Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                    
Commission File Number: 001-34452
__________________________________ 
Apollo Commercial Real Estate Finance, Inc.
(Exact name of registrant as specified in its charter)
__________________________________ 
Maryland
 
27-0467113
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
Apollo Commercial Real Estate Finance, Inc.
c/o Apollo Global Management, LLC
9 West 57th Street, 43rd Floor,
New York, New York 10019
(Address of registrant’s principal executive offices)
(212) 515–3200
(Registrant’s telephone number, including area code)
__________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 






If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
As of July 31, 2017, there were 105,438,209 shares, par value $0.01, of the registrant’s common stock issued and outstanding.
 

Table of Contents

Table of Contents
 
 
Page
 
 

3
Table of Contents

Part I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands—except share and per share data)
 
June 30, 2017
 
December 31, 2016
Assets:
 
 
 
Cash and cash equivalents
$
214,016

 
$
200,996

Restricted cash
57,665

 
62,457

Securities, at estimated fair value
254,484

 
331,076

Securities, held-to-maturity
—

 
146,352

Commercial mortgage loans, held for investment, net
2,037,971

 
1,641,856

Subordinate loans, held for investment, net
1,240,363

 
1,051,236

Investment in unconsolidated joint venture
—

 
22,103

Derivative assets, net
—

 
5,906

Interest receivable
21,998

 
19,281

Other assets, net
40

 
1,714

Total Assets
$
3,826,537

 
$
3,482,977

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Borrowings under repurchase agreements (net of deferred financing costs of $9,345 and $6,763 in 2017 and 2016, respectively)
$
1,330,909

 
$
1,139,803

Convertible senior notes, net
250,949

 
249,994

Participations sold
—

 
84,979

Derivative liabilities, net
4,435

 
—

Accounts payable, accrued expenses and other liabilities
12,346

 
17,681

Payable to related party
7,742

 
7,015

Dividends payable
57,464

 
51,278

Total Liabilities
1,663,845

 
1,550,750

Commitments and Contingencies (see Note 14)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A preferred stock, 3,450,000 shares issued and outstanding ($86,250 aggregate liquidation preference) in 2017 and 2016
35

 
35

Series B preferred stock, 8,000,000 shares issued and outstanding ($200,000 aggregate liquidation preference) in 2017 and 2016
80

 
80

Series C preferred stock, 6,900,000 shares issued and outstanding ($172,500 aggregate liquidation preference) in 2017 and 2016
69

 
69

Common stock, $0.01 par value, 450,000,000 shares authorized, 105,437,919 and 91,422,676 shares issued and outstanding in 2017 and 2016, respectively
1,054

 
914

Additional paid-in-capital
2,236,694

 
1,983,010

Accumulated deficit
(75,240
)
 
(48,070
)
Accumulated other comprehensive loss
—

 
(3,811
)
Total Stockholders’ Equity
2,162,692

 
1,932,227

Total Liabilities and Stockholders’ Equity
$
3,826,537

 
$
3,482,977


See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Operations (Unaudited)
(in thousands—except share and per share data)
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2017
2016
 
2017
2016
Net interest income:
 
 
 
 
 
Interest income from securities
$
3,366

$
7,607

 
$
6,622

$
15,656

Interest income from securities, held to maturity
1,334

2,826

 
4,132

5,722

Interest income from commercial mortgage loans
37,089

24,140

 
71,487

45,267

Interest income from subordinate loans
39,640

28,067

 
74,030

57,442

Interest expense
(19,205
)
(15,722
)
 
(36,235
)
(30,364
)
Net interest income
62,224

46,918

 
120,036

93,723

Operating expenses:
 
 
 
 
 
General and administrative expenses (includes $3,461 and $7,252 of equity based compensation in 2017 and $1,938 and $3,606 of equity compensation in 2016, respectively)
(5,200
)
(4,922
)
 
(10,958
)
(13,104
)
Management fees to related party
(7,742
)
(5,242
)
 
(15,175
)
(10,471
)
Total operating expenses
(12,942
)
(10,164
)
 
(26,133
)
(23,575
)
Income (loss) from unconsolidated joint venture
(3,305
)
59

 
(2,847
)
127

Other income
244

22

 
352

25

Provision for loan losses and impairments
(5,000
)
(15,000
)
 
(5,000
)
(15,000
)
Realized (loss) on sale of assets
—

—

 
(1,042
)
—

Unrealized (loss) on securities
(4,510
)
(11,728
)
 
(1,658
)
(26,802
)
Foreign currency gain (loss)
6,913

(13,082
)
 
10,085

(17,557
)
Gain (loss) on derivative instruments (includes unrealized gains (losses) of ($7,435) and ($10,324) in 2017 and $13,408 and $12,026 in 2016, respectively)
(7,389
)
13,313

 
(10,434
)
18,015

Net income
36,235

10,338

 
83,359

28,956

Preferred dividends
$
(9,310
)
$
(5,860
)
 
$
(18,620
)
$
(11,675
)
Net income available to common stockholders
26,925

4,478

 
64,739

17,281

Basic and diluted net income per share of common stock
$
0.28

$
0.06

 
$
0.68

$
0.24

Basic weighted average shares of common stock outstanding
95,428,134

67,402,311

 
93,530,831

67,393,751

Diluted weighted average shares of common stock outstanding
96,796,289

68,374,557

 
94,907,762

68,351,137

Dividend declared per share of common stock
$
0.46

$
0.46

 
$
0.92

$
0.92



See notes to unaudited condensed consolidated financial statements.
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Table of Contents

Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Comprehensive Income (Unaudited)
(in thousands)
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income available to common stockholders
$
26,925

 
$
4,478

 
$
64,739

 
$
17,281

Foreign currency translation adjustment
3,560

 
(492
)
 
3,811

 
426

Comprehensive income
$
30,485

 
$
3,986

 
$
68,550

 
$
17,707



See notes to unaudited condensed consolidated financial statements.
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Table of Contents

Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(in thousands—except share data)
 
Preferred Stock
 
Common Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Shares
 
Par
 
Shares
 
Par
 
 
 
 
Total
Balance at January 1, 2017
18,350,000

 
$
184

 
91,422,676

 
$
914

 
$
1,983,010

 
$
(48,070
)
 
$
(3,811
)
 
$
1,932,227

Capital increase related to Equity Incentive Plan
—

 
—

 
215,243

 
2

 
4,922

 
—

 
—

 
4,924

Issuance of restricted common stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of common stock
—

 
—

 
13,800,000

 
138

 
248,882

 
—

 
—

 
249,020

Offering costs
—

 
—

 
—

 
—

 
(120
)
 
—

 
—

 
(120
)
Net income
—

 
—

 
—

 
—

 
—

 
83,359

 
—

 
83,359

Change in other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
3,811

 
3,811

Dividends on common stock
—

 
—

 
—

 
—

 
—

 
(91,910
)
 
—

 
(91,910
)
Dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
(18,619
)
 
—

 
(18,619
)
Balance at June 30, 2017
18,350,000

 
$
184

 
105,437,919

 
$
1,054

 
$
2,236,694

 
$
(75,240
)
 
$
—

 
$
2,162,692




See notes to unaudited condensed consolidated financial statements.
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Table of Contents

Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
 
Six months ended June 30, 2017
 
Six months ended June 30, 2016
Cash flows provided by operating activities:
 
 
 
Net income
$
83,359

 
$
28,956

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of discount/premium and PIK interest
(7,934
)
 
(4,445
)
Amortization of deferred financing costs
2,761

 
2,038

Equity-based compensation
4,921

 
1,258

Unrealized loss on securities
1,658

 
26,802

Provision for loan losses and impairment
5,000

 
15,000

Income (loss) from unconsolidated joint venture
2,259

 
(127
)
Foreign currency (gain) loss
(10,014
)
 
17,559

Realized (gain) loss on derivative instruments
110

 
(5,989
)
Unrealized loss on derivative instruments
10,433

 
(12,026
)
Realized loss on sale of security
1,042

 
—

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable, less purchased interest
(16,717
)
 
(16,888
)
Other assets
(1,017
)
 
(9,117
)
Accounts payable, accrued expenses and other liabilities
(5,127
)
 
2,124

Payable to related party
728

 
(55
)
Net cash provided by operating activities
71,462

 
45,090

Cash flows used in investing activities:
 
 
 
Funding of commercial mortgage loans, net of fees received
(395,177
)
 
(313,607
)
Funding of subordinate loans, net of fees received
(222,296
)
 
