APOLLO COMMERCIAL REAL ESTATE FINANCE, INC. FORWARD-LOOKING INFORMATION
We make forward-looking statements herein and will make forward-looking statements in future filings with theSecurities and Exchange Commission ("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"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For these statements, we 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 our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "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: the macro- and micro-economic impact of the COVID-19 pandemic; the severity and duration of the COVID-19 pandemic, including the emergence and spread of COVID-19 variants; actions taken by governmental authorities to contain the COVID-19 pandemic or treat its impact; the efficacy of the vaccines or other remedies and the speed of their distribution and administration; the impact of the COVID-19 pandemic on our financial condition, results of operations, liquidity and capital resources; market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; the demand for commercial real estate loans; our business and investment strategy; our operating results; actions and initiatives of theU.S. government and governments outside ofthe 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; our ability to obtain and maintain financing arrangements, including secured debt arrangements and securitizations; the timing and amount of expected future fundings of unfunded commitments; 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 we participate; changes in the value of our assets; the scope of our target assets; interest rate mismatches between our target assets and any borrowings used to fund such assets; changes in interest rates and the market value of our target assets; changes in prepayment rates on our target assets; effects of hedging instruments on our target assets; rates of default or decreased recovery rates on our target assets; the degree to which hedging strategies may or may not protect us 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; our continued maintenance of our qualification as a real estate investment trust ("REIT") forU.S. federal income tax purposes; our continued exclusion from registration under the Investment Company Act of 1940, as amended (the "1940 Act"); the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our present and potential future competition; and unexpected costs or unexpected liabilities, including those related to litigation. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to 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 us. See "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q and our Annual Report. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with theSEC , could cause our actual results to differ materially from those included in any forward-looking statements 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 32 -------------------------------------------------------------------------------- predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are aMaryland corporation and have elected to be taxed as a REIT forU.S. federal income tax purposes. We primarily originate, acquire, invest in and manage performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We are externally managed and advised by the Manager, an indirect subsidiary of
Apollo, a global, high-growth alternative asset manager with assets under
management of approximately
The Manager is led by an experienced team of senior real estate professionalswho have significant expertise in underwriting and structuring commercial real estate financing transactions. We benefit from Apollo's global infrastructure and operating platform, through which we are able to source, evaluate and manage potential investments in our target assets.
Current Market Conditions
During the first quarter of 2020, there was a global outbreak of COVID-19, which was declared by theWorld Health Organization as a pandemic. In response to COVID-19,the United States and numerous other countries declared national emergencies, which has led to large scale quarantines as well as restrictions to business deemed non-essential. Although more normalized activities have resumed, we are not in a position to estimate the ultimate impact COVID-19 and its variants will have on our business and the economy as a whole. We cannot predict the potential impact related to both known and unknown risks, including future quarantines, closures and other restrictions resulting from the outbreak. The effects of COVID-19 have adversely impacted the value of our assets, business, financial condition, results of operations and cash flows, and our ability to operate successfully. Some of the factors that impacted us to date and may continue to affect us are outlined in Item 1A. "Risk Factors." Please see "Liquidity and Capital Resources" below for additional discussion surrounding the ongoing impact we expect COVID-19 will have on our liquidity and capital resources
Critical Accounting Policies and Use of Estimates
A summary of our critical accounting policies is set forth in our Annual Report under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates."
Real Estate Owned (and Related Debt)
From time to time we may obtain legal title to the collateral from our loans due
to non-performance. This acquisition of real estate is accounted for using the
acquisition method under Accounting Standards Codification ("ASC") Topic 805,
"Business Combinations." We recognize and measure identifiable assets acquired,
liabilities assumed and any non-controlling interest in the acquiree, if
applicable, based on their relative fair values. Once real estate assets have
been recorded at fair value they are evaluated for impairment on a quarterly
basis. Please refer to "Note 2 - Summary of Significant Accounting Policies,"
"Note 3 - Fair Value Disclosure," and "Note 5 - Assets and Liabilities Related
to Real Estate Owned, Held for Sale" for more information regarding real estate
owned and our valuation methodology.
Real estate assets acquired may include land, building, furniture, fixtures and
equipment ("FF&E"), and intangible assets. The fair value of land is determined
by utilizing the market or sales comparison approach, which compares the
property to similar properties in the marketplace. Although we exercise
significant judgment to identify similar properties, and may also consult
independent third-party valuation experts to assist, our assessment of fair
value is subject to uncertainty and sensitive to our selection of comparable
properties.
We estimate the fair value of any building and FF&E by the cost approach which
measures fair value as the replacement cost of these assets. This approach also
requires significant judgment, and our estimate of replacement cost could vary
from actual replacements costs.
Once real estate assets have been recorded at fair value, they are evaluated for
impairment on a quarterly basis. We consider the following factors when
performing our impairment analysis: (i) Management, having the authority to
approve the action, commits to a plan to sell the asset; (ii) significant
negative industry and economic outlook or trends; (iii) expected material costs
necessary to extend the life or operate the real estate asset; and (iv) our
ability to hold and dispose of the real estate asset in the ordinary course of
business. A real estate asset is considered impaired when the sum of estimated
future undiscounted cash flows to be generated by the real estate asset over the
estimated remaining holding period is less than the carrying value of such real
estate asset. An impairment charge is recorded equal to the excess of the
carrying value of the real estate asset over the fair value. When determining
the fair value of a real estate asset for the purpose of assessing impairment,
we make certain assumptions including, but not limited to: consideration of
projected operating cash flows, intended holding
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period of the real estate, comparable selling prices and projected cash flows
from the eventual disposition of the real estate based upon our estimate of a
capitalization rate and discount rate. While we exercise significant judgment in
generating our assumptions, the asset's fair value is subject to uncertainty, as
actual operating cash flows and disposition proceeds could differ from those
assumed in our valuations. Additionally, the output is sensitive to the
assumptions used in calculating any potential impairment.
