APOLLO COMMERCIAL REAL ESTATE FINANCE, INC. The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 8. "Financial Statements and Supplementary Data" of this annual report on Form 10-K. 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$455.5 billion as ofDecember 31, 2020 . The Manager is led by an experienced team of senior real estate professionals who have significant expertise in underwriting and structuring commercial real estate financing transactions. We benefit from Apollo's global infrastructure and operating platform, through which we are able to source, evaluate and manage potential investments in our target assets. Results of Operations All non-USD denominated assets and liabilities are translated to USD at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded. Loan Portfolio Overview The following table sets forth certain information regarding our commercial real estate debt portfolio as ofDecember 31, 2020 ($ in thousands): Amortized
Weighted-Average Coupon Weighted Average Secured Debt
Equity at
Description Cost (1) All-in Yield Arrangements (3) Cost of Funds cost(4)
(1)(2)
Commercial mortgage loans, net $ 5,451,084 4.8 % 5.2 % $ 3,449,665 2.2 % $ 2,001,419
Subordinate loans and other 1,045,893 10.5 % 12.1 % - - 1,045,893
lending assets, net
Total/Weighted-Average $ 6,496,977 5.7 % 6.3 % $ 3,449,665 2.2 % $ 3,047,312
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(1) Weighted-Average Coupon and Weighted-Average All-in Yield are based on the
applicable benchmark rates as of December 31, 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 $13.0 million .
(4) Represents loan portfolio at amortized cost less secured debt outstanding.
The following table provides details of our commercial mortgage loan portfolio
and subordinate loan and other lending assets portfolio, on a loan-by-loan
basis, as of December 31, 2020 ($ in millions):
Commercial Mortgage Loan Portfolio
Construction
# Property Type Risk Rating Origination Date Amortized Cost Unfunded Commitment Loan Fully-extended Maturity Location
1 Urban Retail 3 12/2019 $338 $- 12/2023 London, UK
2 Urban Retail 3 08/2019 317 - 09/2024 Manhattan, NY
3 Hotel 3 10/2019 275 50 08/2024 Various
4 Office 3 02/2020 229 - 02/2025 London, UK
5 Healthcare 3 10/2019 226 31 10/2024 Various
6 Office 3 06/2019 216 27 11/2026 Berlin, Germany
7 Industrial 3 01/2019 197 7 02/2024 Brooklyn, NY
8 Office 3 10/2018 197 3 01/2022 Manhattan, NY
9 Office 3 01/2020 191 97 02/2025 Long Island City, NY
10 Office 3 09/2019 189 - 09/2023 London, UK
11 Hotel 3 04/2018 152 - 04/2023 Honolulu, HI
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12 Office 3 11/2017 148 - 01/2023 Chicago, IL
13 Hotel 3 08/2019 146 - 08/2024 Puglia, Italy
14 Hotel 3 09/2015 145 - 06/2024 Manhattan, NY
15 Hotel 3 05/2018 140 - 06/2023 Miami, FL
16 Office 3 10/2018 140 47 Y 10/2023 Manhattan, NY
17 Office 3 01/2018 139 53 01/2022 Renton, WA
18 Urban Predevelopment(1) 5 03/2017 131 - 12/2021 Brooklyn, NY
19 Urban Predevelopment(1) 5 01/2016 115 - 09/2021 Miami, FL
20 Office 3 04/2019 107 52 Y 09/2025 Culver City, CA
21 Retail center(1) 5 11/2014 105 - 09/2021 Cincinnati, OH
22 Hotel 3 03/2017 105 - 03/2022 Atlanta, GA
23 Office(2) 3 12/2017 105 - 07/2022 London, UK
24 Residential-for-sale: inventory 3 12/2019 100 10 01/2023 Boston, MA
25 Hotel 3 11/2018 100 - 12/2023 Vail, CO
26 Office 3 03/2018 92 - 04/2023 Chicago, IL
27 Hotel 3 12/2017 82 - 12/2023 Manhattan, NY
28 Mixed Use 3 12/2019 79 1 12/2024 London, UK
29 Residential-for-sale: inventory 3 01/2018 72 8 01/2023 Manhattan, NY
30 Residential-for-sale: construction 3 12/2018 71 107 Y 12/2023 Manhattan, NY
31 Residential-for-sale: construction 3 10/2015 69 - Y 08/2021 Manhattan, NY
32 Residential-for-sale: construction 3 12/2018 69 34 Y 01/2024 Hallandale Beach, FL
33 Hotel 3 08/2019 67 - 09/2022 Manhattan, NY
34 Multifamily 3 04/2014 66 - 07/2023 Various
35 Hotel 3 04/2018 64 - 05/2023 Scottsdale, AZ
36 Hotel 3 09/2019 61 - 10/2024 Miami, FL
37 Hotel 3 12/2019 60 - 01/2025 Tucson, AZ
38 Multifamily 3 11/2014 54 - 11/2021 Various
39 Urban Predevelopment 3 12/2016 52 - 06/2022 Los Angeles, CA
40 Hotel 3 05/2019 52 - 06/2024 Chicago, IL
41 Multifamily 3 02/2020 50 1 03/2024 Cleveland, OH
42 Hotel 3 12/2015 42 - 08/2024 St. Thomas, USVI
43 Office 3 12/2019 37 2 12/2022 Edinburgh, Scotland
44 Residential-for-sale: inventory 3 05/2018 24 - 05/2021 Manhattan, NY
45 Hotel 3 02/2018 21 6 11/2024 Pittsburgh, PA
46 Mixed Use 3 12/2019 18 828 Y 06/2025 London, UK
47 Residential-for-sale: inventory 3 06/2018 13 - 07/2021 Manhattan, NY
General CECL Allowance (17)
Sub total / Weighted-Average
Commercial Mortgage Loans 3.1 $5,451 $1,364 2.8 Years
Subordinate Loan and Other Lending Assets Portfolio
# Property Type Risk Rating
Origination Date Amortized Cost Unfunded Commitment Construction Loan Fully-extended Maturity
Location
1 Residential-for-sale: construction(3) 3 06/2015 $223 - Y 06/2021 Manhattan, NY
2 Residential-for-sale: construction(3) 3 11/2017 121 - Y 06/2021 Manhattan, NY
3 Residential-for-sale: construction(4) 3 12/2017 112 9 Y 06/2022 Manhattan, NY
4 Office 3 01/2019 100 - 12/2025 Manhattan, NY
5 Healthcare(5) 3 01/2019 75 - 01/2024 Various
6 Residential-for-sale: construction 3 12/2017 75 7 Y 04/2023 Los Angeles, CA
7 Healthcare(6) 3 07/2019 51 - 06/2024 Various
8 Mixed Use 3 01/2017 42 - 02/2027 Cleveland, OH
9 Mixed Use 3 02/2019 40 - Y 12/2022 London, UK
10 Residential-for-sale: inventory 3 10/2016 36 - 01/2021 Manhattan, NY
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11 Industrial 2 05/2013 32 - 05/2023 Various
12 Mixed Use 3 12/2018 31 20 Y 12/2023 Brooklyn, NY
13 Hotel 3 06/2015 24 - 07/2025 Phoenix, AZ
14 Hotel(1) 5 06/2015 22 - 12/2022 Washington, DC
15 Hotel 3 06/2018 20 - 06/2023 Las Vegas, NV
16 Multifamily 3 05/2018 19 - 05/2028 Cleveland, OH
17 Healthcare(5)(6) 3 02/2019 17 - 01/2034 Various
18 Office 3 07/2013 14 - 07/2022 Manhattan, NY
19 Office 3 08/2017 7 - 09/2024 Troy, MI
20 Mixed Use 3 07/2012 6 - 08/2022 Chapel Hill, NC
General CECL Allowance (21)
Sub total / Weighted-Average
Subordinate Loans and Other
Lending Assets 3.0 $1,046 $36 2.4 Years
Total / Weighted-Average
Loan Portfolio 3.1 $6,497 $1,400 2.8 Years
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(1)Amortized cost for these loans is net of the recorded provisions for loan
losses.
