APOLLO COMMERCIAL REAL ESTATE FINANCE, INC. We make forward-looking statements herein and will make forward-looking statements in future filings with theSEC , 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; actions taken by governmental authorities to contain the COVID-19 pandemic or treat its impact; 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 REIT forU.S. federal income tax purposes; our 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 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 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 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$315.5 billion as ofMarch 31, 2020 . 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. 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 29 --------------------------------------------------------------------------------
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. These responses to COVID-19 have disrupted economic activities and could have a significant continued adverse effect on economic and market conditions, and could result in a recession. As we are still in the midst of the COVID-19 pandemic we are not in a position to estimate the ultimate impact this will have on our business and the economy as a whole. 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" of this Quarterly Report on Form 10-Q. 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 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." There have been no material changes to our critical accounting policies described in our Annual Report other than the adoption of the CECL Standard, as described in "Note 2 - Summary of 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 commercial real estate debt portfolio as ofMarch 31, 2020 ($ in thousands): Weighted Amortized Weighted-Average Average Secured Debt Equity at Description Cost Coupon (1) All-in Arrangements (3) Cost of Funds cost(4) Yield (1)(2) Commercial mortgage loans, net$ 5,413,627 4.8 % 5.3 %$ 3,556,842 2.7 %$ 1,856,785 Subordinate loans and other lending assets, 1,016,991 12.4 % 13.9 % - - 1,016,991 net Total/Weighted-Average$ 6,430,618 6.0 % 6.7 %$ 3,556,842 2.7 %$ 2,873,776 -------
(1) Weighted-Average Coupon and Weighted-Average All-in Yield are based on the
applicable benchmark rates as of
(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
(4) Represents loan portfolio at amortized cost less secured debt outstanding.
The following table provides details of our commercial mortgage loan portfolio and subordinate and other lending assets portfolio, on a loan-by-loan basis, as ofMarch 31, 2020 ($ in millions): Commercial Mortgage Loan Portfolio Unfunded Construction Fully-extended # Property Type Risk Rating Origination Date Amortized Cost Commitment Loan Maturity Location 1 Urban Retail 3 08/2019$316 $- 09/2024 Manhattan, NY 2 Urban Retail 3 12/2019 308 - 12/2023 London, UK 30
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3 Hotel 3 10/2019 240 52 08/2024 Various
4 Healthcare 3 10/2019 212 28 10/2024 Various
5 Office 3 02/2020 207 - 02/2025 London, UK
6 Industrial 3 01/2019 196 7 02/2024 Brooklyn, NY
Berlin,
7 Office 3 06/2019 192 27 11/2026 Germany
Manhattan,
8 Office 3 10/2018 191 8 10/2021 NY
9 Office 3 09/2019 172 - 09/2023 London, UK
Long Island
10 Office 3 01/2020 166 121 02/2025 City, NY
11 Office 3 11/2017 158 - 01/2023 Chicago, IL
12 Hotel 3 04/2018 152 2 04/2023 Honolulu, HI
13 Hotel 3 05/2018 140 - 06/2023 Miami, FL
Manhattan,
14 Hotel (1) 5 09/2015 144 - 06/2023 NY
Puglia,
15 Hotel 3 08/2019 131 - 08/2024 Italy
16 Office 3 01/2018 130 60 01/2022 Renton, WA
Urban Predevelopment
17 (1) 5 03/2017 126 9 12/2020 Brooklyn, NY
Urban Predevelopment
18 (1) 5 01/2016 118 - 09/2021 Miami, FL
Residential-for-sale:
19 inventory 3 03/2018 121 - 03/2021 London, UK
Manhattan,
20 Office 3 10/2018 121 65 Y 10/2023 NY
Residential-for-sale:
21 construction 3 12/2019 114 35 Y 01/2023 Boston, MA
22 Hotel 3 03/2017 105 - 03/2022 Atlanta, GA
Cincinnati,
23 Retail center 5 11/2014 104 - 09/2020 OH
24 Hotel 3 11/2018 99 - 12/2023 Vail, CO
Manhattan,
25 Hotel 3 12/2017 89 - 12/2022 NY
26 Office 3 03/2018 89 3 04/2023 Chicago, IL
Residential-for-sale: Manhattan,
27 inventory 3 12/2019 82 - 07/2021 NY
Culver City,
28 Office 3 04/2019 76 83 Y 09/2025 CA
29 Office 3 12/2017 74 45 07/2022 London, UK
30 Mixed Use 3 12/2019 72 1 12/2024 London, UK
Residential-for-sale: Manhattan,
31 construction 3 12/2018 70 107 Y 12/2023 NY