From time to time, real estate assets are classified as held for sale in the
period in which the six criteria under ASC Topic 360, "Property, Plant, and
Equipment" are met: (1) we commit to a plan and have the authority to sell the
asset; (2) the asset is available for sale in its current condition; (3) we have
initiated an active marketing plan to locate a buyer for the asset; (4) the sale
of the asset is both probable and expected to qualify for full sales recognition
within a period of 12 months; (5) the asset is being actively marketed for sale
at a price that is reflective of its current fair value; and (6) we do not
anticipate changes to our plans to sell the asset. Once a real estate asset is
classified as held for sale, depreciation is no longer recorded, and the asset
is reported at the lower of its carrying value or fair value less cost to sell.
We determine the fair value of the real estate asset classified as held for sale
using valuation methodologies appropriate to what is included within the
disposal group, such as the market or sales comparison approach for land and the
cost approach for any building and FF&E. Although we exercise significant
judgment in generating the assumptions employed in these methodologies,
ultimately, the real estate asset's fair value is subject to uncertainty, as the
actual sales price of the real estate asset could differ from those assumed in
our valuations. Further, if it is determined that the asset should be reported
at its carrying value, the actual sales price of the real estate asset could
also differ from this amount.
Current Expected Credit Losses ("CECL")
We measure and record potential expected credit losses related to our loan portfolio in accordance with the CECL Standard. The CECL Standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The FASB recognizes the WARM method as an acceptable approach for computing current expected credit losses. We have adopted the WARM method to determine the General CECL Allowance for the majority of loans in our portfolio, applied on a collective basis by assets with similar risk characteristics. If we determine that a borrower or sponsor is experiencing financial difficulty, we will record loan-specific allowances (our Specific CECL Allowance). Please see "Note 2 - Summary of Significant Accounting Policies" and "Note 4 Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for further discussion regarding CECL. General CECL Allowance There are various significant assumptions required to estimate our General CECL Allowance which include deriving and applying an annual historical loss rate, forecasting and analyzing the impacts of macroeconomic conditions and the timing of expected repayments, satisfactions and future fundings. We derive an annual historical loss rate based on a CMBS database with historical losses from 1998 through the first quarter of 2022 provided by a third party,Trepp LLC . We apply various filters to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. Selecting these filters requires the use of significant judgment. The historical loss rate, and ultimately General CECL Allowance we calculated, is sensitive to the CMBS dataset that we select. We adjust our determined annual historical loss rate based on our outlook of the macroeconomic environment, for a reasonable and supportable forecast period-which we have determined to be one year. We determine our expectations for the macroeconomic environment by analyzing various market factors and assess the potential impact on our portfolio. This assessment requires the use of significant judgment in selecting relevant market factors and our expectations of the future macroeconomic environment. The future macroeconomic environment is subject to uncertainty as the actual future macroeconomic environment could vary from our expectations, which will impact our General CECL Allowance. Additionally, there are assumptions provided to us by the Manager that represent their best estimate as to expected loan maturity dates, future fundings, and timing of loan repayments. These assumptions, although made with the most available information at the time of the estimate, are subjective and actual activity may not follow the estimated schedule. These assumptions impact the future balances that the loss rate will be applied to and as such impact our General CECL Allowance. As we acquire new loans and the Manager monitors loan and sponsor performance, these estimates may change each period.
Specific CECL Allowance
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When we determine that a borrower or sponsor is experiencing financial
difficulty, we evaluate the related loan for loan-specific allowances, under the
practical expedient per the guidance. Determining that a borrower or sponsor is
experiencing financial difficulty requires the use of significant judgment and
can be based on several factors subject to uncertainty. These factors can
include, but are not limited to, whether cash from the borrower's operations are
sufficient to cover current and future debt service requirements, the borrower's
ability to potentially refinance the loan and other circumstances that can
affect the borrower's ability to satisfy their obligations in accordance the
terms of the loan. When utilizing the practical expedient for collateral
dependent loans, the loan loss provision is determined as the difference between
the fair value of the underlying collateral, adjusted for estimated costs to
sell when applicable, and the carrying value of the loan (prior to the loan loss
provision), as repayment or satisfaction of a loan is dependent on a sale of the
underlying collateral.
The fair value of the underlying collateral is determined by using method(s)
such as discounted cash flow, the market approach, or direct capitalization
approach. These methods require the use of key unobservable inputs, which are
inherently uncertain and subjective. Our estimate of fair value is sensitive to
both the valuation methodology selected and inputs used. Determining a suitable
valuation method and selecting the appropriate key unobservable inputs and
assumptions requires significant judgment and consideration of factors specific
to the underlying collateral being assessed. Additionally, the key unobservable
inputs and assumptions used may vary depending on the information available to
us and market conditions as of the valuation date. As such, the fair value that
we derive and use in calculating our Specific CECL Allowance, is subject to
uncertainty and any actual losses, if incurred, could differ materially from our
provision.
Refer to "Note 2 - Summary of Significant Accounting Policies" to our consolidated financial statements of our most recent annual report on Form 10-K for the complete listing and description of our significant accounting policies.