(2)Includes $9.2 million of a subordinate participation sold accounted for as
secured borrowing.
(3)Both loans are secured by the same property.
(4)Includes $25.8 million of a subordinate participation sold accounted for as
secured borrowing.
(5)Loan and Single Asset, Single Borrower CMBS are secured by the same
properties.
(6)Single Asset, Single Borrower CMBS.
Our average asset and debt balances for the year ended December 31, 2020 were ($
in thousands):
Average month-end balances for the year ended
December 31, 2020
Description Assets Related debt
Commercial mortgage loans, net $ 5,675,735 $ 3,415,598
Subordinate loans and other lending assets,
net 1,018,097 -
Portfolio Management
Due to the impact of COVID-19, some of our borrowers have experienced
consequences which are preventing the execution of their business plans and in
some cases temporary closures. As a result, we have worked with borrowers to
execute loan modifications which are typically coupled with additional equity
contributions from borrowers. Loan modifications to date have included
repurposing of reserves, temporary deferrals of interest or principal, and
partial deferral of coupon interest as payment-in-kind interest.
Investment Activity
During the year ended December 31, 2020 , we committed $562.0 million of capital
to loans ($463.9 million of which was funded during the year ended December 31,
2020 ). In addition, during the year ended December 31, 2020 , we received $683.3
million in repayments and sales and funded $412.7 million for loans closed prior
to 2020.
Net Income Available to Common Stockholders
For the years ended December 31, 2020 and 2019, our net income available to
common stockholders was $4.8 million , or $0.01 per diluted share of common
stock, and $211.6 million , or $1.40 per diluted share of common stock,
respectively.
Operating Results
The following table sets forth information regarding our consolidated results of
operations and certain key operating metrics ($ in thousands):
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Year Ended December 31, 2020 vs 2019
2020 2019
Net interest income:
Interest income from commercial mortgage loans $ 309,134 $ 322,475 $ (13,341)
Interest income from subordinate loans and other lending 118,435 164,933 (46,498)
assets
Interest expense (148,891) (152,926) 4,035
Net interest income 278,678 334,482 (55,804)
Operating expenses:
General and administrative expenses (26,849) (24,097) (2,752)
Management fees to related party (39,750) (40,734) 984
Total operating expenses (66,599) (64,831) (1,768)
Other income 1,604 2,113 (509)
Realized loss on investments (47,632) (12,513) (35,119)Provision for loan losses - Specific CECL Allowance, net (115,000)
(20,000) (95,000)
Provision for loan losses - General CECL Allowance, net (10,600)
- (10,600)
Loss on foreign currency forward contracts (9,743) (14,425) 4,682
Foreign currency translation gain 26,916 19,818 7,098
Loss on interest rate hedging instruments (39,247) (14,470) (24,777)
Net income $18,377 $230,174 $(211,797)
For a comparison and discussion of our results of operations and other operating
and financial data for the fiscal years ended December 31, 2019 and December 31,
2018 , see "Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" of our annual report on Form 10-K for the
fiscal year ended December 31, 2019 , filed with the SEC on February 13, 2020 .
Net Interest Income
Net interest income decreased by $55.8 million during the year ended
December 31, 2020 as compared to the same period in 2019. This decrease was
primarily due to (i) a 1.71% decrease in average one-month LIBOR compared to the
same period in 2019, (ii) the principal balance of $545.7 million being on cost
recovery or non-accrual status as of December 31, 2020 compared to $192.4
million as of December 31, 2019 , and (iii) a $1.1 billion increase in the
average month-end debt balance for the year ended December 31, 2020 as compared
to the same period in 2019. This was partially offset by (i) a $260.6 million
increase in loan principal balance as of December 31, 2020 compared to the same
date in 2019, (ii) in the money LIBOR floors on several of our loans, and (iii)
a decrease in the average LIBOR, noted above, on our debt.
We recognized payment-in-kind ("PIK") interest of $46.7 million and
$54.6 million for the years ended December 31, 2020 and 2019, respectively.
We recognized $0.2 million and $6.1 million in pre-payment penalties and
accelerated fees for the years ended December 31, 2020 and 2019, respectively.
Operating Expenses
General and administrative expenses
General and administrative expenses increased by $2.8 million for the year ended
December 31, 2020 compared to the same period in 2019. The increase was
primarily driven by a $1.8 million increase in general operating expenses and a
$0.9 million increase in non-cash restricted stock and RSU amortization related
to shares of stock awarded under the LTIPs.
