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MarketScreener Homepage  >  Equities  >  Nyse  >  Apollo Commercial Real Estate Finance, Inc.    ARI

APOLLO COMMERCIAL REAL ESTATE FINANCE, INC.

(ARI)
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APOLLO COMMERCIAL REAL ESTATE FINANCE : Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING INFORMATION (form 10-Q)

07/30/2020 | 06:52pm EST
We make forward-looking statements herein and will make forward-looking
statements in future filings with the SEC, press releases or other written or
oral communications within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), 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 the U.S.
government and governments outside of the United States, changes to government
policies and the execution and impact of these actions, initiatives and
policies; the state of the economy generally or in specific geographic regions;
economic trends and economic recoveries; 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 for U.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 the
SEC, 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 a Maryland corporation and have elected to be taxed as a REIT for U.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 $413.6 billion as of June 30,
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 assets.

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Current Market Conditions


During the first quarter of 2020, there was a global outbreak of COVID-19, which
was declared by the World 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 of June 30, 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                $ 5,343,437               4.8 %              5.3 %   $     3,440,177            2.2 %      $   1,903,260
Subordinate loans and
other lending assets,       1,044,400              11.8 %             13.8 %                 -              -            1,044,400
net
Total/Weighted-Average    $ 6,387,837               5.9 %              6.7 %   $     3,440,177            2.2 %      $   2,947,660


-------

(1) Weighted-Average Coupon and Weighted-Average All-in Yield are based on the

applicable benchmark rates as of June 30, 2020 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 $15.1 million.

(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
of June 30, 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           307           -                      12/2023     London, UK
3 Hotel                      3          10/2019           248           50                     08/2024     Various
4 Healthcare                 3          10/2019           211           28                     10/2024     Various



                                       33

--------------------------------------------------------------------------------
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   195      28              11/2026  Germany
                                                                          Manhattan,
8  Office                 3   10/2018   196      4               10/2021  NY
   Urban
9  Predevelopment(1)      5   01/2016   115      -               09/2021  Miami, FL
10 Office                 3   09/2019   172      -               09/2023  London, UK
11 Office                 3   01/2020   174     113              02/2025  Long Island
                                                                          City, NY
12 Office                 3   11/2017   155      -               01/2023  Chicago, IL
   Urban
13 Predevelopment(1)      5   03/2017   127      -               12/2020  Brooklyn, NY
14 Hotel                  3   04/2018   152      1               04/2023  Honolulu, HI
                                                                          Manhattan,
15 Hotel                  5   09/2015   144      -               06/2024  NY
16 Hotel                  3   05/2018   140      -               06/2023  Miami, FL
                                                                          Puglia,
17 Hotel                  3   08/2019   134      -               08/2024  Italy
18 Office                 3   01/2018   132      58              01/2022  Renton, WA
                                                                          Cincinnati,
19 Retail center(1)       5   11/2014   103      -               09/2020  OH
   Residential-for-sale:
20 inventory              3   03/2018   121      -               03/2021  London, UK
                                                                          Manhattan,
21 Office                 3   10/2018   129      57       Y      10/2023  NY
   Residential-for-sale:
22 construction           3   12/2019   128      21       Y      01/2023  Boston, MA
23 Hotel                  3   03/2017   105      -               03/2022  Atlanta, GA
24 Hotel                  3   11/2018   100      -               12/2023  Vail, CO
                                                                          Manhattan,
25 Hotel                  3   12/2017   90       -               12/2022  NY
26 Office                 3   03/2018   91       -               04/2023  Chicago, IL
   Residential-for-sale:                                                  Manhattan,
27 inventory              3   12/2019   82       -               07/2021  NY
                                                                          Culver City,
28 Office                 3   04/2019   86       73       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   68       -               07/2023  Various
                                                                          Manhattan,
33 Hotel                  3   08/2019   67       -               09/2022  NY
                                                                          Scottsdale,
34 Hotel                  3   04/2018   64       -               05/2023  AZ
                                                                          Los Angeles,
35 Urban Predevelopment   3   12/2016   53       -               06/2022  CA
36 Hotel                  3   09/2019   60       -               10/2024  Miami, FL
   Residential-for-sale:                                                  Manhattan,
37 construction           3   01/2018   65       15       Y      01/2023  NY
38 Hotel                  3   12/2019   59       -               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  OH
                                                                          St. Thomas,
42 Hotel                  3   12/2015   42       -               08/2024  USVI
   Residential-for-sale:                                                  Hallandale
43 construction           3   12/2018   52       50       Y      01/2024  Beach, FL
                                                                          Pittsburgh,
44 Hotel(1)               5   02/2018   29       -               03/2023  PA
                                                                          Edinburgh,
45 Office                 3   12/2019   32       3               12/2022  Scotland
   Residential-for-sale:                                                  Manhattan,
46 inventory              3   05/2018   24       -               03/2021  NY
   Residential-for-sale:                                                  Manhattan,
47 inventory              3   06/2018   16       -               07/2021  NY
48 Residential-for-sale:  5   02/2014    3       -               04/2021
   inventory(1)                                                           Bethesda, MD
49 Mixed Use              3   12/2019    4      764       Y      06/2025  London, UK
   General CECL
   Allowance             N/A           (23)
   Sub total /
   Weighted-Average
   Commercial Mortgage
   Loans                 3.1          $5,343$1,426           3.2 Years