32 Multifamily 3 04/2014 69 - 07/2023 Various
Manhattan,
33 Hotel 3 08/2019 67 - 09/2022 NY
Scottsdale,
34 Hotel 3 04/2018 63 - 05/2023 AZ
Los Angeles,
35 Urban Predevelopment 3 12/2016 63 - 06/2020 CA
36 Hotel 3 09/2019 60 - 10/2024 Miami, FL
Residential-for-sale: Manhattan,
37 construction 3 01/2018 60 20 Y 01/2023 NY
38 Hotel 3 12/2019 60 - 01/2025 Tucson, AZ
39 Multifamily 3 11/2014 54 - 11/2021 Various
40 Hotel 3 05/2019 52 - 06/2024 Chicago, IL
Cleveland,
41 Multifamily 3 02/2020 50 1 03/2024 Ohio
42 Multifamily 3 06/2018 47 - 06/2020 London, UK
43 Office 3 08/2018 42 148 Y 12/2022 London, UK
St. Thomas,
44 Hotel 3 12/2015 42 - 08/2024 USVI
Residential-for-sale: Hallandale
45 construction 3 12/2018 40 62 Y 01/2024 Beach, FL
Birmingham,
46 Office 3 04/2019 35 37 Y 08/2022 UK
Pittsburgh,
47 Hotel (1) 5 02/2018 31 - 03/2023 PA
48 Office 3 12/2019 29 6 12/2022 Edinburgh,
Scotland
San
Residential-for-sale: Francisco,
49 construction 3 03/2018 26 88 Y 03/2023 CA
Residential-for-sale: Manhattan,
50 inventory 2 05/2018 24 - 04/2021 NY
Residential-for-sale: Manhattan,
51 inventory 3 06/2018 18 - 06/2020 NY
Residential-for-sale:
52 inventory (1) 5 02/2014 3 - 04/2021 Bethesda, MD
53 Mixed Use 3 12/2019 (8) 777 Y 06/2025 London, UK
General CECL
Allowance N/A (28)
Sub total /
Weighted-Average
Commercial Mortgage
Loans 3.2 $5,414 $1,792 3.3 Years
31
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Subordinate Loan and Other Lending Asset Portfolio
Unfunded Construction Fully-extended # Property Type Risk Rating Origination Date Amortized Cost Commitment Loan(5) Maturity Location
Residential-for-sale:
1 construction (2) 3 06/2015$216 - Y 02/2021 Manhattan, NY
Residential-for-sale:
2 construction 3 12/2017 100 15 Y 06/2022 Manhattan, NY 3 Office 3 01/2019 100 - 12/2025 Manhattan, NY 4 Healthcare 3 01/2019 76 - 01/2024 Various 5 Multifamily 3 10/2015 69 - 11/2020 Manhattan, NY
Residential-for-sale:
6 construction 3 12/2017 68 - Y 04/2023 Los Angeles, CA
Residential-for-sale:
7 construction (2) 3 11/2017 68 - Y 02/2021 Manhattan, NY 8 Healthcare (3) 3 07/2019 51 - 06/2024 Various 9 Mixed Use 3 01/2017 42 - 02/2027 Cleveland, OH
Residential-for-sale:
10 inventory 2 10/2016 36 - 10/2020 Manhattan, NY 11 Mixed Use 3 02/2019 36 - Y 12/2022 London, UK 12 Industrial 2 05/2013 32 - 05/2023 Various 13 Mixed Use 3 12/2018 26 25 Y 12/2023 Brooklyn, NY 14 Hotel 2 06/2015 24 - 07/2025 Phoenix, AZ 15 Hotel 3 06/2018 20 - 06/2023 Las Vegas, NV 16 Multifamily 3 05/2018 19 - 05/2028 Cleveland, OH 17 Healthcare (3) 3 02/2019 17 - 01/2034 Various 18 Office 2 07/2013 14 - 07/2022 Manhattan, NY 19 Hotel (3) 5 06/2015 10 - 12/2022 Washington, DC 20 Hotel 3 05/2017 8 - 06/2027 Anaheim, CA 21 Office 3 08/2017 8 - 09/2024 Troy, MI 22 Mixed Use 3 07/2012 7 - 08/2022 Chapel Hill, NC
General CECL Allowance (30) Sub total / Weighted-Average Subordinate Loans and Other Lending Assets 2.9$1,017 $40 3.0 Years
Total / Weighted-Average
Loan Portfolio 3.1$6,431 $1,832 3.3 Years ------- (1) Amortized cost for these loans is net of the recorded provisions for loan losses. (2) Both loans are secured by the same property. (3) Single Asset, Single Borrower CMBS. Our average asset and debt balances for the three months endedMarch 31, 2020 were ($ in thousands): Average month-end balances for the three months ended March 31, 2020 Description Assets Related debt Commercial mortgage loans, net $ 5,579,719 $
3,231,713
Subordinate loans and other lending assets, net 1,063,453 - Investment Activity During the three months endedMarch 31, 2020 , we committed$562.0 million of capital to loans ($439.9 million of which was funded during the three months endedMarch 31, 2020 ). In addition, during the three months endedMarch 31, 2020 , we funded$118.5 million for loans closed prior to 2020, and received$210.7 million in repayments and sales. Net Income (Loss) Available to Common Stockholders For the three months endedMarch 31, 2020 and 2019, respectively, our net income (loss) available to common stockholders was$(131.2) million , or$(0.86) per diluted share of common stock, and$60.9 million , or$0.43 per diluted 32 -------------------------------------------------------------------------------- share of common stock, respectively. Operating Results The following table sets forth information regarding our consolidated results of operations and certain key operating metrics ($ in thousands): Three months ended March 31, 2020 vs 2019 2020 2019 Net interest income: Interest income from commercial mortgage loans$ 81,855 $ 78,286 $ 3,569 Interest income from subordinate loans and other 34,018 40,839 (6,821 ) lending assets Interest expense (41,205 ) (36,295 ) (4,910 ) Net interest income 74,668 82,830 (8,162 ) Operating expenses: General and administrative expenses (6,531 ) (6,151 ) (380 ) Management fees to related party (10,268 ) (9,613 ) (655 ) Total operating expenses (16,799 ) (15,764 ) (1,035 ) Other income 760 518 242