Management fees to related party
Management fee expense decreased by $1.0 million during the year ended
December 31, 2020 as compared to the same period 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 common stock repurchase of
14,832,632 shares in 2020 (as described in "Note 15 - Stockholders' Equity").
Realized loss on investments
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Realized loss on investments increased by $35.1 million during the year ended
December 31, 2020 as compared to the same period in 2019. The loss for the year
ended December 31, 2020 is attributable to a $15.0 million realized loss in
connection with a troubled debt restructuring ("TDR"), $11.0 million realized
loss related to a loan recapitalization, $19.2 million realized loss as a result
of loan sales or payoffs and $2.4 million realized loss from a foreclosure. The
loss for the year ended December 31, 2019 was attributable to a $12.5 million
realized loss recognized from the payoff of one of our impaired loans. Refer to
"Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net"
for additional information related to realized loss on investments.
Provision for loan losses, net - General CECL Allowance
The General CECL Allowance increased by $10.6 million from initial adoption on
January 1, 2020 , to December 31, 2020 . The increase is primarily related to a
change in our view of estimated future macroeconomic conditions in the backdrop
of the global COVID-19 pandemic and an increase in our view of the remaining
expected term of our loan portfolio as of December 31, 2020 . 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 and impairments, net - Specific CECL Allowance
During the year ended December 31, 2020 , we recorded $115.0 million of Specific
CECL Allowances and Impairments net of $13.0 million in reversals of previously
recorded Specific CECL Allowances and Impairments. Additional Specific CECL
Allowances and Impairments of $128.0 million were recorded on four loans, one of
which had $47.0 million of previously recorded provisions for loan losses,
related to adverse effects from COVID-19. Reversals represent $10.0 million in
Specific CECL Allowances and $3.0 million in impairments to an equity position
held in other assets in our consolidated balance sheet from the payoff of a
loan. 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 years ended December 31, 2020 and 2019
was $17.2 million and $5.4 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 year ended December 31, 2020, the interest rate
cap had an unrealized gain of $0.1 million .
Dividends
The following table details our dividend activity:
Years Ended
Dividends declared per share of: December 31, 2020 December 31, 2019
Common Stock(1) $1.45 $1.84
Series B Preferred Stock 2.00 2.00
Series C Preferred Stock(2) N/A 0.7223
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(1)As our aggregate 2020 distributions exceeded our earnings and profits, $0.35
of the January 2021 distribution declared in the fourth quarter of 2020 are
payable to common stockholders of record as of December 31, 2020 will be treated
as a 2021 distribution for U.S. federal income tax purposes.
(2)The Series C Preferred Stock was redeemed in full in June 2019 .
Subsequent Events
Refer to "Note 20 - Subsequent Events" to the accompanying consolidated
financial statements for disclosure regarding significant transactions that
occurred subsequent to December 31, 2020 .
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Factors Impacting Operating Results
Our results of operations are affected by a number of factors and primarily
depend on, among other things, the level of the interest income from target
assets, the market value of our assets and the supply of, and demand for,
commercial mortgage loans, commercial real estate corporate debt and loans and
other real estate-related debt investments in which we invest, and the financing
and other costs associated with our business. Interest income and borrowing
costs may vary as a result of changes in interest rates and the availability of
financing, each of which could impact the net interest income we receive on our
assets. Our operating results may also be impacted by conditions in the
financial markets, credit losses in excess of initial anticipations or
unanticipated credit events experienced by borrowers whose commercial mortgage
loans are held directly by us.
Changes in market interest rates. With respect to our business operations,
increases in interest rates, in general, may over time cause: (i) the interest
expense associated with variable rate borrowings to increase; (ii) the value of
commercial mortgage loans and commercial real estate corporate debt and loans to
decline; (iii) coupons on variable rate commercial mortgage loans and commercial
real estate corporate debt and loans to reset, although on a delayed basis, to
higher interest rates; (iv) to the extent applicable under the terms of our
investments, prepayments on commercial mortgage loan and commercial real estate
corporate debt and loans portfolio to slow, and (v) to the extent that we enter
into interest rate swap agreements as part of our hedging strategy, the value of
these agreements to increase.
Conversely, decreases in interest rates, in general, may over time cause: (i)
the interest expense associated with variable rate borrowings to decrease; (ii)
the value of commercial mortgage loan and commercial real estate corporate debt
and loans portfolio to increase; (iii) coupons on variable rate commercial
mortgage loans and commercial real estate corporate debt and loans to reset,
although on a delayed basis, to lower interest rates; (iv) to the extent
applicable under the terms of our investments, prepayments on commercial
mortgage loan and commercial real estate corporate debt and loan portfolio to
increase, and (v) to the extent that we enter into interest rate swap agreements
as part of our hedging strategy, the value of these agreements to decrease.
Credit risk. One of our strategic focuses is acquiring assets which are believed
to be of high credit quality. Management believes this strategy will generally
keep credit losses and financing costs low. However, we are subject to varying
degrees of credit risk in connection with our target assets. The Manager seeks
to mitigate this risk by seeking to acquire high quality assets, at appropriate
prices given anticipated and unanticipated losses and by deploying a
value-driven approach to underwriting and diligence, consistent with the
Manager's historical investment strategy, with a focus on current cash flows and
potential risks to cash flow. The Manager seeks to enhance its due diligence and
underwriting efforts by accessing the Manager's extensive knowledge base and
industry contacts. Nevertheless, unanticipated credit losses could occur which
could adversely impact operating results.
Size of portfolio. The size of our portfolio of assets, as measured by the
aggregate principal balance of commercial mortgage-related loans and the other
assets owned is also a key revenue driver. Generally, as the size of our
portfolio grows, the amount of interest income received increases. A larger
portfolio, however, may result in increased expenses as we may incur additional
interest expense to finance the purchase of assets.
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
annual report on Form 10-K. Please see "Liquidity and Capital Resources" below
for additional discussion surrounding the ongoing impact we expect COVID-19 will
have on our liquidity and capital resources.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with GAAP, which requires
the use of estimates and assumptions that involve the exercise of judgment and
use of assumptions as to future uncertainties. The most critical accounting
policies involve decisions and assessments that affect our reported assets and
liabilities, as well as reported revenues and expenses. We believe that all of
the decisions and assessments upon which these financial statements are based
are reasonable based upon information currently available to us. The accounting
policies and estimates that we consider to be most critical to an investor's
understanding of our financial results and condition and require complex
management judgment are discussed below.