Subordinate Loan and Other Lending Asset Portfolio

                                                                    Unfunded                    Fully-extended

# Property Type Risk Rating Origination Date Amortized Cost Commitment Construction Loan Maturity Location



                                       34

--------------------------------------------------------------------------------

Residential-for-sale:

1 construction(2) 3 06/2015 $222 - Y 12/2020 Manhattan, NY

Residential-for-sale:

2  construction           3   12/2017   104      13       Y      06/2022  Manhattan, NY
3  Office                 3   01/2019   100      -               12/2025  Manhattan, NY
4  Healthcare             3   01/2019   76       -               01/2024  Various

Residential-for-sale:

5 construction(2) 3 11/2017 71 - Y 12/2020 Manhattan, NY

Residential-for-sale:

6  construction           3   12/2017   70       -        Y      04/2023  Los Angeles, CA
7  Multifamily            3   10/2015   69       -               04/2021  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              3   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   27       24       Y      12/2023  Brooklyn, NY
14 Hotel                  3   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                 3   07/2013   14       -               07/2022  Manhattan, NY
19 Hotel(1)               5   06/2015   13       -               12/2022  Washington, DC
20 Hotel                  4   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                           (22)
   Sub total /
   Weighted-Average
   Subordinate Loans and
   Other Lending Assets  3.0          $1,044$37             2.7 Years

   Total /
   Weighted-Average
   Loan Portfolio        3.1          $6,387$1,463           3.1 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 six months ended June 30, 2020 were
($ in thousands):
                                             Average month-end balances for the six months
                                                          ended June 30, 2020
Description                                         Assets                 Related debt
Commercial mortgage loans, net             $            5,621,528     $     

3,362,222

Subordinate loans and other lending
assets, net                                             1,061,237                        -


Investment Activity
During the six months ended June 30, 2020, we committed $562.0 million of
capital to loans ($447.4 million of which was funded during the six months ended
June 30, 2020). In addition, during the six months ended June 30, 2020, we
funded $223.0 million for loans closed prior to 2020, and received $398.4
million in repayments and sales.

Net Income (Loss) Available to Common Stockholders
For the three months ended June 30, 2020 and 2019 our net income available to
common stockholders was $56.8 million, or $0.36 per diluted share of common
stock, and $56.5 million, or $0.37 per diluted share of common stock,
respectively. For the six months ended June 30, 2020 and 2019, our net income
(loss) available to common stockholders was $(74.4) million, or $(0.50) per
diluted share of common stock, and $117.4 million, or $0.80 per diluted share of
common stock, respectively.
Operating Results
The following table sets forth information regarding our consolidated results of
operations and certain key operating

                                       35


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metrics ($ in thousands):

