Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is 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, and other commercial real estate related debt investments. These asset classes are referred to as our target assets.
We were formed in Maryland on June 29, 2009, commenced operations on September 29, 2009 and are externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, Inc. (together with its subsidiaries, "Apollo").
We 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 our tax qualification as a REIT, we are required to distribute at least 90% of our 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 our accounts and those of our 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. Our most significant estimates include current expected credit loss ("CECL") allowances. Actual results may differ from 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 our
Annual Report on Form 10-K for the year ended December 31, 2022 ("Annual Report"), 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 our financial position, results of operations and cash flows have been included. Our
results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for
the full year or any other future period.
We currently operate in one reporting segment.
Risks and Uncertainties
Although more normalized activities have resumed and there has been improved global economic activity due to global and domestic vaccination efforts, there are still various uncertainties around the impact coronavirus ("COVID-19") and its variants had and will continue to have on our business and the economy as a whole, including longer-term macroeconomic effects on supply chains, inflation and labor shortages. For example, in response to recent inflationary pressure, the U.S. Federal Reserve and other global central banks have raised interest rates in 2022 and 2023 and have indicated the potential for further interest rate increases. We believe the estimates used in preparing our financial statements and related footnotes are reasonable and supportable based on the best information available to us as of March 31, 2023. The uncertainty over the ultimate impact of COVID-19 and its variants, supply chain disruptions and labor shortages, rising inflation and increases in interest rates on the global economy generally and our business in particular may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and, as a result, actual results may vary significantly from estimates.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 "Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference London Interbank Offered Rate ("LIBOR") or other reference rates expected to be discontinued as a result of reference rate reform. In December 2022, the FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848 ("ASU 2022-06") which deferred the sunset date to December 31, 2024. We have loan agreements, debt agreements, and an interest rate cap that incorporate LIBOR as a referenced interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall
financial markets. As prescribed by the optional expedients within ASU 2020-04, we have accounted for applicable modified contracts that incorporate alternative benchmarks as if they are not substantially different. We will continue to apply such expedients or exceptions related to modifications for certain of our commercial mortgage loans and debt agreements as a result of reference rate reform.
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 value. Market-based or observable inputs are the preferred source of values, followed by valuation models using management's assumptions in the absence of market-based or observable inputs. The three levels of the hierarchy as noted in Accounting Standards Codification ("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 we anticipate that our valuation methods are appropriate and consistent with valuation methods used by 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. We 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 fair values of foreign exchange ("Fx") 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. Our Fx forwards are classified as Level II in the fair value hierarchy.
The fair value of our interest rate cap is determined by using the market standard methodology of discounting the future expected cash receipts that occur when variable interest rates rise above the strike rate of the interest rate cap. The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on a third-party expert's expectation of future interest rates derived from observable market interest rate curves and volatility. Our interest rate cap is classified as Level II in the fair value hierarchy.
The following table summarizes the levels in the fair value hierarchy into which our assets and liabilities with recurring fair value measurements were categorized as of March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of March 31, 2023 | | Fair Value as of December 31, 2022 |
| Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
Recurring fair value measurements: | | | | | | | | | | | | | | | |
Foreign currency forward, net | $ | — | | | $ | 83,649 | | | $ | — | | | $ | 83,649 | | | $ | — | | | $ | 119,499 | | | $ | — | | | $ | 119,499 | |
Interest rate cap asset | — | | | 5,256 | | | — | | | 5,256 | | | — | | | 9,141 | | | — | | | 9,141 | |
Total financial instruments | $ | — | | | $ | 88,905 | | | $ | — | | | $ | 88,905 | | | $ | — | | | $ | 128,640 | | | $ | — | | | $ | 128,640 | |
Non-recurring Fair Value Measurements
We are required to record real estate owned, a nonfinancial asset, at fair value on a non-recurring basis in accordance with ASC 820. Under ASC 820, we may utilize the income, market or cost approach (or combination thereof) to determine the fair value of real estate owned. We deem the inputs used in these approaches to be significant unobservable inputs. Therefore, we classify the fair value of real estate owned within Level III of the fair value hierarchy.
On March 31, 2023, we acquired legal title of a hotel property in Atlanta, GA ("Atlanta Hotel") through a deed-in-lieu of foreclosure. At the time of acquisition, we determined the fair value of the net real estate assets to be $75.0 million, using a combination of market and income approach. We utilized a discount rate and capitalization rate of 10.5% and 9.5%, respectively. No impairments have been recorded as of March 31, 2023.
On August 3, 2022, we acquired legal title of a multifamily development property located in downtown Brooklyn, NY
("Brooklyn Development") through a deed-in-lieu of foreclosure. We determined the fair value of the real estate assumed to be $270.1 million, based on the market value of the land at the time of acquisition. No impairments have been recorded as of March 31, 2023 or December 31, 2022.
On May 24, 2021, we acquired legal title to a full-service luxury hotel in Washington D.C. ("D.C. Hotel") through a deed-in-lieu of foreclosure, which is classified as real estate owned on our consolidated balance sheets. We assumed the D.C. Hotel's assets and liabilities, including a $110.0 million mortgage loan. We repaid the mortgage loan at par and hold the property unlevered. At the time of acquisition, we determined the fair value of the real estate assets to be $154.3 million. No impairments have been recorded as of March 31, 2023 or December 31, 2022.
Refer to "Note 5 – Real Estate Owned" for additional discussions.
Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net
Our loan portfolio was comprised of the following at March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | |
Loan Type | | March 31, 2023 | | December 31, 2022 |
Commercial mortgage loans, net(1) | | $ | 7,879,205 | | | $ | 8,121,109 | |
Subordinate loans and other lending assets, net | | 592,863 | | | 560,881 | |
Carrying value, net | | $ | 8,472,068 | | | $ | 8,681,990 | |
———————
(1)Includes $134.7 million and $138.3 million in 2023 and 2022, respectively, of contiguous financing structured as subordinate loans.
Our loan portfolio consisted of 99% and 98% floating rate loans, based on amortized cost, as of March 31, 2023 and December 31, 2022, respectively.