Risk Ratings
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Our loans are typically collateralized by commercial real estate. As a result,
we regularly evaluate the extent and impact of any credit migration associated
with the performance and/or value of the underlying collateral property as well
as the financial and operating capability of the borrower/sponsor on a loan by
loan basis. Specifically, a property's operating results and any cash reserves
are analyzed and used to assess (i) whether cash from operations are sufficient
to cover the debt service requirements currently and into the future, (ii) the
ability of the borrower to refinance the loan, and/or (iii) the property's
liquidation value. We also evaluate the financial wherewithal of any loan
guarantors as well as the borrower's competency in managing and operating the
properties. In addition, we consider the overall economic environment, real
estate sector, and geographic sub-market in which the borrower operates. Such
analyses are completed and reviewed by asset management and finance personnel,
who utilize various data sources, including (i) periodic financial data such as
debt service coverage ratio, property occupancy, tenant profile, rental rates,
operating expenses, the borrower's exit plan, and capitalization and discount
rates, (ii) site inspections, and (iii) current credit spreads and discussions
with market participants.
We assess the risk factors of each loan, and assign a risk rating based on a
variety of factors, including, without limitation, loan-to-value ratio ("LTV"),
debt yield, property type, geographic and local market dynamics, physical
condition, cash flow volatility, leasing and tenant profile, loan structure and
exit plan, and project sponsorship. This review is performed quarterly. Based on
a 5-point scale, our loans are rated "1" through "5," from less risk to greater
risk, which ratings are defined as follows:
1.Very low risk
2.Low risk
3.Moderate/average risk
4.High risk/potential for loss: a loan that has a risk of realizing a principal
loss
5.Impaired/loss likely: a loan that has a high risk of realizing principal loss,
has incurred principal loss or an impairment has been recorded
The following tables allocate the carrying value of our loan portfolio based on
our internal risk ratings and date of origination at the dates indicated ($ in
thousands):
December 31, 2020
Year Originated
Risk Rating Number of Loans Total % of Portfolio 2020 2019 2018 2017 2016 Prior
1 - $ - - % $ - $ - $ - $ - $ - $ -
2 1 32,000 0.5 % - - - - - 32,000
3 62 6,129,541 93.8 % 469,586 2,661,017 1,398,479 868,514 88,710 643,235
4 - - - % - - - - - -
5 4 373,538 5.7 % - - - 131,050 115,419 127,069
Total 67 $ 6,535,079 100.0 % $ 469,586 $ 2,661,017 $1,398,479$ 999,564 $ 204,129 $ 802,304 General CECL Allowance (38,102) Total carrying value, net$ 6,496,977 Weighted Average Risk Rating 3.1 43
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December 31, 2019
Year Originated
Risk Rating Number of Loans Total % of Portfolio 2019 2018 2017 2016 2015 Prior
1 - $ - - % $ - $ - $ - $ - $ - $ -
2 8 348,324 5.5 % - 241,676 - 36,250 24,546 45,852
3 61 5,707,555 89.5 % 2,736,825 1,355,014 912,636 72,540 499,700 130,840
4 1 182,910 2.9 % - - - 182,910 - -
5 2 136,304 2.1 % - - - - - 136,304
Total 72 $ 6,375,093 100.0 % $ 2,736,825 $ 1,596,690 $ 912,636 $ 291,700 $ 524,246 $ 312,996
Weighted Average Risk Rating 3.0
Current Expected Credit Losses ("CECL")
In June 2016 , the FASB issued ASU 2016-13, which we refer to as the "CECL
Standard." This update has changed how entities measure credit losses for most
financial assets and certain other instruments that are not measured at fair
value. The CECL Standard replaced the "incurred loss" approach under existing
guidance with an "expected loss" model for instruments measured at amortized
cost. The CECL Standard requires entities to record allowances for
held-to-maturity debt securities that are deducted from the carrying amount of
the assets to present the net carrying value at the amounts expected to be
collected on the assets. We continue to record loan-specific allowances as
Specific CECL Allowance, as a practical expedient under the CECL Standard, which
we apply to assets that are collateral dependent and where the borrower or
sponsor is experiencing financial difficulty. In addition, we now record a
General CECL Allowance in accordance with the CECL Standard on the remainder of
the loan portfolio on a collective basis by assets with similar risk
characteristics.
The CECL Standard requires us to record an allowance for credit losses that are
deducted from the carrying amount of our loan portfolio to present the net
carrying value at the amounts expected to be collected on the assets. We adopted
the CECL Standard through a cumulative-effect adjustment to accumulated deficit
on January 1, 2020 . Subsequent changes to the CECL Allowance are recognized
through net income on our consolidated statement of operations.
Specific CECL Allowance
We evaluate our loans on a quarterly basis. For loans where we have deemed the
borrower/sponsor to be experiencing financial difficulty, we have elected to
apply a practical expedient in accordance with the CECL Standard. In accordance
with the practical expedient approach, we determine the loan loss provision to
be the difference between the fair value of the underlying collateral and the
carrying value of the loan (prior to the loan loss provision). When the
repayment or satisfaction of a loan is dependent on a sale, rather than
operations, of the collateral, the fair value is adjusted for the estimated cost
to sell the collateral. The fair value of the underlying collateral is
determined by using method(s) such as discounted cash flow, the market approach,
or direct capitalization approach. The key unobservable inputs used to determine
the fair value of the underlying collateral may vary depending on the
information available to us and market conditions as of the valuation date. If
we deem all or any portion of a loan balance uncollectible, that amount is
written-off.
The following table summarizes the specific provision for loan losses that have
been recorded on our portfolio as of December 31, 2020 ($ in thousands):
Amortized Interest recognition status/
Type Property type Location cost(1) as of date
Mortgage
Urban Predevelopment(2) Brooklyn, NY $ 131,050 Cost Recovery/ 3/1/2020
Urban Predevelopment(2)(3) Miami, FL 115,419 Cost Recovery/ 3/1/2020
Retail Center(4)(5) Cincinnati, OH 105,344 Cost Recovery/ 10/1/2019
Mortgage total: $ 351,813
Mezzanine
Hotel(6) Washington, DC $ 21,725 Cost Recovery/ 3/31/2020
Mezzanine total: $ 21,725
Grand total: $ 373,538
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(1)Amortized cost is shown net of $175.0 million of net Specific CECL Allowance.