                         Three months ended June 30,        2020 vs 2019    

Six months ended June 30, 2020 vs. 2019

                           2020               2019                                2020              2019
Net interest income:
Interest income from
commercial mortgage  $      75,641$      77,458$     (1,817 )$     157,496$  155,744$        1,752
loans
Interest income from
subordinate loans           32,616              41,043           (8,427 )          66,634           81,882            (15,248 )
and other lending
assets
Interest expense           (37,498 )           (33,511 )         (3,987 )         (78,703 )        (69,806 )           (8,897 )
Net interest income         70,759              84,990          (14,231 )         145,427          167,820            (22,393 )
Operating expenses:
General and
administrative              (6,425 )            (6,574 )            149           (12,956 )        (12,725 )             (231 )

expenses

Management fees to          (9,957 )           (10,259 )            302           (20,225 )        (19,872 )             (353 )
related party
Total operating            (16,382 )           (16,833 )            451           (33,181 )        (32,597 )             (584 )
expenses
Other income                   591                 484              107             1,351            1,002                349
Realized loss on           (16,405 )           (12,513 )         (3,892 )         (16,405 )        (12,513 )           (3,892 )
investments
Reversal of
(provision for) loan         9,500              15,000           (5,500 )        (140,500 )         15,000           (155,500 )
losses - Specific
CECL Allowance
Reversal of
(provision for) loan        15,669                   -           15,669           (17,796 )              -            (17,796 )
losses - General
CECL Allowance
Foreign currency
translation gain             2,559              (7,777 )         10,336           (35,390 )           (883 )          (34,507 )
(loss)
Gain (loss) on
foreign currency            (2,995 )            11,186          (14,181 )          67,496            4,466             63,030
forwards
Loss on interest
rate hedging                (3,095 )           (13,113 )         10,018           (38,643 )        (13,113 )          (25,530 )
instruments
Net income (loss)    $      60,201$      61,424$     (1,223 )$     (67,641 )$  129,182$     (196,823 )

Net Interest Income


Net interest income decreased by $14.2 million and $22.4 million during the
three and six months ended June 30, 2020, respectively, as compared to the same
periods in 2019. The decrease was primarily due to (i) a 2.08% and 1.59%
decrease in average one-month LIBOR, respectively, for the three and six months
ended June 30, 2020 compared to June 30, 2019, (ii) loans with an aggregate
principal balance of $583.8 million being on cost recovery or non-accrual status
as of June 30, 2020 compared to $199.1 million at June 30, 2019, (iii) an
increase in interest expense due to an increase in our net debt balance of $1.6
billion for the three and six months ended June 30, 2020 compared to June 30,
2019, and (iv) a significant increase in under earning liquidity in the form of
cash and cash equivalents since March 2020 compared to in 2019. This decrease
was offset by (i) a $1.2 billion increase in loan principal balance as of
June 30, 2020 compared to the same date in 2019 and (ii) in the money LIBOR
floors on several of our loans.
We recognized PIK interest of $12.4 million and $24.8 million for the three and
six months ended June 30, 2020, respectively, and $14.6 million and $29.1
million for the three and six months ended June 30, 2019, respectively.
We recognized $0 and $0.2 million in pre-payment penalties and accelerated fees
for the three and six months ended June 30, 2020, respectively, and $0 and $3.7
million for the three and six months ended June 30, 2019, respectively.
Operating Expenses
General and administrative expenses

