stockholders and fund operations. The Company’sWe closely monitor our liquidity position is closely monitored and the Company believes it haswe believe we have sufficient current liquidity and access to additional liquidity to meet financial obligations for at least the next 12 months.
Debt-to-Common Equity Ratio
The following table presents our debt-to-common equity ratio:
|
| | | |
| June 30, 2018March 31, 2019 | | December 31, 20172018 |
Debt-to-CommonDebt to Equity Ratio (1)
| 1.2x1.0x | | 0.9x |
———————
(1) Represents total secured debt arrangements and convertible senior notes, less cash and loan proceeds held by servicer to commontotal stockholders' equity.
The Company’sOur primary sources of liquidity are as follows:
Cash Generated from Operations
Cash from operations is generally comprised of interest income from the Company’sour investments, net of any associated financing expense, principal repayments from the Company’sour investments, net of associated financing repayments, proceeds from the sale of investments, and changes in working capital balances. See “Results"Results of Operations – Investments" above for a summary of interest rates related to the Company’sour investment portfolio as of June 30, 2018.March 31, 2019.
Borrowings Under Various Financing Arrangements
JPMorgan Facility
In June 2018, the Company,May 2017, through two indirect wholly ownedwholly-owned subsidiaries, we entered into an amendment to thea Fifth Amended and Restated Master Repurchase Agreement for thewith JPMorgan Facility, which extended the term to June 2020, plus a one-year extension option available at the Company's option, subject to certain conditions.Chase Bank, National Association. The JPMorgan Facility provides for maximum total borrowing capacity of $1.4 billion, comprised of a $1.25 billion repurchase facility and a $132.0$105.0 million asset specific financing
and enables the Companyus to elect to receive advances in either U.S. dollars, British pounds ("GBP"), or Euros ("EUR"). The repurchase facility matures in June 2020, plus a one-year extension available at our option, subject to certain conditions. The asset specific financing matures in FebruaryMay 2019. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company hasWe have agreed to provide a limited guarantee of the obligations of itsour indirect wholly-owned subsidiaries under the JPMorgan Facility.
As of June 30, 2018, the CompanyMarch 31, 2019, we had $1.0 billion$923.3 million (including £38.0 million assuming conversion into U.S. dollars) of borrowings outstanding under the JPMorgan Facility secured by certain of the Company'sour commercial mortgage loans.
DB Repurchase Facility
In April 2018, the Company, through an indirect wholly-owned subsidiary, we entered into a Second Amended and Restated Master Repurchase Agreement (the "Second Amendment and Restatement") with Deutsche Bank AG, Cayman Islands Branch
and Deutsche Bank AG, London Branch. The Second AmendmentBranch, which was upsized in September 2018, and Restatement provides for advances of up to $800.0 million$1.0 billion for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties located in the United States, United Kingdom and the European Union, and enables the Companyus to elect to receive advances in either U.S. dollars, British pounds, or Euros. Additionally, the Company has $55.0 million of asset specific financings with Deutsche BankThe repurchase facility matures in connection with financing first mortgage loans secured by real estate. The Second Amendment and Restatement has a maturity date of March 31, 2020, plus onea one-year extension available at the Company'sour option, subject to certain conditions. The asset specific financings mature in September 2018. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company hasWe have agreed to provide a limited guarantee of the obligations of itsour indirect wholly-owned subsidiaries under this facility.
As of June 30, 2018, the CompanyMarch 31, 2019, we had $625.4$617.0 million (including £118.3£108.2 million assuming conversion into U.S. dollars) of borrowings outstanding under the DB Repurchase Facility secured by certain of the Company'sour commercial mortgage loans.
Goldman Facility
In November 2017, the Company, through an indirect wholly-owned subsidiary, we entered into a master repurchase and securities contract agreement with Goldman Sachs Bank USA, (the "Goldman Facility), which provides for advances of upwas upsized in March 2019 from $300.0 million to $300.0$500.0 million and matures in November 2020.2019, plus two one-year extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified margin deficit thresholds. The Company hasWe have agreed to provide a limited guarantee of the obligations of the seller under the Goldman Facility.
As of June 30, 2018, the CompanyMarch 31, 2019, we had total borrowings of $209.0$233.3 million of borrowings outstanding under the Goldman Facility.
CS Facility - USD
In JuneJuly 2018, the Company, through an indirect wholly-owned subsidiary, we entered into a master repurchase agreementMaster Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd, (the "CS Facility"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - USD matures six months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company hasWe have agreed to provide a guarantee of the obligations of itsour indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $188.0 million of borrowings outstanding under the CS Facility - USD secured by certain of our commercial mortgage loans.