Provision for loan losses - Specific CECL Allowance (150,000 )
- (150,000 )
Provision for loan losses - General CECL Allowance (33,465 ) - (33,465 )
Foreign currency gain (loss) (37,949 ) 6,894 (44,843 )
Gain (loss) on foreign currency forwards 70,491 (6,720 ) 77,211
Unrealized loss on interest rate swap (35,548 ) - (35,548 )
Net income (loss) $ (127,842 ) $
67,758
Net Interest Income
Net interest income decreased by$8.2 million during the three months endedMarch 31, 2020 as compared to the same period in 2019. The decrease was primarily due to (i) a 1.09% decrease in average one-month LIBOR for the three months endedMarch 31, 2020 compared toMarch 31, 2019 and (ii) an increase in interest expense due to an increase in our net debt balance of$1.9 billion as ofMarch 31, 2020 compared toMarch 31, 2019 . This decrease was offset by (i) a$1.5 billion increase in loan principal balance as ofMarch 31, 2020 compared toMarch 31, 2019 and (ii) in the money LIBOR floors on several of our loans. We recognized$0.2 million and$3.7 million in pre-payment penalties and accelerated fees for the three months endedMarch 31, 2020 and 2019, respectively. We recognized PIK interest of$12.4 million and$14.5 million for the three months endedMarch 31, 2020 and 2019, respectively. Operating Expenses General and administrative expenses General and administrative expenses increased by$0.4 million for the three months endedMarch 31, 2020 compared to the same period in 2019. The increase was primarily driven by a$0.4 million increase in non-cash restricted stock and RSU amortization related to shares of common stock awarded under the LTIPs. Management fees to related party Management fee expense increased by$0.7 million during the three months endedMarch 31, 2020 as compared to the same periods in 2019. The increase is primarily attributable to an increase in our stockholders' equity (as defined in the Management Agreement) as a result of us completing the follow-on public offering of 17,250,000 shares during the second quarter of 2019 (as described in "Note 14 - Stockholders' Equity"). 33 -------------------------------------------------------------------------------- Management fees and the relationship between us and the Manager under the Management Agreement are discussed further in the accompanying condensed consolidated financial statements, in "Note 12 - Related Party Transactions." Provision for loan losses - General CECL Allowance The General CECL Allowance increased by$33.5 million during the three months endedMarch 31, 2020 . The increase is predominantly related to a change in our view of estimated macro-economic conditions, including unemployment rate and commercial real estate price index, in the backdrop of the COVID-19 global pandemic. Other factors that contributed to the increase include an increase in our view of remaining expected term of our loan portfolio and growth in the portfolio from new investments during the quarter. Refer to "Note 2 - Summary of Significant Accounting Policies" and "Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net" for additional information related to our General CECL Allowance. Provision for loan losses - Specific CECL Allowance During the three months endedMarch 31, 2020 , we recorded impairments on five new loans and increased the Specific CECL Allowance on two loans that previously had loan loss provisions, primarily due to the impact from COVID-19. Refer to "Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net" for additional information related to our Specific CECL Allowance. Foreign currency gain and (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, 2020 and 2019 was$32.5 million and$0.2 million , respectively. Unrealized loss on interest rate swap We use an interest rate swap to manage exposure to variable cash flows on portions of our borrowings under our senior secured term loan. The interest rate swap agreement allows us to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure. For the three months endedMarch 31, 2020 , we had an unrealized loss on the interest rate swap of$35.5 million . We did not have the interest rate swap at any point during the three months endedMarch 31, 2019 . Dividends We have declared the following dividends in 2020: Dividend declared per share of:March 31, 2020 Common Stock$0.40 Series B Preferred Stock 0.50 Subsequent Events Refer to "Note 18 - Subsequent Events" to the accompanying condensed consolidated financial statements for disclosure regarding significant transactions that occurred subsequent toMarch 31, 2020 . Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. As ofMarch 31, 2020 , we had$1.1 billion of corporate debt and$3.6 billion of asset specific financings. We have no corporate debt maturities untilAugust 2022 . As ofMarch 31, 2020 , we had$582 million of cash on hand and$8 million of approved and undrawn capacity from our secured debt arrangements. In addition, we have a significant amount of unencumbered loan assets. In light of COVID-19 and its severe impact on the economy we have taken steps to increase our cash balances in order to maintain an adequate level of liquidity to meet future outflows. As the duration and severity of COVID-19 remain unknown, so does the impact it will have on our borrowers, lenders, and the economy as a whole. We will continue to closely monitor developments related to COVID-19 as it relates to our liquidity position and 34 -------------------------------------------------------------------------------- financial obligations. At this time we believe we have sufficient liquidity and access to additional liquidity to meet financial obligations for at least the next 12 months. Debt-to-Equity Ratio The following table presents our debt-to-equity ratio: March 31, 2020 December 31, 2019 Debt to Equity Ratio (1) 1.6 1.4
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(1) Represents total debt less cash and loan proceeds held by servicer to total stockholders' equity. Our primary sources of liquidity are as follows: Cash Generated from Operations Cash from operations is generally comprised of interest income from our investments, net of any associated financing expense, principal repayments from our investments, net of associated financing repayments, proceeds from the sale of investments, and changes in working capital balances. See "Results of Operations - Loan Portfolio Overview" above for a summary of interest rates related to our investment portfolio as ofMarch 31, 2020 . Borrowings Under Various Financing Arrangements JPMorgan Facility InNovember 2019 , through three indirect wholly-owned subsidiaries, we entered into a Sixth Amended and Restated Master Repurchase Agreement withJPMorgan Chase Bank, National Association . The JPMorgan Facility allows for$1.3 billion of maximum borrowings (with amounts borrowed in British pounds and Euros converted toU.S. dollars for purposes of calculating availability based on the greater of the spot rate as of the initial financing under the corresponding mortgage loan and the then-current spot rate) and matures inJune 2022 and has two one-year extensions available at our option, which are subject to the approval of JPMorgan and certain other conditions. The JPMorgan Facility enables us to elect to receive advances inU.S. dollars, British pounds, or Euros. Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofMarch 31, 2020 , we had$1.2 billion (including £75.6 million and €60.0 million assuming conversion into USD) of borrowings outstanding under the JPMorgan Facility secured by certain of our commercial mortgage loans. DB Facility InMarch 2020 , through an indirect wholly-owned subsidiary, we entered into a Third Amended and Restated Master Repurchase Agreement with Deutsche Bank AG,Cayman Islands Branch,London Branch, which provides for advances of up to$1.0 billion for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties located inthe United States ,United Kingdom and theEuropean Union , and enables us to elect to receive advances in USD, GBP, or EUR. The repurchase facility matures inMarch 2021 , and has two one-year extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofMarch 31, 2020 , we had$507.0 million of borrowings outstanding under the DB Facility secured by certain of our commercial mortgage loans. Goldman Facility InNovember 2017 , through an indirect wholly-owned subsidiary, we entered into a master repurchase and securities contract agreement withGoldman Sachs Bank USA , which provides advances up to$500.0 million and matures inNovember 2020 , and has one one-year extension available at our option, subject to certain conditions. Margin calls may occur any time at specified margin deficit thresholds. As ofMarch 31, 2020 , we had$359.5 million of borrowings outstanding under the Goldman Facility secured by certain of our commercial mortgage loans. CS Facility - USD 35
