APOLLO COMMERCIAL REAL ESTATE FINANCE, INC. FORWARD-LOOKING INFORMATION We make forward-looking statements herein and will make forward-looking statements in future filings with theSEC , press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: the macro- and micro-economic impact of the COVID-19 pandemic; the severity and duration of the COVID-19 pandemic; actions taken by governmental authorities to contain the COVID-19 pandemic or treat its impact; the efficacy of the vaccines or other remedies and the speed of their distribution and administration; the impact of the COVID-19 pandemic on our financial condition, results of operations, liquidity and capital resources; market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; the demand for commercial real estate loans; our business and investment strategy; our operating results; actions and initiatives of theU.S. government and governments outside ofthe United States , changes to government policies and the execution and impact of these actions, initiatives and policies; the state of the economy generally or in specific geographic regions; economic trends and economic recoveries; our ability to obtain and maintain financing arrangements, including secured debt arrangements and securitizations; the timing and amount of expected future fundings of unfunded commitments; the availability of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which we participate; changes in the value of our assets; the scope of our target assets; interest rate mismatches between our target assets and any borrowings used to fund such assets; changes in interest rates and the market value of our target assets; changes in prepayment rates on our target assets; effects of hedging instruments on our target assets; rates of default or decreased recovery rates on our target assets; the degree to which hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting, legal or regulatory issues or guidance and similar matters; our continued maintenance of our qualification as a REIT forU.S. federal income tax purposes; our continued exclusion from registration under the Investment Company Act of 1940, as amended (the "1940 Act"); the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our present and potential future competition; and unexpected costs or unexpected liabilities, including those related to litigation. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. See "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q and our Annual Report. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with theSEC , could cause our actual results to differ materially from those included in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Overview We are aMaryland corporation and have elected to be taxed as a REIT forU.S. federal income tax purposes. We primarily originate, acquire, invest in and manage performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets. We are externally managed and advised by the Manager, an indirect subsidiary of Apollo, a high-growth, global alternative asset manager with assets under management of approximately$471.8 billion as ofJune 30, 2021 . The Manager is led by an experienced team of senior real estate professionalswho have significant expertise in underwriting and structuring commercial real estate financing transactions. We benefit from Apollo's global infrastructure and operating platform, through which we are able to source, evaluate and manage potential investments in our target assets. Current Market Conditions During the first quarter of 2020, there was a global outbreak of COVID-19, which was declared by theWorld Health 35 -------------------------------------------------------------------------------- Organization as a pandemic. In response to COVID-19,the United States and numerous other countries declared national emergencies, which has led to large scale quarantines as well as restrictions to business deemed non-essential. These responses to COVID-19 have disrupted economic activities and could have a significant continued adverse effect on economic and market conditions, and could result in a recession. As we are still in the midst of the COVID-19 pandemic we are not in a position to estimate the ultimate impact this will have on our business and the economy as a whole. The effects of COVID-19 have adversely impacted the value of our assets, business, financial condition, results of operations and cash flows, and our ability to operate successfully. Some of the factors that impacted us to date and may continue to affect us are outlined in "Item 1A. Risk Factors" of our Annual Report on Form 10-K. Please see "Liquidity and Capital Resources" below for additional discussion surrounding the ongoing impact we expect COVID-19 will have on our liquidity and capital resources. Critical Accounting Policies A summary of our critical accounting policies is set forth in our Annual Report under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates." See below for new critical accounting policies adopted since our Annual Report. Real Estate Owned (and related debt) Acquisition of real estate is accounted for using the acquisition method under Accounting Standards Codification ("ASC") Topic 805, "Business Combinations." We recognize and measure identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, if applicable, based on their relative fair values. If applicable, we recognize and measure intangible assets and expense acquisition-related costs in the periods in which the costs are incurred and the services are received. Real estate assets are evaluated for impairment on a quarterly basis. We consider the following factors when performing our impairment analysis: (1) Management, having the authority to approve the action, commits to a plan to sell the asset; (2) significant negative industry and economic outlook or trends; (3) expected material costs necessary to extend the life or operate the real estate asset; and (4) our ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows to be generated by the real estate asset over the estimated remaining holding period is less than the carrying value of such real estate asset. An impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value. When determining the fair value of a real estate asset, we make certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon our estimate of a capitalization rate and discount rate. Results of Operations All non-USD denominated assets and liabilities are translated to USD at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded. Loan Portfolio Overview The following table sets forth certain information regarding our loan portfolio as ofSeptember 30, 2021 ($ in thousands): Amortized
Weighted-Average Coupon Weighted Average Secured Debt
Equity at
Description Cost (1) All-in Yield Arrangements (3) Cost of Funds cost(4)
(1)(2)
Commercial mortgage loans, net $ 6,397,772 4.4 % 4.8 % $ 3,450,858 2.0 % $ 2,946,914
Subordinate loans and other 817,759 7.5 % 7.9 % - - 817,759
lending assets, net
Subordinate loan, held for sale 41,773 12.8 % 13.8 % - 41,773
Total/Weighted-Average $ 7,257,304 4.8 % 5.2 % $ 3,450,858 2.0 % $ 3,806,446
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(1) Weighted-Average Coupon and Weighted-Average All-in Yield are based on the
applicable benchmark rates as of September 30, 2021 on the floating rate loans.
(2) Weighted-Average All-in Yield includes the amortization of deferred
origination fees, loan origination costs and accrual of both extension and exit
fees. Weighted-Average All-in Yield excludes the benefit of forward points on
currency hedges relating to loans denominated in currencies other than USD.
(3) Gross of deferred financing costs of $11.6 million .
(4) Represents loan portfolio at amortized cost less secured debt outstanding.