CS Facility - GBP
In June 30, 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, which provides for advances for the Companysale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - GBP matures six months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had total borrowings of $145.9$148.2 million (£110.5113.7 million assuming conversion into U.S. dollars) of borrowings outstanding under the CS Facility - GBP secured by one of the Company'sour commercial mortgage loans.
HSBC Facility
In September 2018, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc, which provides for a single asset financing. The facility matures in December 2019 and unless terminated by either party, automatically extends for further periods prior to maturity. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $49.9 million (£38.3 million assuming conversion into U.S. dollars) of borrowings outstanding under the HSBC Facility secured by one of our commercial mortgage loans.
Debt Covenants
Each of the guarantees related to our secured debt arrangements contain the following uniform financial covenants (i) tangible net worth must be greater than $1.25 billion plus 75% of the net cash proceeds of any equity issuance after March 31, 2017 (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 3:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or $30.0 million.
Convertible Senior Notes
The Company hasIn two separate offerings during 2014, we issued in two offerings in 2014, an aggregate principal amount of $254.8 million of 5.50% Convertible Senior Notes due 2019, for which the Companywe received aggregate net proceeds,$248.6 million, after deducting the underwriting discount and estimated offering expenses payable byexpenses. The 2019 Notes were exchanged or converted for shares of our common stock and cash as follows:
(i) On August 2, 2018, we entered into privately negotiated exchange agreements with a limited number of holders of the Company,2019 Notes pursuant to which we exchanged $206.2 million of approximately $248.6 million.the 2019 Notes for an aggregate of (a) 10,020,328 newly issued shares of our common stock, and (b) $39.3 million in cash. We recorded $166.0 million of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions,
(ii) Certain holders elected to convert $47.9 million of the 2019 Notes, which were settled for an aggregate of (a) 2,775,509 newly issued shares of our common stock, and (b) $0.2 million in cash. We recorded $13.9 million of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions. These conversions occurred from August 2018 through maturity.
The Company hasremaining $0.7 million in principal amount of the 2019 Notes were repaid at maturity on March 15, 2019.
During the year ended December 31, 2018, we recorded a loss on early extinguishment of debt of $2.6 million, in connection with the exchanges and conversions of the 2019 Notes. This includes fees and accelerated amortization of capitalized costs. There was no such loss related to the 2019 Notes during the three months ended March 31, 2019.
In two separate offerings during 2017, we issued in two offerings in 2017, an aggregate principal amount of $345.0 million of 4.75% Convertible Senior Notes due 2022, for which the Companywe received aggregate net proceeds,$337.5 million, after deducting the underwriting discount and estimated offering expenses payable byexpenses. At March 31, 2019, the Company,2022 Notes had a carrying value of approximately $337.5$335.9 million and an unamortized discount of $9.1 million.
Cash Generated from Offerings
During the firstfourth quarter of 2018, the Company completed a follow-on public offeringwe issued $230.0 million of 15,525,000 shares of its common stock, at a price of $17.77 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $275.95.375% Convertible Senior Notes due 2023, for which we received $223.7 million after deducting estimatedthe underwriting discount and offering expenses. At March 31, 2019, the 2023 Notes had a carrying value of $222.8 million and an unamortized discount of $7.2 million.
Other Potential Sources of Financing
The Company’sOur primary sources of cash currently consist of cash available, which was $76.4$109.3 million as of June 30, 2018,March 31, 2019, principal and interest payments the Company receiveswe receive on itsour portfolio of assets, and available borrowings under itsour secured debt arrangements. The Company expects itsWe expect our other sources of cash to consist of cash generated from operations and prepayments of principal received on the Company’sour portfolio of assets. Such prepayments are difficult to estimate in advance. Depending on market conditions, the Companywe may utilize additional borrowings as a source of cash, which may also include additional secured debt arrangements as well as other borrowings such as credit facilities, or conduct additional public and private debt and equity offerings.
The Company maintainsWe maintain policies relating to itsour borrowings and use of leverage. See “Leverage Policies”"Leverage Policies" below. In the future, the Companywe may seek to raise further equity or debt capital or engage in other forms of borrowings in order to fund future investments or to refinance expiring indebtedness.
The CompanyWe generally intendsintend to hold itsour target assets as long-term investments, although itwe may sell certain of itsour investments in order to manage itsour interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.
To maintain itsour qualification as a REIT under the Internal Revenue Code, the Companywe must distribute annually at least 90% of itsour REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit the Company’sour ability to retain earnings and thereby replenish or increase capital for operations.