Activity relating to our loan portfolio for the three months ended March 31, 2023 was as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance | | Deferred Fees/Other Items (1) | | Specific CECL Allowance | | Carrying Value, Net |
December 31, 2022 | | $ | 8,892,767 | | | $ | (51,053) | | | $ | (133,500) | | | $ | 8,708,214 | |
New funding of loans | | 181,017 | | | — | | | — | | | 181,017 | |
Add-on loan fundings(2) | | 113,821 | | | — | | | — | | | 113,821 | |
Loan repayments and sales | | (491,705) | | | — | | | — | | | (491,705) | |
Gain (loss) on foreign currency translation | | 65,291 | | | (118) | | | — | | | 65,173 | |
| | | | | | | | |
Net realized loss on investment | | (5,197) | | | 573 | | | — | | | (4,624) | |
Transfer to real estate owned | | (75,000) | | | | | — | | | (75,000) | |
Deferred fees and other items | | — | | | (4,290) | | | — | | | (4,290) | |
Payment-in-kind interest and amortization of fees | | — | | | 9,729 | | | — | | | 9,729 | |
March 31, 2023 | | $ | 8,680,994 | | | $ | (45,159) | | | $ | (133,500) | | | $ | 8,502,335 | |
General CECL Allowance(3) | | | | | | | | (30,267) | |
Carrying value, net | | | | | | | | $ | 8,472,068 | |
———————
(1)Other items primarily consist of purchase discounts or premiums, cost recovery interest, exit fees, deferred origination expenses, and the activity of unconsolidated joint ventures.
(2)Represents fundings committed prior to 2023.
(3)$4.7 million of the General CECL Allowance, as defined in this Form 10-Q, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheet.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Number of loans | | 55 | | | 61 | |
Principal balance | | $ | 8,680,994 | | | $ | 8,892,767 | |
Carrying value, net | | $ | 8,472,068 | | | $ | 8,681,990 | |
Unfunded loan commitments(1) | | $ | 872,707 | | | $ | 1,041,654 | |
Weighted-average cash coupon(2) | | 7.9 | % | | 7.2 | % |
Weighted-average remaining fully-extended term(3) | | 2.8 years | | 2.8 years |
Weighted-average expected term(4) | | 2.1 years | | 1.7 years |
———————
(1)Unfunded loan commitments are funded to finance construction costs, tenant improvements, leasing commissions, or carrying costs. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
(2)For floating rate loans, based on applicable benchmark rates as of the specified dates. For loans placed on non-accrual the interest rate used in calculating weighted-average cash coupon is 0%.
(3)Assumes all extension options are exercised.
(4)Expected term represents our estimated timing of repayments as of the specified dates. Excludes risk-rated 5 loans.
Property Type
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Property Type | | Carrying Value | | % of Portfolio(1) | | Carrying Value | | % of Portfolio(1) |
Hotel | | $ | 1,988,065 | | | 23.4 | % | | $ | 2,117,079 | | | 24.3 | % |
Residential | | 1,602,078 | | | 18.8 | | | 1,537,541 | | | 17.7 | |
Office | | 1,484,536 | | | 17.5 | | | 1,671,006 | | | 19.2 | |
Retail | | 1,389,601 | | | 16.3 | | | 1,364,752 | | | 15.7 | |
Healthcare | | 576,639 | | | 6.8 | | | 575,144 | | | 6.6 | |
Mixed Use | | 569,927 | | | 6.7 | | | 559,809 | | | 6.4 | |
Industrial | | 299,323 | | | 3.5 | | | 296,860 | | | 3.4 | |
Other(2) | | 592,166 | | | 7.0 | | | 586,023 | | | 6.7 | |
Total | | $ | 8,502,335 | | | 100.0 | % | | $ | 8,708,214 | | | 100.0 | % |
General CECL Allowance(3) | | (30,267) | | | | | (26,224) | | | |
Carrying value, net | | $ | 8,472,068 | | | | | $ | 8,681,990 | | | |
(1)Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.
(2)Other property types include parking garages (3.2%), caravan parks (2.4%) and urban predevelopment (1.4%) in 2023, and parking garages (3.1%), caravan parks (2.3%) and urban predevelopment (1.3%) in 2022.
(3)$4.7 million and $4.3 million of the General CECL Allowance for 2023 and 2022, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets.
Geography
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Geographic Location | | Carrying Value | | % of Portfolio(1) | | Carrying Value | | % of Portfolio(1) |
United Kingdom | | $ | 2,421,641 | | | 28.5 | % | | $ | 2,470,532 | | | 28.4 | % |
New York City | | 2,011,244 | | | 23.7 | | | 2,049,493 | | | 23.5 | |
Other Europe(2) | | 1,442,910 | | | 17.0 | | | 1,542,462 | | | 17.7 | |
West | | 605,164 | | | 7.1 | | | 584,247 | | | 6.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Midwest | | 585,238 | | | 6.9 | | | 592,756 | | | 6.8 | |
Southeast | | 565,306 | | | 6.6 | | | 642,542 | | | 7.4 | |
Other(3) | | 870,832 | | | 10.2 | | | 826,182 | | | 9.5 | |
Total | | $ | 8,502,335 | | | 100.0 | % | | $ | 8,708,214 | | | 100.0 | % |
General CECL Allowance(4) | | (30,267) | | | | | (26,224) | | | |
Carrying value, net | | $ | 8,472,068 | | | | | $ | 8,681,990 | | | |
(1)Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.
(2)Other Europe includes Germany (5.0%), Italy (4.6%), Spain (4.0%), Sweden (2.9%) and Ireland (0.5%) in 2023 and Italy (5.4%), Germany (4.9%), Spain (3.8%), Sweden (2.8%) and Ireland (0.7%) in 2022.
(3)Other includes Northeast (5.6%), Southwest (2.4%), Mid-Atlantic (1.4%) and Other (0.8%) in 2023 and Northeast (5.5%), Southwest (2.3%), Mid-Atlantic (1.4%) and Other (0.3%) in 2022.
(4)$4.7 million and $4.3 million of the General CECL Allowance for 2023 and 2022, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets.