During the year ended December 31, 2020 , there was $118.0 million in net
Specific CECL Allowances taken due to factors including COVID-19. See Note 2 for
additional information regarding COVID-19.
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(2)The fair value of urban predevelopment collateral was determined by assuming
rent per square foot ranging from 25 to $225 and a capitalization rate ranging
from 5.0% to 5.5%.
(3)In October 2020 , we entered into a joint venture which owns the underlying
properties that secure our $180.5 million first mortgage loan. The entity in
which we own an interest, and which owns the underlying properties was deemed to
be a Variable Interest Entity ("VIE") and we determined that we are not the
primary beneficiary of that VIE.
(4)The fair value of retail collateral was determined by applying a
capitalization rate of 8.3%.
(5)The entity in which we own an interest and which owns the underlying property
was deemed to be a VIE and we determined that we are not the primary beneficiary
of that VIE. As of December 31, 2019 we had recorded $47.0 million provision for
loan loss. During the years ended December 31, 2020 and 2019, $1.6 million and
$1.4 million , respectively, of interest paid was applied towards reducing the
carrying value of the loan.
(6)The fair value of hotel collateral was determined by applying a discount rate
of 8.5% and a capitalization rate of 7.0%. During the year ended December 31,
2020 and 2019, there was $0.2 million and $0 million of interest paid applied
towards reducing the carrying value of the loan, respectively.
We evaluate modifications to our loan portfolio to determine if the
modifications constitute a troubled debt restructuring ("TDR") and/or
substantial modification, under ASC Topic 310 "Receivables." In 2015, we
originated a $157.8 million loan secured by a hotel in New York City . During the
second quarter of 2020, this loan was restructured and was deemed to be a TDR.
In connection with this restructuring, the borrower committed to contributed
additional equity of $15.0 million and concurrently we wrote down our principal
on this loan by $15.0 million , which had been previously recorded as a Specific
CECL Allowance. As of December 31, 2020 , the loan had a principal balance and
amortized cost of $142.8 million and $144.7 million , respectively, has a risk
rating of 3, and is on accrual status. During the three months ended June 30,
2020 , the CECL Allowance of $15.0 million was reversed through reversal of loan
losses, while the write-down was recorded in realized loss on investments in our
consolidated statement of operations.
In 2018, we originated a $38.5 million commercial mortgage loan secured by a
hotel in Pittsburgh, Pennsylvania . During the fourth quarter of 2020, the loan
was recapitalized with the minority equity holder in the property. In connection
with this recapitalization, we received approximately $5.9 million of principal
that paid down the existing loan and we wrote down our principal by
$11.0 million , ($9.5 million of which had been previously recorded as a Specific
CECL Allowance). In addition, the sponsor committed to contribute $11.4 million
in new equity. As of December 31, 2020 , the recapitalized loan had a principal
balance and amortized cost of $21.6 million and $21.5 million , respectively,
with a risk rating of 3. During the fourth quarter of 2020, the Specific CECL
Allowance of $9.5 million was reversed through provision for loan losses and
impairments, net, while the write-down was recorded in realized loss on
investments in our consolidated statement of operations.
General CECL Allowance
The CECL Standard requires an entity to consider historical loss experience,
current conditions, and a reasonable and supportable forecast of the
macroeconomic environment. The FASB recognizes the weighted average remaining
maturity ("WARM") method as an acceptable approach for computing current
expected credit losses. We have adopted the WARM method to comply with the CECL
Standard in determining a General CECL Allowance for a majority of our
portfolio. In the future, we may use other acceptable methods, such as a
probability-of-default/loss-given-default method. For loans where we have deemed
the borrower/sponsor to be experiencing financial difficulty, we have elected to
apply a practical expedient in which the fair value of the underlying collateral
is compared to the amortized cost of the loan in determining a Specific CECL
Allowance.
In accordance with the WARM method, an annual historical loss rate is applied to
the amortized cost of an asset or pool of assets over the remaining expected
life. The WARM method requires consideration of the timing of expected future
fundings of existing commitments and repayments over each asset's remaining
life. An annual loss factor, adjusted for macroeconomic estimates, is applied
over each subsequent period and aggregated to arrive at the General CECL
Allowance.
In determining the General CECL Allowance, we considered various factors
including (i) historical loss experience in the commercial real estate lending
market, (ii) timing of expected repayments and satisfactions, (iii) expected
future funding, (iv) capital subordinate to us when we are the senior lender,
(v) capital senior to us when we are the subordinate lender, and (vi) our
current and future view of the macroeconomic environment. The standard requires
the use of significant judgment to arrive at an estimated credit loss. There is
significant uncertainty related to future macroeconomic conditions as the result
of COVID-19.
We derived an annual historical loss rate based on a commercial mortgage backed
securities ("CMBS") database with historical losses from 1998 through the fourth
quarter of 2020 provided by a third party, Trepp LLC . We applied various filters
to arrive at a CMBS dataset most analogous to our current portfolio from which
to determine an appropriate historical loss rate. The annual historical loss
rate was further adjusted to reflect our expectations of the macroeconomic
environment for a reasonable and supportable forecast period which we have
determined to be one year.
The General CECL Allowance on subordinate loans is calculated by incorporating
both the loan balance of the position(s) of the structurally senior third-party
lender(s) and the balance of our subordinate loan(s). The subordinate loans, by
virtue of being the first loss position, are required to absorb losses prior to
the senior position(s) being impacted, resulting in a higher
45
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percentage allowance attributable to the subordinate loan. The General CECL
Allowance on unfunded loan commitments is time-weighted based on our expected
commitment to fund such obligations. The General CECL Allowance on unfunded
commitments is recorded as a liability on our consolidated balance sheet within
accounts payable, accrued expenses and other liabilities.