Results of Operations
All non-USD denominated assets and liabilities are translated to USD 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. Loan Portfolio Overview
The following table sets forth certain information regarding our loan portfolio
as of
Weighted-Average Coupon Weighted Average Secured Debt
Equity at
Description Carrying Value (1) All-in Yield Arrangements (3) Cost of Funds(4) cost(5)
(1)(2)
Commercial mortgage loans, net $ 7,586,554 4.2 % 4.8 % $ 4,582,019 2.3 % $ 3,004,535
Subordinate loans and other 763,488 7.2 % 7.5 % - - 763,488
lending assets, net
Total/Weighted-Average$ 8,350,042 4.5 % 5.0 %$ 4,582,019 2.3 %$ 3,768,023 ------- (1) Weighted-Average Coupon and Weighted-Average All-in Yield are based on the applicable benchmark rates as ofMarch 31, 2022 on the floating rate loans. (2) Weighted-Average All-in Yield includes the amortization of deferred origination fees, loan origination costs and accrual of both extension and exit fees. Weighted-Average All-in Yield excludes the benefit of forward points on currency hedges relating to loans denominated in currencies other than USD. (3) Gross of deferred financing costs of$10.7 million . (4) Cost of funds includes weighted average spread and applicable benchmark rates as ofMarch 31, 2022 on secured debt arrangements. (5) Represents loan portfolio at amortized cost less secured debt outstanding.
The following table provides details of our commercial mortgage loan portfolio
and subordinate loan and other lending assets portfolio, on a loan-by-loan
basis, as of
Commercial Mortgage Loan Portfolio
Construction
# Property Type Risk Rating Origination Date Amortized Cost Unfunded Commitment Loan
3rd Party Subordinate Debt Fully-extended Maturity Location
1 Hotel 3 10/2019 $327 $46 Y 08/2024 Various, Spain
2 Hotel 3 11/2021 215 24 Y 11/2026 Various, UK /Ireland
3 Hotel 3 04/2018 152 - 04/2023 Honolulu, HI
4 Hotel 3 09/2015 145 - 06/2024 Manhattan, NY
5 Hotel 3 07/2021 140 39 08/2026 Various, US
6 Hotel 3 08/2019 132 - 08/2024 Puglia, Italy
7 Hotel 3 05/2018 115 - 06/2024 Miami, FL
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8 Hotel 4 03/2017 106 - 10/2022 Atlanta, GA
9 Hotel 3 10/2021 99 - 11/2026 New Orleans, LA
10 Hotel 3 11/2018 90 - 12/2023 Vail, CO
11 Hotel 3 12/2019 60 - 01/2025 Tucson, AZ
12 Hotel 3 11/2021 78 86 Y 12/2026 St. Thomas, USVI
13 Hotel 3 05/2021 59 2 Y 06/2026 Fort Lauderdale, FL
14 Hotel 3 05/2019 52 - 06/2024 Chicago, IL
15 Hotel 3 10/2021 43 45 Y 10/2026 Lake Como, Italy
16 Hotel 3 12/2015 43 - 08/2024 St. Thomas, USVI
17 Hotel 3 02/2018 27 - 11/2024 Pittsburgh, PA
18 Hotel 3 12/2021 23 33 Y 06/2025 Dublin, Ireland
19 Office 3 02/2020 221 - 02/2025 London, UK
20 Office 3 01/2020 218 71 Y 02/2025 Long Island City, NY
21 Office 3 03/2022 207 58 Y 04/2027 Manhattan, NY
22 Office 3 06/2019 205 15 08/2026 Berlin, Germany
23 Office 3 02/2022 162 - 06/2025 Milan, Italy
24 Office 3 10/2018 187 - 10/2023 Manhattan, NY
25 Office 3 11/2017 129 - 01/2023 Chicago, IL
26 Office(1) 3 12/2017 119 - Y 07/2022 London, UK
27 Office 3 02/2022 118 483 Y 02/2027 London, UK
28 Office 3 03/2018 86 - Y 04/2023 Chicago, IL
29 Office 3 12/2019 18 2 04/2022 Edinburgh, Scotland
30 Office 3 11/2021 25 55 Y 11/2025 Milan, Italy
31 Urban Retail 3 08/2019 317 - Y 09/2024 Manhattan, NY
32 Industrial 3 03/2021 273 - 05/2026 Various, Sweden
33 Residential-for-sale: inventory 3 12/2021 165 50 01/2027 Manhattan, NY
34 Residential-for-sale: construction 3 12/2018 114 65 Y Y 12/2023 Manhattan, NY
35 Residential-for-sale: inventory 3 12/2021 53 - Y 01/2026 Hallandale Beach, FL
36 Residential-for-sale: inventory 3 12/2019 69 9 Y 11/2025 Boston, MA
37 Residential-for-sale: inventory 3 01/2018 15 2 Y 01/2023 Manhattan, NY
38 Residential-for-sale: inventory 3 06/2018 5 - Y 07/2022 Manhattan, NY
39 Residential-for-rent 3 12/2021 230 18 12/2026 Various, UK
40 Residential-for-rent 3 05/2021 82 - Y 05/2026 Cleveland, OH
41 Residential-for-rent 3 04/2014 60 - 07/2023 Various
42 Residential-for-rent 3 11/2014 50 - 06/2023 Various, US
43 Residential-for-rent 3 02/2020 50 - 06/2022 Cleveland, OH
44 Portfolio(2) 3 06/2021 264 23 06/2026 Various, Germany
45 Parking Garages 3 05/2021 270 5 05/2026 Various, US
46 Healthcare 3 03/2022 374 - 03/2027 Various, MA
47 Healthcare 3 10/2019 212 - 10/2024 Various, UK
48 Caravan Parks 3 02/2021 215 - 02/2028 Various, UK
49 Multifamily Development(3) 5 03/2017 180 - 07/2022 Brooklyn, NY
50 Urban Predevelopment(3) 5 01/2016 123 - 09/2022 Miami, FL
51 Retail center 3 10/2021 403 - 10/2026 Various, UK
52 Retail center(3) 5 11/2014 105 - 09/2022 Cincinnati, OH
53 Mixed Use 3 12/2019 186 627 Y Y 06/2025 London, UK
54 Mixed Use 3 03/2022 134 42 Y 03/2027 Brooklyn, NY
55 Mixed Use 3 12/2019 53 - 12/2024 London, UK
General CECL Allowance (16)
Subtotal / Weighted-Average
Commercial Mortgage Loans 3.1 $7,587 $1,800 3.2 Years