(40,920
)
Funding of unconsolidated joint venture
(726
)
 
(362
)
Funding of other assets
(1,379
)
 
—

Proceeds (payments) on settlements of derivative instruments
(201
)
 
5,989

Increase in collateral held related to derivative contracts
(22
)
 
13,210

Proceeds from sale of securities
69,248

 
—

Proceeds from sale of investment in unconsolidated joint venture
24,498

 
—

Payments received on securities
1,930

 
14,545

Payments received on securities, held-to-maturity
146,530

 
1,500

Payments received on commercial mortgage loans
10,452

 
36,044

Payments received on subordinate loans
58,740

 
26,538

Payments received on other assets
—

 
51

Net cash used in investing activities
(308,403
)
 
(257,012
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
249,021

 
—

Payment of offering costs
(359
)
 
(45
)
Proceeds from repurchase agreement borrowings
464,153

 
380,458

Repayments of repurchase agreement borrowings
(272,878
)
 
(80,137
)
Repayments of participations sold
(85,081
)
 
(1,013
)
Payment of deferred financing costs
(5,343
)
 
(2,846
)
Dividends on common stock
(85,724
)
 
(63,183
)
Dividends on preferred stock
(18,620
)
 
(12,786
)
Net cash provided by financing activities
245,169

 
220,448

Net increase in cash, cash equivalents, and restricted cash
8,228

 
8,527

Cash, cash equivalents, and restricted cash, beginning of period
263,453

 
97,542

Cash, cash equivalents, and restricted cash, end of period
$
271,681

 
$
106,069

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
11,916

 
$
26,991

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Dividend declared, not yet paid
$
57,464

 
$
36,427

Offering costs payable
$
41

 
$
220


See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance Inc. and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands—except share and per share data)
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, referred to throughout this report as the “Company,” “ARI,” “we,” “us” and “our”) is a corporation that has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities (“CMBS”) and other commercial real estate-related debt investments in the United States. These asset classes are referred to as the Company’s target assets.
The Company, organized in Maryland on June 29, 2009, commenced operations on September 29, 2009 and is externally managed and advised by ACREFI Management, LLC (the “Manager”), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries, “Apollo”).
The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain its tax qualification as a REIT, the Company is required to distribute at least 90% of its taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include the Company’s accounts and those of its consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s most significant estimates include the fair value of financial instruments, loan loss reserves and impairment. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. The Company's results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year or any other future period.
On August 31, 2016, the Company, pursuant to the terms and conditions of the Agreement and Plan of Merger, dated February 26, 2016 (as amended, the “AMTG Merger Agreement”) acquired Apollo Residential Mortgage, Inc. (“AMTG”). AMTG merged with and into the Company (the “AMTG Merger”) with the Company continuing as the surviving entity. As a result, all operations of AMTG and its former subsidiaries are consolidated with the operations of the Company. As of December 31, 2016 all assets acquired from AMTG were sold.
Under Financial Accounting Standards Board (the “FASB”) ASC Topic 805, “Business Combinations”, or ASC 805, the acquirer in a business combination must recognize, with certain exceptions, the fair values of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. We applied the provisions of ASC 805 in accounting for the Company's acquisition of AMTG. In doing so, we recorded provisional amounts for certain items as of the date of the acquisition, including the fair value of certain assets and liabilities. During the measurement period, a period which shall not exceed one year, the Company retrospectively adjusted the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of such date that, if known, would have affected the measurement of the amounts recognized. See further discussion in "Note 17 - Business Combination."
The Company currently operates in one business segment.


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Recent Accounting Pronouncements
In May 2014, the FASB issued guidance which broadly amends the accounting guidance for revenue recognition. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company's condensed consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” or ASU 2014-15. ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The Company adopted this guidance and determined that there was no material impact on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” or ASU 2016-09. ASU 2016-09 requires all income tax effects of share-based payment awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares for tax withholding purposes than is permitted under current guidance without triggering liability accounting. Finally, the guidance allows a policy election to account for employee forfeitures as they occur. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for any entity in any interim or annual period. The Company adopted this guidance and determined there was no material impact on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326),” or ASU 2016-13. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  The guidance will replace the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently assessing the impact of the guidance will have on the Company's condensed consolidated financial statements when adopted.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” or ASU 2016-15. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance addresses the classification of various transactions including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, distributions received from equity method investments, beneficial interests in securitization transactions, and others. The Company adopted this guidance in the third quarter of 2016 and determined that there was no material impact on the Company's condensed consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” or ASU 2016-18. ASU 2016-18 is intended to clarify how entities present restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash and cash equivalents and restricted cash in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash and cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and is to be applied retrospectively. The Company early adopted ASU 2016-18 on June 30, 2017, which changes the Company's condensed consolidated statement of cash flows and related disclosures for all periods presented. The following is a reconciliation of the Company's cash, cash equivalents, and restricted cash to the total presented in the Company's condensed consolidated statement of cash flows for the six months ended June 30, 2017 and June 30, 2016:

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Six months ended June 30,
 
2017
 
2016
Cash and cash equivalents
$
214,016

 
$
38,631

Restricted cash
57,665

 
67,438

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
271,681

 
$
106,069



Note 3 – Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair values. Market based or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy as noted in ASC 820, Fair Value Measurements and Disclosures, are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While the Company anticipates that its valuation methods will be appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
The estimated fair value of the Company's CMBS portfolio is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. The Company believes that these dealers who are usually market makers in these securities utilize various valuation techniques and inputs including, but not limited to, observable trades, discounted cash flow, market yield and duration to price these securities. Broker quotes are only indicative of fair value and may not necessarily represent what the Company would receive in an actual trade for the applicable instrument. Management performs additional analysis on prices received based on broker quotes to validate the prices and adjustments are made as deemed necessary by management to capture current market information. As of December 31, 2016 the estimated fair values of the Company’s securities were based on observable inputs and were classified as Level II in the fair value hierarchy. Based on illiquidity in the market for these securities as of June 30, 2017, the Manager determined that broker quotes lack observable inputs and thus a transfer into Level III in the fair value hierarchy was necessary. In accordance with GAAP, the Company elects the fair value option for these securities at the date of purchase in order to allow the Company to measure these securities at fair value with the change in estimated fair value included as a component of earnings in order to reflect the performance of the investment in a timely manner.
The estimated fair values of the Company’s derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts (or payments) that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The fair values of foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange rate.  The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries.  The Company’s derivative instruments are classified as Level II in the fair value hierarchy.

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The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of June 30, 2017 and December 31, 2016:
 
 
Fair Value as of June 30, 2017
 
Fair Value as of December 31, 2016
 
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
CMBS (Fair Value Option)
$
—

 
$
—

 
$
254,484

 
$
254,484

 
$
—

 
$
331,076

 
$
—

 
$
331,076

Derivative instruments, net
—

 
(4,435
)
 
—

 
(4,435
)
 
—

 
5,906

 
—

 
5,906

Total
$
—

 
$
(4,435
)
 
$
254,484

 
$
250,049

 
$
—

 
$
336,982

 
$
—

 
$
336,982


The following is a reconciliation of investments for which Level III inputs were used in determining fair value:
 
 
CMBS
Fair value at December 31, 2016
 
$
—

Transfers into Level III (1)
 
254,484

Fair value at June 30, 2017
 
$
254,484


(1)     Transfers into Level III of the fair value hierarchy represent investments that experienced an insignificant level of market activity during the period and were thus valued in the absence of observable inputs. Transfers into Level III of the fair value hierarchy are recorded at the end of the reporting period. Based on illiquidity in the market for these securities as of June 30, 2017, the Manager determined that broker quotes, which are the primary valuation technique used to mark these investments at fair value, lack observable inputs and thus a transfer into Level III was necessary.

The following table summarizes information about significant unobservable inputs used in the fair value measurement of Level III investments as of June 30, 2017. There were no Level III investments as of December 31, 2016:

 
 
 
 
 
 
Unobservable Input
Asset Category
 
Fair Value
 
Primary Valuation Technique
 
Input
 
Range
CMBS
 
254,484

 
Broker quotes
 
Price (1)
 
63 - 100

(1)    A significant increase (decrease) in the unobservable input in isolation would result in significantly higher (lower) fair value measurement.