Risk Rating
We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan to value ("LTV") ratio, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:
1. Very low risk
2. Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss, or an impairment has been recorded
The following tables present the carrying value of our loan portfolio by year of origination and internal risk rating and gross write-offs by year of origination as of March 31, 2023 and December 31, 2022, respectively ($ in thousands):
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March 31, 2023 |
| | | | | | | | | Amortized Cost by Year Originated |
Risk Rating | | Number of Loans | | Total | | % of Portfolio | | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior |
1 | | — | | | $ | — | | | — | % | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2 | | 3 | | | 195,584 | | | 2.3 | % | | | — | | | — | | | — | | | — | | | 129,712 | | | 65,872 | |
3 | | 47 | | | 8,081,606 | | | 95.1 | % | | | 172,260 | | | 2,606,091 | | | 2,383,028 | | | 676,366 | | | 1,508,600 | | | 735,261 | |
4 | | 3 | | | 110,762 | | | 1.3 | % | | | — | | | — | | | — | | | — | | | — | | | 110,762 | |
5 | | 2 | | | 114,383 | | | 1.3 | % | | | — | | | — | | | — | | | — | | | — | | | 114,383 | |
Total | | 55 | | | $ | 8,502,335 | | | 100.0 | % | | | $ | 172,260 | | | $ | 2,606,091 | | | $ | 2,383,028 | | | $ | 676,366 | | | $ | 1,638,312 | | | $ | 1,026,279 | |
General CECL Allowance(1) | | (30,267) | | | | | | | | | | | | | | | | |
Total carrying value, net | $ | 8,472,068 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Weighted Average Risk Rating | | 3.0 | | | | | | | | | | | | | |
Gross write-offs | | $ | — | | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 |
| | | | | | | | | Amortized Cost by Year Originated |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | Number of Loans | | Total | | % of Portfolio | | | 2022 | | 2021 | | 2020 | | 2019 | | 2017 | | Prior |
1 | | — | | | $ | — | | | — | % | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2 | | 2 | | | 65,943 | | | 0.8 | % | | | — | | | — | | | — | | | — | | | — | | | 65,943 | |
3 | | 54 | | | 8,401,925 | | | 96.5 | % | | | 2,575,455 | | | 2,462,499 | | | 687,329 | | | 1,637,050 | | | 479,769 | | | 559,823 | |
4 | | 2 | | | 27,451 | | | 0.3 | % | | | — | | | — | | | — | | | — | | | 19,951 | | | 7,500 | |
5 | | 3 | | | 212,895 | | | 2.4 | % | | | — | | | — | | | — | | | — | | | — | | | 212,895 | |
Total | | 61 | | | $ | 8,708,214 | | | 100.0 | % | | | $ | 2,575,455 | | | $ | 2,462,499 | | | $ | 687,329 | | | $ | 1,637,050 | | | $ | 499,720 | | | $ | 846,161 | |
General CECL Allowance(1) | | (26,224) | | | | | | | | | | | | | | | | |
Total carrying value, net | $ | 8,681,990 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Weighted Average Risk Rating | | 3.0 | | | | | | | | | | | | | |
Gross write-offs | | $ | 7,000 | | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,000 | |
———————
(1)$4.7 million of the General CECL Allowance for both 2023 and 2022, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets.
CECL
In accordance with ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments", which we refer to as the "CECL Standard," we record allowances for loans and held-to-maturity debt securities that are deducted from the carrying amount of the assets to present the net carrying value of the amounts expected to be collected on the assets. We record loan specific allowances as a practical expedient under the CECL Standard ("Specific CECL Allowance"), which we apply to assets that are collateral dependent and where the borrower or sponsor is experiencing financial difficulty. For the remainder of the portfolio, we record a general allowance ("General CECL Allowance", and together with the Specific CECL Allowance, "CECL Allowances"), on a collective basis by assets with similar risk characteristics. We have elected to use the weighted average remaining maturity ("WARM") method in determining a General CECL Allowance for a majority of our portfolio. In the future, we may use other acceptable methods, such as a probability-of-default/loss-given-default method.
The following schedule illustrates changes in CECL Allowances for the three months ended March 31, 2023 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Specific CECL Allowance(1) | | General CECL Allowance | | Total CECL Allowance | | CECL Allowance as % of Amortized Cost(1) | |
| | | Funded | Unfunded | Total | | | General | Total | |
December 31, 2022 | $ | 133,500 | | | $ | 26,224 | | $ | 4,347 | | $ | 30,571 | | | $ | 164,071 | | | 0.36 | % | 1.86 | % | |
Changes: | | | | | | | | | | | |
| Allowances | — | | | 4,043 | | 348 | | 4,391 | | | $ | 4,391 | | | | | |
March 31, 2023 | $ | 133,500 | | | $ | 30,267 | | $ | 4,695 | | $ | 34,962 | | | $ | 168,462 | | | 0.42 | % | 1.95 | % | |
———————
(1)Loans evaluated for Specific CECL Allowance are excluded from General CECL Allowance pool.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Specific CECL Allowance(1) | | General CECL Allowance | | Total CECL Allowance | | CECL Allowance as % of Amortized Cost(1) |
| | | Funded | Unfunded | Total | | | General | Total |
December 31, 2021 | $ | 145,000 | | | $ | 33,588 | | $ | 3,106 | | $ | 36,694 | | | $ | 181,694 | | | 0.49 | % | 2.26 | % |
Changes: | | | | | | | | | | |
| Allowances (Reversals) | 30,000 | | | (12,211) | | 822 | | (11,389) | | | 18,611 | | | | |
March 31, 2022 | $ | 175,000 | | | $ | 21,377 | | $ | 3,928 | | $ | 25,305 | | | $ | 200,305 | | | 0.32 | % | 2.34 | % |
| | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | |
———————
(1)Loans evaluated for Specific CECL Allowance are excluded from General CECL Allowance pool.
For information on General and Specific CECL Allowance changes during the three months ended March 31, 2023 and during the year ended December 31, 2022, see below.
General CECL Allowance
In determining the General CECL Allowance using the WARM method, an annual historical loss rate, adjusted for macroeconomic estimates, is applied to the amortized cost of an asset, or pool of assets, over each subsequent period for the assets' remaining expected life. We considered various factors including (i) historical loss experience in the commercial real estate lending market, (ii) timing of expected repayments and satisfactions, (iii) expected future funding, (iv) capital subordinate to us when we are the senior lender, (v) capital senior to us when we are the subordinate lender, and (vi) our current and future view of the macroeconomic environment for a reasonable and supportable forecast period. The CECL Standard requires the use of significant judgment to arrive at an estimated credit loss. There is significant uncertainty related to future macroeconomic conditions, including inflation, labor shortages and interest rates.
We derived an annual historical loss rate based on a commercial mortgage-backed securities ("CMBS") database with historical losses from 1998 through the first quarter of 2023 provided by a third party, Trepp LLC. We applied various filters to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. The annual historical loss rate was further adjusted to reflect our expectations of the macroeconomic environment for a reasonable and supportable forecast period. At the onset of the COVID-19 pandemic, we adopted a shortened four quarter forecast period in response to heightened macroeconomic uncertainty brought by the pandemic. With the effects of the pandemic gradually easing in response to global and domestic vaccination efforts and other public safety measures, we reverted to a longer forecast period of six quarters effective December 31, 2022 and further extended to eight quarters effective March 31, 2023. In assessing the macroeconomic environment, we consider macroeconomic factors, including unemployment rate, commercial real estate prices, and market liquidity. We compared the historical data for each metric to historical commercial real estate losses in order to determine the correlation of the data. We used projections, obtained from third-party service providers, of each factor to approximate the impact the macroeconomic outlook may have on our loss rate.
The General CECL Allowance on subordinate loans is calculated by incorporating both the loan balance of the position(s) of the structurally senior third-party lender(s) and the balance of our subordinate loan(s). The subordinate loans, by virtue of being the first loss position, are required to absorb losses prior to the senior position(s) being impacted, resulting in a higher percentage allowance attributable to the subordinate loan. The General CECL Allowance on unfunded loan commitments is time-weighted based on our expected commitment to fund such obligations. The General CECL Allowance on unfunded commitments is recorded as a liability on our condensed consolidated balance sheets within accounts payable, accrued expenses and other liabilities.