-------------------------------------------------------------------------------- InJuly 2018 , through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through itsCayman Islands Branch and Alpine Securitization Ltd , which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - USD has an "evergreen" feature such that the facility continues unless terminated at any time by Credit Suisse with six months' notice. Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofMarch 31, 2020 , we had$325.9 million of borrowings outstanding under the CS Facility - USD secured by certain of our commercial mortgage loans. CS Facility - GBP InJune 2018 , through an indirect wholly-owned subsidiary, we entered into a Global Master Repurchase Agreement withCredit Suisse Securities (Europe) Limited , which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - GBP matures inSeptember 2020 . Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofMarch 31, 2020 , we had$84.7 million (£68.2 million assuming conversion into USD) of borrowings outstanding under the CS Facility - GBP secured by one commercial mortgage loan. HSBC Facility - USD InOctober 2019 , through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement withHSBC Bank plc , which provides for a single asset financing. The facility is scheduled to mature inJanuary 2021 . Margin calls may occur any time at specified aggregate margin thresholds. As ofMarch 31, 2020 , we had$50.6 million of borrowings under the HSBC Facility - USD secured by one commercial mortgage loan. HSBC Facility - GBP InSeptember 2018 , through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement withHSBC Bank plc , which provides for a single asset financing. The facility is scheduled to mature inJune 2020 . Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofMarch 31, 2020 , we had$32.2 million (£26.0 million assuming conversion into USD) of borrowings outstanding under the HSBC Facility - GBP secured by one commercial mortgage loan. HSBC Facility - EUR InJuly 2019 , through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement withHSBC Bank plc , which provides for a single asset financing. The facility matures inJuly 2021 . Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofMarch 31, 2020 , we had$151.5 million (€137.4 million assuming conversion into USD) of borrowings outstanding under the HSBC Facility - EUR secured by one of our commercial mortgage loans. Barclays Facility - USD InMarch 2020 , through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement pursuant to a Master Repurchase Agreement with Barclays Bank plc. The Barclays Facility - USD allows for$200.0 million of maximum borrowings and initially matures inMarch 2023 with extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified aggregate margin deficit thresholds. Barclays Facility - GBP/EUR Beginning inOctober 2019 , through an indirect wholly-owned subsidiary, we entered into five secured debt arrangements pursuant to a Global Master Repurchase Agreement with Barclays Bank plc. Margin calls may occur any time at specified aggregate margin deficit thresholds. The table below provides the currency, outstanding balance, stated maturity, and extended maturity for each of the five secured debt arrangements under the Barclays Facility - GBP/EUR: 36 --------------------------------------------------------------------------------
Borrowings Fully-Extended
Local Currency outstanding (in $) Maturity(1)
GBP $217,350 December 2023
GBP 156,958 February 2023
GBP 149,830 October 2024
GBP 121,716 September 2023
Sub-total/Weighted-Average $645,854 November 2023
EUR 179,586 see below
Total/Weighted-Average $825,440
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(1) Assumes underlying loans extend to fully extended maturity and extensions at
our option are exercised.
The Barclays Facility - EUR has an "evergreen" feature such that the facility
continues for one year and can be terminated by either party on certain dates
with, depending on the date of notice, a minimum of nine to twelve month notice.