Note 4 – Securities
At June 30, 2017, all of the Company's CMBS (Fair Value Option) were pledged to secure borrowings under the Company’s master repurchase agreements with UBS AG, London Branch ("UBS") (the "UBS Facility") and Deutsche Bank AG ("DB") (the "DB Facility"). See "Note 7 - Borrowings Under Repurchase Agreements" for further information regarding these facilities.
CMBS (Held-to-Maturity) represents a loan the Company closed during May 2014 that was subsequently contributed to a securitization during August 2014. During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. The property consists of 442 hotel rooms, 114 timeshare units, two casinos and approximately 131,500 square feet of retail space. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation. The Company evaluated this transaction and concluded that due to its continuing involvement, the transaction should not be accounted for as a sale. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation. During May 2017, the loan and associated CMBS (Held-to-Maturity) were fully repaid and the related Securities, held-to-maturity and participation sold line items were removed from the Company's condensed consolidated balance sheet.

12
Table of Contents

The amortized cost and estimated fair value of the Company’s debt securities at June 30, 2017 are summarized as follows:
 
Security Description
Face
Amount
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated Fair
Value
CMBS (Fair Value Option)
$
300,064

 
$
293,312

 
$
147

 
$
(38,975
)
 
$
254,484

During the six months ended June 30, 2017, the Company sold securities resulting in a net realized loss of $1,042.
The amortized cost and estimated fair value of the Company’s debt securities at December 31, 2016 are summarized as follows:
 
Security Description
Face
Amount
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated
Fair
Value
CMBS (Fair Value Option)
$
375,861

 
$
368,247

 
$
292

 
$
(37,463
)
 
$
331,076

CMBS (Held-to-Maturity)
146,530

 
146,352

 
—

 
—

 
146,352

Total
$
522,391

 
$
514,599

 
$
292

 
$
(37,463
)
 
$
477,428

During the six months ended June 30, 2016, the Company did not sell any securities.
The overall statistics for the Company’s CMBS (Fair Value Option) calculated on a weighted average basis as of June 30, 2017 and December 31, 2016 are as follows:
 
 
June 30, 2017
 
December 31, 2016
Credit Ratings *
B-NR

 
B+-NR

Coupon
5.8
%
 
5.9
%
Yield
4.6
%
 
6.0
%
Weighted Average Life
2.3 years

 
2.5 years

 
*
Ratings per Fitch Ratings, Moody’s Investors Service or Standard & Poor's.
The percentage vintage, property type and location of the collateral securing the Company's CMBS (Fair Value Option) calculated on a weighted average basis as of June 30, 2017 and December 31, 2016 are as follows:
 
Vintage
June 30, 2017
 
December 31, 2016
2005
0.9
%
 
2.0
%
2006
15.4

 
12.1

2007
68.0

 
73.5

2008
15.7

 
12.4

Total
100.0
%
 
100.0
%
 
Property Type
June 30, 2017
 
December 31, 2016
Office
35.8
%
 
34.6
%
Retail
30.6

 
29.0

Multifamily
12.4

 
12.4

Other (1)
21.2

 
24.0

Total
100.0
%
 
100.0
%
 (1)    No other individual category comprises more than 10% of the total.
 

13
Table of Contents

Location
June 30, 2017
 
December 31, 2016
South Atlantic
26.9
%
 
23.8
%
Middle Atlantic
16.5

 
16.7

Pacific
14.3

 
15.3

East North Central
14.4

 
10.8

Other (1)
27.9

 
33.4

Total
100.0
%
 
100.0
%
 (1)    No other individual category comprises more than 10% of the total.
Note 5 – Loans, Held for Investment
The Company’s loans receivable are comprised of the following:

Loan Type
 
June 30, 2017
 
December 31, 2016
Commercial mortgage loans, held for investment, net
 
$
2,037,971

 
$
1,641,856

Subordinate loans, held for investment, net
 
1,240,363

 
1,051,236

Total loans, held for investment, net
 
$
3,278,334

 
$
2,693,092

 
Activity relating to our loans, held for investment portfolio was as follows:
 
 
Principal Balance
 
Deferred Fees/Other Items (1)
 
Provision for Loan Loss (2)
 
Carrying Value
December 31, 2016
 
2,720,344

 
(12,252
)
 
(15,000
)
 
2,693,092

Loan fundings
 
624,602

 
—

 
—

 
624,602

Loan repayments
 
(69,192
)
 
—

 
—

 
(69,192
)
Unrealized gain on foreign currency translation
 
12,376

 
—

 
—

 
12,376

Provision for loan loss (2)
 
—

 
—

 
(1,981
)
 
(1,981
)
Deferred fees and other items (1)
 
—

 
(7,141
)
 
—

 
(7,141
)
PIK interest, amortization of fees and other items (1)
 
14,000

 
12,578

 
—

 
26,578

June 30, 2017
 
3,302,130

 
(6,815
)
 
(16,981
)
 
3,278,334


(1)
Other items primarily consist of purchase discounts or premiums, exit fees, and deferred origination expenses.
(2)
In addition to the $1,981 provision for loan loss, the Company recorded an impairment of $3,019 against a related investment previously recorded under other assets on the Company's condensed consolidated balance sheet.

The following table details overall statistics for our loan portfolio:

 
 
June 30, 2017
 
December 31, 2016
Number of loans
 
52

 
45

Principal balance
 
$
3,302,130

 
$
2,720,344

Carrying value
 
$
3,278,334

 
$
2,693,092

Unfunded loan commitments (1)
 
$
119,813

 
$
170,365

Weighted-average cash coupon (2)
 
8.55
%
 
8.88
%
 
(1)
Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
(2)
For floating rate loans, assumes one-month LIBOR of 1.22% and 0.77%, as of June 30, 2017 and December 31, 2016, respectively.

The tables below detail the property type and geographic distribution of the properties securing the loans in our portfolio:


14
Table of Contents

 
 
June 30, 2017
 
December 31, 2016
Property Type
 
Carrying
Value
 
% of
Portfolio
 
Carrying
Value
 
% of
Portfolio
Hotel
 
$702,447
 
21.4%
 
$408,428
 
15.2%
Residential - for sale
 
547,113
 
16.7%
 
469,997
 
17.5%
Urban Retail Predevelopment
 
583,241
 
17.8%
 
491,187
 
18.2%
Office
 
257,291
 
7.8%
 
255,031
 
9.5%
Residential Rental
 
290,152
 
8.9%
 
309,243
 
11.5%
Mixed Use
 
253,649
 
7.7%
 
134,797
 
4.9%
Retail Center
 
240,902
 
7.3%
 
209,401
 
7.8%
Healthcare
 
172,872
 
5.3%
 
170,549
 
6.3%
Industrial
 
157,040
 
4.8%
 
156,809
 
5.8%
Other
 
73,627
 
2.3%
 
87,650
 
3.3%
Total
 
$3,278,334
 
100%
 
$2,693,092
 
100%

 
 
June 30, 2017
 
December 31, 2016
Geographic Location
 
Carrying
Value
 
% of
Portfolio
 
Carrying
Value
 
% of
Portfolio
New York City
 
$1,255,668
 
38.3%
 
$1,034,303
 
38.4%
Midwest
 
498,767
 
15.2%
 
405,992
 
15.1%
Southeast
 
596,664
 
18.2%
 
332,276
 
12.3%
United Kingdom
 
252,881
 
7.7%
 
244,756
 
9.1%
West
 
226,977
 
6.9%
 
219,664
 
8.2%
Mid Atlantic
 
198,501
 
6.1%
 
263,717
 
9.8%
Southwest
 
25,000
 
0.8%
 
54,614
 
2%
Northeast
 
181,987
 
5.5%
 
137,770
 
5.1%
Other International
 
41,889
 
1.3%
 
—
 
—%
Total
 
$3,278,334
 
100%
 
$2,693,092
 
100%

The Company evaluates its loans for possible impairment on a quarterly basis. The Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations 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. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss 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. An allowance for loan loss is established when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan.

During the second quarter of 2017, the Company recorded a loan loss provision of $1,981 on a commercial mortgage loan secured by fully-built, for-sale residential condominium units located in Bethesda, MD. In addition to the $1,981 provision for loan loss, the Company recorded an impairment of $3,019 on a related investment previously recorded under other assets on the Company's condensed consolidated balance sheet. The loan loss provision and impairment was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable

15
Table of Contents

inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of $678 dollars per square foot across properties and 15%, respectively. Effective April 1, 2017, the Company has ceased accruing all interest associated with the loan and accounts for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance).