Subordinate Loan and Other Lending Assets Portfolio
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Origination Date Amortized Cost Unfunded Commitment Construction Loan 3rd Party Subordinate Debt Fully-extended Maturity
Location
1 Residential-for-sale: inventory(4) 3 06/2015$242 $- Y 05/2022Manhattan, NY 2 Residential-for-sale: inventory(4) 3 05/2020 179 - Y 05/2022Manhattan, NY 3 Residential-for-sale: inventory(3)(4) 5 11/2017 52 - Y 05/2022Manhattan, NY 4 Office 3 01/2019 100 - 12/2025Manhattan, NY 5 Office 3 07/2013 14 - 07/2022Manhattan, NY 6 Office 3 08/2017 8 - 09/2024Troy, MI 7 Mixed Use 3 02/2019 39 - 06/2022London, UK 8 Mixed Use 3 07/2012 7 - 08/2022Chapel Hill, NC 9 Healthcare(5) 3 07/2019 51 - Y 06/2024 Various, US 10 Hotel 3 06/2015 24 - 07/2025Phoenix, AZ 11 Hotel 3 06/2018 20 - 06/2023Las Vegas, NV 12 Industrial 2 05/2013 32 - 05/2023 Various, US
General CECL Allowance (5)
Subtotal / Weighted-Average Subordinate
Loans and Other Lending Assets 3.1 $763 $- 0.9 Years
Total / Weighted-Average
Loan Portfolio 3.1 $8,350 $1,800 3.0 Years
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(1)Includes$26.3 million of a subordinate participation sold accounted for as secured borrowing. (2)Includes portfolio of office, industrial, and retail property types. (3)Amortized cost for these loans is net of the recorded Specific CECL Allowance. (4)Loans are secured by the same property. (5)Single Asset, Single Borrower CMBS.
Our average asset and debt balances for the three months ended
Average month-end balances for the three months ended
March 31, 2022
Description Assets Related debt
Commercial mortgage loans, net $ 7,263,212 $ 4,271,453
Subordinate loans and other lending assets,
net 801,698 -
Portfolio Management
Due to the impact of COVID-19, some of our borrowers have experienced
consequences which have prevented the execution of their business plans and in
some cases, resulted in temporary closures. As a result, we have worked with
borrowers to execute loan modifications which are typically coupled with
additional equity contributions from borrowers. Loan modifications to date have
included repurposing of reserves, temporary deferrals of interest or principal,
and partial deferral of coupon interest as payment-in-kind interest.
Investment Activity
During the three months ended March 31, 2022 , we committed $1.8 billion of
capital to loans ($1.2 billion was funded at closing). In addition, during the
three months ended March 31, 2022 , we received $0.7 billion in repayments and
funded $0.1 billion for commitments closed prior to 2022.
Net Income Available to Common Stockholders
For the three months ended
Operating Results
The following table sets forth information regarding our condensed consolidated
results of operations and certain key operating metrics compared to both the
same period in the previous year and the most recently reported period ($ in
thousands):
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Three months ended Q1'22 vs.
March 31, 2022 December 31, Q4'21
2021
Net interest income:
Interest income from commercial mortgage loans $ 84,424 $ 85,595 $ (1,171)
Interest income from subordinate loans and other 15,835 18,343 (2,508)
lending assets
Interest expense (45,118) (44,730) (388)
Net interest income 55,141 59,208 (4,067)
Operations related to real estate owned:
Revenue from real estate owned operations 9,040 11,647 (2,607)
Operating expenses related to real estate owned (9,652) (11,015) 1,363
Depreciation and amortization on real estate owned (704) (1,097) 393
Net loss related to real estate owned (1,316) (465) (851)
Operating expenses:
General and administrative expenses (7,187) (8,610) 1,423
Management fees to related party (9,354) (9,773) 419
Total operating expenses (16,541) (18,383) 1,842
Other income - 34 (34)
Realized loss on investments - (767) 767
Provision for loan losses - Specific CECL Allowance, (30,000) - (30,000)
net
Reversal of (provision for) loan losses - General CECL 11,389
(1,817) 13,206
Allowance, net
Gain on foreign currency forward contracts 22,762 2,021 20,741
Foreign currency translation loss (32,518) (3,879) (28,639)
Gain on interest rate hedging instruments 6,321 1,143 5,178
Net income $15,238 $37,095 $(21,857)
Net Interest Income
Net interest income decreased by $4.1 million during the three months ended
March 31, 2022 compared to the three months ended December 31, 2021 . Decrease in
interest income on subordinate loans primarily relates to a $60.9 million
decrease in our average outstanding loan balance, excluding loans on
non-accrual, during the three months ended March 31, 2022 . The decrease in our
commercial mortgage interest is primarily due to the repayment of a loan with an
amortized cost basis as of December 31, 2021 of £260.7 million ($352.8 million
assuming conversion into USD) which was accruing default interest.