Leverage Policies
The Company usesWe use leverage for the sole purpose of financing itsour portfolio and not for the purpose of speculating on changes in interest rates. In addition to itsour secured debt arrangements, in the future the Companywe may access additional sources of borrowings. The Company’sOur charter and bylaws do not limit the amount of indebtedness the Companywe can incur; however, the Company iswe are limited by certain financial covenants under itsour secured debt arrangements. Consistent with the Company’sour strategy of keeping leverage within a conservativeprudent range, the Company expects thatwe expect to, depending upon the composition of itsour portfolio, maintain our debt-to-common equity ratio will beat less than 2.0x.
Investment Guidelines
The Company'sOur current investment guidelines, approved by the Company'sour board of directors, are comprised of the following:
no investment will be made that would cause the Companyus to fail to qualify as a REIT for U.S. federal income tax purposes;
no investment will be made that would cause the Companyus to register as an investment company under the 1940 Act;
investments will be predominantly in the Company’sour target assets;
no more than 20% of the Company’sour cash equity (on a consolidated basis) will be invested in any single investment at the time of the investment; and
until appropriate investments can be identified, the Manager may invest the proceeds of any offering in interest bearing, short-term investments, including money market accounts and/or funds, that are consistent with the Company’sour intention to qualify as a REIT.
The board of directors must approve any change in these investment guidelines.
Contractual Obligations and Commitments
The Company’sOur contractual obligations including expected interest payments as of June 30, 2018March 31, 2019 are summarized as follows ($ in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Less than 1 year (3) | | 1 to 3 years (3) | | 3 to 5 years (3) | | More than 5 years (3) | | Total |
JPMorgan Facility (1) | $ | 247,219 |
| | $ | 814,126 |
| | $ | — |
| | $ | — |
| | $ | 1,061,345 |
|
DB Repurchase Facility (1) | 150,218 |
| | 533,258 |
| | — |
| | — |
| | 683,476 |
|
Goldman Facility (1) | 9,524 |
| | 222,530 |
| | — |
| | — |
| | 232,054 |
|
CS Facility (1) | 149,026 |
| | — |
| | — |
| | | | 149,026 |
|
Convertible Senior Notes | 281,062 |
| | 32,775 |
| | 363,906 |
| | — |
| | 677,743 |
|
Unfunded loan commitments (2) | 414,919 |
| | 402,164 |
| | 1,012 |
| | — |
| | 818,095 |
|
Total | $ | 1,251,968 |
| | $ | 2,004,853 |
| | $ | 364,918 |
| | $ | — |
| | $ | 3,621,739 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Less than 1 year (3) | | 1 to 3 years (3) | | 3 to 5 years (3) | | More than 5 years (3) | | Total |
Secured debt arrangements (1) | $ | 743,438 |
| | $ | 1,709,875 |
| | $ | — |
| | $ | — |
| | $ | 2,453,313 |
|
Convertible senior notes, net | 28,750 |
| | 57,500 |
| | 601,190 |
| | — |
| | 687,440 |
|
Unfunded loan commitments (2) | 505,512 |
| | 533,578 |
| | — |
| | — |
| | 1,039,090 |
|
Total | $ | 1,277,700 |
| | $ | 2,300,953 |
| | $ | 601,190 |
| | $ | — |
| | $ | 4,179,843 |
|
———————
| |
(1) | Based on the applicable benchmark rates as of June 30, 2018March 31, 2019 on the floating rate debt for interest payments due. |
| |
(2) | Based on the Company'sour expected funding schedule, which is based upon the Manager’s estimates based upon the best information available to the Manager at the time. There is no assurance that the payments will occur in accordance with these estimates or at all, which could affect the Company’sour operating results. |
| |
(3) | Assumes underlying assets are financed through the fully extended maturity date of the facility. |
Loan Commitments. As of June 30, 2018March 31, 2019, the Companywe had $818.1 million$1.0 billion of unfunded loan commitments, comprised of $637.8$968.0 million related to itsour commercial mortgage loan portfolio, and $180.3$71.1 million related to itsour subordinate loan portfolio.