During 2016, the Company recorded a loan loss provision of $10,000 on a multifamily commercial mortgage loan and $5,000 on a multifamily subordinate loan secured by a multifamily property located in Williston, ND. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were 11% and 10%, respectively. The Company has ceased accruing payment in kind ("PIK") interest associated with the loan and recognizing interest income upon receipt of cash.

As of June 30, 2017, the aggregate loan loss provision was $11,981 and $5,000 for commercial mortgage loans and subordinate loans, respectively. As of December 31, 2016, the aggregate loan loss provision was $10,000 and $5,000 for commercial mortgage loans and subordinate loans, respectively.

Note 6 – Unconsolidated Joint Venture
In September 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ L.P. (“Champ LP”) following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in Bremer Kreditbank AG ("BKB"). The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 (or $39,477). The Company committed to invest up to approximately €38,000 (or $50,000). Champ LP together with certain unaffiliated third party investors, in aggregate, own 100% of BKB.
BKB specializes in corporate banking and financial services for medium-sized German companies. It also provides professional real estate financing, acquisition finance, institutional asset management and private wealth management services for German high-net-worth individuals.
The Company evaluated Champ LP to determine if it met the definition of a variable interest entity ("VIE") in accordance with ASC 810, Consolidation. The Company determined that Champ LP met the definition of a VIE, however, the Company was not the primary beneficiary; therefore, the Company was not required to consolidate the assets and liabilities of the partnership in accordance with the authoritative guidance. Additionally, Champ LP is an Investment Company under GAAP, and is therefore reflected at fair value. The Company's investment in Champ LP was accounted for as an equity method investment and therefore the Company recorded its proportionate share of the net asset value in accordance with ASC 323, Investments - Equity Method and Joint Ventures.
In January 2015, the Company funded an additional investment of €3,331 (or $3,929) related to its investment in Champ LP. In February 2015, the Company sold approximately 48% of its ownership interest in Champ LP at cost to an investment fund managed by Apollo for €16,314 (or $20,794) (of which $2,614 related to foreign exchange losses which were previously included in accumulated other comprehensive loss). In June 2016, the Company transferred €427 of its unfunded commitment to Apollo, reducing its unfunded commitment to Champ LP to €2,802 (or $2,985).
In May 2017, the Company sold its remaining ownership interest in Champ LP to unaffiliated third parties for €21,792 or $24,498, resulting in a loss of $3,305. As of June 30, 2017, the Company had no interest in Champ LP.







16
Table of Contents


Note 7 – Borrowings Under Repurchase Agreements
At June 30, 2017 and December 31, 2016, the Company’s borrowings had the following outstanding balances, maturities and weighted average interest rates:
 
 
June 30, 2017
 
 
December 31, 2016
Lender
Maximum Amount of Borrowings
 
Borrowings Outstanding
 
Maturity (1)
 
Weighted
Average
Rate (2)
 
 
Maximum Amount of Borrowings
 
Borrowings Outstanding
 
Maturity (1)
 
Weighted
Average
Rate (2)
JPMorgan Facility (3)
$
1,118,000

 
$
794,404

 
March 2020
 
L+2.26%

 
 
$
943,000

 
$
657,452

 
January 2019
 
L+2.25%

DB Repurchase Facility (4)
563,813

 
263,980

 
March 2020
 
L+2.56%

 
 
300,000

 
137,355

 
September 2019
 
L+2.66%

Goldman Loan
37,700

 
37,700

 
April 2019
 
L+3.50%

 
 
N/A

 
40,657

 
April 2019
 
L+3.50%

Sub-total
1,719,513

 
1,096,084

 
 
 
L+2.37%

 
 


 
835,464

 
 
  
L+2.38%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UBS Facility
133,899

 
100,798

 
September 2018
 
2.77
%
 
 
N/A

 
133,899

 
September 2018
 
2.79
%
DB Facility (5)
300,000

 
143,372

 
April 2018
 
3.59
%
 
 
N/A

 
177,203

 
April 2018
 
3.63
%
Sub-total
433,899

 
244,170

 
 
 
3.25
%
 
 


 
311,102

 
 
 
3.27
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: deferred financing costs
N/A

 
(9,345
)
 
 
 
N/A

 
 
N/A

 
(6,763
)
 
 
 
N/A

Total / Weighted Average
$
2,153,412

 
$
1,330,909

  
 
 
3.53
%
 
 


 
$
1,139,803

 
 
  
3.18
%

(1) Maturity date assumes all extensions are exercised.
(2) Assumes one-month LIBOR was 1.22% and 0.77% as of June 30, 2017 and December 31, 2016, respectively.
(3) As of June 30, 2017, the Company's master repurchase agreement with JPMorgan Chase Bank, National Association
(the "JPMorgan Facility") provided for maximum total borrowings comprised of the $975,000 repurchase facility and a $143,000 asset specific financing.
(4) As of June 30, 2017, the Company's master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch (the "DB Repurchase Facility") provided for maximum total borrowings comprised of the $450,000 and £45,000 repurchase facility and a $55,200 asset specific financing.
(5) Advances under the DB Facility accrue interest at a per annum pricing rate based on the rate implied by the fixed rate bid under a fixed for floating interest rate swap for the receipt of payments indexed to three-month U.S. dollar LIBOR, plus a financing spread ranging from 1.80% to 2.32% based on the rating of the collateral pledged.

At June 30, 2017, the Company’s borrowings had the following remaining maturities:
 
 
Less than
1 year
 
1 to 3
years
 
3 to 5
years
 
More than
5 years
 
Total
JPMorgan Facility
$
436,546

 
$
357,858

 
$
—

 
$
—

 
$
794,404

DB Repurchase Facility
58,613

 
205,367

 
—

 
—

 
263,980

Goldman Loan
—

 
37,700

 
—

 
—

 
37,700

UBS Facility
—

 
100,798

 
—

 
—

 
100,798

DB Facility
143,372

 
—

 
—

 
—

 
143,372

Total
$
638,531

 
$
701,723

 
$
—

 
$
—

 
$
1,340,254

At June 30, 2017, the Company’s collateralized financings were comprised of borrowings outstanding under the JPMorgan Facility, the DB Repurchase Facility, the Company's repurchase agreement with Goldman Sachs Bank USA (the "Goldman Loan"), the UBS Facility and the DB Facility. The table below summarizes the outstanding balances at June 30, 2017, as well as the maximum and average month-end balances for the six months ended June 30, 2017 for the Company's borrowings under repurchase agreements.
 

17
Table of Contents

 
 
 
For the six months ended June 30, 2017
 
Balance at June 30, 2017
 
Maximum Month-End
Balance
 
Average Month-End
Balance
JPMorgan Facility borrowings
$
794,404

 
$
894,031

 
$
832,685

DB Repurchase Facility borrowings
263,980

 
367,010

 
297,148

Goldman Loan borrowings
37,700

 
39,590

 
38,707

UBS Facility borrowings
100,798

 
133,899

 
111,832

DB Facility borrowings
143,372

 
177,203

 
149,453

Total
$
1,340,254

 
 
 
 