                                       36


--------------------------------------------------------------------------------

General and administrative expenses decreased by $0.1 million for the three
months ended June 30, 2020 compared to the same period in 2019. The decrease was
primarily driven by a $0.1 million decrease in general operating expenses.
General and administrative expenses increased by $0.2 million for the six months
ended June 30, 2020 compared to the same period in 2019. The increase was
primarily due to a $0.3 million increase in non-cash restricted stock and RSU
amortization related to shares of common stock awarded under the LTIPs. This was
offset by a $0.1 million decrease in general operating expenses.
Management fees to related party
Management fee expense decreased by $0.3 million during the three months ended
June 30, 2020 as compared to the same periods in 2019. The decrease is primarily
attributable to a decrease in our stockholders' equity (as defined in the
Management Agreement) as a result of our repurchase of 5,795,976 shares during
the six months ended June 30, 2020 (as described in "Note 14 - Stockholders'
Equity").
Management fees increased by $0.4 million during the six months ended June 30,
2020 as compared to the same period in 2019. The increase is primarily
attributable to an increase in our stockholders' equity (as defined in the
Management Agreement) as a result of a higher weighted-average basic share count
during the six months ended June 30, 2020.
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."
Reversal of (provision for) loan losses - General CECL Allowance
The General CECL Allowance decreased by $15.7 million during the three months
ended June 30, 2020 and increased by $17.8 million during the six months ended
June 30, 2020. For the six months ended June 30, 2020, the increase is primarily
related to a more negative view of estimated future macroeconomic conditions,
primarily due to COVID-19 and, for the three months ended June 30, 2020, the
decrease is primarily related to an improvement in our view of estimated future
market conditions. Other factors that contributed to the reversal at June 30,
2020 were seasoning of the portfolio and loan sales that occurred 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.
Reversal of (provision for) loan losses - Specific CECL Allowance
During the three months ended June 30, 2020, we increased the Specific CECL
Allowance, on two loans which had an existing Specific CECL Allowance, for an
aggregate of $5.5 million and reversed $15.0 million of a previously recorded
Specific CECL Allowance. During the six months ended June 30, 2020, we recorded
Specific CECL Allowances on five loans, totaling $155.5 million, partially
offset by a $15.0 million reversal of a previously recorded allowance. 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 and six months ended June 30, 2020
was $(0.4) million and $32.1 million, respectively, and the net impact for the
three and six months ended June 30, 2019 was $3.4 million and $3.6 million,
respectively.
Loss on interest rate hedges
In connection with the senior secured term loan, we had previously entered into
an interest rate swap to fix LIBOR at 2.12% effectively fixing our all-in coupon
on the senior secured term loan at 4.87%. During the second quarter of 2020 we
terminated the interest rate swap and recognized a realized loss of $53.9
million. Subsequent to the termination of the interest rate swap in 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 senior secured
term loan to 3.50%. During the three and six months ended June 30, 2020, the
interest rate cap had an unrealized gain of $0.7 million.
Dividends
The following table details our dividend activity:


                                       37


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                                     Three months ended               Six months ended
Dividend declared per share of: June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019
Common Stock                        $0.35$0.46$0.75$0.92
Series B Preferred Stock            0.50            0.50            1.00            1.00
Series C Preferred Stock             N/A           0.2223            N/A           0.7223


Subsequent Events
Refer to "Note 18 - Subsequent Events" to the accompanying condensed
consolidated financial statements for disclosure regarding significant
transactions that occurred subsequent to June 30, 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 of June 30, 2020, we had $1.1 billion of corporate debt and
$3.4 billion of asset specific financings. We have no corporate debt maturities
until August 2022. As of June 30, 2020, we had $487 million of cash on hand and
$31.4 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 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:
                         June 30, 2020   December 31, 2019
Debt to Equity Ratio (1)      1.7               1.4


-------

(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 of June 30, 2020.

Borrowings Under Various Financing Arrangements
JPMorgan Facility
In November 2019, through three indirect wholly-owned subsidiaries, we entered
into a Sixth Amended and Restated Master Repurchase Agreement with JPMorgan
Chase Bank, National Association. The JPMorgan Facility allows for $1.3 billion
of maximum borrowings (with amounts borrowed in British pounds and Euros
converted to U.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 in June 2022 and has
two one-year extensions available at our option, which are subject to certain
conditions. The JPMorgan Facility enables us to elect to receive advances in
U.S. dollars, GBP, or EUR. Margin calls may occur any time at specified
aggregate margin deficit thresholds.
As of June 30, 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
In March 2020, through an indirect wholly-owned subsidiary, we entered into a
Third Amended and Restated Master Repurchase Agreement with Deutsche Bank AG,
Cayman Islands Branch, London Branch, which provides for