Operations Related to Real Estate Owned
In 2017, we originated a$20.0 million junior mezzanine loan which was subordinate to: (i) a$110.0 million mortgage loan, and (ii) a$24.5 million senior mezzanine loan, secured by a full-service luxury hotel inWashington, D.C. OnMay 24, 2021 , we acquired legal title to the hotel through a deed-in-lieu of foreclosure and the criteria for held-for-sale classification in ASC Topic 360, "Property, Plant, and Equipment" were not met. The assets and liabilities related to the hotel were assumed at their estimated fair value at acquisition and presented net of accumulated depreciation and impairment charges. As ofMarch 1, 2022 the related assets and liabilities were transferred to assets and liabilities related to real estate owned, held for sale, as due to our marketing efforts on the property, as well as other developments, it now met the criteria for held for sale. Results of operations from the hotel are comprised of operating revenue, expenses and real estate asset depreciation. As ofMarch 1, 2022 , we ceased recording depreciation on the building and furniture, fixtures, and equipment on the condensed consolidated statement of operations. The loss from hotel operations increased by$0.9 million during the three months endedMarch 31, 2022 compared to the three months endedDecember 31, 2021 , which was primarily related to a new variant of COVID-19 during the first quarter of 2022. Refer to "Note 5 - Assets and Liabilities Related to Real Estate Owned, Held for Sale" for more information related to our impairment and realized losses on real estate owned. Operating Expenses
General and administrative expenses
General and administrative expenses decreased by
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the three months ended December 31, 2021 . The decrease was primarily driven by
the $1.3 million one time expense during the three months ended December 31,
2021 of arrangement fees related to the Term Loan modification as discussed in
"Note 8 - Senior Secured Term Loans, Net".
Management fees to related party
Management fee expense is in line for the three months ended
Other income
Other income is in line for the three months ended
Realized loss on investments and provision for loan losses - Specific CECL Allowance, net
As ofMarch 31, 2022 , sales velocity on the underlying property lagged behind the borrower's business plan and management's expectations. Based on this information, we deemed the borrower to be experiencing financial difficulty and accordingly recorded a$30.0 million of Specific CECL Allowance on the Junior Mezzanine B Loan. During the fourth quarter of 2021, we sold our interest in a subordinate loan secured by a mixed-use property with an outstanding principal of$41.9 million . We recorded a realized loss of approximately$0.8 million in connection with this sale.
Reversal of (provision for) loan losses - General CECL Allowance, net
Our General CECL Allowance decreased by$11.4 million during the three months endedMarch 31, 2022 compared to a$1.8 million increase during three months endedDecember 31, 2021 . The decrease in General CECL Allowance recorded during 2022 was largely due to changes in expected loan repayment dates as well as portfolio seasoning and an improved macroeconomic outlook, which was partially offset by new loan originations. Comparatively, the$1.8 million increase in General CECL Allowance three months endedDecember 31, 2021 , was driven by new loan originations that were partially offset by portfolio seasoning and accelerated loan repayments. Refer to "Note 2 - Summary of Significant Accounting Policies" and "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information related to our General CECL Allowance.
Foreign currency gain (loss) and gain (loss) on derivative instruments
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD. When foreign currency gain and (loss) on derivative instruments are evaluated on a combined basis, the net impact for the three months endedMarch 31, 2022 andDecember 31, 2021 was$9.8 million and$1.9 million , respectively, of loss. The increase in net loss from the previous quarter primarily represents a timing difference between the valuation on the foreign currency forward contracts, which are valued using spot rates, forward point estimates, and discount factors, and the foreign currency translation calculation which uses only spot rates.
Gain on interest rate hedges
InMay 2019 , we entered into a$500.0 million senior secured term loan (the "2026 Term Loan"). During the second quarter of 2020, we entered into a three-year interest rate cap to cap LIBOR at 0.75%. This effectively limits the maximum all-in coupon on our 2026 Term Loan to 3.50%. During the three months endedMarch 31, 2022 andDecember 31, 2021 , the interest rate cap had an unrealized gain of$6.3 million and$1.1 million , respectively, as a result of rising interest rates. Subsequent Events
Refer to "Note 20 - Subsequent Events" to the accompanying condensed
consolidated financial statements for disclosure regarding significant
transactions that occurred subsequent to
Contractual Obligations, Liquidity, and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to fund and maintain our assets and operations,
repay borrowings, make distributions to our stockholders and other general
business needs. We utilize various sources of cash in order to meet our
liquidity needs in the next twelve months, which is considered the short-term,
and the longer term.
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Our current debt obligations consist of $1.9 billion , at face value, of
corporate debt and $4.6 billion of asset specific financings. Our corporate debt
includes $783.3 million of term loan borrowings, $500.0 million of senior
secured notes, and $575.0 million of convertible notes, of which $345.0 million
mature in August 2022 . Our asset specific financings are generally tied to the
underlying loans and we anticipate repayments of $414.3 million of secured debt
arrangements in the short term. Specifics about our secured debt arrangements
and corporate debt maturities and obligations are discussed below.
In addition to our debt obligations, as of March 31, 2022 , we had $1.8 billion
of unfunded loan commitments. We expect that approximately $790.6 million will
be funded to existing borrowers in the short term.