JPMorgan Facility
On March 31, 2017, the Company, through two indirect wholly owned subsidiaries, amended and restated the JPMorgan Facility, which currently provides for maximum total borrowings of $1,118,000, comprised of the $975,000 repurchase facility and a $143,000 asset specific financing, and a term expiring in March 2019 plus a one-year extension option available at the Company's option, subject to certain conditions. Amounts borrowed under the JPMorgan Facility bear interest at spreads ranging from 2.25% to 4.75% over one-month LIBOR. Margin calls may occur any time the aggregate repurchase price exceeds the agreed upon advance rate multiplied by the market value of the assets by more than $250. The Company has agreed to provide a limited guarantee of the obligations of its indirect wholly-owned subsidiaries under the JPMorgan Facility.
As of June 30, 2017, the Company had $794,404 of borrowings outstanding under the JPMorgan Facility secured by certain of the Company's commercial mortgage and subordinate loans.
DB Repurchase Facility
On September 29, 2016, the Company, through indirect wholly-owned subsidiaries, entered into the DB Repurchase Facility which provides for maximum total borrowings of $563,813 comprised of the $450,000 and £45,000 repurchase facility and a $55,200 asset specific financing in connection with financing first mortgage loans secured by real estate. The DB Repurchase Facility matures in March 2018 with two one-year extension options available at the Company's option, subject to certain conditions. Amounts borrowed under the DB Repurchase Facility bear interest at spreads ranging from 2.10% to 3.00% over one-month LIBOR. Margin calls may occur any time at specified aggregate margin deficit thresholds. The Company has agreed to provide a guarantee of the obligations of its indirect wholly-owned subsidiaries under this facility.
As of June 30, 2017, the Company had $263,980 borrowings outstanding under the DB Repurchase Facility secured by certain of the Company's commercial mortgage loans.
Goldman Loan
On January 26, 2015, the Company, through an indirect wholly-owned subsidiary, entered into the Goldman Loan. The Goldman Loan provides for a purchase price of $37,700 (as of June 30, 2017) and a repurchase date of the earliest of: (1) April 30, 2019, (2) an early repurchase date as a result of repayment or sale of the purchased loan, or (3) an accelerated repurchase date as a result of certain events of default. Subject to the terms and conditions thereof, the Goldman Loan provides for the purchase and sale of certain participation interests in a mortgage loan secured by single-family and condominium properties. Prior to an event of default, amounts borrowed under the Goldman Loan bear interest at a spread of 3.5% plus one-month LIBOR. In addition, the Goldman Loan provides that margin calls may occur during the continuance of certain credit events if the market value of the mortgaged properties drop below an agreed upon percentage. The Goldman Loan contains affirmative and negative covenants and provisions regarding events of default that are normal and customary for similar repurchase agreements. The Company has agreed to the following restrictive covenants, among others: (1) continuing to operate in a manner that allows the Company to qualify as a REIT and (2) financial covenants, including (A) a minimum consolidated tangible net worth covenant ($750,000), (B) maximum total indebtedness to consolidated tangible net worth (3:1), (C) minimum liquidity ($15,000), (D) minimum sum of (i) cash liquidity and (ii) “near cash liquidity” (5.0% of the Company’s total recourse indebtedness), (E) minimum net income (one U.S. dollar during any four consecutive fiscal quarters) and (F) a minimum ratio of EBITDA to interest expense (1.5 to 1.0). The Company has also agreed to provide a guarantee of the obligations under the Goldman Loan.
As of June 30, 2017, the Company had $37,700 of borrowings outstanding under the Goldman Loan secured by one commercial mortgage loan held by the Company.
UBS Facility
In September 2013, the Company, through an indirect wholly-owned subsidiary, entered into the UBS Facility, which currently provides that the Company may borrow up to $133,899 in order to finance the acquisition of CMBS. The UBS Facility matures in September 2017, with a one-year extension available at the Company's option, subject to certain conditions.

18
Table of Contents

Advances under the UBS Facility accrue interest at a per annum pricing rate equal to a spread of 1.55% per annum over the rate implied by the fixed rate bid under a fixed-for-floating interest rate swap for the receipt of payments indexed to six-month U.S. dollar LIBOR. The Company posted agreed-upon initial margin in cash and is required to post additional margin based on the fair value of the underlying collateral. The margin posted is classified as restricted cash on the Company's condensed consolidated balance sheets. Additionally, depending on the utilization rate of the facility, a portion of the undrawn amount may be subject to non-use fees. The UBS Facility contains customary terms and conditions for facilities of this type and financial covenants to be met by the Company, including a minimum net asset value covenant (which shall not be less than an amount equal to $500,000) and a maximum total debt to consolidated tangible net worth covenant (3:1). The Company has agreed to provide a full guarantee of the obligations of its indirect wholly-owned subsidiary under the UBS Facility.
As of June 30, 2017, the Company had $100,798 of borrowings outstanding under the UBS Facility secured by CMBS held by the Company.
DB Facility
In April 2014, the Company, through an indirect wholly-owned subsidiary, entered into the DB Facility, which currently provides that the Company may borrow up to $300,000 in order to finance the acquisition of CMBS. The DB Facility matures in April 2018. Advances under the DB Facility accrue interest at a per annum pricing rate based on the rate implied by the fixed rate bid under a fixed for floating interest rate swap for the receipt of payments indexed to three-month U.S. dollar LIBOR, plus a financing spread ranging from 1.80% to 2.32% based on the rating of the collateral pledged.
The Company posted agreed-upon initial margin in cash and is required to post additional margin based on the fair value of the underlying collateral. The margin posted is classified as restricted cash on the Company's condensed consolidated balance sheets.
Additionally, the undrawn amount is subject to a 1.8% non-use fee. The DB Facility contains customary terms and conditions for facilities of this type and financial covenants to be met by the Company, including minimum shareholder's equity of 50% of the gross capital proceeds of its initial public offering and any subsequent public or private offerings.
As of June 30, 2017, the Company had $143,372 of borrowings outstanding under the DB Facility secured by CMBS held by the Company.
The Company was in compliance with the financial covenants under its borrowing agreements at June 30, 2017 and December 31, 2016.
Note 8 – Convertible Senior Notes
On March 17, 2014, the Company issued $143,750 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "March 2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $139,037. At June 30, 2017, the March 2019 Notes had a carrying value of $142,007 and an unamortized discount of $1,743.
On August 18, 2014, the Company issued an additional $111,000 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "August 2019 Notes," and together with the March 2019 Notes, the "2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $109,615. At June 30, 2017, the August 2019 Notes had a carrying value of $108,942 and an unamortized discount of $2,058.
The following table summarizes the terms of the 2019 Notes.
 
Principal Amount
Coupon Rate
Effective Rate (1)
Conversion Rate (2)
Maturity Date
Remaining Period of Amortization
March 2019 Notes
$143,750
5.50%
6.25%
57.1177
3/15/2019
1.71 years
August 2019 Notes
$111,000
5.50%
6.50%
57.1177
3/15/2019
1.71 years
(1)
Effective rate includes the effect of the adjustment for the conversion option (see footnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital.
(2)
The Company has the option to settle any conversions in cash, shares of common stock or a combination thereof.  The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of 2019 Notes converted, and includes adjustments relating to cash dividend payments made by the Company to stockholders that have been deferred and carried-forward in accordance with, and are not yet required to be made pursuant to, the terms of the applicable supplemental indenture.

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Table of Contents

The Company may not redeem the 2019 Notes prior to maturity. The sale price of the Company's common stock on June 30, 2017 of $18.55 was greater than the per share conversion price of the 2019 Notes. The Company has the intent and ability to settle the 2019 Notes in cash and, as a result, the 2019 Notes did not have any impact on the Company's diluted earnings per share.
In accordance with ASC 470 the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) is to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. GAAP requires that the initial proceeds from the sale of the 2019 Notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Company at such time. The Company measured the fair value of the debt components of the 2019 Notes as of their issuance date based on effective interest rates.  As a result, the Company attributed approximately $11,445 of the proceeds to the equity component of the 2019 Notes, which represents the excess proceeds received over the fair value of the liability component of the 2019 Notes at the date of issuance. The equity component of the 2019 Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of June 30, 2017. The resulting debt discount is being amortized over the period during which the 2019 Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the 2019 Notes will increase in subsequent reporting periods through the maturity date as the 2019 Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately $3,503 and $7,006 for the three and six months ended June 30, 2017, respectively. The aggregate contractual interest expense was approximately $3,503 and $7,006 for the three and six months ended June 30, 2016, respectively. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately $913 and $1,814 for the three and six months ended June 30, 2017, respectively. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately $883 and $1,759 for the three and six months ended June 30, 2016, respectively.

Note 9 – Participations Sold
Participations sold represent the interests in loans the Company originated and subsequently partially sold. The Company presents the participations sold as both assets and non-recourse liabilities because the participation does not qualify as a sale according to ASC 860, Transfers and Servicing. The income earned on the participation sold is recorded as interest income and an identical amount is recorded as interest expense on the Company's condensed consolidated statements of operations.
During January 2015, the Company closed a £34,519 (or $51,996) floating-rate mezzanine loan secured by a portfolio of 44 senior housing facilities located throughout the United Kingdom. During February 2015, the Company closed an additional £20,000 (or $30,672) and participated that balance to an investment fund affiliated with Apollo. During December 2016, the Company qualified for sale accounting with respect to the previous participation sold that was converted to a discrete financial instrument, and therefore deconsolidated the participation sold.
During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation in the loan. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation and classified it as CMBS (Held-to-Maturity) on its condensed consolidated financial statements. During May 2017, the loan and associated CMBS (Held-to-Maturity) were fully repaid and the related Securities, held-to-maturity and participation sold line items were removed from the Company's condensed consolidated balance sheet.
Note 10 – Derivative Instruments
The Company uses forward currency contracts to economically hedge interest and principal payments due under its loans denominated in currencies other than U.S. dollars.
The Company has entered into a series of forward contracts to sell an amount of foreign currency (British pound ("GBP")) for an agreed upon amount of U.S. dollars at various dates through March 2018. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by the Company related to foreign denominated loan investments.