Management Agreement. On September 23, 2009, the Companywe entered into the Management Agreement with the Manager pursuant to which the Manager is entitled to receive a management fee and the reimbursement of certain expenses. The table above does not include amounts due under the Management Agreement as those obligations do not have fixed and determinable payments. Pursuant to the Management Agreement, the Manager is entitled to a base management fee calculated and payable quarterly in arrears in an amount equal to 1.5% of the Company’sour stockholders’ equity (as defined in the Management Agreement), per annum. The Manager will use the proceeds from its management fee in part to pay compensation to its officers and personnel. The Company doesWe do not reimburse itsthe Manager or its affiliates for the salaries and other compensation of their personnel, except for the allocable share of the compensation of (1) the Company’sour Chief Financial Officer based on the percentage of time spent on the Company’sour affairs and (2) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment professional personnel of the Manager or its affiliates who spend all or a portion of their time managing the Company’sour affairs based on the percentage of time devoted by such personnel to the Company’sour affairs. The Company isWe are also required to reimburse itsthe Manager for operating expenses related to the Companyus incurred by itsthe Manager, including expenses relating to legal, accounting, due diligence and other services. Expense reimbursements to the Manager are made in cash on a monthly basis following the end of each month. The Company’sOur reimbursement obligation is not subject to any dollar limitation.
The current term of the Management Agreement currently runs through September 29, 2018.2019. Absent certain action by the independent directors of the Company’sour board of directors, as described below, the Management Agreement will automatically renew on each anniversary for a one yearone-year term. The Management Agreement may be terminated upon expiration of the one-year term only upon the affirmative vote of at least two-thirds of the Company’sour independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Companyus or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’sour 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. Amounts payable under the Company’s Management Agreement are not fixed and determinable. Following a meeting by the Company’sour independent directors in February 2018, which included a discussion of the Manager’s performance and the level of the management fees thereunder, the Companywe determined not to terminate the Management Agreement.
Forward Currency Contracts. We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than U.S. dollars. We have entered into a series of forward contracts to sell an amount of foreign currency (British pounds) for an agreed upon amount of U.S. dollars at various dates through December 2021. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments. Refer to "Note 9 - Derivatives, Net" to the accompanying condensed consolidated financial statements for details regarding our forward contracts.
Off-balance Sheet Arrangements
The Company doesWe do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, the Company haswe have not guaranteed any obligations of unconsolidated entities or entered into any commitment to provide additional funding to any such entities.
Dividends
The Company intendsWe intend to continue to make regular quarterly distributions to holders of itsour common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of itsour REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that itwe pay tax at regular corporate rates to the extent that itwe annually distributesdistribute less than 100% of itsour net taxable income. The CompanyWe generally intendsintend over time to pay dividends to itsour stockholders in an amount equal to itsour net taxable income, if and to the extent authorized by itsour board of directors. Any distributions the Company makeswe make are at the discretion of itsour board of directors and depend upon, among other things, the Company'sour actual results of operations. These results and the Company’sour ability to pay distributions are affected by various factors, including the net interest and other income from itsour portfolio, itsour operating expenses and any other expenditures. If the Company’sour cash available for distribution is less than itsour net taxable income, the Companywe could be required to sell assets or borrow funds to make cash distributions or the Companywe may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
The Company hasAs of March 31, 2019, we had 6,770,393 shares of Series B Preferred Stock outstanding, which entitles holders to receive dividends that are payable quarterly in arrears. The Series B Preferred Stock pay cumulative cash dividends:dividends, which are payable quarterly in equal amounts in arrears on the 15th day of each January, April, July and October: (i) from, and including, the original date of issuance of the Series B Preferred Stock to, but excluding, September 20, 2020, at an initial rate of 8.00% per annum of the $25.00 per share liquidation preference; and (ii) from, and including, September 20, 2020, at the rate per annum equal to the greater of (a) 8.00% and (b) a floating rate equal to the 3-month LIBOR rate as calculated on each applicable date of determination plus 6.46% of the $25.00 liquidation preference. Except under certain limited circumstances, the Series B Preferred Stock is generally not convertible into or exchangeable for any other property or any other securities of the Companyour securities at the election of the holders. On or after September 21, 2020, the Companywe may, at itsour option, redeem the shares at a redemption price of $25.00, plus any accrued unpaid distribution through the date of the redemption.
The Company hasAs of March 31, 2019, we had 6,900,000 shares of Series C Preferred Stock outstanding, which entitles holders to receive dividends that are payable quarterly in arrears. The Series C Preferred Stock pay cumulative cash dividends, which are payable quarterly in equal amounts in arrears on the last day of each January, April, July, and October, at the rate of 8.00% per annum of the $25.00 per share liquidation preference (equivalent to $2.00 per annum per share) from, and including July 29, 2016 (the “Series C Initial Dividend Date”) and are payable quarterly in equal amounts in arrears on the last day of each April, July, October and January, at the then applicable annual rate.. Except under certain limited circumstances, the Series C Preferred Stock is generally not convertible into or exchangeable for any other property or any other securities of the Companyour securities at the election of the holders. On or after September 20, 2017, the CompanyWe may, at itsour option, redeem the shares at a redemption price of $25.00, plus any accrued unpaid distribution through the date of the redemption.