We have made an accounting policy election to exclude accrued interest receivable ($65.7 million and $65.4 million as of March 31, 2023 and December 31, 2022, respectively), included in other assets on our condensed consolidated balance sheets, from the amortized cost basis of the related commercial mortgage loans and subordinate loans and other lending assets in determining the General CECL Allowance, as any uncollectible accrued interest receivable is written off in a timely manner.
Although our secured debt obligations and senior secured term loan financing have a minimum tangible net worth maintenance covenant, the General CECL Allowance has no impact on these covenants as we are permitted to add back the General CECL Allowance for the computation of tangible net worth as defined in the respective agreements.
The following schedule sets forth our General CECL Allowance as of March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
Commercial mortgage loans, net | | $ | 27,570 | | | $ | 22,848 | |
Subordinate loans and other lending assets, net | | 2,697 | | | 3,376 | |
Unfunded commitments(1) | | 4,695 | | | 4,347 | |
Total General CECL Allowance | | $ | 34,962 | | | $ | 30,571 | |
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(1)The General CECL Allowance on unfunded commitments is recorded as a liability on our condensed consolidated balance sheets within accounts payable, accrued expenses and other liabilities.
Our General CECL Allowance increased by $4.4 million during the quarter ended March 31, 2023. The increase was primarily driven by an increase in our view of the remaining expected term of our loan portfolio, partially offset by the impact of portfolio seasoning and loan repayments and sales.
Specific CECL Allowance
For collateral-dependent loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we have elected to apply a practical expedient in accordance with the CECL Standard in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a Specific CECL Allowance. The Specific CECL Allowance is determined as the difference between the fair value of the underlying collateral and the carrying value of the loan (prior to the Specific CECL Allowance). When the repayment or satisfaction of a loan is dependent on a sale, rather than operations, of the collateral, the fair value is adjusted for the estimated cost to sell the collateral. Collateral-dependent loans evaluated for a Specific CECL Allowance are removed from the General CECL pool. The fair value of the underlying collateral is determined by using method(s) such as discounted cash flow, the market approach, or direct capitalization approach. The key unobservable inputs used to determine the fair value of the underlying collateral may vary depending on the information available to us and market conditions as of the valuation date.
We regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. The Specific CECL Allowance is evaluated on a quarterly basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is 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 liquidation value of the underlying collateral. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such impairment analysis is 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.
The following table summarizes our risk rated 5 loans as of March 31, 2023, which were analyzed for Specific CECL Allowances ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Type | Property type | Location | Amortized cost prior to Specific CECL Allowance | Specific CECL Allowance | Amortized cost | Interest recognition status/ as of date | Risk rating |
Mortgage | | | | | | |
| Retail(1)(2) | Cincinnati, OH | $165,903 | $67,000 | $98,903 | Non-Accrual/ 10/1/2019 | 5 |
Mortgage total: | | $165,903 | $67,000 | $98,903 | | |
| | | | | | | |
Mezzanine | | | | | | |
| Residential(3) | Manhattan, NY | $81,980 | $66,500 | $15,480 | Non-Accrual/ 7/1/2021 | 5 |
Mezzanine total: | | $81,980 | $66,500 | $15,480 | | |
| | | | | | | |
Total: | | $247,883 | $133,500 | $114,383 | | |
| | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | |
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(1)The fair value of retail collateral was determined by applying a capitalization rate of 8.5%.
(2)In September 2018, we entered a joint venture with Turner Consulting II, LLC ("Turner Consulting"), through an entity which owns the underlying property that secures our loan. Turner Consulting contributed 10% of the venture’s equity and we contributed 90%. The entity was deemed to be a Variable Interest Entity (a "VIE") and we determined that we are not the primary beneficiary of that VIE as we do not have the power to direct the entity's activities. During the three months ended March 31, 2023 and 2022, $0.7 million and $0.2 million, respectively, of interest paid was applied towards reducing the carrying value of the loan. The related profit and loss from the joint venture was immaterial for the three March 31, 2023 and 2022.
(3)The fair value of the residential collateral was determined by making certain projections and assumptions with respect to future performance and a discount rate of 10%.
We cease accruing interest on loans if we deem the interest to be uncollectible with any previously accrued uncollected interest on the loan charged to interest income in the same period. The amortized cost basis for loans on non-accrual was $398.2 million and $468.0 million as of March 31, 2023 and December 31, 2022, respectively. Under certain circumstances, we may apply the cost recovery method under which interest collected on a loan reduces the loan's amortized cost. For the three months ended March 31, 2023 and 2022, we received $0.7 million and $0.2 million, respectively, in interest that reduced amortized cost under the cost recovery method.
As of March 31, 2023 and December 31, 2022, the amortized cost basis for loans with accrued interest past due 90 or more days was $398.2 million and $581.3 million, respectively. As of March 31, 2023 and December 31, 2022, there were no loans with accrued interest between 30 and 89 days past due, respectively.
During the third quarter of 2022, we refinanced our three mezzanine loans, and originated a commercial mortgage loan as part of an overall recapitalization. All of the loans are secured by an ultra-luxury residential property in Manhattan, NY. These loans have an aggregate amortized cost at March 31, 2023 of $743.9 million (net of $66.5 million Specific CECL Allowance) (inclusive of $82.5 million of payment- in-kind interest). As of March 31, 2023, these loans include (i) a $250.3 million commercial mortgage loan (“Senior Loan”), (ii) a $194.3 million senior mezzanine loan (“Senior Mezzanine Loan”), (iii) a $283.8 million junior mezzanine loan (“Junior Mezzanine A Loan”), and (iv) a $15.5 million junior mezzanine loan (net of a $66.5 million Specific CECL Allowance) (“Junior Mezzanine B Loan” together with the Junior Mezzanine A Loan collectively referred to as “Junior Mezzanine Loan”).
In refinancing the Senior Mezzanine Loan and Junior Mezzanine Loan, we modified the loan terms with the borrower by modifying the interest rates from LIBOR+15.7% to the Secured Overnight Financing Rate ("SOFR")+9.0% on the Senior Mezzanine Loan, from LIBOR+22.5% to SOFR+15.0% on the Junior Mezzanine A Loan, and from LIBOR+17.5% to SOFR+15.0% on the Junior Mezzanine B Loan. We also extended the term on all three loans from July 2022 to September 2024, including a one-year extension. Based on our analysis under ASC 310-20 “Receivables – Nonrefundable Fees and Other Costs” (“ASC 310-20”), we have deemed this refinance to be a continuation of our existing loans. We opted to cease accruing interest on the Junior Mezzanine A Loan and Junior Mezzanine B Loan as of July 1, 2021 based on a waterfall sharing arrangement with a subordinate capital provider. We will continue to not accrue interest on the Junior Mezzanine Loan following this refinancing.