                                       38


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advances of up to $1.0 billion for the sale and repurchase of eligible first
mortgage loans secured by commercial or multifamily properties located in the
United States, United Kingdom and the European Union, and enables us to elect to
receive advances in USD, GBP, or EUR. The repurchase facility matures in March
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 of June 30, 2020, we had $509.8 million of borrowings outstanding under the
DB Facility secured by certain of our commercial mortgage loans.
Goldman Facility
In November 2017, through an indirect wholly-owned subsidiary, we entered into a
master repurchase and securities contract agreement with Goldman Sachs Bank USA,
which provides advances up to $500.0 million and matures in November 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 of June 30, 2020, we had $354.6 million of borrowings outstanding under the
Goldman Facility secured by certain of our commercial mortgage loans.
CS Facility - USD
In July 2018, through an indirect wholly-owned subsidiary, we entered into a
Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman
Islands Branch and Alpine Securitization Ltd, which provides for advances for
the sale and repurchase of eligible commercial mortgage loans secured by real
estate. The CS Facility - USD has an "evergreen" feature such that the facility
continues unless terminated at any time by Credit Suisse with six months'
notice. Margin calls may occur any time at specified aggregate margin deficit
thresholds.
As of June 30, 2020, we had $321.5 million of borrowings outstanding under the
CS Facility - USD secured by certain of our commercial mortgage loans.
CS Facility - GBP
In June 2018, through an indirect wholly-owned subsidiary, we entered into a
Global Master Repurchase Agreement with Credit 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 has an
"evergreen" feature such that the facility continues unless terminated at any
time by Credit Suisse with six months' notice. Margin calls may occur any time
at specified aggregate margin deficit thresholds.
As of June 30, 2020, we had $84.6 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
In October 2019, through an indirect wholly-owned subsidiary, we entered into a
secured debt arrangement with HSBC Bank plc, which provides for a single asset
financing. The facility is scheduled to mature in January 2021. Margin calls may
occur any time at specified aggregate margin thresholds.
As of June 30, 2020, we had $47.2 million of borrowings under the HSBC Facility
- USD secured by one commercial mortgage loan.
HSBC Facility - GBP
In September 2018, through an indirect wholly-owned subsidiary, we entered into
a secured debt arrangement with HSBC Bank plc, which provided for a single asset
financing. The facility matured and was repaid in June 2020 in connection with
the repayment of the underlying loan.
HSBC Facility - EUR
In July 2019, through an indirect wholly-owned subsidiary, we entered into a
secured debt arrangement with HSBC Bank plc, which provides for a single asset
financing. The facility matures in July 2021. Margin calls may occur any time at
specified aggregate margin deficit thresholds.
As of June 30, 2020, we had $150.6 million (€134.1 million assuming conversion
into USD) of borrowings outstanding under the HSBC Facility - EUR secured by one
commercial mortgage loan.

                                       39

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Barclays Facility - USD
In March 2020, through an indirect wholly-owned subsidiary, we entered into a
secured debt arrangement pursuant to a Master Repurchase Agreement with Barclays
Bank plc. The Barclays Facility - USD allows for $200.0 million of maximum
borrowings and initially matures in March 2023 with extensions available at our
option, subject to certain conditions. Margin calls may occur any time at
specified aggregate margin deficit thresholds.
As of June 30, 2020, we had $35.2 million of borrowings outstanding under the
Barclays Facility - USD secured by one commercial mortgage loan.
Barclays Facility - GBP/EUR
Beginning in October 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. In June 2020, all assets previously
financed pursuant to this facility were refinanced under the Barclays Private
Securitization.
Barclays Private Securitization
In June 2020, through a newly formed entity, we entered into a private
securitization with Barclays Bank plc. Barclays Bank plc retained $782.0 million
senior notes from the securitization. This Barclays Private Securitization
finances the loans that were previously financed under the Barclays Facility -
GBP/EUR. In addition, we pledged an additional commercial mortgage loan with an
outstanding principal balance of £26.0 million and pledged additional collateral
of a financed loan of €5.3 million (totaling $38.2 million in USD).
The securitization eliminates daily margining provisions and grants us
significant discretion to modify certain terms of the underlying collateral
including waiving certain loan-level covenant breaches and deferring or waiving
of debt service payments for up to 18 months. The securitization includes LTV
based covenants with significant headroom to existing levels that are also
subject to a six-month holiday through December 2020. These deleveraging
requirements are based on significant declines in the value of the collateral as
determined by an annual third-party (engaged by us) appraisal process tied to
the provisions of the underlying loan agreements. We believe this provides us
with both cushion and predictability to avoid sudden unexpected outcomes and
material repayment requirements. In addition to the pledge of the additional
collateral noted above, we paid down the previous financing by €16.5 million
(totaling $18.5 million in USD) and agreed to increase the financing spreads by
0.25%.
The table below provides the borrowings outstanding and weighted-average
fully-extended maturities by currency for the assets financed under the Barclays
Private Securitization ($ in thousands):
                                                                     Fully-Extended
                                            Borrowings outstanding    Maturity(1)
Total/Weighted-Average GBP                                $644,397   November 2023
Total/Weighted-Average EUR                                 137,609    May 2021(2)
Total/Weighted-Average Securitization                     $782,006     July 