The following schedule sets out our General CECL Allowance as of December 31,
2020 , and as of the date of adoption, January 1, 2020 ($ in thousands):
December 31, 2020 January 1, 2020(1)
Commercial mortgage loans, net $ 17,012 $ 12,149
Subordinate loans and other lending assets, net 21,090 15,630
Unfunded commitments(2) 3,365 3,088
Total General CECL Allowance $ 41,467 $ 30,867
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(1)As ofJanuary 1, 2020 , we adopted the CECL Standard through a cumulative-effect adjustment to accumulated deficit (2)The General CECL Allowance on unfunded commitments is recorded as a liability on our consolidated balance sheet within accounts payable, accrued expenses and other liabilities Refer to "Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net" for further information regarding CECL. Interest Income Recognition Interest income on commercial mortgage loans, subordinate loans and other lending assets is accrued based on the actual coupon rate adjusted for accretion of any purchase discounts, the amortization of any purchase premiums and the accretion of any deferred fees, in accordance with GAAP. Loans that are significantly past due may be placed on non-accrual if we determine it is probable that we will not collect all payments which are contractually due. When a loan is placed on non-accrual, interest is only recorded as interest income when it is received. Under certain circumstances, we may utilize the cost recovery method under which interest collected on a loan is a reduction to its amortized cost. The cost recovery method will no longer apply if collection of all principal and interest is reasonably assured. A loan may be placed back on accrual status if we determine it is probable that we will collect all payments which are contractually due. Hedging Instruments and Hedging Activities Consistent with maintaining our qualification as a REIT, in the normal course of business, we use a variety of derivative financial instruments to manage, or hedge, interest rate and foreign currency risk. Derivatives are used for hedging purposes rather than speculation. We determine their fair value and obtain quotations from a third party to facilitate the process in determining these fair values. If our hedging activities do not achieve the desired results, reported earnings may be adversely affected. GAAP requires an entity to recognize all derivatives as either assets or liabilities in the balance sheets and to measure those instruments at fair value. To the extent the instrument qualifies for hedge accounting, the fair value adjustments will be recorded as a component of other comprehensive income in stockholders' equity until the hedged item is recognized in earnings. Whenever we decide not to pursue hedge accounting, the fair value adjustments will be recorded in earnings immediately based on changes in the fair market value of those instruments. We have not designated any of our derivative instruments as hedges under GAAP and therefore, changes in the fair value of our derivatives are recorded directly in earnings. In connection with our senior secured term loan, inMay 2019 , we entered into an interest rate swap to fix LIBOR at 2.12% or an all-in interest rate of 4.87%. We used our interest rate swap to manage exposure to variable cash flows on our borrowings under our senior secured term loan. However during the second quarter of 2020, we terminated our interest rate swap due to a significant decrease in LIBOR and recognized a realized loss on the accompanying consolidated statement of operations. InJune 2020 , we entered into an interest rate cap, which we use to manage exposure to variable cash flows on our borrowings under our senior secured term loan by effectively limiting LIBOR from exceeding 0.75%. Unrealized gains or losses related to the interest rate swap and cap were recorded net under interest expense in our consolidated statement of operations. We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD. 46 -------------------------------------------------------------------------------- Recent Accounting Pronouncements For a description of our adoption of new accounting pronouncements and the impact thereof on our business, see "Note 2 - Summary of Significant Accounting Policies" to the accompanying consolidated financial statements.U.S. Federal Income Tax Legislation OnDecember 22, 2017 ,Congress enacted TCJA. The TCJA made major changes to the Internal Revenue Code, including the reduction of the tax rates applicable to individuals and subchapter C corporations, a reduction or elimination of certain deductions (including new limitations on the deductibility of interest expense), permitting immediate expensing of capital expenditures and significant changes in the taxation of earnings from non-U.S. sources. The effect of the significant changes made by the TCJA remains uncertain, and additional administrative guidance is still required in order to fully evaluate the effect of many provisions. In addition, final regulations implementing certain of these new rules have not yet been issued and additional changes or corrections may still be forthcoming. While we do not currently expect this reform to have a significant impact to our consolidated financial statements, stockholders are urged to consult with their tax advisors regarding the effects of the TCJA or other legislative, regulatory or administrative developments on an investment in our common stock. 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 ofDecember 31, 2020 , we had$1.1 billion of corporate debt and$3.4 billion of asset specific financings. We have no corporate debt maturities untilAugust 2022 . As ofDecember 31, 2020 , we had$325 million of cash on hand and$18.4 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: December 31, 2020 December 31, 2019 Debt to Equity Ratio (1) 1.8 1.4 ------- (1)Represents total debt less cash and loan proceeds held by servicer (recorded with Other Assets, see "Note 6 - Other Assets" for more information) to total stockholders' equity. 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 ofDecember 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 GBP and Euros ("EUR") converted to USD 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 certain conditions. The JPMorgan Facility enables us to elect to receive advances in USD, GBP, or EUR. Margin calls may occur any time at specified aggregate margin deficit thresholds. 47 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , we had$1.2 billion (including £83.1 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 DB 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 ofDecember 31, 2020 , we had$520.5 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 2021 . In addition, the Goldman Facility contains a two-year amortization period subsequent to theNovember 2021 maturity, which allows for the refinancing or pay down of assets under the facility. Margin calls may occur any time at specified margin deficit thresholds. As ofDecember 31, 2020 , we had$332.4 million of borrowings outstanding under the Goldman Facility secured by certain of our commercial mortgage loans. CS Facility - USD 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 ofDecember 31, 2020 , we had$369.2 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 (the "CS Facility - GBP"). During the third quarter of 2020, CS Facility - GBP the facility was repaid in full in connection with the sale of the underlying 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 "HSBC Facility - USD"). During the fourth quarter of 2020, the HSBC Facility - USD was repaid in full and the asset was moved to another facility. HSBC Facility - GBP InSeptember 2018 , through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement withHSBC Bank plc , which provided for a single asset financing (the "HSBC Facility - GBP"). The HSBC Facility - GBP matured and was repaid in full inJune 2020 in connection with the repayment of the underlying 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 HSBC Facility - EUR matures inJuly 2021 . Margin calls may occur any time at specified aggregate margin deficit thresholds. As ofDecember 31, 2020 , we had$163.8 million (€134.1 million assuming conversion into USD) of borrowings outstanding under the HSBC Facility - EUR secured by one commercial mortgage loan. 48 -------------------------------------------------------------------------------- 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. As ofDecember 31, 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 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 (the "Barclays Facility - GBP/EUR"). InJune 2020 , all assets previously financed pursuant to the Barclays Facility - GBP/EUR were refinanced under the Barclays Private Securitization. Barclays Private Securitization InJune 2020 , through a newly formed entity, we entered into a private securitization with Barclays Bank plc, of which Barclays Bank plc retained$782.0 million of senior notes. The Barclays Private Securitization finances the loans that were previously financed under the Barclays Facility - GBP/EUR. 