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The following table provides details of our commercial mortgage loan portfolio
and subordinate loan and other lending assets portfolio, on a loan-by-loan
basis, as of September 30, 2021 ($ in millions):
Commercial Mortgage Loan Portfolio
Construction
# Property Type Risk Rating Origination Date Amortized Cost Unfunded Commitment Loan 3rd Party Subordinate Debt Fully-extended Maturity Location
1 Hotel 3 10/2019 $265 $43 Y 08/2024 Various, Spain
2 Hotel 3 04/2018 152 - 04/2023 Honolulu, HI
3 Hotel 3 09/2015 145 - 06/2024 Manhattan, NY
4 Hotel 3 07/2021 139 39 08/2026 Various, US
5 Hotel 3 08/2019 138 - 08/2024 Puglia, Italy
6 Hotel 3 05/2018 115 - 06/2024 Miami, FL
7 Hotel 3 03/2017 106 - 03/2022 Atlanta, GA
8 Hotel 3 11/2018 90 - 12/2023 Vail, CO
9 Hotel 3 12/2017 82 - 12/2023 Manhattan, NY
10 Hotel 3 08/2019 68 - Y 03/2022 Manhattan, NY
11 Hotel 3 09/2019 61 - 10/2024 Miami, FL
12 Hotel 3 12/2019 60 - 01/2025 Tucson, AZ
13 Hotel 3 05/2021 59 2 06/2026 Fort Lauderdale, FL
14 Hotel 3 05/2019 52 - 06/2024 Chicago, IL
15 Hotel 3 12/2015 43 - 08/2024 St. Thomas , USVI
16 Hotel 3 02/2018 25 2 11/2024 Pittsburgh, PA
17 Office 3 02/2020 226 - 02/2025 London, UK
18 Office 3 01/2020 210 78 Y 02/2025 Long Island City, NY
19 Office 3 06/2019 209 22 08/2026 Berlin, Germany
20 Office 3 09/2019 188 - 09/2023 London, UK
21 Office 3 10/2018 157 30 Y 10/2023 Manhattan, NY
22 Office 3 11/2017 137 - 01/2023 Chicago, IL
23 Office 3 04/2019 136 23 09/2025 Culver City, CA
24 Office(1) 3 12/2017 121 - Y 07/2022 London, UK
25 Office 3 03/2018 86 - Y 04/2023 Chicago, IL
26 Office 3 12/2019 37 2 12/2022 Edinburgh, Scotland
27 Urban Retail 3 12/2019 351 - 12/2023 London, UK
28 Urban Retail 3 08/2019 318 - Y 09/2024 Manhattan, NY
29 Industrial 3 03/2021 294 - 05/2026 Various, Sweden
30 Industrial 3 01/2019 197 7 02/2024 Brooklyn, NY
31 Residential-for-sale: construction 3 12/2018 103 1 Y 01/2024 Hallandale Beach, FL
32 Residential-for-sale: construction 3 12/2018 100 79 Y Y 12/2023 Manhattan, NY
33 Residential-for-sale: inventory 3 12/2019 90 3 Y 01/2023 Boston, MA
34 Residential-for-sale: construction 3 10/2015 66 - Y Y 11/2021 Manhattan, NY
35 Residential-for-sale: inventory 3 01/2018 37 3 Y 01/2023 Manhattan, NY
36 Residential-for-sale: inventory 3 05/2018 8 - Y 12/2021 Manhattan, NY
37 Residential-for-sale: inventory 3 06/2018 6 - Y 12/2021 Manhattan, NY
38 Multifamily 3 05/2021 82 - Y 05/2026 Cleveland, OH
39 Multifamily 3 04/2014 61 - 07/2023 Various
40 Multifamily 3 11/2014 50 - 06/2023 Various, US
41 Multifamily 3 02/2020 50 1 03/2024 Cleveland, OH
42 Portfolio(2) 3 06/2021 271 27 06/2026 Various, Germany
43 Parking Garages 3 05/2021 269 5 05/2026 Various, US
44 Healthcare 3 10/2019 222 30 10/2024 Various, UK
45 Caravan Parks 3 02/2021 220 - 02/2028 Various, UK
46 Multifamily Development (3) 5 03/2017 175 - 12/2021 Brooklyn, NY
47 Urban Predevelopment(3) 5 01/2016 120 - 09/2022 Miami, FL
48 Retail center(3) 5 11/2014 105 - 09/2022 Cincinnati, OH
49 Mixed Use 3 12/2019 59 774 Y Y 06/2025 London, UK
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50 Mixed Use 3 12/2019 54 - 12/2024 London, UK
General CECL Allowance (18)
Subtotal / Weighted-Average
Commercial Mortgage Loans 3.1 $6,397 $1,171 2.9 Years
Subordinate Loan and Other Lending Assets Portfolio
# Property Type Risk Rating Origination Date Amortized Cost Unfunded Commitment Construction Loan 3rd Party Subordinate Debt Fully-extended Maturity
Location
1 Residential-for-sale: construction(4) 3 06/2015$234 $- Y Y 12/2021Manhattan, NY 2 Residential-for-sale: construction(4) 3 05/2020 135 - Y Y 12/2021Manhattan, NY 3 Residential-for-sale: construction(4) 4 11/2017 82 - Y Y 12/2021Manhattan, NY 4 Mixed Use 3 02/2019 40 - Y 12/2022London, UK 5 Mixed Use 3 12/2018 40 12 Y 12/2023Brooklyn, NY 6 Mixed Use 3 07/2012 7 - 08/2022Chapel Hill, NC 7 Office 3 01/2019 100 - 12/2025Manhattan, NY 8 Office 3 07/2013 14 - 07/2022Manhattan, NY 9 Office 3 08/2017 8 - 09/2024Troy, MI 10 Healthcare(5) 3 07/2019 51 - Y 06/2024 Various, US 11 Healthcare(6) 3 01/2019 33 - 01/2024 Various, US 12 Healthcare(5)(6) 3 02/2019 13 - Y 01/2034 Various, US 13 Industrial 2 05/2013 32 - 05/2023 Various, US 14 Hotel 3 06/2015 24 - 07/2025Phoenix, AZ 15 Hotel 3 06/2018 20 - 06/2023 Las Vegas, NV General CECL Allowance (15) Subtotal / Weighted-Average Subordinate Loans and Other Lending Assets 3.1$818 $12 1.5 Years Subordinate Loans Held For Sale 16 Mixed Use 3 01/2017$42 $- 02/2027Cleveland, OH Subtotal / Weighted-Average Subordinate Loans Held For Sale 3.0$42 $- 5.3 Years Total / Weighted-Average Loan Portfolio 3.1$7,257 $1,183 2.7 Years ------- (1)Includes$26.9 million of a subordinate participation sold accounted for as secured borrowing. (2)Includes portfolio of office, industrial, and retail property types. (3)Amortized cost for these loans is net of the recorded Specific CECL Allowance. (4)Loans are secured by the same property. (5)Single Asset, Single Borrower CMBS. (6)Loan and Single Asset, Single Borrower CMBS are secured by the same properties.
Our average asset and debt balances for the nine months ended
Average month-end balances for the nine months ended
September 30, 2021
Description Assets Related debt
Commercial mortgage loans, net $ 6,327,429 $ 3,589,131
Subordinate loans and other lending assets,
net 945,789 -
Subordinate loans, held for sale 42,067 -
Portfolio Management
Due to the impact of COVID-19, some of our borrowers have experienced
consequences which are preventing the execution of their business plans and in
some cases, causing temporary closures. As a result, we have worked with
borrowers to execute loan modifications which are typically coupled with
additional equity contributions from borrowers. Loan modifications to date have
included repurposing of reserves, temporary deferrals of interest or principal,
and partial deferral of coupon interest as payment-in-kind interest.