In accordance with ASC 326, "Financial Instruments – Credit Losses" and adoption of ASU 2022-02 "Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures", we have classified the refinancing of the Senior Mezzanine Loan and Junior Mezzanine Loan as an interest rate reduction and term extension. The aggregate amortized cost of the Senior Mezzanine Loan and Junior Mezzanine Loan as of March 31, 2023 totaled $493.6 million (net of $66.5 million Specific CECL Allowance), or 5.8% of our aggregate commercial mortgage loans and subordinate loans and other lending assets by amortized cost. As of March 31, 2022, sales velocity on the underlying property lagged behind the borrower's business plan and management's expectations. Based on this information as of March 31, 2022, we deemed the borrower to be experiencing financial difficulty and accordingly changed the risk rating to a 5 and recorded $30.0 million of Specific CECL Allowance on the Junior Mezzanine B Loan. During the three months ended December 31, 2022, we recorded an additional $36.5 million Specific CECL Allowance on the Junior Mezzanine B Loan, bringing the total loan Specific CECL Allowance to $66.5 million, due to a slower sales pace across the ultra-luxury residential segment at the end of 2022 in response to broader market uncertainty. The modified loan terms as discussed above have been reflected in our calculation of CECL for the quarter ended March 31, 2023. Refer to "CECL" section above for additional information regarding our calculation of CECL Allowance. As of each March 31, 2023 and December 31, 2022, our amortized cost basis in this loan was $15.5 million and its risk rating remained as a 5.
In March 2017, we originated a first mortgage secured by a hotel in Atlanta, GA. As of May 1, 2022, due to slower than expected recovery from the COVID-19 pandemic, we deemed the borrower to be experiencing financial difficulty and ceased accruing interest. During the second quarter of 2022, we recorded a $7.0 million Specific CECL Allowance. Additionally, during 2022, we modified the loan to provide two short term extensions to the borrower. During the fourth quarter of 2022, the loan went into maturity default, at which time we were in discussions with the sponsor regarding consensual foreclosure. In anticipation of the foreclosure, we wrote off the previously recorded Specific CECL Allowance, and recorded a $7.0 million realized loss on the loan within realized gain (loss) on investments within our December 31, 2022 consolidated statement of operations.
On March 31, 2023, we acquired legal title of the underlying hotel through a deed-in-lieu foreclosure and recognized an additional $4.8 million loss within net realized loss on investments on our condensed consolidated statement of operations. The realized loss represents the difference between the original loan's amortized cost and the fair value of the net real estate assets acquired at the time of foreclosure. Refer to "Note 5 - Real Estate Owned" for additional disclosure.
As of March 31, 2023 and December 31, 2022, there were $0.5 million and $9.5 million, respectively of unfunded commitments related to borrowers experiencing financial difficulty for the entire loan portfolio.
Other Loan and Lending Assets Activity
We recognized no payment-in-kind interest for the three months ended March 31, 2023 and $1.2 million for the three months ended March 31, 2022.
We recognized no pre-payment penalties and accelerated fees for the three months ended March 31, 2023 and $2.1 million for the three months ended March 31 2022.
As of March 31, 2023 and December 31, 2022, our portfolio included other lending assets, which are subordinate risk retention interests in securitization vehicles. The underlying mortgages related to our subordinate risk retention interest is secured by a portfolio of properties located throughout the United States. Our maximum exposure to loss from the subordinate
risk retention interest is limited to the book value of such interests. The book value as of both March 31, 2023 and December 31, 2022 was $51.1 million, consisting of one interest with a weighted average maturity of 1.2 years and 1.4 years, respectively. We are not obligated to provide, and do not intend to provide financial support to these subordinate risk retention interests. These interests are accounted for as held-to-maturity and recorded at carrying value on our condensed consolidated balance sheets.
During the three months ended March 31, 2023, we received £72.2 million ($88.4 million assuming conversion into U.S. Dollars ("USD")) full repayment of one of our commercial mortgage loans secured by an office property in London, UK, including all default interest accrued to date, which was approximately $0.7 million. In conjunction with the repayment, we are no longer recording the previously sold subordinate interest as a secured borrowing on our consolidated balance sheet, which had an amortized cost basis of £20.8 million ($25.1 million assuming conversion into USD). Refer to "Note 12 – Participations Sold" for additional detail related to the subordinate interest.
Loan Sales
From time to time, we may enter into sale transactions with other parties. All sale transactions are evaluated in accordance with ASC 860, "Transfers and Servicing" ("ASC 860").
During the first quarter of 2023, we sold our entire interests in three commercial mortgage loans secured by various properties in Europe, with aggregate commitments of €205.7 million ($219.0 million assuming conversion into USD, of which €115.0 million or $122.4 million assuming conversion into USD, was funded at the time of sale). Additionally, we sold a partial interest of £15.0 million ($18.2 million assuming conversion into USD) in a commercial mortgage loan secured by a mixed-use property located in London, UK. These sales were made to entities managed by affiliates of the Manager. We evaluated the transaction under ASC 860 and determined the sale of our entire interests and the sale of the partial interest met the criteria for sale accounting. We recorded a net gain of approximately $0.2 million in connection with these sales within net realized loss on investments in our March 31, 2023 condensed consolidated statement of operations.
Note 5 – Real Estate Owned
Real Estate Owned, Held for Investment
As of March 31, 2023, assets and liabilities related to real estate owned, held for investment consisted of three properties: the D.C. Hotel, a full-service luxury hotel in Washington, D.C., the Brooklyn Development, a multifamily development property located in downtown Brooklyn, NY, and the Atlanta Hotel, a hotel in Atlanta, GA.
D.C. Hotel
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 the D.C. Hotel. During the first quarter of 2020, we recorded a $10.0 million Specific CECL Allowance and placed our junior mezzanine loan on non-accrual status.
On May 24, 2021, we purchased the $24.5 million senior mezzanine loan at par and acquired legal title to the 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 resulted in a $20.0 million realized loss on investments included within realized gain (loss) on investments in our 2021 consolidated statement of operations.
On May 24, 2021, in accordance with ASC 805, "Business Combinations" ("ASC 805"), we allocated the fair value of the hotel’s acquired assets and assumed debt. The non-recurring fair value measurement was classified as Level III within the fair value hierarchy due to the use of significant unobservable inputs. On June 29, 2021, we repaid the $110.0 million mortgage loan against the property. As of March 1, 2022, the hotel assets, comprised of land, building, furniture fixtures, and equipment, and accumulated depreciation (collectively "REO Fixed Assets"), and liabilities met the criteria to be classified as held for sale under ASC Topic 360, "Property, Plant, and Equipment." Accordingly, as of March 1, 2022, we ceased recording depreciation on the building and furniture, fixtures, and equipment on the condensed consolidated statement of operations.