The following table summarizes the Company's non-designated foreign exchange (“Fx”) forwards as of June 30, 2017:

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Table of Contents

Type of Derivative
June 30, 2017
 
Number of Contracts
 
Aggregate Notional Amount
 
Notional Currency
 
Maturity
Fx Contracts - GBP
9
 
156,458
 
GBP
 
July 2017- March 2018

The following table summarizes the Company's non-designated Fx forwards as of December 31, 2016:
Type of Derivative
December 31, 2016
 
Number of Contracts
 
Aggregate Notional Amount
 
Notional Currency
 
Maturity
Fx Contracts - GBP
11
 
148,310
 
GBP
 
January 2017- December 2017
The Company has not designated any of its derivative instruments as hedges as defined in ASC 815, Derivatives and Hedging and, therefore, changes in the fair value of the Company's derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to the Company’s derivative instruments for the three and six months ended June 30, 2017 and 2016. 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
Location of Loss Recognized in Income
2017
 
2016
 
2017
 
2016
Forward currency contract
Gain (loss) on derivative instruments - unrealized
$
(7,438
)
 
$
13,426

 
$
(10,321
)
 
$
12,116

Forward currency contract
Gain (loss) on derivative instruments - realized
46

 
(95
)
 
(110
)
 
5,989

Interest rate caps (1)
Gain (loss) on derivative instruments - unrealized
3

 
(18
)
 
(3
)
 
(90
)
Sub-total
 
$
(7,389
)
 
$
13,313

 
$
(10,434
)
 
$
18,015

 
 
 
 
 
 
 
 
 
Forward currency contract
Income (loss) from unconsolidated joint venture
(587
)
 
—

 
(587
)
 
—

Total
 
$
(7,976
)
 
$
13,313

 
$
(11,021
)
 
$
18,015


(1)
With a notional amount of $42,830 and $48,120 at June 30, 2017 and 2016, respectively.

The following table summarizes the gross asset and liability amounts related to the Company's derivative instruments at June 30, 2017 and December 31, 2016.

 
June 30, 2017
 
December 31, 2016
 
Gross
Amount of
Recognized
Liabilities
 
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
 
Net Amounts
of Liabilities
Presented in the Condensed
Consolidated Balance Sheet
 
Gross
Amount of
Recognized
Assets
 
Gross
Amounts
Offset in the
Consolidated Balance Sheet
 
Net Amounts
of Assets
Presented in
the Consolidated Balance Sheet
Interest rate caps
$
—

 
$
3

 
$
3

 
$
23

 
$
—

 
$
23

Forward currency contract
(4,691
)
 
253

 
(4,438
)
 
5,883

 
—

 
5,883

Total derivative instruments
$
(4,691
)
 
$
256

 
$
(4,435
)
 
$
5,906

 
$
—

 
$
5,906


Note 11 – Related Party Transactions
AMTG Merger
As fully described in "Note 17- Business Combination", in August 2016, the Company acquired AMTG, an entity managed by an affiliate of Apollo.
Management Agreement

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In connection with the Company’s initial public offering in September 2009, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors.
Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The current term of the Management Agreement expires on September 29, 2018 and is automatically renewed for successive one-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by the Company’s independent directors in February 2017, which included a discussion of the Manager’s performance and the level of the management fees thereunder, the Company determined not to seek termination of the Management Agreement.
For the three and six months ended June 30, 2017, the Company incurred approximately $7,742 and $15,175, respectively, in base management fees under the Management Agreement. For the three and six months ended June 30, 2016, respectively, the Company incurred approximately $5,242 and $10,471 in base management fees under the Management Agreement. In addition to the base management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company or for certain services provided by the Manager to the Company. For the three and six months ended June 30, 2017, the Company paid expenses totaling $76 and $194, respectively, related to reimbursements for certain expenses paid by the Manager on behalf of the Company under the Management Agreement. For the three and six months ended June 30, 2016, the Company paid expenses totaling $44 and $842, respectively, related to reimbursements for certain expenses paid by the Manager on behalf of the Company under the Management Agreement. Expenses incurred by the Manager and reimbursed by the Company are reflected in the respective condensed consolidated statement of operations expense category or the condensed consolidated balance sheet based on the nature of the item.
Included in payable to related party on the condensed consolidated balance sheet at June 30, 2017 and December 31, 2016 are approximately $7,742 and $7,015, respectively, for base management fees incurred but not yet paid under the Management Agreement.

Unconsolidated Joint Venture
In September 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ LP following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in BKB. The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 (or $39,477). The Company committed to invest up to approximately €38,000 (or $50,000).
In January 2015, the Company funded an additional investment of €3,331 (or $3,929) related to its investment in Champ LP. In February 2015, the Company sold approximately 48% of its ownership interest in Champ LP at cost to an account managed by Apollo for approximately €16,314 (or $20,794). In June 2016, the Company transferred €427 of its unfunded commitment to Apollo, reducing its unfunded commitment to Champ LP to €2,802 (or $2,985). 
In May 2017, the Company sold its remaining ownership interest in Champ LP, to unaffiliated third parties for €21,792 or $24,498, resulting in a loss of $3,305. As of June 30, 2017, the Company had no interest in Champ LP.

Loans receivable
In June, 2017, the Company increased its outstanding loan commitment through the acquisition of an additional $25,000 of interests in an existing pre-development mezzanine loan from a fund managed by an affiliate of the Manager, increasing the Company's total outstanding loan commitment to $100,000. The pre-development mezzanine loan is for the construction of a residential condominium building in New York, New York and is part of a $300,000 mezzanine loan.  


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Note 12 – Share-Based Payments
On September 23, 2009, the Company’s board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (as amended from time to time, the “LTIP”). The LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7.5% of the issued and outstanding shares of the Company’s common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of the Company’s board of directors (the “Compensation Committee”) and all grants under the LTIP must be approved by the Compensation Committee.
The Company recognized stock-based compensation expense of $3,461 and $7,252, respectively, for the three and six months ended June 30, 2017, related to restricted stock and RSU vesting. The Company recognized stock-based compensation expense of $1,938 and $3,606, respectively, for the three and six months ended June 30, 2016, related to restricted common stock and RSU vesting. The following table summarizes the activity related to restricted common stock and RSUs during the six months ended June 30, 2017:
 
 
Type
Date
 
Restricted Stock
 
RSUs
 
Estimated Fair Value
on Grant Date
 
Initial Vesting
 
Final Vesting
Outstanding at December 31, 2016
 
150,110

 
1,703,775

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancelled upon delivery
January 2017
 
—

 
(332,349
)
 
n/a

 
n/a
 
n/a
 
Vested
January 2017
 
(5,161
)
 
—

 
n/a

 
n/a
 
n/a
 
Forfeiture
March 2017
 
—

 
(1,971
)
 
n/a

 
n/a
 
n/a
 
Vested
April 2017
 
(5,164
)
 
 
 
n/a

 
n/a
 
n/a
 
Grant
April 2017
 
14,674

 
—

 
$
275

 
April 2018
 
April 2020
 
Canceled upon delivery
May 2017
 
—

 
(1,971
)
 
n/a

 
n/a
 
n/a
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at June 30, 2017
 
154,459

 
1,367,484

 
 
 
 
 
 


Below is a summary of restricted stock and RSU vesting dates as of June 30, 2017.

Vesting Date
Restricted Stock Vesting
 
RSU Vesting
 
Total Awards
July 2017
4,004

 
544

 
4,548

October 2017
3,997

 
—

 
3,997

December 2017
53,923

 
601,218

 
655,141

January 2018
2,749

 
—

 
2,749

April 2018
7,645

 
—

 
7,645

June 2018
—

 
544

 
544

July 2018
1,420

 
—

 
1,420

October 2018
1,424

 
—

 
1,424

December 2018
41,670

 
484,066

 
525,736

January 2019
1,419

 
—

 
1,419

April 2019
6,314

 
—

 
6,314

December 2019
25,000

 
281,112

 
306,112

April 2020
4,894

 
—

 
4,894

 
154,459

 
1,367,484

 
1,521,943


At June 30, 2017, the Company had unrecognized compensation expense of approximately $2,063 and $19,937, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.