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 as ofJune 30, 2020 . The Barclays Private Securitization eliminates daily margining provisions and grants us significant discretion to modify certain terms of the underlying collateral including waiving certain loan-level covenant breaches and deferring or waiving of debt service payments for up to 18 months. The securitization includes LTV based covenants with significant headroom to existing levels that are also subject to a six-month holiday throughDecember 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$18.5 million in USD) and agreed to increase the financing spreads by 0.25%. The table below provides the borrowings outstanding (on an as converted basis) and weighted-average fully-extended maturities by currency for the assets financed under the Barclays Private Securitization as ofDecember 31, 2020 ($ in thousands): Borrowings outstanding Fully-Extended Maturity(1) Total/Weighted-Average GBP$708,130 February 2024 Total/Weighted-Average EUR 149,598 November 2021(2) Total/Weighted-Average Securitization$857,728 September 2023
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(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 ofDecember 31, 2020 , we had$857.7 million (£518.0 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 afterMarch 31, 2017 (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 3.75:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or$30.0 million . Under these covenants, our General CECL Allowance is added back to our tangible net worth calculation. 49
-------------------------------------------------------------------------------- We were in compliance with the covenants under each of our secured debt arrangements atDecember 31, 2020 andDecember 31, 2019 . Senior Secured Term Loan InMay 2019 , we entered into the$500.0 million senior secured term loan. During the year endedDecember 31, 2020 , we repaid$5.0 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 principal balance as ofDecember 31, 2020 andDecember 31, 2019 was$492.5 million and$497.5 million , respectively. The senior secured term loan matures inMay 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. AtDecember 31, 2020 , the 2022 Notes had a carrying value of$340.4 million and an unamortized discount of$4.6 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. AtDecember 31, 2020 , the 2023 Notes had a carrying value of$225.3 million and an unamortized discount of$4.7 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. Other Potential Sources of Financing Our primary sources of cash currently consist of cash available, which was$325.5 million as ofDecember 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 or conduct additional public and private debt and equity offerings. As ofDecember 31, 2020 we also held$1.1 billion of unencumbered assets, consisting of$49.1 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. AtDecember 31, 2020 , our debt-to-equity ratio was 1.8 and our portfolio was comprised of$5.5 billion of commercial mortgage loans and$1.0 billion of subordinate loans and other lending assets. In order to achieve our return on equity, we generally finance our mortgage loans with 2.0 to 3.0 turns of leverage and generally do not finance our subordinate loan portfolio given built-in inherent structural leverage. Consequently, depending on our portfolio mix, our debt-to-equity ratio may exceed our previously disclosed thresholds. 50
-------------------------------------------------------------------------------- Investment Guidelines Our current investment guidelines, approved by our board of directors, are comprised of the following: •no investment will be made that would cause us to fail to qualify as a REIT forU.S. federal income tax purposes; •no investment will be made that would cause us to register as an investment company under the 1940 Act; •investments will be predominantly in our target assets; •no more than 20% of our cash equity (on a consolidated basis) will be invested in any single investment at the time of the investment; and •until appropriate investments can be identified, the Manager may invest the proceeds of any offering in interest bearing, short-term investments, including money market accounts and/or funds, that are consistent with our intention to qualify as a REIT. The board of directors must approve any change in or waiver to these investment guidelines. Contractual Obligations and Commitments Our contractual obligations including expected interest payments as ofDecember 31, 2020 are summarized as follows ($ 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)$ 526,080 $
625,526
$ 3,626,601 Senior secured term loan(2) 19,433 19,286 19,139 37,875 472,545
568,278
Convertible senior notes 28,750 368,075 240,302 - -
637,127
Unfunded loan commitments (3) 606,655 402,847 333,604 6,044 - 1,349,150 Total$ 1,180,918 $ 1,415,734 $ 2,177,501 $ 934,458 $ 472,545 $ 6,181,156 ------- (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 December 31, 2020 on the floating rate debt for interest payments due. (3) Based on fully extended maturity and 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 16 - Commitments and Contingencies" for further detail regarding unfunded loan commitments. Loan Commitments. As ofDecember 31, 2020 , we had$1.4 billion of unfunded loan commitments, comprised of$1.4 billion related to our commercial mortgage loan portfolio, and$36.5 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, 2021 . 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 51 -------------------------------------------------------------------------------- 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 2021 , 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 USD. 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 USD at various dates throughDecember 2024 . These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments. Refer to "Note 10- Derivatives, Net" to the accompanying consolidated financial statements for details regarding our forward currency contracts. Interest Rate Swap and Cap. InJune 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 consolidated financial statements for details regarding our interest rate cap. Off-balance Sheet Arrangements As ofDecember 31, 2020 , we have interests in two unconsolidated joint ventures, each of which owns underlying properties that secure one of our first mortgage loans, respectively. The unconsolidated joint ventures were deemed to be VIEs, of which we are not the primary beneficiary. Accordingly, the VIEs are not consolidated in our consolidated financial statements as ofDecember 31, 2020 . Our maximum exposure to loss from these commercial mortgage loans is limited to their carrying value, which as ofDecember 31, 2020 was$220.8 million . 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 ofDecember 31, 2020 , we had 6,770,393 shares of 8.00% Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock ("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. 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. InJune 2019 , we redeemed all 6,900,000 shares of 8.00% Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock"). 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 Distributable Earnings 52