2023

-------

(1) Assumes underlying loans extend to fully extended maturity and extensions at
our option are exercised.
(2) The EUR portion of the Barclays Private Securitization has an "evergreen"
feature such that the facility continues for one year and can be terminated by
either party on certain dates with, depending on the date of notice, a minimum
of nine to twelve months' notice.

As of June 30, 2020, we had $782.0 million (£519.6 million and €122.5 million
assuming conversion into USD) of borrowings outstanding under the Barclays
Private Securitization secured by certain 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. Under these
covenants, our General CECL Allowance is added back to our tangible net worth
calculation.
Senior Secured Term Loan
In May 2019, we entered into the $500.0 million senior secured term loan. During
the six months ended June 30,

                                       40

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2020, we repaid $2.5 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 June 30, 2020 was
$495.0 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 June 30, 2020, the 2022 Notes had a carrying value of $339.0
million and an unamortized discount of $6.0 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 June 30, 2020, the
2023 Notes had a carrying value of $224.5 million and an unamortized discount of
$5.5 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. During the six months
ended June 30, 2020, we repurchased 5,795,976 shares of our common stock under
this program at a weighted-average price of $7.96 per share.
Other Potential Sources of Financing
Our primary sources of cash currently consist of cash available, which was
$487.2 million as of June 30, 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 June 30, 2020 we also held $1.1 billion of
unencumbered assets, consisting of $35.8 million of senior mortgages and $1.1
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 June 30, 2020, our debt-to-equity ratio was 1.7 and our portfolio was comprised of $5.3 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

                                       41


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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 U.S. federal income tax purposes;

• 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 of June 30,
2020 are summarized as follows ($ in thousands):

                                                                                                           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) $ 422,716$ 1,036,199$ 832,697$ 1,348,088 $ - $ 3,639,700 Senior secured term loan(2)

           19,673                19,524          

19,375 38,343 515,890 612,805 Convertible senior notes

              28,750                28,750         359,881         234,121              -         651,502
Unfunded loan commitments (3)        564,550               596,686         169,738           4,268              -       1,335,242
Total                           $  1,035,689$       1,681,159$ 1,381,691$ 1,624,820$  515,890$ 6,239,249


-------

(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 June 30, 2020 on the floating

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.



Loan Commitments. As of June 30, 2020, we had $1.5 billion of unfunded loan
commitments, comprised of $1.4 billion related to our commercial mortgage loan
portfolio, and $37.0 million related to our subordinate loan portfolio.
Management Agreement. On September 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 on September 29, 2020.
Absent certain action by the independent directors of our board of directors, as
described below, the Management Agreement will automatically renew