As of March 31, 2020 , we had $825.4 million (£520.0 million and €162.8 million
assuming conversion into U.S.
dollars) of borrowings outstanding under the Barclays Facility - GBP/EUR secured
by five of our commercial mortgage loans.
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 after March 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 .
Senior Secured Term Loan
In May 2019 , we entered into the $500.0 million senior secured term loan. During
the three months ended March 31, 2020 , we repaid $1.3 million of principal
related to the senior secured term loan. The senior secured term loan bears
interest at LIBOR plus 2.75% and was issued at a price of 99.5%. The outstanding
balance as of March 31, 2020 was $496.3 million . The senior secured term loan
matures in May 2026 and contains restrictions relating to liens, asset sales,
indebtedness, and investments in non-wholly owned entities. The senior secured
term loan includes the following financial covenants: (i) our ratio of total
recourse debt to tangible net worth cannot be greater than 3:1; and (ii) our
ratio of total unencumbered assets to total pari-passu indebtedness must be at
least 1.25:1.
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. At March 31, 2020 , the 2022 Notes had a carrying value of $338.4
million and an unamortized discount of $6.6 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. At March 31, 2020 ,
the 2023 Notes had a carrying value of $224.2 million and an unamortized
discount of $5.8 million .
Cash Generated from Equity Offerings
During the second quarter of 2019, we completed a follow-on public offering of
17,250,000 shares of our common stock, including shares issued pursuant to the
underwriters' option to purchase additional shares, at a price of $18.27 per
share. The aggregate net proceeds from the offering were $314.8 million after
deducting offering expenses.
In March 2020 , our board of directors approved a stock repurchase program for up
to an aggregate of $150.0 million of our common stock. In March 2020 , we
repurchased 300,000 shares of common stock under this plan for $2.4 million .
Other Potential Sources of Financing
37
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Our primary sources of cash currently consist of cash available, which was
$582.1 million as of March 31, 2020 , principal and interest payments we receive
on our portfolio of assets, and available borrowings under our secured debt
arrangements. We expect our other sources of cash to consist of cash generated
from operations and prepayments of principal received on our portfolio of
assets. Such prepayments are difficult to estimate in advance. 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 such as credit facilities, or conduct additional public and private
debt and equity offerings. As of March 31, 2020 we also held $1.2 billion of
unencumbered assets, consisting of $0.2 billion of senior mortgages and $1.0
billion of mezzanine loans.
We maintain policies relating to our borrowings and 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 target assets as long-term investments, 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.
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 March 31, 2020 , our debt-to-equity ratio was 1.6 and our portfolio was
comprised of $5.4 billion of commercial mortgage loans and $1.0 billion of
subordinate loans and other lending assets. In order to achieve our return on
equity, we generally finance our mortgage loans with 2.0 to 3.0 turns of
leverage and generally do not finance our subordinate loan portfolio given
built-in inherent structural leverage. Consequently, depending on our portfolio
mix, our debt-to-equity ratio may exceed our previously disclosed thresholds.
Investment Guidelines
Our current investment guidelines, approved by our board of directors, are
comprised of the following:
• no investment will be made that would cause us to fail to qualify as a REIT
for
• no investment will be made that would cause us to register as an investment
company under the 1940 Act;
• investments will be predominantly in our target assets;
• no more than 20% of our cash equity (on a consolidated basis) will be
invested in any single investment at the time of the investment; and
• until appropriate investments can be identified, the Manager may invest the
proceeds of any offering in interest bearing, short-term investments,
including money market accounts and/or funds, that are consistent with our
intention to qualify as a REIT.
The board of directors must approve any change in or waiver to these investment guidelines. Contractual Obligations and Commitments Our contractual obligations including expected interest payments as ofMarch 31, 2020 are summarized as follows ($ in thousands): 38 --------------------------------------------------------------------------------
More
Less than 1 2 to 3 3 to 5 than 5
year (1) 1 to 2 years(1) years (1) years (1) years (1) Total
Secured debt
arrangements(1)(2) $ 344,787 $ 1,117,097 $ 205,964 $ 2,144,893 $ - $ 3,812,741
Senior secured
term loan(2) 22,316 22,141 21,965 43,451 523,406 633,279
Convertible senior
notes 28,750 28,750 363,978 237,211 - 658,689
Unfunded loan
commitments (3)(4) 528,627 729,951 289,918
17,482 11,793 1,577,771
Total $ 924,480 $ 1,897,939 $ 881,825 $ 2,443,037 $ 535,199 $ 6,682,480
-------(1) Assumes underlying assets are financed through the fully extended maturity
date of the secured debt arrangement.