-------------------------------------------------------------------------------- Beginning in the fourth quarter of 2020 to more appropriately reflect the principal purpose of the measure, "Operating Earnings" was relabeled "Distributable Earnings", a non-GAAP financial measure. The definition continues to be net income available to common stockholders, computed in accordance with GAAP, adjusted for (i) equity-based compensation expense (a portion of which may become cash-based upon final vesting and settlement of awards should the holder elect net share settlement to satisfy income tax withholding), (ii) any unrealized gains or losses or other non-cash items 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. Distributable Earnings may also be adjusted to exclude certain other non-cash items, as determined by the Manager and approved by a majority of our independent directors. For the years endedDecember 31, 2020 and 2019, our Distributable Earnings were$125.6 million , or$0.84 per share, and$268.4 million , or$1.80 per share, respectively. The weighted-average diluted shares outstanding used for Distributable Earnings per weighted-average diluted share has been adjusted from weighted-average diluted shares under GAAP to exclude shares issued from a potential conversion of the Notes. Consistent with the treatment of other unrealized adjustments to Distributable Earnings, these potentially issuable shares are excluded until a conversion occurs, which we believe is a useful presentation for investors. We believe that excluding shares issued in connection with a potential conversion of the Notes from our computation of Distributable Earnings per weighted average diluted share is useful to investors for various reasons, including the following: (i) conversion of 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 Distributable Earnings per weighted-average diluted share is consistent with how we treat other unrealized items in our computation of Distributable Earnings per weighted-average diluted share; and (iv) we believe that when evaluating our operating performance, investors and potential investors consider our Distributable Earnings relative to our actual distributions, which are based on shares outstanding and not shares that might be issued in the future. For the year endedDecember 31, 2020 , 28,533,271 weighted-average potentially issuable shares with respect to the Notes were excluded from weighted-average diluted shares outstanding because the effect was anti-dilutive (see "Note 18- Net Income per Share" for additional information). The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings ($ in thousands, except Price): Year ended December 31, 2020 2019 Weighted-Averages Shares Shares Weighted-average diluted shares - GAAP 148,004,385 175,794,896
Weighted-average potential shares issued under conversion of the Notes
- (28,913,665)
Unvested RSUs 2,030,467 1,836,210
Weighted-average diluted shares - Distributable Earnings 150,034,852 148,717,441
As a REIT, U.S. federal income tax law generally requires us to distribute
annually at least 90% of our REIT taxable income, without regard to the
deduction for dividends paid and excluding net capital gains, and that we pay
tax at regular corporate rates to the extent that we annually distribute less
than 100% of our net taxable income. Given these requirements and our belief
that dividends are generally one of the principal reasons stockholders invest in
a REIT, we generally intend over time to pay dividends to our stockholders in an
amount equal to our net taxable income, if and to the extent authorized by our
board of directors. Distributable Earnings is a key factor considered by the
board of directors in setting the dividend and as such we believe Distributable
Earnings is useful to investors.
As discussed in "Note 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 our consolidated statement of operations. We have not had an
interest rate swap on our consolidated balance sheet since this termination. 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 seven
of our commercial real estate loans, two restructurings, one payoff of a
previously impaired loan, and one foreclosure.
We also believe it is useful to our investors to present Distributable Earnings
prior to realized loss on investments and realized loss on interest rate swap to
reflect our operating results because (i) our operating results are primarily
comprised of earning interest income on our investments net of borrowing and
administrative costs, which comprise our ongoing operations
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and (ii) it has been a useful factor related to our dividend per share because
it is one of the considerations when a dividend is determined. We believe that
our investors use Distributable Earnings and Distributable Earnings prior to
realized loss on investments and interest rate swap, or a comparable
supplemental performance measure, to evaluate and compare the performance of our
company and our peers.
A significant limitation associated with Distributable Earnings as a measure of
our financial performance over any period is that it excludes unrealized gains
(losses) from investments. In addition, our presentation of Distributable
Earnings may not be comparable to similarly-titled measures of other companies,
that use different calculations. As a result, Distributable Earnings should not
be considered as a substitute for our GAAP net income as a measure of our
financial performance or any measure of our liquidity under GAAP. Distributable
Earnings are reduced for realized losses on loans which include losses that
management believes are near certain to be realized.
The table below summarizes the reconciliation from net income available to
common stockholders to Distributable Earnings and Distributable Earnings prior
to realized loss on investments and interest rate swap ($ in thousands):
Year Ended
2020 2019 (1)
Net income available to common stockholders $ 4,837 $ 211,649
Adjustments:
Equity-based compensation expense 16,815 15,897 Unrealized (gain) loss on interest rate swap (14,470) 14,470 Loss on foreign currency forwards 9,743 14,425 Foreign currency gain, net (26,916) (19,818) Unrealized gain on interest rate cap (134) - Realized gains relating to interest income on foreign 1,945 1,904 currency hedges, net Realized gains relating to forward points on foreign 5,088 6,789 currency hedges, net Amortization of the convertible senior notes related to 3,084 3,105 equity reclassification Provision for loan losses and impairments 125,600 20,000 Realized loss on investments 47,632 12,513 Realized loss on interest rate swap 53,851 - Total adjustments: 222,238 69,285
Distributable Earnings prior to realized loss on $ 227,075
$ 280,934
investments and interest rate swap
Realized loss on investments (47,632) (12,513) Realized loss on interest rate swap (53,851) - Distributable Earnings $ 125,592 $ 268,421 Diluted Distributable Earnings per share prior to $ 1.51 $ 1.89
realized loss on investments and interest rate swap Diluted Distributable Earnings per share of common stock $
0.84 $ 1.80
Weighted-average diluted shares - Distributable Earnings 150,034,852
148,717,441
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(1) The presentation for the comparative period has been reorganized to conform with the 2020 presentation of Distributable Earnings. This reorganization has no impact on Distributable Earnings.
Book Value Per Share
The table below calculates our book value per share ($ in thousands, except per share data):
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December 31, 2020 December 31, 2019
Stockholders' Equity $ 2,270,529 $ 2,629,975
Series B Preferred Stock (Liquidation Preference) (169,260) (169,260) Common Stockholders' Equity $ 2,101,269 $ 2,460,715 Common Stock 139,295,867 153,537,296 Book value per share $ 15.08 $ 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
Repurchase of common stock 0.62
Net unrealized gain on currency hedges 0.10
Decrease in fair value on interest rate swap (0.27)
Vesting and delivery of RSUs (0.07)
Realized loss on sales (0.02)
Other 0.01
Book value per share at
16.40
Specific CECL Allowance $ (1.02)
Book value per share at
$ 15.38
General CECL Allowance $ (0.30)
Book value per share at December 31, 2020 $ 15.08
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, analyzing our compliance with financial covenants related to
tangible net worth and debt-to-equity under our secured debt arrangements and
senior secured term loan, which permit us to add the General CECL Allowance to
our GAAP stockholders' equity. Given that our lenders consider book value per
share prior to the General CECL Allowance as an important metric related to our
debt covenants, we believe disclosing book value per share prior to the General
CECL Allowance is important to investors such that they have the same
visibility.
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