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Investment Activity
During the nine months ended September 30, 2021 , we committed $1.5 billion of
capital to loans ($1.5 billion was funded at closing). In addition, during the
nine months ended September 30, 2021 , we received $1.0 billion in repayments and
funded $377.4 million for loans closed prior to 2021.
Net Income (Loss) Available to Common Stockholders
For the three months ended September 30, 2021 and 2020, our net income available
to common stockholders was $57.3 million , or $0.38 per diluted share of common
stock, and $46.0 million , or $0.31 per diluted share of common stock,
respectively. For the nine months ended September 30, 2021 and 2020, our net
income (loss) available to common stockholders was $176.5 million , or $1.18 per
diluted share of common stock, and $(28.5) million , or $(0.20) per diluted share
of common stock, respectively.
Operating Results
In connection with our adoption of the amendment to Item 303 of Regulation S-K
commencing January 1, 2021 we changed our basis of comparison to compare the
current period to the previous period rather than the same period in the
previous year. The reason for this change is because we believe comparing the
most recent period allows us to provide a more meaningful discussion to changes
in operating results given our business and target assets.
The following table sets forth information regarding our condensed consolidated
results of operations and certain key operating metrics compared to both the
same period in the previous year and the most recently reported period ($ in
thousands):
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Three months ended Q3'21 vs. Nine months ended
September 30, June 30, 2021 Q2'21 September 30, September 30, 2021 vs. 2020
2021 2021 2020
Net interest income:
Interest income from $ 84,304 $ 82,447 $ 1,857 $ 242,107 $ 232,018 $ 10,089
commercial mortgage loans
Interest income from
subordinate loans and other 18,836 31,775 (12,939) 82,070 95,491 (13,421)
lending assets
Interest expense (42,391) (39,737) (2,654) (117,792) (113,527) (4,265)
Net interest income 60,749 74,485 (13,736) 206,385 213,982 (7,597)
Operations related to real
estate owned:
Revenue from real estate 5,896 1,374 4,522 7,270 - 7,270
owned operations
Operating expenses related to (6,914) (1,994) (4,920) (8,908) - (8,908)
real estate owned
Depreciation and amortization (1,096) (452) (644) (1,548) - (1,548)
on real estate owned
Net loss related to real (2,114) (1,072) (1,042) (3,186) - (3,186)
estate owned
Operating expenses:
General and administrative (6,561) (6,734) 173 (20,235) (19,580) (655)
expenses
Management fees to related (9,583) (9,440) (143) (28,387) (30,152) 1,765
party
Total operating expenses (16,144) (16,174) 30 (48,622) (49,732) 1,110 Other income 3,676 17 3,659 3,785 1,479 2,306 Realized loss on investments - (20,000) 20,000 (20,000) (17,442) (2,558) Realized losses and impairments on real estate - - - (550) - (550)
owned
Reversal of (provision for) loan losses - Specific CECL - 30,000 (30,000) 30,000 (139,950) 169,950 Allowance, net Reversal of (provision for) loan losses - General CECL 5,766 (414) 6,180 6,590 (12,004) 18,594 Allowance, net Gain (loss) on foreign currency forward contracts 32,947 (3,094) 36,041 39,653 32,959 6,694 Foreign currency translation (24,413) 4,054 (28,467) (27,808) (8,388) (19,420) (gain) loss Gain (loss) on interest rate (75) (111) 36 171 (39,207) 39,378 hedging instruments Net income (loss)$60,392 $67,691 $(7,299) $186,418 $(18,303) $204,721 Net Interest Income Net interest income decreased by$13.7 million during the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 . This decrease was primarily due to (i) the cessation of interest accrual on the Junior Mezzanine Loan (refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for more information), (ii)$469.1 million of full and partial loan repayments during the three months endedSeptember 30, 2021 , and (iii)$2.7 million increase in interest expense as a result of an increase in our average debt balance during the three months endedSeptember 30, 2021 . The decrease was partially offset by interest income on$141.0 million in originations and$112.9 million of add-on fundings during the three months endedSeptember 30, 2021 . We recognized PIK interest of$10.2 million , and$13.7 million for the three months endedSeptember 30, 2021 andJune 30, 2021 , respectively. 40 -------------------------------------------------------------------------------- We recognized$0.6 million pre-payment penalties and accelerated fees for the three months endedSeptember 30, 2021 and$0.7 million for the three months endedJune 30, 2021 . Net interest income decreased$7.6 million during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decrease in interest income primarily relates to a 0.54% decrease in LIBOR, an increase in our average debt balance for these periods of$189.7 million , and the cessation of interest accrual on the Junior Mezzanine Loan. Operations Related to Real Estate Owned In 2017, we originated a$20.0 million junior mezzanine loan which was subordinate to: (i) a$110.0 million mortgage loan, and (ii) a$24.5 million senior mezzanine loan, secured by a full-service luxury hotel inWashington, D.C. OnMay 24, 2021 , we acquired legal title to the hotel through a deed-in-lieu of foreclosure and the criteria for held-for-sale classification in ASC Topic 360, "Property, Plant, and Equipment" were not met. The assets and liabilities related to the hotel were assumed at their estimated fair value at acquisition and presented net of accumulated depreciation and impairment charges. Result of operations from the hotel are comprised of operating revenue, expenses and real estate asset depreciation. As the real estate owned was acquired onMay 24, 2021 , the net loss from real estate owned increased for the three months endedSeptember 30, 2021 because it reflects a full period of operations. Refer to "Note 5 - Real Estate Owned" for more information related to our impairment and realized losses on real estate owned. Operating Expenses General and administrative expenses General and administrative expenses decreased by$0.2 million for the three months endedSeptember 30, 2021 compared to the three months endedJune 30, 2021 . There was no material change in general and administrative expenses between these comparable periods. General and administrative expenses increased by$0.7 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily driven by a$0.3 million increase in operating expenses and a$0.4 million increase in non-cash restricted stock and RSU amortization related to shares of stock awarded under the LTIPs. Management fees to related party Management fee expense increased by$0.1 million during the three months endedSeptember 30, 2021 as compared to the three months endedJune 30, 2021 . Management fee expense decreased by$1.8 million during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decrease is primarily attributable to a decrease in our stockholders' equity (as defined in the Management Agreement) as a result of our common stock repurchase of 10,834,595 shares during the nine months endedSeptember 30, 2020 . Other income Other income increased by$3.7 million during the three months endedSeptember 30, 2021 as compared to the three months endedJune 30, 2021 due to a$3.7 million shared appreciation fee related to a first mortgage loan secured by a portfolio of multifamily assets located inthe United States . For the nine months endedSeptember 30, 2021 compared to the same period in 2020, the$2.3 million increase in other income is related to the recognition of the above mentioned$3.7 million fee