As of March 1, 2023, due to current market conditions, we have curtailed active marketing efforts, and reclassified the REO Fixed Assets and liabilities from real estate owned, held for sale to real estate owned, held for investment, net in accordance with ASC Topic 360.
The REO Fixed Assets were reclassified to their carrying value before classifying as held for sale in March of 2022 and
$4.0 million in depreciation, representing the amount that would have been recorded had the asset remained as held for investment, was recognized. All other assets and liabilities were reclassified to the corresponding line items on the condensed consolidated balance sheet. No realized gain or loss was recorded in connection with this reclassification.
As of March 31, 2023 and December 31, 2022, the value of net real estate assets related to the D.C. Hotel was $154.2 million and $155.9 million, respectively. For the three months ended March 31, 2023 and 2022, we recorded a net loss from operations of $1.9 million and $1.3 million, respectively.
Brooklyn Development
In 2015, we originated a $122.2 million multifamily development commercial mortgage loan secured by an assemblage of properties in downtown Brooklyn, NY. In 2020, the loan went into default and we recorded a $30.0 million Specific CECL Allowance, due to the deterioration of market conditions attributable to COVID-19. As a result of improved market conditions we reversed $20 million of Specific CECL Allowance during the second quarter of 2021. In the second quarter of 2022, we reversed the remaining $10 million Specific CECL Allowance as a result of market rent growth and value created from development activities at the underlying property.
On August 3, 2022, we acquired legal title of the property through a deed-in-lieu of foreclosure and accounted for the asset acquisition in accordance with ASC 805. At that time, our amortized cost basis in the commercial mortgage loan was $226.5 million. We recorded the real estate assumed at a fair value of $270.1 million based on the market value of the land. We recognized a realized gain of $43.6 million, recorded within realized gain (loss) on investments on our consolidated statement of operations, which reflects the difference between the fair value of the property and the carrying value of the loan at the time of acquisition. The non-recurring fair value measurement was classified as Level III within the fair value hierarchy due to the use of significant unobservable inputs, including comparable sales of similar properties in the market. Since title acquisition, we have capitalized an additional $46.5 million of construction and financing costs, including $13.9 million capitalized during the three months ended March 31, 2023. As of March 31, 2023 and December 31, 2022, our cost basis in the property was $316.6 million and $302.7 million, respectively.
Upon taking title, we concurrently contributed the property to a joint venture with a third-party real estate developer. The entity was deemed to be a VIE, of which we were determined to be the primary beneficiary. Through our wholly owned subsidiaries, we hold a 100% equity ownership interest in the joint venture and our partner is only entitled to profit upon achievement of certain returns under our joint venture agreement. Concurrently with taking title to the property, we obtained $164.8 million in construction financing on the property. As of March 31, 2023 and December 31, 2022, the carrying value of the construction financing included within debt related to real estate owned, held for investment, net on our condensed consolidated balance sheets was $160.6 million, net of $4.2 million in deferred financing costs and $160.3 million, net of $4.5 million in deferred financing costs, respectively.
The construction financing includes a maximum commitment of $388.4 million, an interest rate of term one-month SOFR+2.55%, and current maturity of August 2026, with an option to extend for one year, contingent upon meeting certain conditions. The construction financing agreement contains covenants requiring our unencumbered liquidity be greater than $100.0 million and our net worth be greater than $600.0 million. Under these covenants, our General CECL Allowance is added back to our net worth calculation. As of both March 31, 2023 and December 31, 2022, we were in compliance with these covenants.
Atlanta Hotel
In March 2017, we originated a first mortgage secured by the Atlanta Hotel. During the second quarter of 2022, due to slower than expected recovery from the COVID-19 pandemic, we deemed the borrower to be experiencing financial difficulty. Accordingly, we ceased accruing interest on the loan and recorded a $7.0 million Specific CECL Allowance.
During the fourth quarter of 2022, we wrote off the $7.0 million previously recorded Specific CECL Allowance and reduced the principal balance of the loan which was recorded as a realized loss within net realized loss on investments in our December 31, 2022 consolidated statement of operations.
On March 31, 2023, we acquired legal title of the Atlanta Hotel through a deed-in-lieu foreclosure. In accordance with ASC 805, we allocated the fair value of the assumed assets and liabilities on the March 31, 2023 acquisition date as follows:
| | | | | |
| March 31, 2023 |
Assets: | |
Cash | $ | 569 | |
Buildings | 50,152 | |
Land | 16,628 | |
Furniture, fixtures, and equipment | 8,220 | |
Other assets | 2,827 | |
Total Assets | $ | 78,396 | |
Liabilities: | |
Accounts payable, accrued expenses and other liabilities | $ | 3,396 | |
Total Liabilities | $ | 3,396 | |
Net Real Estate Assets | $ | 75,000 | |
We determined the $75.0 million fair value of net real estate assets in accordance with ASC 820, "Fair Value Measurements and Disclosures" utilizing significant unobservable inputs. As such, the fair value of real estate owned is categorized within Level III of the fair value hierarchy set forth by ASC 820. See "Note 3 - Fair Value Disclosure" for discussion of our non-recurring fair value measurements. Additionally, we recognized a realized loss of $4.8 million, recorded within net realized loss on investments on our condensed consolidated statement of operations. The realized loss represents the difference between the original loan's amortized cost and the fair value of the net assets acquired.
We recorded no income or loss from the hotel's operations for the three months ended March 31, 2023.
Note 6 – Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands): | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Interest receivable | $ | 65,738 | | | $ | 65,383 | |
Loan proceeds held by servicer | 1,044 | | | 3,371 | |
Other(1) | 9,641 | | | 1,853 | |
Total | $ | 76,423 | | | $ | 70,607 | |
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(1)Includes $9.3 million of other assets from real estate owned as of March 31, 2023. Refer to "Note 5 – Real Estate Owned" for additional information.
Note 7 – Secured Debt Arrangements, Net
We utilize secured debt arrangements to finance the origination activity in our loan portfolio. Our secured debt arrangements are comprised of secured credit facilities, a private securitization, and a revolving credit facility. During the three months ended March 31, 2023, we entered into two new secured debt arrangements, including a credit facility with Banco Santander, S.A., New York Branch and a revolving credit facility administered by Bank of America, N.A. ("Revolving Credit Facility") which provided a combined $470.0 million of additional capacity, and upsized the Atlas Facility, as defined in this Form 10-Q, by $83.3 million.