Non-GAAP Financial Measures
Operating Earnings
For the three and six months ended June 30,March 31, 2019 and 2018, the Company’sour Operating Earnings were $54.9$68.4 million, or $0.44$0.50 per share, and $102.7$47.9 million, or $0.87$0.43 per share, respectively. For the three and six months ended June 30, 2017, the Company’s Operating Earnings were $44.6 million, or $0.46 per share and $84.3 million, or $0.88 per share. Operating Earnings is a non-GAAP financial measure that is defined by the Companywe define as net income available to common stockholders, computed in accordance with GAAP, adjusted for (i) equity-based compensation expense (a portion of which may become cash-based upon final vesting and settlement of awards should the holder elect net share settlement to satisfy income tax withholding), (ii) any unrealized gains or losses or other non-cash items included in net income available to common stockholders, (iii) unrealized income from unconsolidated joint ventures, (iv) foreign currency gains (losses), other than (a) realized gains/(losses) related to interest income, and (b) forward point gains/(losses) realized on our foreign currency hedges, (v) the non-cash amortization expense related to the reclassification of a portion of the convertible senior notesNotes to stockholders’ equity in accordance with GAAP, and (vi) provision for loan losses and impairments. Beginning with the quarter ended September 30, 2016, the Companywe slightly modified itsour definition of Operating Earnings to include realized gains (losses) on currency swaps related to interest income on investments denominated in a currency other than U.S. dollars. In addition, beginning with the quarter ended December 31, 2018, we further modified our definition of Operating Earnings to include the impact from forward points on our foreign currency hedges, which reflect the interest rate differentials between the applicable base rate for our foreign currency investments and USD LIBOR. These forward contracts effectively convert the rate exposure to USD LIBOR, resulting in additional interest income earned in U.S. dollar terms. These amounts are not included in GAAP net income. In order to conform to the 2018 year-end presentation, which incorporates this modification, prior-year Operating Earnings results presented below have been modified accordingly. Operating Earnings may also be adjusted to exclude certain other non-cash items, as determined by the Manager and approved by a majority of the Company'sour independent directors.
The weighted-average diluted shares outstanding used for Operating Earnings per weighted-average diluted share has been adjusted from weighted-average diluted shares under GAAP to exclude shares issued from a potential conversion of the Notes. Consistent with the treatment of other unrealized adjustments to Operating Earnings, these potentially issuable shares are excluded until a conversion occurs, which we believe is a useful presentation for investors. We believe that excluding shares issued in connection with a potential conversion of the Notes from our computation of Operating Earnings per weighted-average diluted share is useful to investors for various reasons, including the following: (i) conversion of Notes to shares requires both the holder of a Note to elect to convert the Note and for us to elect to settle the conversion in the form of shares; (ii) future conversion decisions by Note holders will be based on our stock price in the future, which is presently not determinable; (iii) the exclusion of shares issued in connection with a potential conversion of the Notes from the computation of Operating Earnings per weighted-average diluted share is consistent with how we treat other unrealized items in our computation of Operating Earnings per weighted-average diluted share; and (iv) we believe that when evaluating our operating performance, investors and potential investors consider our Operating Earnings relative to our actual distributions, which are based on shares outstanding and not shares that might be issued in the future. The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Operating Earnings ($ in thousands, except Price):
|
| | | | | | | | | |
| Three months ended March 31, 2019 (1) |
| | | | | |
Weighted-Averages | Face | | Price | | Shares |
Weighted-average diluted shares - GAAP | | | | | 164,683,086 |
|
2019 Notes (2) | $ | 26,487 |
| | $17.17 | | (1,542,708 | ) |
2022 Notes | $ | 345,000 |
| | $19.91 | | (17,327,970 | ) |
2023 Notes | $ | 230,000 |
| | $20.53 | | (11,205,301 | ) |
Unvested RSUs | — |
| | — |
| | 1,849,564 |
|
Weighted-average diluted shares - Operating Earnings | | | | | 136,456,671 |
|
———————
(1) This reconciliation only applies to the three months ended March 31, 2019 because in the reporting period for the three months ended March 31, 2018 we used the treasury stock method when determining the potential share dilution from the Notes in the computation of earnings per share.