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Table of Contents

RSU Deliveries
During the six months ended June 30, 2017, the Company delivered 200,569 shares of common stock for 334,320 vested RSUs. The Company allows RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid-in-capital on the condensed consolidated statement of changes in stockholders' equity. The adjustment was $2,330 for the six months ended June 30, 2017, and is included as a reduction of capital increase related to the Company's equity incentive plan in the condensed consolidated statement of changes in stockholders’ equity.
Note 13 – Stockholders’ Equity
The Company's authorized capital stock consists of 450,000,000 shares of common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of June 30, 2017, 105,437,919 shares of common stock
were issued and outstanding and there were 3,450,000 shares of 8.625% Series A Cumulative Redeemable Perpetual Preferred
Stock ("Series A Preferred Stock") issued and outstanding, 8,000,000 shares of 8.00% Fixed-to-Floating Series B Cumulative
Redeemable Perpetual Preferred Stock ("Series B Preferred Stock") issued and outstanding and 6,900,000 shares of 8.00%
Fixed-to-Floating Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") issued and
outstanding.
Dividends. During 2017, the Company declared the following dividends on its common stock:
 
Declaration Date
Record Date
Payment Date
Per Share
March 14, 2017
March 31, 2017
April 17, 2017
$0.4600
June 15, 2017
June 30, 2017
July 17, 2017
$0.4600

During 2017, the Company declared the following dividends on its Series A Preferred Stock:
 
Declaration Date
Record Date
Payment Date
Per Share
March 14, 2017
March 31, 2017
April 17, 2017
$0.5391
June 15, 2017
June 30, 2017
July 17, 2017
$0.5391
During 2017, the Company declared the following dividends on its Series B Preferred Stock:
 
Declaration Date
Record Date
Payment Date
Per Share
March 14, 2017
March 31, 2017
April 17, 2017
$0.5000
June 15, 2017
June 30, 2017
July 17, 2017
$0.5000

During 2017, the Company declared the following dividends on its Series C Preferred Stock:
 
Declaration Date
Record Date
Payment Date
Per Share
March 14, 2017
March 31, 2017
April 28, 2017
$0.5000
June 15, 2017
June 30, 2017
July 31, 2017
$0.5000

Common Stock Offerings. During the second quarter of 2017, the Company completed a follow-on public offering of 13,800,000 shares of its common stock, at a price of $18.05 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $248,900 after deducting estimated offering expenses.

During the fourth quarter of 2016, the Company completed a follow-on public offering of 10,500,000 shares of its common stock, at a price of $16.97 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $177,796 after deducting estimated offering expenses.

AMTG Merger. In addition, in 2016 the Company issued common and preferred equity in connection with the AMTG Merger as described in "Note 17 - Business Combination."


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Table of Contents

Note 14 – Commitments and Contingencies

Legal Proceedings. From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business.
After the announcement of the execution of the AMTG Merger Agreement, two putative class action lawsuits challenging the proposed First Merger (as defined in the AMTG Merger Agreement), captioned Aivasian v. Apollo Residential Mortgage, Inc., et al., No. 24-C-16-001532 and Wiener v. Apollo Residential Mortgage, Inc., et al., No. 24-C-16-001837, were filed in the Circuit Court for Baltimore City, (the “Court”). A putative class and derivative lawsuit was later filed in the Court captioned Crago v. Apollo Residential Mortgage, Inc., No. 24-C-16-002610. Following a hearing on May 6, 2016, the Court entered orders among other things, consolidating the three actions under the caption In Re Apollo Residential Mortgage, Inc. Shareholder Litigation, Case No.: 24-C-16-002610. The plaintiffs have designated the Crago complaint as the operative complaint. The operative complaint includes both direct and derivative claims, names as defendants AMTG, the board of directors of AMTG (the “AMTG Board”), ARI, Arrow Merger Sub Inc., Apollo and Athene Holding Ltd. and alleges, among other things, that the members of the AMTG Board breached their fiduciary duties to the AMTG stockholders and that the other corporate defendants aided and abetted such fiduciary breaches. The operative complaint further alleges, among other things, that the proposed First Merger involves inadequate consideration, was the result of an inadequate and conflicted sales process, and includes unreasonable deal protection devices that purportedly preclude competing offers. It also alleges that the transactions with Athene Holding Ltd. are unfair and that the registration statement on Form S-4 filed with the SEC on April 6, 2016 contains materially misleading disclosures and omits certain material information. The operative complaint seeks, among other things, certification of the proposed class, declaratory relief, preliminary and permanent injunctive relief, including enjoining or rescinding the First Merger, unspecified damages, and an award of other unspecified attorneys’ and other fees and costs. On May 6, 2016, counsel for the plaintiffs filed with the Court a stipulation seeking the appointment of interim co-lead counsel, which stipulation was approved by the Court on June 9, 2016. Defendants’ motions to dismiss have been fully briefed, and oral argument was held on December 8, 2016.
On January 4, 2017, the United States Department of Justice served a Request for Information and Documents (the “Request”) on the Company, in connection with a preliminary investigation into certain aspects of the Company's former residential real estate portfolio, which the Company acquired in connection with the AMTG Merger and subsequently sold in 2016. The Request seeks a range of information in connection with the residential real estate portfolio, including, among other things, information concerning policies, procedures, and practices related to advertising, marketing, identifying, or acquiring residential properties for sale or rent, and various data for all rental and sales contracts executed since January 1, 2012. The Company is cooperating with the Department of Justice and fully complying with the Request.

Loan Commitments. As described in "Note 5 - Loans, Held for Investment", at June 30, 2017, the Company had $119,813 of unfunded commitments related to its commercial mortgage loan portfolio and subordinate loan portfolio.
Note 15 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the condensed consolidated balance sheet at June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Cash and cash equivalents
$
214,016

 
$
214,016

 
$
200,996

 
$
200,996

Restricted cash
57,665

 
57,665

 
62,457

 
62,457

Securities, held-to-maturity
—

 
—

 
146,352

 
146,352

Commercial mortgage loans
2,037,971

 
2,034,082

 
1,641,856

 
1,648,896

Subordinate loans
1,240,363

 
1,244,548

 
1,051,236

 
1,060,882

Borrowings under repurchase agreements
(1,340,254
)
 
(1,338,368
)
 
(1,146,566
)
 
(1,146,807
)
Convertible senior notes, net
(250,949
)
 
(274,262
)
 
(249,994
)
 
(268,124
)
Participations sold
—

 
—

 
(84,979
)
 
(85,072
)
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and cash

25
Table of Contents

equivalents, restricted cash and convertible senior notes, net are measured using observable Level I inputs as defined in "Note 3 - Fair Value Disclosure." Estimates of fair value for all other financial instruments in the table above are measured using significant estimates, or unobservable Level III inputs as defined in "Note 3 - Fair Value Disclosure."
Note 16 – Net Income per Share
ASC 260, Earnings per share, requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.
The table below presents basic and diluted net (loss) income per share of common stock using the two-class method for the three and six months ended June 30, 2017 and June 30, 2016:

 
For the three  
  months ended 
 June 30,
 
For the six 
 months ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
36,235

 
$
10,338

 
$
83,359

 
$
28,956

Preferred dividends
(9,310
)
 
(5,860
)
 
(18,620
)
 
(11,675
)
Net income available to common stockholders
26,925

 
4,478

 
64,739

 
17,281

Dividends declared on common stock
(48,501
)
 
(31,005
)
 
(90,647
)
 
(62,002
)
Dividends on participating securities
(630
)
 
(437
)
 
(1,259
)
 
(885
)
Net (loss) attributable to common stockholders
$
(22,206
)
 
$
(26,964
)
 
$
(27,167
)
 
$
(45,606
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares of common stock outstanding
95,428,134

 
67,402,311

 
93,530,831

 
67,393,751

Diluted weighted average shares of common stock outstanding
96,796,289

 
68,374,557

 
94,907,762

 
68,351,137

Basic and diluted net income per weighted average share of common stock
 
 
 
 
 
 
 
Distributable Earnings
$
0.51

 
$
0.46

 
$
0.97

 
$
0.92

Undistributed (loss)
$
(0.23
)
 
$
(0.40
)
 
$
(0.29
)
 
$
(0.68
)
Basic and diluted net income per share of common stock
$
0.28

 
$
0.06

 
$
0.68

 
$
0.24

For the three and six months ended June 30, 2017, 1,368,155 and 1,376,930 unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive. For the three and six months ended June 30, 2016, 972,246 and 957,386 unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.