Our borrowings under secured debt arrangements at March 31, 2023 and December 31, 2022 are detailed in the following table ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | |
| Maximum Amount of Borrowings(1) | | Borrowings Outstanding(1) | | Maturity (2) | | Maximum Amount of Borrowings(1) | | Borrowings Outstanding(1) | | Maturity (2) | |
JPMorgan Facility - USD(3)(4) | $ | 1,483,123 | | | $ | 1,247,388 | | | September 2026 | | $ | 1,532,722 | | | $ | 1,306,320 | | | September 2026 | |
JPMorgan Facility - GBP(3)(4) | 16,877 | | | 16,877 | | | September 2026 | | 67,278 | | | 67,278 | | | September 2026 | |
| | | | | | | | | | | | |
Deutsche Bank Facility - USD(3) | 700,000 | | | 385,818 | | | March 2026 | | 700,000 | | | 385,818 | | | March 2026 | |
Atlas Facility - USD(5) | 695,339 | | | 688,126 | | | March 2027(6)(7) | | 635,653 | | | 632,747 | | | March 2027(6)(7) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
HSBC Facility - GBP | 372,095 | | | 372,095 | | | April 2025 | | 364,423 | | | 364,423 | | | April 2025 | |
HSBC Facility - EUR | 276,299 | | | 276,299 | | | January 2026(7) | | 272,890 | | | 272,890 | | | January 2026 | |
Goldman Sachs Facility - USD | 300,000 | | | 33,755 | | | November 2025(8) | | 300,000 | | | 70,249 | | | November 2025(8) | |
Barclays Facility - USD | 200,000 | | | 111,909 | | | June 2027(6) | | 200,000 | | | 111,909 | | | June 2027 | |
MUFG Securities Facility - GBP | 198,355 | | | 198,355 | | | June 2025(6) | | 194,272 | | | 194,272 | | | June 2025 | |
Santander Facility - USD | 300,000 | | | 75,000 | | | February 2025(6) | | — | | | — | | | N/A | |
Santander Facility - EUR | 58,531 | | | 54,202 | | | August 2024 | | 57,807 | | | 53,320 | | | August 2024 | |
Total Secured Credit Facilities | 4,600,619 | | | 3,459,824 | | | | | 4,325,045 | | | 3,459,226 | | | | |
Barclays Private Securitization - GBP, EUR, SEK | 1,872,779 | | | 1,872,779 | | | February 2026(7) | | 1,850,076 | | | 1,850,076 | | | February 2026(7) | |
Revolving Credit Facility - USD(9) | 170,000 | | | — | | | March 2026 | | — | | | — | | | N/A | |
Total Secured Debt Arrangements | 6,643,398 | | | 5,332,603 | | | | | 6,175,121 | | | 5,309,302 | | | | |
Less: deferred financing costs | N/A | | (15,750) | | | | | N/A | | (12,477) | | | | |
Total Secured Debt Arrangements, net(10)(11)(12) | $ | 6,643,398 | | | $ | 5,316,853 | | | | | $ | 6,175,121 | | | $ | 5,296,825 | | | |
|
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(1)As of March 31, 2023, British Pound Sterling("GBP"), Euro ("EUR"), and Swedish Krona ("SEK") borrowings were converted to USD at a rate of 1.23, 1.08, and 0.10, respectively. As of December 31, 2022, GBP, EUR and SEK borrowings were converted to USD at a rate of 1.21, 1.07 and 0.10, respectively.
(2)Maturity date assumes extensions at our option are exercised with consent of financing providers, where applicable.
(3)The JPMorgan Facility and Deutsche Bank Facility enable us to elect to receive advances in USD, GBP, or EUR.
(4)The JPMorgan Facility allows for $1.5 billion of maximum borrowings in total as of March 31, 2023. The JPMorgan Facility was temporarily upsized from $1.5 billion to $1.6 billion during August 2022 and the maximum borrowings decreased to $1.5 billion as of January 2023.
(5)The Atlas Facility was formerly the Credit Suisse Facility. See "—Atlas Facility" below for additional discussion.
(6)Assumes financings are extended in line with the underlying loans.
(7)Represents weighted average maturity across various financings with the counterparty. See below for additional details.
(8)Assumes facility enters the two-year amortization period subsequent to the November 2023 maturity, which allows for the refinancing or pay down of assets under the facility.
(9)The current stated maturity of the Revolving Credit Facility is March 2026. Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. Borrowings under the Revolving Credit Facility are full recourse to certain guarantor wholly-owned subsidiaries of the Company. See "—Revolving Credit Facility" below for additional discussion.
(10)Weighted-average borrowing costs as of March 31, 2023 and December 31, 2022 were applicable benchmark rates and credit spread adjustments, plus spreads of USD: +2.35% / GBP: +1.92% / EUR: +1.54% / SEK: +1.50% and USD: +2.28% / GBP: +2.02% / EUR: +1.54%/ SEK: +1.50%, respectively.
(11)Weighted average advance rates based on cost as of March 31, 2023 and December 31, 2022 were 69.7% (65.6% (USD) / 74.5% (GBP) / 71.7% (EUR) / 80.5% (SEK)) and 68.8% (63.9% (USD) / 74.0% (GBP) / 72.1% (EUR) / 80.5% (SEK)), respectively.
(12)As of March 31, 2023 and December 31, 2022, approximately 58% and 58% of the outstanding balance under these secured borrowings were recourse to us.
Terms of our secured credit facilities are designed to keep each lender's credit exposure generally constant as a percentage of the underlying value of the assets pledged as security to the facility. If the credit of the underlying collateral value decreases, the amount of leverage to us may be reduced. As of March 31, 2023 and December 31, 2022, the weighted average haircut under our secured debt arrangements was approximately 30.3% and 31.21%, respectively. Our secured credit facilities do not contain capital markets-based mark-to-market provisions.
Atlas Facility
On February 8, 2023, in connection with the acquisition by certain subsidiaries of Atlas Securitized Products Holdings (“Atlas”), which is a wholly-owned investment of a fund managed by an affiliate of the Manager, of certain warehouse assets and liabilities of the Credit Suisse AG Securitized Products Group ("Credit Suisse AG")(the “Transaction”), the Credit Suisse Facility was acquired by Atlas ("Atlas Facility"). In order to effect the assignment of the Credit Suisse Facility and related agreements, the Company and one of its subsidiaries, similar to the other sellers and guarantors party to the subject agreements in the Transaction, entered into an Omnibus Assignment, Assumption and Amendment Agreement as well as certain related agreements with Credit Suisse AG and Atlas. Refer to "Note 14 - Related Party Transactions" for further discussion regarding the transaction.
Revolving Credit Facility
On March 3, 2023, we entered into the Revolving Credit Facility administered by Bank of America, N.A. Revolving Credit Facility provides up to $170.0 million of borrowings secured by qualifying commercial mortgage loans and real property owned assets. The Revolving Credit Facility has a term of three years, maturing in March 2026. The Revolving Credit Facility enables us to borrow on qualifying commercial mortgage loans for up to two years and real property owned assets for up to six months. As of March 31, 2023 we had no borrowings outstanding on the Revolving Credit Facility. During the three months ended March 31, 2023, we recorded $27.4 thousand in unused fees related to the Revolving Credit Facility.