partially offset by a decrease in interest income earned on our cash balance. Realized loss on investments and Reversal of (provision for) loan losses - Specific CECL Allowance, net OnMay 24, 2021 , we purchased a$24.5 million senior mezzanine loan at par and acquired legal title to the underlying hotel through a deed-in-lieu of foreclosure. We assumed the hotel's assets and liabilities (including the$110.0 million mortgage loan) and recorded an additional$10.0 million charge reflecting the difference between the fair value of the hotel's net assets and the carrying amount of the loan. This$10.0 million loss on title assumption plus the previously recorded Specific CECL Allowance of$10.0 million represents the$20.0 million recorded as a realized loss on investments in our condensed consolidated statement of operations. In addition to the$10.0 million Specific CECL Allowance realized on the above property we reversed$20.0 million of 41 -------------------------------------------------------------------------------- previously recorded Specific CECL Allowance on a multifamily development loan located inBrooklyn, NY due to a more favorable market outlook as compared to when the allowance was taken. There was no realized loss on investment or changes to our Specific CECL Allowances during the three months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2020 , we recorded Specific CECL Allowance on eight loans net of reversals of$140.0 million due to the negative impact of COVID-19. Realized losses and impairment on real estate owned During the first quarter of 2021, our real estate owned, held for sale asset was reviewed for possible impairment due to a change in expected time to sell the asset. A$0.6 million impairment loss was recorded during the three months endedMarch 31, 2021 , which was fully realized when the property was sold during the second quarter of 2021. Refer to "Note 5 - Real Estate Owned" for more information related to our impairment and realized losses on real estate owned. Reversal of (provision for) loan losses - General CECL Allowance, net During the three months endedSeptember 30, 2021 , our General CECL Allowance decreased by$5.8 million from the previous quarter. The decrease is primarily related to the seasoning of our loan portfolio as well as changes in expected maturity related to held for sale classification. Our General CECL Allowance decreased$18.6 million for nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . This decrease was largely due to improvement of economic conditions, specifically as it relates to the understanding and outlook of COVID-19, as well as the seasoning of our loan portfolio. Refer to "Note 2 - Summary of Significant Accounting Policies" and "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information related to our General CECL Allowance. Foreign currency gain (loss) and gain (loss) on derivative instruments We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD. When foreign currency gain and (loss) on derivative instruments are evaluated on a combined basis, the net impact for the three months endedSeptember 30, 2021 andJune 30, 2021 was$8.5 million and$1.0 million , respectively. The large balance for the three months endedSeptember 30, 2021 was caused by a decrease in USD foreign exchange rates that increase the value of our interest cash flow hedges, which have no offset in foreign currency gain (loss). The net impact for nine months endedSeptember 30, 2021 andSeptember 30, 2020 was$11.8 million and$24.6 million , respectively. During the nine months endedSeptember 30, 2020 there was a significant fall in USD foreign exchange rates, caused by COVID-19, which increased our unrealized gain from hedges on our future expected interest cash flows. As hedges on our future expected interest cash flows have no offset in foreign currency gain (loss) it caused the large balance noted above. Similarly the USD foreign exchange rates decreased during 2021 and so the interest cash flow hedges increased in value with no offset in foreign currency gain (loss). Gain (loss) on interest rate hedges In the second quarter of 2020, we entered into a three-year interest rate cap to cap LIBOR at 0.75%. This effectively limits the maximum all-in coupon on our 2026 Term Loan to 3.50%. During the three months endedSeptember 30, 2021 andJune 30, 2021 , the interest rate cap had an unrealized gain (loss) of$(0.1) million . We previously used an interest rate swap to manage exposure to variable cash flows on portions of our borrowings under our 2026 Term Loan. The interest rate swap agreement allowed us to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow. During the nine months endedSeptember 30, 2020 we recognized a realized loss on the interest rate swap of$53.9 million . During the second quarter of 2020, we terminated this interest rate swap. Dividends The following table details our dividend activity: 42 --------------------------------------------------------------------------------
Three months ended Nine months ended
Dividends declared per share
of: September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Common Stock $0.35 $0.35 $1.05 $1.10
Series B Preferred Stock - 0.50 1.00 1.50
Series B-1 Preferred Stock 0.45 - 0.45 -
Subsequent Events
Refer to "Note 20 - Subsequent Events" to the accompanying condensed
consolidated financial statements for disclosure regarding significant
transactions that occurred subsequent to September 30, 2021 .
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our assets
and operations, make distributions to our stockholders and other general
business needs. As of September 30, 2021 , we had $1.9 billion , at face value, of
corporate debt and $3.5 billion of asset specific financings. We have no
corporate debt maturities until August 2022 . As of September 30, 2021 , we had
$243 million of cash on hand and $349.8 million of approved and undrawn capacity
from our secured debt arrangements. In addition, we have a significant amount of
unencumbered loan assets. In light of COVID-19 and its severe impact on the
economy we have taken steps to increase our cash balances in order to maintain
an adequate level of liquidity to meet future outflows. As the duration and
severity of the COVID-19 pandemic, as well as the efficacy of the vaccines or
other remedies and the speed of their distribution and administration, remain
unknown, so does the impact it will have on our borrowers, lenders, and the
economy as a whole. We will continue to closely monitor developments related to
COVID-19 as it relates to our liquidity position and financial obligations. At
this time we believe we have the ability to generate and obtain adequate amounts
of cash to meet financial obligations. See "Contractual Obligations and
Commitments" below for further detail.
Debt-to-Equity Ratio
The following table presents our debt-to-equity ratio:
September 30, 2021 December 31, 2020
Debt to Equity Ratio (1) 2.2 1.8
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(1)Represents total debt less cash and loan proceeds held by servicer (recorded
with Other Assets, see "Note 6 - Other Assets" for more information) to total
stockholders' equity.
Our primary sources of liquidity are as follows:
Cash Generated from Operations
Cash from operations is generally comprised of interest income from our
investments, net of any associated financing expense, principal repayments from
our investments, net of associated financing repayments, proceeds from the sale
of investments, and changes in working capital balances. See "Results of
Operations - Loan Portfolio Overview" above for a summary of interest rates
related to our investment portfolio as of September 30, 2021 .