(2) Based on the applicable benchmark rates as of
rate debt for interest payments due.
(3) Based on our 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 our operating results. Refer to
"Note 15- Commitments and Contingencies" for further detail regarding
unfunded loan commitments.
(4) In connection with the sale of three loans, which sale closed subsequent to
relieved of future funding obligations totaling
excluded from the above table, all of which was expected to be funded within
two years of
Loan Commitments. As ofMarch 31, 2020 , we had$1.8 billion of unfunded loan commitments, comprised of$1.8 billion related to our commercial mortgage loan portfolio, and$40.5 million related to our subordinate loan portfolio. Management Agreement. OnSeptember 23, 2009 , we 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 our 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. We do not reimburse the Manager or its affiliates for the salaries and other compensation of their personnel, except for the allocable share of the compensation of (1) our Chief Financial Officer based on the percentage of time spent on our 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 our affairs based on the percentage of time devoted by such personnel to our affairs. We are also required to reimburse the Manager for operating expenses related to us incurred by the 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. Our reimbursement obligation is not subject to any dollar limitation. The current term of the Management Agreement will expire onSeptember 29, 2020 . Absent certain action by the independent directors of our board of directors, as described below, the Management Agreement will automatically renew on each anniversary for a one-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 our independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to us or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager's right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Amounts payable under the Management Agreement are not fixed and determinable. Following a meeting by our independent directors inFebruary 2020 , which included a discussion of the Manager's performance and the level of the management fees thereunder, we 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 thanU.S. dollars. We have entered into a series of forward contracts to sell an amount of foreign currency (GBP and EUR) for an agreed upon amount ofU.S. dollars at various dates throughDecember 2024 . These forward contracts were executed to economically fix theU.S. dollar amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments. Refer to "Note 10- Derivatives, Net" to the accompanying condensed consolidated financial statements for details regarding our forward currency contracts. 39 -------------------------------------------------------------------------------- Interest Rate Swap. In connection with the senior secured term loan, we entered into an interest rate swap to fix LIBOR at 2.12%, effectively fixing our all-in coupon on the senior secured term loan at 4.87%. Refer to "Note 10- Derivatives, Net" to the accompanying condensed consolidated financial statements for details regarding our interest rate swap. Off-balance Sheet Arrangements We 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, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment to provide additional funding to any such entities. 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 required distribution in the form of a taxable stock distribution or distribution of debt securities. As ofMarch 31, 2020 , 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, 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 of our securities at the election of the holders. On or afterSeptember 21, 2020 , we may, at our option, redeem the shares at a redemption price of$25.00 , plus any accrued unpaid distribution through the date of the redemption. OnJune 10, 2019 , we redeemed all 6,900,000 shares of Series C Preferred Stock outstanding. Holders of the Series C Preferred Stock received the redemption price of$25.00 plus accumulated but unpaid dividends to the redemption date of$0.2223 . Non-GAAP Financial Measures Operating Earnings For the three months endedMarch 31, 2020 , our Operating Earnings were$62.7 million , or$0.40 per share as compared to$68.4 million , or$0.50 per share for the same period in the prior year. Operating Earnings is a non-GAAP financial measure that we 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 Notes to stockholders' equity in accordance with GAAP, and (vi) provision for loan losses. Beginning with the quarter endedDecember 31, 2018 , we 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 inU.S. dollar terms. These amounts may not be included in GAAP net income in the same period as this 40
--------------------------------------------------------------------------------
adjustment. Generally these amounts would be included in prior period GAAP net
income as unrealized gains on forward currency contracts. Operating 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.
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,
2020 2019
Weighted-Averages Shares Shares
Weighted-average diluted shares - GAAP 153,948,191 134,607,107
Unvested RSUs 2,007,242
1,849,564
Weighted-average diluted shares - Operating
Earnings 155,955,433 136,456,671
Three months ended March 31, 2020 Three months ended March 31, 2019
Weighted-Averages Face Price Shares Face Price Shares
Weighted-average
diluted shares - GAAP 153,948,191 164,683,086
2019 Notes(1) N/A N/A - $
26,487 $17.17 (1,542,708 )
2022 Notes $ 345,000 $19.91 - $ 345,000 $19.91 (17,327,970 )
2023 Notes $ 230,000 $20.53 - $ 230,000 $20.53 (11,205,301 )Unvested RSUs N/A N/A 2,007,242 N/A N/A 1,849,564 Weighted-average diluted shares - Operating Earnings 155,955,433 136,456,671 -------
(1) Face represents the weighted-average balances during the period.