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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 in February 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 than U.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 of U.S. dollars at various dates through December 2024. These forward
contracts were executed to economically fix the U.S. dollar amounts of foreign
denominated cash flows expected to be received by us related to foreign
denominated loan investments. Refer to "Note 10- Derivatives, Net" to the
accompanying condensed consolidated financial statements for details regarding
our forward currency contracts.
Interest Rate Swap and Cap. In connection with the senior secured term loan, we
previously entered into an interest rate swap to fix LIBOR at 2.12%, effectively
fixing our all-in coupon on the senior secured term loan at 4.87%. During the
second quarter of 2020 we terminated our interest rate swap due to significant
decrease in LIBOR and recognized a realized loss on the accompanying condensed
consolidated statement of operations. Subsequently, in June 2020, we entered
into an interest rate cap for approximately $1.1 million. We use our interest
rate cap to manage exposure to variable cash flows on our borrowings under our
senior secured term loan by effectively limiting LIBOR from exceeding 0.75%.
Refer to "Note 10- Derivatives, Net" to the accompanying condensed consolidated
financial statements for details regarding our interest rate cap.
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 of June 30, 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 after
September 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

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redemption.

In June 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 and six months ended June 30, 2020, our Operating Earnings were
$(11.3) million, or $(0.07) per share, and $51.4 million, or $0.33 per share,
respectively, as compared to $56.6 million, or $0.38 per share, and $125.0
million, or $0.88 per share, respectively, for the same periods 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. 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 

June 30, Six months ended June 30,

                                                          2020            2019             2020            2019
Weighted-Averages                Face       Price        Shares          Shares           Shares          Shares
Weighted-average diluted
shares - GAAP                                         182,083,702     174,101,234      152,735,852     169,418,177
2019 Notes(1)                 $  13,170$17.17              -               -                -        (767,093 )
2022 Notes                    $ 345,000$19.91    (17,327,970 )   (17,327,970 )              -     (17,327,970 )
2023 Notes                    $ 230,000$20.53    (11,205,301 )   (11,205,301 )              -     (11,205,301 )
Unvested RSUs                       N/A        N/A              -       1,846,173        2,017,080       1,847,860
Weighted-average diluted
shares - Operating Earnings                           153,550,431     147,414,136      154,752,932     141,965,673


-------

(1) Face represents the weighted-average balance for the six months ended June 30, 2019. There was no impact from the 2019 Notes in the other periods shown.



                                       44

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                           Computation of Share Count for Operating Earnings
                                      Three months ended June 30,          Six months ended June 30,
                                          2020              2019             2020             2019
Basic weighted-average shares of
common stock outstanding             151,523,513        145,567,963      152,735,852      140,117,813
Weighted-average unvested RSUs         2,026,918          1,846,173        2,017,080        1,847,860
Weighted-average diluted shares
- Operating Earnings                 153,550,431        147,414,136      154,752,932      141,965,673



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 income or expense related to our derivative
instruments. 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. Operating Earnings allows us to isolate the net
interest income or expense associated with our swaps and caps in order to
monitor and project our full cost of borrowings.
As discussed in "Note 10 - Derivatives" we terminated our interest rate swap,
which we used to manage exposure to variable cash flows on our borrowings under
our senior secured term loan, in the second quarter of 2020 and recorded a
realized loss in the condensed consolidated statement of operations. As of June
30, 2020, there are no interest rate swaps on our condensed consolidated balance
sheet. In addition, as discussed in "Note 4 - Commercial Mortgage, Subordinate
Loans and Other Lending Assets, Net," we recorded a net realized loss on the
sale of three construction loans and, in connection with a troubled debt
restructuring, on one hotel loan.
We believe it is useful to our investors to also present Operating Earnings
excluding realized loss on investments and realized loss on interest rate swap
to reflect our operating results because our operating results are primarily
comprised of earning interest income on our investments net of borrowing and
administrative costs, which are our ongoing operations. We believe that our
investors use Operating Earnings and Operating Earnings excluding realized loss
on investments and realized loss on interest rate swap, or a comparable
supplemental performance measure, to evaluate and compare the performance of our
company and our peers and, as such, we believe that the disclosure of Operating
Earnings and Operating Earnings excluding realized loss on investments and
realized loss on interest rate swap is useful to our investors.
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, that 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 and Operating Earnings excluding
realized loss on investments and realized loss on interest rate swap ($ in
thousands):

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                                         Three months ended June 30,        