Borrowings Under Various Financing Arrangements
JPMorgan Facility
In November 2019 , through wholly-owned subsidiaries, we entered into a Sixth
Amended and Restated Master Repurchase Agreement with JPMorgan Chase Bank,
National Association . During the third quarter of 2021, we amended the JPMorgan
Facility to allow for $1.5 billion of maximum borrowings and maturity in
September 2024 , plus two one-year extensions available at our option, which are
subject to certain conditions. The JPMorgan Facility enables us to elect to
receive advances in USD, GBP, or EUR. Margin calls may occur any time at
specified aggregate margin deficit thresholds.
As of September 30, 2021 , we had $1.1 billion (including £64.2 million and €60.0
million assuming conversion into USD) of borrowings outstanding under the
JPMorgan Facility secured by certain of our commercial mortgage loans.
DB Facility
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In March 2020 , through an indirect wholly-owned subsidiary, we entered into a
Third Amended and Restated Master Repurchase Agreement with Deutsche Bank AG,
Cayman Islands Branch, London Branch (the "DB Facility"). During the first
quarter of 2021, we amended the DB Facility to reduce the commitment from $1.0
billion to $700.0 million ($398.5 million drawn at September 30, 2021 ) for the
sale and repurchase of eligible first mortgage loans secured by commercial or
multifamily properties, located in the United States , United Kingdom and the
European Union , and enables us to elect to receive advances in USD, GBP, or EUR.
The DB Facility matures in March 2022 , and has a one-year extension available at
our option, subject to certain conditions. Margin calls may occur any time at
specified aggregate margin deficit thresholds.
As of September 30, 2021 , we had $398.5 million of borrowings outstanding under
the DB Facility secured by certain of our commercial mortgage loans.
Goldman Facility
In November 2017 , through an indirect wholly-owned subsidiary, we entered into a
master repurchase and securities contract agreement with Goldman Sachs Bank USA ,
which provides advances up to $500.0 million and matures in November 2021 . In
addition, the Goldman Facility contains a two-year amortization period
subsequent to the November 2021 maturity, which allows for the refinancing or
pay down of assets under the facility. Margin calls may occur any time at
specified margin deficit thresholds.
As of September 30, 2021 , we had $142.8 million of borrowings outstanding under
the Goldman Facility secured by certain of our commercial mortgage loans.
CS Facility - USD
In July 2018 , through an indirect wholly-owned subsidiary, we entered into a
Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman
Islands Branch and Alpine Securitization Ltd , which provides for advances for
the sale and repurchase of eligible commercial mortgage loans secured by real
estate. The CS Facility - USD has an "evergreen" feature such that the facility
continues unless terminated at any time by Credit Suisse with six months'
notice. Margin calls may occur any time at specified aggregate margin deficit
thresholds.
As of September 30, 2021 , we had $189.2 million of borrowings outstanding under
the CS Facility - USD secured by certain of our commercial mortgage loans.
HSBC Facility - EUR
In July 2019 , through an indirect wholly-owned subsidiary, we entered into a
secured debt arrangement with HSBC Bank plc , which provides for a single asset
financing. The HSBC Facility - EUR was extended during the first quarter 2021
and matures in July 2022 . Margin calls may occur any time at specified aggregate
margin deficit thresholds.
As of September 30, 2021 , we had $165.9 million (€143.3 million assuming
conversion into USD) of borrowings outstanding under the HSBC Facility - EUR
secured by one commercial mortgage loan.
Barclays Facility - USD
In March 2020 , through an indirect wholly-owned subsidiary, we entered into a
secured debt arrangement pursuant to a Master Repurchase Agreement with Barclays
Bank plc. The Barclays Facility - USD allows for $200.0 million of maximum
borrowings and initially matures in March 2023 with extensions available at our
option, subject to certain conditions. Margin calls may occur any time at
specified aggregate margin deficit thresholds.
As of September 30, 2021 , we had $32.7 million of borrowings outstanding under
the Barclays Facility - USD secured by one commercial mortgage loan.
Barclays Private Securitization
44
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In June 2020 , through a newly formed entity, we entered into a private
securitization with Barclays Bank plc, of which Barclays Bank plc retained
$782.0 million of senior notes. The Barclays Private Securitization finances the
loans that were previously financed under the Barclays Facility - GBP/EUR. In
June 2020 , we pledged an additional commercial mortgage loan with an outstanding
principal balance of £26.0 million and pledged additional collateral of a
financed loan of €5.3 million as of June 30, 2020 . During the quarter ended
March 31, 2021 , we pledged two additional commercial mortgage loans with
outstanding principal balances of $227.4 million (£165.0 million assuming
conversion into USD) and $187.4 million (kr1.6 billion assuming conversion into
USD) as of March 31, 2021 . During the quarter ended June 30, 2021 , we pledged an
additional commercial mortgage loan with an outstanding principal balance of
$281.7 million (€237.6 million assuming conversion into USD), and pledged
additional collateral of a financed loan of $114.7 million (kr1.0 billion
assuming conversion into USD).
The Barclays Private Securitization eliminates daily margining provisions and
grants us significant discretion to modify certain terms of the underlying
collateral including waiving certain loan-level covenant breaches and deferring
or waiving of debt service payments for up to 18 months. The securitization
includes LTV based covenants with significant headroom to previous levels
included in the Barclays Facility - GBP/EUR. These deleveraging requirements are
based on significant declines in the value of the collateral as determined by an
annual third-party (engaged by us) appraisal process tied to the provisions of
the underlying loan agreements. We believe this provides us with both cushion
and predictability to avoid sudden unexpected outcomes and material repayment
requirements. In addition to the pledge of the additional collateral noted
above, we paid down the previous financing by €16.5 million (totaling $18.5
million in USD) and agreed to increase the financing spreads by 0.25%.