(2) Face represents the weighted-average balances during the period.
|
| | | | | | |
Computation of Share Count for Operating Earnings |
| | Three months ended March 31, |
| | 2019 | | 2018 |
Basic weighted-average shares of common stock outstanding | | 134,607,107 |
| | 110,211,853 |
|
Weighted-average unvested RSUs | | 1,849,564 |
| | 1,659,576 |
|
Weighted-average diluted shares - Operating Earnings | | 136,456,671 |
| | 111,871,429 |
|
In order to evaluate the effective yield of the portfolio, the Company useswe use Operating Earnings to reflect the net investment income of the Company’sour portfolio as adjusted to include the net interest expense related to the Company’sour derivative instruments. Operating Earnings allows the Companyus to isolate the net interest expense associated with the Company’sour swaps in order to monitor and project the Company’sour full cost of borrowings. The CompanyWe also believesbelieve that itsour investors use Operating Earnings, or a comparable supplemental performance measure, to evaluate and compare the performance of the Companyour company and itsour peers and, as such, the Company believeswe believe that the disclosure of Operating Earnings is useful to itsour investors. In addition,Forward points effectively convert our foreign rate exposure to USD LIBOR, which we believe is a better reflection of our operating results and we believe the Company has previously disclosed that it has disposedinclusion of all of its CMBS as of December 31, 2017. Accordingly, the Company has disclosedresulting gain or loss in Operating Earnings excluding realized loss and costs from sale of CMBS because the Company believes it is useful to investors to present the results of the Company's ongoing operations while excluding the effects associated with the disposal of its CMBS.our investors.
A significant limitation associated with Operating Earnings as a measure of the Company'sour financial performance over any period is that it excludes unrealized gains (losses) from investments. In addition, the Company’sour presentation of Operating Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, Operating Earnings should not be considered as a substitute for the Company’sour GAAP net income as a measure of itsour financial performance or any measure of itsour liquidity under GAAP.
The table below summarizes the reconciliation from net income available to common stockholders to Operating Earnings ($ in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
Net income available to common stockholders | $ | 60,923 |
| | $ | 42,598 |
|
Adjustments: |
| |
|
Equity-based compensation expense | 3,901 |
| | 3,342 |
|
Loss on derivative instruments | 6,720 |
| | 11,032 |
|
Foreign currency gain, net | (6,894 | ) | | (10,125 | ) |
Net realized gains relating to interest income on foreign currency hedges, net (1) | 418 |
| | (237 | ) |
Net realized gains relating to forward points on foreign currency hedges, net | 2,431 |
| | 174 |
|
Amortization of the convertible senior notes related to equity reclassification | 909 |
| | 1,140 |
|
Total adjustments: | 7,485 |
| | 5,326 |
|
Operating Earnings | $ | 68,408 |
| | $ | 47,924 |
|
Diluted Operating Earnings per share of common stock (2) | $ | 0.50 |
| | $ | 0.43 |
|
Weighted-average diluted shares - Operating Earnings | 136,456,671 |
| | 111,871,429 |
|
(1) In order to conform to the 2019 presentation of the reconciliation from net income available to common stockholders to Operating Earnings, $0.2 million was reclassified from Foreign currency gain, net for the three months ended March 31, 2018.
(2) For the computation of diluted Operating Earnings per share of common stock, for the three months ended March 31, 2019, $8.4 million of interest expense related to the Notes is not deducted from the numerator and the potentially dilutive shares related to the Notes are excluded from the denominator.