Six months ended June 30,

                                           2020                2019               2020               2019

Net income (loss) available to $ 56,816$ 56,505$ (74,411 ) common stockholders

                                                                             $     117,428

Adjustments:

Equity-based compensation expense             4,252               4,294             8,515               8,195
Unrealized (gain) loss on interest          (50,018 )            13,113           (14,470 )            13,113
rate swap
(Gain) loss on currency forwards              2,995             (11,186 )         (67,496 )            (4,466 )
Foreign currency (gain) loss, net            (2,559 )             7,777            35,390                 883
Unrealized gain on interest rate cap           (738 )                 -              (738 )                 -
Realized gains relating to interest
income on foreign currency hedges,            1,088                 325             1,344                 744

net

Realized gains relating to forward
points on foreign currency hedges,            1,318                  44             3,489               2,476

net

Amortization of the convertible
senior notes related to equity                  765                 721             1,519               1,630

reclassification

Provision for (reversal of) loan            (25,169 )           (15,000 )         158,296             (15,000 )
losses
Total adjustments:                          (68,066 )                88           125,849               7,575
Operating Earnings                   $      (11,250 )$      56,593$      51,438$     125,003

Realized loss on investments                 16,405              12,513            16,405              12,513
Realized loss on interest rate swap          53,851                   -            53,851                   -
Operating Earnings excluding
realized loss on investments and     $       59,006$      69,106$     121,694$     137,516
realized loss on interest rate swap
Diluted Operating Earnings per share $        (0.07 )$        0.38$        0.33$        0.88
of common stock (1)
Diluted Operating Earnings excluding
realized loss on investments and     $         0.38       $        0.47$        0.79$        0.97
realized loss on interest rate swap
Basic weighted-average shares of        151,523,513         145,567,963       152,735,852         140,117,813
common stock outstanding
Weighted-average diluted shares -       153,550,431         147,414,136       154,752,932         141,965,673
Operating Earnings


-------
(1) For the computation of diluted Operating Earnings per share of common stock
and diluted Operating Earnings excluding realized loss on investments and
realized loss on interest rate swap per share of common stock, for the three
months ended June 30, 2020, $8.7 million of interest expense related to the
Notes is not deducted from the numerator and the potentially dilutive shares
related to the Notes are excluded from the denominator, while there is no such
impact for the six months ended June 30, 2020. For the computation of diluted
Operating Earnings per share of common stock and diluted Operating Earnings
excluding realized loss on investments and realized loss on interest rate swap
per share of common stock, for the three and six months ended June 30, 2019,
$7.9 million and $16.4 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):

                                             June 30, 2020           December 31, 2019
Stockholders' Equity                    $           2,365,506     $           2,629,975
   Series B Preferred Stock
(Liquidation Preference)                             (169,260 )                (169,260 )
Common Stockholders' Equity             $           2,196,246     $           2,460,715
Common Stock                                      148,326,806               153,537,296
Book value per share                    $               14.81     $               16.03



The table below shows the changes in our book value per share:

                                       46


--------------------------------------------------------------------------------

                                                                 Book value per share
Book value per share at December 31, 2019                      $            

16.03

Net unrealized gain on currency hedges                                      

0.20

Repurchase of common stock                                                  

0.25

Decrease in fair value on interest rate swap                                  (0.27 )
Vesting and delivery of RSUs                                                  (0.07 )
Other                                                                         (0.01 )
Book value per share at June 30, 2020 prior to CECL Allowances $            

16.13

Specific CECL Allowance                                        $            

(1.01 ) Book value per share at June 30, 2020 prior to General CECL Allowance

                                                      $            

15.12

General CECL Allowance                                         $              (0.31 )
Book value per share at June 30, 2020                          $            

14.81




We believe that presenting book value per share with sub-totals prior to the
CECL Allowances is useful for investors for various reasons, including, among
other things, the calculations for our financial covenants related to tangible
net worth and debt-to-equity under our secured debt arrangements and senior
secured term loan permit us to add the General CECL Allowance to our GAAP
stockholders' equity. Given 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.

                                       47

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© Edgar Online, source Glimpses

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