The table below provides the borrowings outstanding (on an as converted basis)
and weighted-average fully-extended maturities by currency for the assets
financed under the Barclays Private Securitization as of September 30, 2021 ($
in thousands):
Borrowings outstanding Fully-Extended Maturity(1)
Total/Weighted-Average GBP $854,768 August 2024
Total/Weighted-Average SEK 237,110 August 2022
Total/Weighted-Average EUR 361,713 August 2022(2)
Total/Weighted-Average Securitization $1,453,591 October 2023
-------
(1)Assumes underlying loans extend to fully extended maturity and extensions at our option are exercised. (2)The EUR portion of the Barclays Private Securitization has an "evergreen" feature such that the facility continues for one year and can be terminated by either party on certain dates with, depending on the date of notice, a minimum of nine to twelve months' notice. As ofSeptember 30, 2021 , we had$1.5 billion (£634.4 million, €312.4 million, and kr2.1 billion assuming conversion into USD) of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans. Debt Covenants The guarantees related to our secured debt arrangements contain the following financial covenants: (i) tangible net worth must be greater than$1.25 billion plus 75% of the net cash proceeds of any equity issuance afterMarch 31, 2017 (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 3.75:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or$30.0 million . Under these covenants, our General CECL Allowance is added back to our tangible net worth calculation. We were in compliance with the covenants under each of our secured debt arrangements atSeptember 30, 2021 andDecember 31, 2020 . Senior Secured Term Loan InMay 2019 , we entered into the$500.0 million 2026 Term Loan. During the nine months endedSeptember 30, 2021 , we repaid$3.8 million of principal related to the 2026 Term Loan. The 2026 Term Loan bears interest at LIBOR plus 2.75%, was issued at a price of 99.5%, and matures inMay 2026 . InMarch 2021 , we entered into the$300.0 million 2028 Term Loan. During the nine months endedSeptember 30, 2021 , we repaid$1.5 million of principal related to the 2028 Term Loan. The 2028 Term Loan bears interest at LIBOR (with a floor of 0.50%) plus 3.50%, was issued at a price of 99.0%, and matures inMarch 2028 . 45 -------------------------------------------------------------------------------- The outstanding Term Loans principal balance as ofSeptember 30, 2021 andDecember 31, 2020 was$787.3 million and$492.5 million , respectively. The Term Loans contain restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The Term Loans include the following financial covenants: (i) our ratio of total recourse debt to tangible net worth cannot be greater than 3:1; and (ii) our ratio of total unencumbered assets to total pari-passu indebtedness must be at least 1.25:1. Senior Secured Notes InJune 2021 , we issued$500.0 million of 4.625% Senior Secured Notes due 2029 (the "2029 Notes"), for which we received net proceeds of$495.0 million , after offering expenses. The 2029 Notes will mature onJune 15, 2029 , unless earlier repurchased or redeemed. The 2029 Notes are secured by a first-priority lien, and rank pari passu in right of payment with all of our existing and future first lien obligations, including indebtedness under the Term Loans. The 2029 Notes were issued at par and contain covenants relating to liens, indebtedness, and investments in non-wholly owned entities. As ofSeptember 30, 2021 , the 2029 Notes had a carrying value of$493.9 million net of deferred financing costs of$6.1 million . The 2029 notes requires that we maintain a ratio of total unencumbered assets to total pari-passu indebtedness of at least 1.20:1. Convertible Senior Notes In two separate offerings during 2017, we issued an aggregate principal amount of$345.0 million of 4.75% Convertible Senior Notes due 2022, for which we received$337.5 million , after deducting the underwriting discount and offering expenses. AtSeptember 30, 2021 , the 2022 Notes had a carrying value of$342.4 million and an unamortized discount of$2.6 million . During the fourth quarter of 2018, we issued$230.0 million of 5.375% Convertible Senior Notes due 2023, for which we received$223.7 million after deducting the underwriting discount and offering expenses. AtSeptember 30, 2021 , the 2023 Notes had a carrying value of$226.5 million and an unamortized discount of$3.5 million . Other Potential Sources of Financing Our primary sources of cash currently consist of cash available, which was$243.4 million as ofSeptember 30, 2021 , principal and interest payments we receive on our portfolio of assets, and available borrowings under our secured debt arrangements. We expect our other sources of cash to consist of cash generated from operations and prepayments of principal received on our portfolio of assets. Such prepayments are difficult to estimate in advance. Depending on market conditions, we may utilize additional borrowings as a source of cash, which may also include additional secured debt arrangements as well as other borrowings or conduct additional public and private debt and equity offerings. As ofSeptember 30, 2021 we also held$1.7 billion of unencumbered assets, consisting of$795.4 million of senior mortgages and$874.1 million of mezzanine loans. We maintain policies relating to our borrowings and use of leverage. See "Leverage Policies" below. In the future, we may seek to raise further equity or debt capital or engage in other forms of borrowings in order to fund future investments or to refinance expiring indebtedness. We generally intend to hold our target assets as long-term investments, although we may sell certain of our investments in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit our ability to retain earnings and replenish or increase capital for operations. Leverage Policies We use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. In addition to our secured debt arrangements and senior secured term loan, we access additional sources of borrowings. Our charter and bylaws do not limit the amount of indebtedness we can incur; however, we are subject to and carefully monitor the limits placed on us by our credit providers and those that assign ratings on our Company. AtSeptember 30, 2021 , our debt-to-equity ratio was 2.2 and our portfolio was comprised of$6.4 billion of commercial mortgage loans and$0.8 billion of subordinate loans and other lending assets. In order to achieve our return on equity, we generally finance our mortgage loans with 2.0 to 3.0 turns of leverage and generally do not finance our subordinate loan portfolio given built-in inherent structural leverage. Consequently, depending on our portfolio mix, our debt-to-equity ratio may exceed our previously disclosed thresholds. 46 -------------------------------------------------------------------------------- Investment Guidelines Our current investment guidelines, approved by our board of directors, are comprised of the following: •no investment will be made that would cause us to fail to qualify as a REIT forU.S. federal income tax purposes; •no investment will be made that would cause us to register as an investment company under the 1940 Act; •investments will be predominantly in our target assets; •no more than 20% of our cash equity (on a consolidated basis) will be invested in any single investment at the time of the investment; and •until appropriate investments can be identified, the Manager may invest the proceeds of any offering in interest bearing, short-term investments, including money market accounts and/or funds, that are consistent with our intention to qualify as a REIT. The board of directors must approve any change in or waiver to these investment guidelines. Contractual Obligations and Commitments Our contractual obligations including expected interest payments as ofSeptember 30, 2021 are summarized as follows ($ in thousands): More Less than 1 2 to 3 3 to 5 than 5 year (1) 1 to 2 years(1) years (1) years (1) years (1) Total Secured debt arrangements(1)(2)$ 1,154,255 $ 656,128 $ 975,088 $ 813,635 $ -$ 3,599,106 Senior Secured Notes 23,125 23,125 23,125 46,250 1,060,087 1,175,712 Senior secured term loan(2) 34,073 33,808 33,612 524,936 299,995 926,424 Convertible senior notes 372,172 12,363 231,030 - - 615,565 Unfunded loan commitments (3) 570,551 528,380 23,455 - - 1,122,385 Total$ 2,154,176 $ 1,253,804 $ 1,286,310 $ 1,384,821 $ 1,360,082 $ 7,439,192 ------- (1) Assumes underlying assets are financed