Note 17 – Business Combination

On August 31, 2016, the Company, pursuant to the terms and conditions of the AMTG Merger Agreement, acquired AMTG for consideration of common stock and preferred stock, as applicable and cash. AMTG merged with and into the Company with the Company continuing as the surviving entity. As a result, all operations of AMTG and its former subsidiaries are consolidated with the operations of the Company. In connection with financing the AMTG Merger, on August 31, 2016, the Company entered into a Loan Agreement (the “Athene Loan Agreement”) with Athene USA Corporation, a subsidiary of Athene Holding Ltd., as lender (“Athene USA”), pursuant to which the Company borrowed $175,000 in order to fund a portion

26
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of the Company’s obligations under the AMTG Merger Agreement. The Athene Loan Agreement was repaid in full and terminated on September 1, 2016. On August 31, 2016, pursuant to an Asset Purchase and Sale Agreement, dated February 26, 2016 (as amended, the “Asset Purchase Agreement”) by and among Athene Annuity & Life Assurance Company and Athene Annuity and Life Company (collectively, “Athene Annuity”) and the Company, the Company sold primarily non-agency residential mortgage backed securities previously held by AMTG to Athene Annuity for cash consideration of approximately $1,100,000. Proceeds from the sale were used to repay approximately $804,000 in associated financing, $175,000 to satisfy the Athene Loan Agreement and for general corporate purposes. All of the assets acquired from AMTG were sold during 2016.
The AMTG Merger was accounted for as a business combination in accordance with ASC 805, Business Combinations.  The transactions pursuant to the Athene Loan Agreement and the Asset Purchase Agreement were contemporaneous with and contingent on the AMTG Merger, therefore the Company recorded the transaction net. The Company was designated as the accounting acquirer. The total purchase price has been allocated based upon management’s estimates of fair value. The difference between the fair value of net assets of AMTG and the consideration was recorded as a bargain purchase gain.
The bargain purchase gain was computed as follows:
Consideration Paid:
$ (in thousands)


Cash
$
220,159


Common stock issued
218,397


Preferred stock assumed
172,500


Total consideration paid
$
611,056

 
 
 
Assets acquired:



Cash and cash equivalents
399,402


Restricted cash
10,552


Investments
1,491,484


Other assets
34,822

 
 
 
Liabilities assumed:



Borrowings under repurchase agreements
(1,254,518
)

Other liabilities
(30,665
)
 
 
 

Net assets acquired
651,077






Bargain purchase gain
$
40,021

The Company incurred $11,350 of transaction-related expenses related to the AMTG Merger during 2016. Transaction-related expenses are comprised primarily of transaction fees and AMTG Merger costs, including legal, finance, consulting, professional fees and other third-party costs.
The following table provides the pro forma consolidated operational data as if the AMTG Merger had occurred on January 1, 2016:

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 Three Months Ended
 
 Six Months Ended
(in thousands, except per share data)
June 30, 2016
 
June 30, 2016
Total revenue
$
94,257

 
$
190,565

Net income attributable to common shareholders
24,778

 
24,546


 
 
 
Common shares outstanding at June 30, 2016
67,402,311

 
67,402,311

Net income per common share, basic and diluted
$
0.36

 
$
0.36

The pro forma consolidated operational data is based on assumptions and estimates considered appropriate by our management; however, these pro forma results are not necessarily indicative of the results of operations that would have been obtained had the AMTG Merger occurred at the beginning of the period presented, nor do they purport to represent the consolidated results of operations for future periods. The pro forma consolidated operational data does not include the impact of any synergies that may be achieved from the AMTG Merger or any strategies that management may consider in order to continue to efficiently manage operations.

 Note 18 – Subsequent Events

On July 3, 2017, the Company announced that it will redeem all 3,450,000 issued and outstanding shares of the Series A Preferred Stock on August 2, 2017. The Series A Preferred Stockholders are entitled to the redemption price of $25.00 plus unpaid dividends of $0.1079 per share.

In July 2017, the Company received approximately $60,000 in proceeds from sales and principal pay downs from two CMBS.

Subsequent to the end of the second quarter, the Company committed capital to the following commercial real estate debt investments:

•
$125,000 and £60,000 of first mortgage loans ($125,000 and £32,190 of which were funded);
•
$37,500 of subordinate loans ($37,500 of which were funded); and
•
$2,900 for previously closed loans.

The Company received approximately $50,400 from loan repayments.



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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in thousands—except share and per share data)
FORWARD-LOOKING INFORMATION
The Company makes 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, the Company claims the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses 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: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets or the general economy or the demand for commercial real estate loans; the Company’s business and investment strategy; the Company’s operating results; actions and initiatives of the U.S. government and governments outside of the United States and changes to government policies and the execution and impact of these actions, initiatives and policies; the state of the economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including repurchase agreement financing and securitizations; the availability of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the scope of the Company’s target assets; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in interest rates and the market value of the Company’s target assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which hedging strategies may or may not protect the Company from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting, legal or regulatory issues or guidance and similar matters; the Company’s continued maintenance of its qualification as a REIT for U.S. federal income tax purposes; the Company’s continued exclusion from registration under the Investment Company Act of 1940, as amended; the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; the Company’s present and potential future competition; and unexpected costs or unexpected liabilities, including those related to litigation, including litigation arising from the AMTG Merger and related transactions.
The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. See “Item 1A - Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company is a Maryland corporation that has elected to be taxed as a REIT for U.S. federal income tax purposes. The Company primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, CMBS and other commercial real estate-related debt investments. These asset classes are referred to as the Company’s target assets.
The Company is 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 $197 billion as of March 31, 2017.
The Manager is led by an experienced team of senior real estate professionals who have significant expertise in underwriting and structuring commercial real estate financing transactions. The Company benefits from Apollo’s global

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infrastructure and operating platform, through which the Company is able to source, evaluate and manage potential investments in the Company’s target assets.

Market Overview

Based on the current market dynamics, including significant upcoming commercial real estate debt maturities, we believe there remain compelling opportunities for the Company to invest capital in its target assets at attractive risk adjusted returns. The Company will continue to focus on underlying real estate value, and transactions that benefit from the Company’s ability to execute complex and sophisticated transactions.

Although the Company does not participate in the conduit lending market, the Company believes that an active CMBS market can be viewed as an indicator of the active commercial real estate lending markets. New-issue CMBS issuance continued in 2016 with total issuance in the United States of approximately $76 billion. Despite the robust issuance in 2016, current volumes of CMBS issuance are still moderate relative to the peak of the market, which saw more than $229 billion in CMBS issuance in 2007, creating significant opportunities for non-CMBS lenders such as the Company.

On February 3, 2017, President Trump signed an executive order for a broad review of federal regulation of the U.S. financial system by the Secretary of the Treasury, in consultation with the heads of the member agencies of the Financial Stability Oversight Council, a panel comprising top U.S. financial regulators, to be reported within 120 days of the day of the order. While the outcome is uncertain, there have been several indications that the new administration will seek to deregulate the U.S. financial industry, including by altering the Dodd-Frank Act, which may, among other things, decrease the restrictions on banks and other financial institutions and allow them to compete with us for investment opportunities that were previously not available to them.

The Company believes the challenges faced by conduit lenders and the general uncertainty around value and pricing could create attractive risk adjusted investment opportunities for the Company. As a result, the Company expects to continue to see opportunities to originate mezzanine and first mortgage financings in transactions which benefit from the Company’s ability to source, structure and execute complex transactions.

Critical Accounting Policies
A summary of the Company’s accounting policies is set forth in its Annual Report on Form 10-K for the year ended December 31, 2016 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 the Company's critical accounting policies described in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2017.
Financial Condition and Results of Operations
All non-U.S. dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.
Investments
The following table sets forth certain information regarding the Company’s investments at June 30, 2017:
 
Description
 
Current Principal Balance
 
Amortized
Cost
 
Weighted Average Yield (2)
 
Debt
 
Cost of Funds
 
Equity at
cost
 
Current
Weighted
Average
Underwritten IRR (1)(2)
 
Fully- Levered
Weighted
Average
Underwritten IRR (1)(2)(3)
First mortgages
 
$
2,054,855

 
$
2,037,971

 
7.3
%
 
$
1,096,084

 
3.6
%