We have various sources of liquidity that we are able to use in order to satisfy
our short and long term obligations. As of March 31, 2022 , we had $215.7 million
of cash on hand. As of March 31, 2022 we also held approximately $1.8 billion of
unencumbered assets, consisting of $1.1 billion of senior mortgages and $768.2
million of mezzanine loans. Depending on market conditions, we may utilize
additional borrowings as a source of cash, which may also include additional
secured debt arrangements as well as other borrowings or conduct additional
public and private debt and equity offerings.
We maintain policies relating to our use of leverage. See "Leverage Policies"
below. In the future, we 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.
We generally intend to hold our assets for investment, although we may sell certain of our investments in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.
To maintain our qualification as a REIT under the Internal Revenue Code, we must
distribute annually at least 90% of our REIT taxable income, determined without
regard to the deduction for dividends paid and excluding net capital gain. These
distribution requirements limit our ability to retain earnings and replenish or
increase capital for operations.
We also have interests in two unconsolidated joint ventures, each of which owns
underlying properties that secure one of our first mortgage loans, respectively
and are accounted for as off-balance-sheet arrangements. The unconsolidated
joint ventures were deemed to be Variable Interest Entities ("VIEs"), of which
we are not the primary beneficiary. Accordingly, the VIEs are not consolidated
in our condensed consolidated financial statements as of March 31, 2022 . Our
maximum exposure to loss from these commercial mortgage loans is limited to
their carrying value, which as of March 31, 2022 was $227.2 million . Although
there is risk of loss we have no contractual obligation to fund any additional
capital into the joint ventures.
Borrowings Under Various Financing Arrangements
The table below summarizes the outstanding balances and maturities for our various financing arrangements:
March 31, 2022 December 31, 2021
Borrowings Maturity (2) Borrowings Maturity (2)
Outstanding(1) Outstanding(1)
Secured credit facilities $ 2,649,353 September 2025 $ 2,256,646 October 2025
Barclays Private Securitization 1,932,666 February 2026 1,902,684 August 2024
Total Secured debt arrangements $ 4,582,019 $ 4,159,330
Senior secured term loans $ 783,250 January 2027 $ 785,250 January 2027
Senior secured notes 500,000 June 2029 500,000 June 2029
Convertible senior notes 575,000 February 2023 575,000 February 2023
Total Borrowings $ 6,440,269 $ 6,019,580 -------
(1)Borrowings Outstanding represent principal balances as of the respective reporting periods. (2)Maturity dates represent weighted average maturities based on borrowings outstanding and assumes extensions at our option are exercised with consent of financing providers, where applicable.
Secured Credit Facilities
InMarch 2022 , through an indirect wholly-owned subsidiary, we entered into the Santander Facility. The Santander Facility allows for €54.0 million ($59.8 million assuming conversion to USD) of maximum borrowings and initially matures inAugust 2024 . As ofMarch 31, 2022 , we had entered into secured debt arrangements with seven secured credit facilities through wholly-owned subsidiaries. Terms under various master repurchase agreements vary by secured credit facility. 40 --------------------------------------------------------------------------------
Refer to Note 7 - Secured Debt Arrangements, Net of our Condensed Consolidated Financial Statements for additional disclosure regarding our secured credit facilities.
Barclays Private Securitization
InJune 2020 , through a newly formed entity, we entered into a private securitization with Barclays Bank plc, of which Barclays Bank plc retained$782.0 million of senior notes. The Barclays Private Securitization finances the loans that were previously financed under the Barclays Facility - GBP/EUR. During 2021, we pledged five additional commercial mortgage loans and additional collateral with a total outstanding principal balance as ofDecember 31, 2021 of €237.6 million, £572.7 million, and kr2.6 billion (totaling$1.3 billion assuming conversion into USD). During the first quarter of 2022, we pledged three additional commercial mortgage loans with outstanding principal balances of £134.8 million ($177.1 million assuming conversion into USD) and €157.4 million ($174.2 million assuming conversion into USD), and pledged additional collateral of a financed loan of £78.8 million ($103.5 million assuming conversion into USD) for a total of$454.8 million . As ofMarch 31, 2022 , we had £925.4 million, €448.7 million, and kr2.1 billion ($1.9 billion assuming conversion into USD) of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans. Refer to "Note 7 - Secured Debt Arrangements, Net" of our Condensed Consolidated Financial Statements for additional disclosure regarding our Barclays Private Securitization. Senior Secured Term Loans InMay 2019 , we entered into the$500.0 million 2026 Term Loan. During the three months endedMarch 31, 2022 , we repaid$1.3 million of principal related to the 2026 Term Loan. The 2026 Term Loan bears interest at LIBOR plus 2.75%, was issued at a price of 99.5%, and matures inMay 2026 . InMarch 2021 , we entered into the$300.0 million 2028 Term Loan. During the three months endedMarch 31, 2022 , we repaid$0.8 million of principal related to the 2028 Term Loan. The 2028 Term Loan bears interest at LIBOR (with a floor of 0.50%) plus 3.50%, was issued at a price of 99.0%, and matures inMarch 2028 . The outstanding Term Loans principal balance as ofMarch 31, 2022 and 2021 was$783.3 million and$785.3 million , respectively. The Term Loans contain restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. During the fourth quarter of 2021, we modified the financial covenants of the Term Loans which included the following: (i) increased our maximum ratio of total recourse debt to tangible net worth from 3:1 to 4:1; (ii) increased our maximum ratio of total unencumbered assets to total pari-passu indebtedness from 1.25:1 to 2.50:1, and (iii) amended the unencumbered asset definition to include residual repo equity. In conjunction with the modification, we incurred$5.2 million in fees,$3.9 million of which were consent fees paid to borrowers recorded as deferred financing costs and$1.3 million of arrangement fees paid to the Term Loan arranger recorded as general and administrative expenses. We were in compliance with the applicable covenants as ofMarch 31, 2022 andDecember 31, 2021 .