through the fully extended maturity date of the secured debt arrangement. (2) Based on the applicable benchmark rates as of September 30, 2021 on the floating rate debt for interest payments due. (3) Based on fully extended maturity and our expected funding schedule, which is based upon the Manager's estimates based upon the best information available to the Manager at the time. There is no assurance that the payments will occur in accordance with these estimates or at all, which could affect our operating results. Refer to "Note 17 - Commitments and Contingencies" for further detail regarding unfunded loan commitments. Loan Commitments. As ofSeptember 30, 2021 , we had$1.2 billion of unfunded loan commitments, comprised of$1.2 billion related to our commercial mortgage loan portfolio, and$11.7 million related to our subordinate loan portfolio. Management Agreement. OnSeptember 23, 2009 , we entered into the Management Agreement with the Manager pursuant to which the Manager is entitled to receive a management fee and the reimbursement of certain expenses. The table above does not include amounts due under the Management Agreement as those obligations do not have fixed and determinable payments. Pursuant to the Management Agreement, the Manager is entitled to a base management fee calculated and payable quarterly in arrears in an amount equal to 1.5% of our stockholders' equity (as defined in the Management Agreement), per annum. The Manager will use the proceeds from its management fee in part to pay compensation to its officers and personnel. We do not reimburse the Manager or its affiliates for the salaries and other compensation of their personnel, except for the allocable share of the compensation of (1) our Chief Financial Officer based on the percentage of time spent on our affairs and (2) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment professional personnel of the Manager or its affiliateswho spend all or a portion of their time managing our affairs based on the percentage of time devoted by such personnel to our affairs. We are also required to reimburse the Manager for operating expenses related to us incurred by the Manager, including expenses relating to legal, accounting, due diligence and other services. Expense reimbursements to the Manager are made in cash on a monthly basis following the end of each month. Our reimbursement obligation is not subject to any dollar limitation. The term of the Management Agreement was automatically renewed for a successive one-year term onSeptember 29, 2021 , and will automatically renew 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 our independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to ARI or (2) a determination that the 47 -------------------------------------------------------------------------------- management fee payable to the Manager is not fair, subject to the Manager's right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by our independent directors inFebruary 2021 , which included a discussion of the Manager's performance and the level of the management fees thereunder, we determined not to seek termination of the Management Agreement. Forward Currency Contracts. We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD. We have entered into a series of forward contracts to sell an amount of foreign currency (GBP, SEK and EUR) for an agreed upon amount of USD at various dates throughMay 2026 . These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments. Refer to "Note 11- Derivatives" to the accompanying condensed consolidated financial statements for details regarding our forward currency contracts. Interest Rate Cap. InJune 2020 , we entered into an interest rate cap for approximately$1.1 million . We use our interest rate cap to manage exposure to variable cash flows on our borrowings under our senior secured term loan by effectively limiting LIBOR from exceeding 0.75%. Refer to "Note 11- Derivatives" to the accompanying condensed consolidated financial statements for details regarding our interest rate cap. Off-balance Sheet Arrangements As ofSeptember 30, 2021 , we have interests in two unconsolidated joint ventures, each of which owns underlying properties that secure one of our first mortgage loans, respectively. The unconsolidated joint ventures were deemed to be VIEs, of which we are not the primary beneficiary. Accordingly, the VIEs are not consolidated in our condensed consolidated financial statements as ofSeptember 30, 2021 . Our maximum exposure to loss from these commercial mortgage loans is limited to their carrying value, which as ofSeptember 30, 2021 was$225.2 million . Dividends We intend to continue to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. We generally intend over time to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Any distributions we make are at the discretion of our board of directors and depend upon, among other things, our actual results of operations. These results and our ability to pay distributions are affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. OnJuly 15, 2021 , we exchanged all 6,770,393 shares outstanding of our Series B Preferred Stock for 6,770,393 shares of 7.25% Series B-1 Cumulative Redeemable Perpetual Preferred Stock, par value$0.01 per share, with a liquidation preference of$25.00 per share, pursuant to an exchange agreement with the two existing shareholders. The Series B Preferred Stock entitled holders to receive dividends at a rate of 8.00% per annum and paid cumulative cash dividends, which were payable quarterly in equal amounts in arrears on the 15th day of each January, April, July and October. As ofSeptember 30, 2021 , we had 6,770,393 shares of Series B-1 Preferred Stock outstanding. The Series B-1 Preferred Stock pay cumulative cash dividends, which are payable quarterly in equal amounts in arrears on the 15th day of each January, April, July and October: at a rate of 7.25% per annum of the$25.00 per share liquidation preference. Except under certain limited circumstances, the Series B-1 Preferred Stock is generally not convertible into or exchangeable for any other property or any other of our securities at the election of the holders. On and afterJuly 15, 2026 , we may, at our option, redeem the shares at a redemption price of$25.00 , plus any accrued unpaid dividends to, but not including, the date of the redemption. Non-GAAP Financial Measures Distributable Earnings Beginning in the fourth quarter of 2020 to more appropriately reflect the principal purpose of the measure, "Operating Earnings" was relabeled "Distributable Earnings", a non-GAAP financial measure. The definition continues to be net income 48 -------------------------------------------------------------------------------- (loss) available to common stockholders, computed in accordance with GAAP, adjusted for (i) equity-based compensation expense (a portion of which may become cash-based upon final vesting and settlement of awards should the holder elect net share settlement to satisfy income tax withholding), (ii) any unrealized gains or losses or other non-cash items (including depreciation and amortization related to real estate owned) included in net income available to common stockholders, (iii) unrealized income from unconsolidated joint ventures, (iv) foreign currency gains (losses), other than (a) realized gains/(losses) related to interest income, and (b) forward point gains/(losses) realized on our foreign currency hedges, (v) the non-cash amortization expense related to the reclassification of a portion of the Convertible Notes to stockholders' equity in accordance with GAAP, and (vi) provision for loan losses. Distributable Earnings may also be adjusted to exclude certain other non-cash items, as determined by the Manager and approved by a majority of our independent directors. For the three and nine months endedSeptember 30, 2021 , our Distributable Earnings were$49.2 million , or$0.35 per share, and$143.6 million , or$1.01 per share, respectively, as compared to$52.9 million , or$0.36 per share, and$104.3 million , or$0.68 per share, respectively, for the same periods in the prior year. The weighted-average diluted shares outstanding used for Distributable Earnings per weighted-average diluted share has been adjusted from weighted-average diluted shares under GAAP to exclude shares issued from a potential conversion of the Convertible Notes. Consistent with the treatment of other unrealized adjustments to Distributable Earnings, these potentially issuable