Book Value Per Share
The table below calculates our book value per share ($ in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income available to common stockholders | $ | 48,512 |
| | $ | 26,925 |
| | $ | 91,110 |
| | $ | 64,739 |
|
Adjustments: |
| |
| |
| |
|
Equity-based compensation expense | 4,014 |
| | 3,461 |
| | 7,356 |
| | 7,252 |
|
Unrealized loss on securities | — |
| | 4,510 |
| | — |
| | 1,658 |
|
(Gain) loss on derivative instruments | (33,538 | ) | | 7,389 |
| | (22,506 | ) | | 10,434 |
|
Foreign currency (gain) loss, net | 29,797 |
| | (6,958 | ) | | 19,435 |
| | (10,284 | ) |
Amortization of the convertible senior notes related to equity reclassification | 1,156 |
| | 618 |
| | 2,296 |
| | 1,226 |
|
Loss from unconsolidated joint venture | — |
| | 3,305 |
| | — |
| | 2,847 |
|
Provision for loan losses and impairments | 5,000 |
| | 5,000 |
| | 5,000 |
| | 5,000 |
|
Realized gain from unconsolidated joint venture | — |
| | 346 |
| | — |
| | 346 |
|
Total adjustments: | 6,429 |
| | 17,671 |
| | 11,581 |
| | 18,479 |
|
Operating Earnings | $ | 54,941 |
| | $ | 44,596 |
| | $ | 102,691 |
| | $ | 83,218 |
|
|
|
| |
|
| |
|
| |
|
|
Realized loss and costs from sale of CMBS | — |
| | — |
| | — |
| | 1,042 |
|
Operating Earnings excluding realized loss and costs from sale of CMBS | 54,941 |
| | 44,596 |
| | 102,691 |
| | 84,260 |
|
Basic and diluted Operating Earnings per share of common stock | $ | 0.44 |
| | $ | 0.46 |
| | $ | 0.87 |
| | $ | 0.88 |
|
Basic and diluted Operating Earnings excluding realized loss and costs from sale of CMBS per share of common stock | $ | 0.44 |
| | $ | 0.46 |
| | $ | 0.87 |
| | $ | 0.89 |
|
Basic weighted average shares of common stock outstanding | 123,019,993 |
| | 95,428,134 |
| | 116,651,305 |
| | 93,530,831 |
|
Diluted weighted average shares of common stock outstanding | 124,629,317 |
| | 96,796,289 |
| | 118,281,153 |
| | 94,907,762 |
|
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Stockholders' Equity | $ | 2,539,824 |
| | $ | 2,509,747 |
|
Series B Preferred Stock (Liquidation Preference) | (169,260 | ) | | (169,260 | ) |
Series C Preferred Stock (Liquidation Preference) | (172,500 | ) | | (172,500 | ) |
Common Stockholders' Equity | $ | 2,198,064 |
| | $ | 2,167,987 |
|
Common Stock | 136,254,352 |
| | 133,853,565 |
|
Book value per share | $ | 16.13 |
| | $ | 16.20 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company seeksWe seek to manage itsour risks related to the credit quality of itsour assets, interest rates, liquidity, prepayment speeds and market value, while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of itsour capital stock. While risks are inherent in any business enterprise, the Company seekswe seek to quantify and justify risks in light of available returns and to maintain capital levels consistent with the risks the Company undertakes.we undertake.
Credit Risk
One of the Company’sour strategic focuses is acquiring assets that it believeswe believe to be of high credit quality. The Company believesWe believe this strategy will generally keep itsour credit losses and financing costs low. However, the Company iswe are subject to varying degrees of credit risk in connection with itsour other target assets. The Company seeksWe seek to mitigate this risk by seeking to acquire high quality assets, at appropriate prices given anticipated and unanticipated losses, and by deploying a value-driven approach to underwriting and diligence, consistent with the Manager’s historical investment strategy, with a focus on current cash flows and potential risks to cash flow. The Manager seeks to enhance its due diligence and underwriting efforts by accessing the Manager’s knowledge base and industry contacts. Nevertheless, unanticipated credit losses could occur, which could adversely impact the Company’sour operating results.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond the Company’sour control. The Company isWe are subject to interest rate risk in connection with itsour target assets and itsour related financing obligations.
To the extent consistent with maintaining the Company’sour REIT qualification, the Company seekswe seek to manage risk exposure to protect itsour portfolio of financial assets against the effects of major interest rate changes. The CompanyWe generally seeksseek to manage this risk by:
attempting to structure itsour financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;
using hedging instruments, interest rate swaps and interest rate caps; and
to the extent available, using securitization financing to better match the maturity of the Company’sour financing with the duration of itsour assets.
The following table projectsestimates the hypothetical impact on the Company'sour net interest income for the twelve-month period following June 30, 2018,March 31, 2019, assuming an immediate increase or decrease of 50 basis points in the applicable interest rate benchmark by currency ($ in thousands)thousands, except per share data):
| | | | | | 50 basis point increase | | | | 50 basis point increase | | 50 basis point decrease |
Currency | | Net floating rate assets subject to interest rate sensitivity | | Increase to net interest income (1) | | Increase to net interest income (per Share) (1) | | Net floating rate assets subject to interest rate sensitivity | | Increase to net interest income (1) | | Increase to net interest income (per share) (1) | | Decrease to net interest income (1)(2) | | Decrease to net interest income (per share) (1)(2) |
USD | | $ | 2,075,348 |
| | $ | 10,377 |
| | $ | 0.08 |
| | $ | 2,349,599 |
| | $ | 11,748 |
| | $ | 0.09 |
| | $ | (10,073 | ) | | $ | (0.07 | ) |
GBP | | 363,955 |
| | 1,820 |
| | 0.02 |
| | 284,758 |
| | 1,424 |
| | 0.01 |
| | (789 | ) | | (0.01 | ) |
EUR | | 48,586 |
| | 243 |
| | — |
| |
Total: | | $ | 2,487,889 |
| | $ | 12,440 |
| | $ | 0.10 |
| | $ | 2,634,357 |
| | $ | 13,172 |
| | $ | 0.10 |
| | $ | (10,862 | ) | | $ | (0.08 | ) |
———————
(1) Any such hypothetical impact on interest rates on the Company’sour variable rate borrowings does not consider the effect of any change in overall economic activity that could occur in a rising or falling interest rate environment. Further, in the event of a change in interest rates of that magnitude, the Companywe may take actions to further mitigate the Company’sour exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company’sour financial structure.