Computation of Share Count for Operating Earnings
Three
months ended
2020 2019
Basic weighted-average shares of common stock outstanding 153,948,191 134,607,107 Weighted-average unvested RSUs
2,007,242 1,849,564
Weighted-average diluted shares - Operating Earnings 155,955,433 136,456,671
In order to evaluate the effective yield of the portfolio, we use Operating
Earnings to reflect the net investment income of our portfolio as adjusted to
include the net interest expense related to our derivative instruments.
Operating Earnings allows us to isolate the net interest expense associated with
our swaps in order to monitor and project our full cost of borrowings. We also
believe that our investors use Operating Earnings, or a comparable supplemental
performance
41
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measure, to evaluate and compare the performance of our company and our peers
and, as such, we believe that the disclosure of Operating Earnings is useful to
our investors. 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 inclusion of the resulting gain or loss in Operating Earnings is
useful to our investors. Our operating results are primarily comprised of
earning interest income on our investments net of borrowing and administrative
costs.
A significant limitation associated with Operating 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 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 our GAAP net income as a measure of our financial
performance or any measure of our liquidity under GAAP.
The table below summarizes the reconciliation from net income (loss) available
to common stockholders to Operating Earnings ($ in thousands):
Three months
ended
2020 2019
Net income (loss) available to common stockholders$ (131,227 ) $ 60,923 Adjustments: Equity-based compensation expense 4,263 3,901 Unrealized loss on interest rate swap 35,548 - (Gain) loss on currency forwards (70,491 ) 6,720 Foreign currency (gain) loss, net 37,949 (6,894 ) Realized gains relating to interest income on foreign 256 418 currency hedges, net Realized gains relating to forward points on foreign 2,171 2,431 currency hedges, net Amortization of the convertible senior notes related to 754 909 equity reclassification Provision for loan losses 183,465 - Total adjustments: 193,915 7,485 Operating Earnings$ 62,688 $ 68,408 Diluted Operating Earnings per share of common stock (1) $ 0.40$ 0.50 Basic weighted-average shares of common stock outstanding 153,948,191
134,607,107
Weighted-average diluted shares - Operating Earnings 155,955,433
136,456,671
-------
(1) For the computation of diluted Operating Earnings per share of common stock, for the three months endedMarch 31, 2020 and 2019,$0.0 million and$8.4 million , respectively, of interest expense related to the Notes is not deducted from the numerator and the potentially dilutive shares related to the Notes are excluded from the denominator.
Book Value Per Share
The table below calculates our book value per share ($ in thousands, except per
share data):
March 31, 2020 December 31, 2019
Stockholders' Equity $ 2,400,911 $ 2,629,975
Series B Preferred Stock
(Liquidation Preference) (169,260 ) (169,260 )
Common Stockholders' Equity $ 2,231,651 $ 2,460,715
Common Stock 153,740,547 153,537,296
Book value per share $ 14.52 $ 16.03
The table below shows the changes in our book value per share:
Book value per share
Book value per share at December 31, 2019 $ 16.03
Net unrealized gain on currency hedges 0.20
42
-------------------------------------------------------------------------------- Repurchase of common stock
0.01
Decrease in fair value on interest rate swap (0.24 ) Vesting and delivery of RSUs (0.07 ) Other (0.01 ) Book value per share atMarch 31, 2020 prior to CECL Allowances$ 15.92 Specific CECL Allowance$ (0.98 ) Book value per share atMarch 31, 2020 prior to General CECL Allowance$ 14.94 General CECL Allowance$ (0.42 ) Book value per share atMarch 31, 2020 $
14.52
We believe that presenting book value per share with sub-totals prior to the
CECL Allowances is useful for investors for various reasons. These include,
among other things, the calculations for our covenants related to tangible net
worth and debt-to-equity under our secured debt arrangements and senior secured
term loan B permit us to add the General CECL Allowance to our GAAP
stockholders' equity.
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