shares are excluded until a conversion occurs, which we believe is a useful presentation for investors. We believe that excluding shares issued in connection with a potential conversion of the Convertible Notes from our computation of Distributable Earnings per weighted average diluted share is useful to investors for various reasons, including the following: (i) conversion of Convertible Notes to shares requires both the holder of a note to elect to convert the Convertible Note and for us to elect to settle the conversion in the form of shares (ii) future conversion decisions by note holders will be based on our stock price in the future, which is presently not determinable; (iii) the exclusion of shares issued in connection with a potential conversion of the Convertible Notes from the computation of Distributable Earnings per weighted-average diluted share is consistent with how we treat other unrealized items in our computation of Distributable Earnings per weighted-average diluted share; and (iv) we believe that when evaluating our operating performance, investors and potential investors consider our Distributable Earnings relative to our actual distributions, which are based on shares outstanding and not shares that might be issued in the future. For the three and nine months endedSeptember 30, 2021 , 28,533,271 weighted-average potentially issuable shares with respect to the Convertible Notes were included in the dilutive earnings per share denominator. For the three and nine months endedSeptember 30, 2020 , all of the potentially issuable shares with respect to the Convertible Notes were excluded from the calculation of diluted net loss per share because the effect was anti-dilutive. Refer to "Note 19 - Net Income (Loss) per Share" for further discussion. The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings ($ in thousands, except Price): Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Weighted-Averages Shares Shares Shares Shares Diluted shares - GAAP 170,884,172 146,612,313 170,836,682 150,679,773 Potential shares issued under (28,533,271) - (28,533,271) - conversion of the Convertible Notes Unvested RSUs - 2,051,311 -
2,028,573
Diluted shares - Distributable Earnings 142,350,901 148,663,624 142,303,411 152,708,346 As a REIT,U.S. federal income tax law generally requires us to distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons stockholders invest in a REIT, we generally intend over time to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Distributable Earnings is a key factor considered by the board of directors in setting the dividend and as such we believe Distributable Earnings is useful to investors. As discussed in "Note 11 - Derivatives" we terminated our interest rate swap, which we used to manage exposure to variable cash flows on our borrowings under our senior secured term loan, in the second quarter of 2020 and recorded a realized loss in our condensed consolidated statement of operations. We have not had an interest rate swap on our condensed consolidated balance sheet since this termination. In addition, as discussed in "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net," we recorded a net realized loss on the sale of seven of our commercial real estate loans, two restructurings, one payoff of a previously impaired loan, and one foreclosure. 49 -------------------------------------------------------------------------------- We also believe it is useful to our investors to present Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap to reflect our operating results because (i) our operating results are primarily comprised of earning interest income on our investments net of borrowing and administrative costs, which comprise our ongoing operations and (ii) it has been a useful factor related to our dividend per share because it is one of the considerations when a dividend is determined. We believe that our investors use Distributable Earnings and Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap, or a comparable supplemental performance measure, to evaluate and compare the performance of our company and our peers. A significant limitation associated with Distributable Earnings as a measure of our financial performance over any period is that it excludes unrealized gains (losses) from investments. In addition, our presentation of Distributable Earnings may not be comparable to similarly-titled measures of other companies, that use different calculations. As a result, Distributable Earnings should not be considered as a substitute for our GAAP net income as a measure of our financial performance or any measure of our liquidity under GAAP. Distributable Earnings are reduced for realized losses on loans which include losses that management believes are near certain to be realized. The table below summarizes the reconciliation from net income available to common stockholders to Distributable Earnings and Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap ($ in thousands): Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020
Net income (loss) available to common stockholders $ 57,266
4,405 4,212 13,149 12,726
Unrealized loss on interest rate swap - - - (14,470)
(Gain) Loss on foreign currency forwards (32,947) 34,537 (39,653) (32,959)
Foreign currency (gain) loss, net 24,413 (27,002) 27,808 8,388
Unrealized (gain) loss on interest rate cap 75 564 (171) (174)
Realized gains (losses) relating to interest income (219) (90) (1,558) 1,254
on foreign currency hedges, net
Realized gains relating to forward points on 63 244 75 3,733
foreign currency hedges, net
Amortization of the convertible senior notes 824 777 2,436 2,296
related to equity reclassification
Depreciation and amortization on real estate owned 1,096 - 1,548 -
Provision for (reversal of) loan losses and
impairments (5,766) (6,342) (36,590) 151,954
Realized losses and impairments on real estate - 1,037 20,550 17,442
owned and investments
Realized loss on interest rate swap - - - 53,851
Total adjustments: (8,056) 7,937 (12,406) 204,041
Distributable Earnings prior to realized losses and impairments on real estate owned, investments, and $ 49,210
Realized losses and impairments on real estate $ -
- - - (53,851)
Distributable Earnings $ 49,210
0.35 $ 0.36 $ 1.15 $ 1.15
owned, investments, and interest rate swap
Diluted Distributable Earnings per share of common $ 0.35 $ 0.36 $ 1.01 $ 0.68 stock
Weighted-average diluted shares - Distributable 142,350,901
148,663,624 142,303,411 152,708,346
Earnings
Book Value Per Share
50
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The table below calculates our book value per share ($ in thousands, except per
share data):
September 30, 2021 December 31, 2020
Stockholders' Equity $ 2,306,442 $ 2,270,529
Series B Preferred Stock (Liquidation
Preference) - (169,260)
Series B-1 Preferred Stock (Liquidation
Preference) $ (169,260) $ -
Common Stockholders' Equity $ 2,137,182 $ 2,101,269
Common Stock 139,894,060 139,295,867
Book value per share $ 15.28 $ 15.08
The table below shows the changes in our book value per share:
Book value per share
Book value per share at December 31, 2020 $ 15.08
General CECL Allowance 0.30
Book value per share at
$ 15.38
Earnings in excess of dividends 0.10
Net reversal of Specific CECL Allowance 0.07
Net unrealized gain on currency hedges 0.06
Other 0.01
Vesting and delivery of RSUs (0.08)
Book value per share at
$ 15.54
General CECL Allowance and depreciation and amortization (0.26)
Book value per share at September 30, 2021 $ 15.28
We believe that presenting book value per share with sub-totals prior to the
CECL Allowances and depreciation and amortization is useful for investors for
various reasons, including, among other things, analyzing our compliance with
financial covenants related to tangible net worth and debt-to-equity under our
secured debt arrangements and senior secured term loan, which permit us to add
the General CECL Allowance to our GAAP stockholders' equity. Given that our
lenders consider book value per share prior to the General CECL Allowance as an
important metric related to our debt covenants, we believe disclosing book value
per share prior to the General CECL Allowance is important to investors such
that they have the same visibility. We further believe that presenting book
value before depreciation and amortization is useful to investors since it is a
non-cash expense included in net income and is not representative of our core
business and ongoing operations.
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