(2) Certain of our floating rate loans are subject to a LIBOR floor.
Prepayment Risk
Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on an asset to be less than expected. In certain cases, the Company adaptswe adapt to prepayment risk by stating prepayment penalties in loan agreements.
Market Risk
Commercial mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and
other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans or loans, as the case may be, which could also cause the Companyus to suffer losses.
Inflation
Virtually all of the Company’sour assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence the Company’sour performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company’sOur financial statements are prepared in accordance with GAAP and distributions are determined by the Company'sour board of directors consistent with the Company'sour obligation to distribute to itsour stockholders at least 90% of itsour REIT taxable income, excluding net capital gains and determined without regard to the dividends paid deduction, on an annual basis in order to maintain the Company’sour REIT qualification. In each case, the Company’sour activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
Currency Risk
38Some of our loans and secured debt arrangements are denominated in a foreign currency and subject to risks related to
fluctuations in currency rates. We mitigate this exposure through foreign currency forward contracts, which match the net
principal and interest of our foreign currency loans and secured debt arrangements.
Item 4. Controls and Procedures.
The Company’sOur Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company’s
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by
paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, the
Company’sour disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation
and disclosure of information relating to the CompanyARI that would potentially be subject to disclosure under the Exchange Act,
and the rules and regulations promulgated thereunder.
During the period ended June 30, 2018,March 31, 2019, there was no change in the Company’sour internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the CompanyARI to disclose material information otherwise required to be set forth in the Company’sour periodic reports.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Companywe may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced an action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No. 653251/2018) in New York Supreme Court. The complaint names as defendants (i) ACREFI Mortgage Lending, LLC, a subsidiary of the Company, (ii) the Company, and (iii) certain funds managed by Apollo, who are co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs allege that the defendants tortiously interfered with the contractual equity put right in the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project. The plaintiffs allege the loss of a $70.0 million investment as part of total damages of $700.0 million, which includes punitive damages. The Company believesdefendants moved to dismiss the complaint on August 17, 2018, and the motion was fully briefed in October 2018. Oral argument took place on March 12, 2019, and the court’s decision is pending. We believe the claims are without merit and willplan to vigorously defend the case.
On January 4, 2017, the United States Department of Justice served a Request for Information and Documents (the "Request") on the Company, in connection with a preliminary investigation into certain aspects of the Company's former residential real estate portfolio, which the Company acquired in connection with the merger of Apollo Residential Mortgage, Inc. with and into the Company and subsequently sold in 2016. The Request sought a range of information in connection with the residential real estate portfolio, including, among other things, information concerning policies, procedures, and practices related to advertising, marketing, identifying, or acquiring residential properties for sale or rent, and various data for all rental and sales contracts executed since January 1, 2012. The Company fully cooperated with the Department of Justice, and was advised, by a letter dated May 2, 2018, that the Department of Justice did not intend to take any further actions in this matter as it relates to the Company.
Item 1A. Risk Factors
See the Company’sour Annual Report on Form 10-K for the year ended December 31, 2017.2018. There have been no material changes to the Company’sour risk factors during the sixthree months ended June 30, 2018.March 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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32.1* | | |
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101.INS* | | XBRL Instance Document |
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101.SCH* | | XBRL Taxonomy Extension Schema |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | |
| | | APOLLO COMMERCIAL REAL ESTATE FINANCE, INC. |
| | |
July 25, 2018April 24, 2019 | | | |
| | |
| By: | | /s/ Stuart A. Rothstein |
| | | Stuart A. Rothstein |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | |
| By: | | /s/ Jai Agarwal |
| | | Jai Agarwal |
| | | Chief Financial Officer, Treasurer and Secretary |
| | | (Principal Financial Officer and Principal Accounting Officer) |