Senior Secured Notes
InJune 2021 , we issued$500.0 million of 4.625% Senior Secured Notes due 2029 (the "2029 Notes"), for which we received net proceeds of$495.0 million , after offering expenses. The 2029 Notes will mature onJune 15, 2029 , unless earlier repurchased or redeemed. The 2029 Notes are secured by a first-priority lien, and rank pari passu in right of payment with all of our existing and future first lien obligations, including indebtedness under the Term Loans. The 2029 Notes were issued at par and contain covenants relating to liens, indebtedness, and investments in non-wholly owned entities. As ofMarch 31, 2022 , the 2029 Notes had a carrying value of$494.2 million net of deferred financing costs of$5.8 million . The 2029 Notes require that we maintain a ratio of total unencumbered assets to total pari-passu indebtedness of at least 1.20:1. We were in compliance with this covenant as ofMarch 31, 2022 andDecember 31, 2021 . Convertible Senior Notes In two separate offerings during 2017, we issued an aggregate principal amount of$345.0 million of 4.75% Convertible Senior Notes due 2022, for which we received$337.5 million , after deducting the underwriting discount and offering expenses. AtMarch 31, 2022 , the 2022 Notes had a carrying value of$344.9 million and an unamortized discount of$0.1 million . During the fourth quarter of 2018, we issued$230.0 million of 5.375% Convertible Senior Notes due 2023, for which we received$223.7 million after deducting the underwriting discount and offering expenses. AtMarch 31, 2022 , the 2023 Notes had a carrying value of$228.8 million and an unamortized discount of$1.2 million . 41 --------------------------------------------------------------------------------
Debt Covenants
The guarantees related to our secured debt arrangements contain the following financial covenants: (i) tangible net worth must be greater than$1.25 billion plus 75% of the net cash proceeds of any equity issuance afterMarch 31, 2017 ; (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 3.75:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or$30.0 million . Under these covenants, our General CECL Allowance is added back to our tangible net worth calculation.
We were in compliance with the covenants under each of our secured debt
arrangements at
Debt-to-Equity Ratio
The following table presents our debt-to-equity ratio:
March 31, 2022 December 31, 2021
Debt to Equity Ratio(1) 2.7 2.4
-------
(1)Represents total debt less cash and loan proceeds held by servicer (recorded
with Other Assets, see "Note 6 - Other Assets" for more information) to total
stockholders' equity.
Leverage Policies
We use leverage for the sole purpose of financing our portfolio and not for the
purpose of speculating on changes in interest rates. In addition to our secured
debt arrangements and senior secured term loan, we access additional sources of
borrowings. Our charter and bylaws do not limit the amount of indebtedness we
can incur; however, we are subject to and carefully monitor the limits placed on
us by our credit providers and those that assign ratings on our company.
At
Investment Guidelines
Our current investment guidelines, approved by our board of directors, are comprised of the following:
•no investment will be made that would cause us to fail to qualify as a REIT for
•no investment will be made that would cause us to register as an investment company under the 1940 Act;
•investments will be predominantly in our target assets;
•no more than 20% of our 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 our intention to qualify as a REIT.
The board of directors must approve any change in or waiver to these investment guidelines.
Dividends We intend to continue to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. We generally intend over time to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Any distributions we make are at the discretion of our board of directors and depend upon, among other things, our actual results of operations. These results and our ability to pay distributions are affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the 42 --------------------------------------------------------------------------------
required distribution in the form of a taxable stock distribution or distribution of debt securities.
The following table details our dividend activity:
Three months ended
Dividends declared per share of: March 31, 2022 March 31, 2021
Common Stock $0.35 $0.35
Series B Preferred Stock N/A 0.50
Series B-1 Preferred Stock 0.45 N/A
On July 15, 2021 , we exchanged all 6,770,393 shares outstanding of our 8.00%
Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock, par
value $0.01 per share ("Series B Preferred Stock"), with a liquidation
preference of $25.00 per share, for 6,770,393 shares of 7.25% Series B-1
Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share
("Series B-1 Preferred Stock"), with a liquidation preference of $25.00 per
share, pursuant to an exchange agreement with the two existing shareholders.
As of March 31, 2022 , and December 31, 2021 we had 6,770,393 shares of Series
B-1 Preferred Stock outstanding. The Series B-1 Preferred Stock pay cumulative
cash dividends, which are payable quarterly in equal amounts in arrears on the
15th day of each January, April, July and October: at a rate of 7.25% per annum
of the $25.00 per share liquidation preference. Except under certain limited
circumstances, the Series B-1 Preferred Stock is generally not convertible into
or exchangeable for any other property or any other of our securities at the
election of the holders. On and after July 15, 2026 , we may, at our option,
redeem the shares at a redemption price of $25.00 , plus any accrued unpaid
dividends to, but not including, the date of the redemption.
Non-GAAP Financial Measures
Distributable Earnings
Beginning in the fourth quarter of 2020 to more appropriately reflect the principal purpose of the measure, "Operating Earnings" was relabeled "Distributable Earnings", a non-GAAP financial measure. The definition continues to be 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 (including depreciation and amortization related to real estate owned) 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 Notes to stockholders' equity in accordance with GAAP, and (vi) provision for loan losses. Distributable Earnings may also be adjusted to exclude certain other non-cash items, as determined by the Manager and approved by a majority of our independent directors. For three months endedMarch 31, 2022 , our Distributable Earnings were$49.5 million , or$0.35 per share, as compared to$55.6 million , or$0.39 per share, for the same period in the prior year. The weighted-average diluted shares outstanding used for Distributable 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 Convertible Notes. Consistent with the treatment of other unrealized adjustments to Distributable 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 Convertible Notes from our computation of Distributable Earnings per weighted average diluted share is useful to investors for various reasons, including the following: (i) conversion of Convertible Notes to shares requires both the holder of a note to elect to convert the Convertible 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 Convertible Notes from the computation of Distributable Earnings per weighted-average diluted share is consistent with how we treat other unrealized items in our computation of Distributable Earnings per weighted-average diluted share; and (iv) we believe that when evaluating our operating performance, investors and potential investors consider our Distributable Earnings relative to our actual distributions, which are based on shares outstanding and not shares that might be issued in the future. 43 --------------------------------------------------------------------------------
The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings:
Three months ended
2022 2021
Weighted-Averages Shares Shares
Diluted shares - GAAP 140,353,386 170,792,684
Potential shares issued under conversion of the Convertible - (28,533,271)
Notes
Unvested RSUs 2,571,417 - Diluted shares - Distributable Earnings 142,924,803 142,259,413 As a REIT,U.S. federal income tax law generally requires us to distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons stockholders invest in a REIT, we generally intend over time to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Distributable Earnings is a key factor considered by the board of directors in setting the dividend and as such we believe Distributable Earnings is useful to investors.
As discussed in "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other
Lending Assets, Net," we recorded an impairment of
We also believe it is useful to our investors to present Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap to reflect our operating results because (i) our operating results are primarily comprised of earning interest income on our investments net of borrowing and administrative costs, which comprise our ongoing operations and (ii) it has been a useful factor related to our dividend per share because it is one of the considerations when a dividend is determined. We believe that our investors use Distributable Earnings and Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap, or a comparable supplemental performance measure, to evaluate and compare the performance of our company and our peers. A significant limitation associated with Distributable Earnings as a measure of our financial performance over any period is that it excludes unrealized gains (losses) from investments. In addition, our presentation of Distributable Earnings may not be comparable to similarly-titled measures of other companies, that use different calculations. As a result, Distributable Earnings should not be considered as a substitute for our GAAP net income as a measure of our financial performance or any measure of our liquidity under GAAP. Distributable Earnings are reduced for realized losses on loans which include losses that management believes are near certain to be realized.
The table below summarizes the reconciliation from net income available to common stockholders to Distributable Earnings and Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap ($ in thousands):
44
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Three months ended March
31,
2022 2021
Net income available to common stockholders $ 12,170 $ 54,950
Adjustments:
Equity-based compensation expense 4,698 4,387 Gain on foreign currency forwards (22,762) (9,800) Foreign currency loss, net 32,518 7,449 Unrealized gain on interest rate cap (6,321) (357) Realized gains (losses) relating to interest income on 3,684 (620) foreign currency hedges, net Realized gains relating to forward points on foreign 6,229 6 currency hedges, net Amortization of the convertible senior notes related to - 800 equity reclassification Depreciation and amortization on real estate owned 704 - Provision for (reversal of) loan losses and impairments 18,611 (1,238) Realized losses and impairments on real estate owned and - 550
investments
Total adjustments: 37,361 1,177 Distributable Earnings prior to realized losses and $ 49,531 $ 56,127
impairments on real estate owned, and investments
Realized losses and impairments on real estate owned and $ - $ (550) investments Distributable Earnings $ 49,531 $ 55,577
Diluted Distributable Earnings per share prior to realized losses and impairments on real estate owned, and
$ 0.35 $ 0.39
investments
Diluted Distributable Earnings per share of common stock $ 0.35 $ 0.39
Weighted-average diluted shares - Distributable Earnings 142,924,803 142,259,413
Book Value Per Share
The table below calculates our book value per share ($ in thousands, except per
share data):
March 31, 2022 December 31, 2021
Stockholders' Equity $ 2,251,018 $ 2,294,626
Series B-1 Preferred Stock (Liquidation
Preference) (169,260) (169,260)
Common Stockholders' Equity $ 2,081,758 $ 2,125,366
Common Stock 140,541,409 139,894,060
Book value per share $ 14.81 $ 15.19
The table below shows the changes in our book value per share:
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Book value per share
Book value per share at December 31, 2021 $ 15.19
General CECL Allowance 0.28
Book value per share at December 31, 2021 prior to General CECL
Allowance $ 15.47
Specific CECL Allowance (0.22)
Vesting and delivery of RSUs (0.12)
Net unrealized loss on currency hedges (0.10)
Adoption of ASU 2020-06 (0.02)
Book value per share at
$ 15.01
General CECL Allowance and depreciation and amortization (0.20)
Book value per share at March 31, 2022 $ 14.81
We believe that presenting book value per share with sub-totals prior to the
CECL Allowances and depreciation and amortization is useful for investors for
various reasons, including, among other things, analyzing our compliance with
financial covenants related to tangible net worth and debt-to-equity under our
secured debt arrangements and senior secured term loan, which permit us to add
the General CECL Allowance to our GAAP stockholders' equity. Given that our
lenders consider book value per share prior to the General CECL Allowance as an
important metric related to our debt covenants, we believe disclosing book value
per share prior to the General CECL Allowance is important to investors such
that they have the same visibility. We further believe that presenting book
value before depreciation and amortization is useful to investors since it is a
non-cash expense included in net income and is not representative of our core
business and ongoing operations.
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