The guarantees related to the Revolving Credit Facility contain the following financial covenants: (i) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or $30.0 million; (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 4:1; (iii) tangible net worth must be greater than $1.25 billion plus 75% of the net cash proceeds of any equity issuance after March 31, 2017; and (iv) maintain a minimum interest coverage ratio of 1.5:1. We were in compliance with the covenants under the Revolving Credit Facility as of March 31, 2023.
Barclays Private Securitization
We are party to a private securitization with Barclays Bank plc (the "Barclays Private Securitization"). Commercial mortgage loans currently financed under the Barclays Securitization are denominated in GBP, EUR and SEK.
The Barclays Private Securitization does not include daily margining provisions and grants us significant discretion to modify certain terms of the underlying collateral including waiving certain loan-level covenant breaches and deferring or waiving of debt service payments for up to 18 months. The securitization includes loan-to-value based covenants with deleveraging requirements that are based on significant declines in the value of the collateral as determined by an annual third-party (engaged by us) appraisal process tied to the provisions of the underlying loan agreements. We believe this provides us with both cushion and predictability to avoid sudden unexpected outcomes and material repayment requirements.
The table below provides principal balances and the carrying value for commercial mortgage loans pledged to the Barclays Private Securitization as of March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | |
| March 31, 2023 |
Local Currency | Count | | Outstanding Principal | | Carrying Value |
GBP | 7 | | $ | 1,544,534 | | | $ | 1,525,382 | |
EUR | 5 | | 759,708 | | 754,935 |
SEK | 1 | | 248,634 | | | 246,170 | |
Total | 13 | | $ | 2,552,876 | | | $ | 2,526,487 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
Local Currency | Count | | Outstanding Principal | | Carrying Value |
GBP | 7 | | $ | 1,495,616 | | | $ | 1,475,241 | |
EUR | 5 | | 752,531 | | 747,240 |
SEK | 1 | | 248,064 | | | 245,714 | |
Total | 13 | | $ | 2,496,211 | | | $ | 2,468,195 | |
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 March 31, 2023 ($ in thousands): | | | | | | | | | | | |
| Borrowings Outstanding(1) | | Fully-Extended Maturity(2) |
Total/Weighted-Average GBP | $ | 1,147,379 | | | May 2026 |
Total/Weighted-Average EUR | 526,493 | | June 2025(3) |
Total/Weighted-Average SEK | 198,907 | | May 2026 |
Total/Weighted-Average Securitization | $ | 1,872,779 | | | February 2026 |
———————
(1)As of March 31, 2023, we had £930.0 million, €485.7 million, and kr2.1 billion of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans.
(2)Assumes underlying loans extend to fully extended maturity and extensions at our option are exercised.
(3)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.
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 December 31, 2022 ($ in thousands):
| | | | | | | | | | | |
| Borrowings Outstanding(1) | | Fully-Extended Maturity(2) |
Total/Weighted-Average GBP | 1,125,420 | | May 2026 |
Total/Weighted-Average EUR | 526,204 | | June 2025(3) |
Total/Weighted-Average SEK | 198,452 | | May 2026 |
Total/Weighted-Average Securitization | $ | 1,850,076 | | | February 2026 |
———————
(1)As of December 31, 2022, we had £931.4 million, €491.6 million, and kr2.1 billion of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans.
(2)Assumes underlying loans extend to fully extended maturity and extensions at our option are exercised.
(3)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.
The table below provides the assets and liabilities of the Barclays Private Securitization VIE included in our condensed consolidated balance sheets ($ in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Assets: | | | |
Cash | $ | 1,734 | | | $ | 758 | |
Commercial mortgage loans, net(1) | 2,526,487 | | | 2,468,195 | |
Other Assets | 30,230 | | | 30,992 | |
Total Assets | $ | 2,558,451 | | | $ | 2,499,945 | |
Liabilities: | | | |
Secured debt arrangements, net (net of deferred financing costs of $2.7 million and $2.3 million in 2023 and 2022, respectively) | $ | 1,870,088 | | | $ | 1,847,799 | |
Accounts payable, accrued expenses and other liabilities(2) | 10,735 | | | 8,814 | |
Total Liabilities | $ | 1,880,823 | | | $ | 1,856,613 | |
———————
(1)Net of the General CECL Allowance of $8.0 million and $8.2 million as of March 31, 2023 and December 31, 2022, respectively.
(2)Includes General CECL Allowance related to unfunded commitments on commercial mortgage loans, net of $2.9 million and $2.9 million as of March 31, 2023 and December 31, 2022, respectively.
The table below provides the net income of the Barclays Private Securitization VIE included in our condensed consolidated statement of operations ($ in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
Net Interest Income: | | | | | | | |
Interest income from commercial mortgage loans | | | | | $ | 46,977 | | | $ | 28,714 | |
Interest expense | | | | | (23,133) | | | (9,588) | |
Net interest income | | | | | $ | 23,844 | | | $ | 19,126 | |
| | | | | | | |
Decrease (increase) in current expected credit loss allowance, net | | | | | 199 | | | 3,341 | |
Foreign currency translation gain (loss) | | | | | 10,002 | | | (19,629) | |
Net Income | | | | | $ | 34,045 | | | $ | 2,838 | |
At March 31, 2023, our borrowings had the following remaining maturities ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than 5 years | | Total |
JPMorgan Facility | $ | 143,557 | | | $ | 527,349 | | | $ | 593,359 | | | $ | — | | | $ | 1,264,265 | |
Deutsche Bank Facility | 88,359 | | | 130,892 | | | 166,567 | | | — | | | 385,818 | |
Atlas Facility | — | | | 105,008 | | | 583,118 | | | — | | | 688,126 | |
HSBC Facility | — | | | 493,056 | | | 155,338 | | | — | | | 648,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goldman Sachs Facility | — | | | 33,755 | | | — | | | — | | | 33,755 | |
Barclays Facility | — | | | — | | | 111,909 | | | — | | | 111,909 | |
MUFG Securities Facility | — | | | 198,355 | | | — | | | — | | | 198,355 | |
Santander Facility - USD | — | | | 75,000 | | | — | | | — | | | 75,000 | |
Santander Facility - EUR | — | | | 54,202 | | | — | | | — | | | 54,202 | |
Barclays Private Securitization | — | | | 716,189 | | | 1,156,590 | | | — | | | 1,872,779 | |
Total | $ | 231,916 | | | $ | 2,333,806 | | | $ | 2,766,881 | | | $ | — | | | $ | 5,332,603 | |
The table above reflects the fully extended maturity date of the facility and assumes facilities with an "evergreen" feature continue to extend through the fully-extended maturity of the underlying asset and assumes underlying loans are extended with consent of financing providers.
The table below summarizes the outstanding balances at March 31, 2023, as well as the maximum and average month-end balances for the three months ended March 31, 2023 for our borrowings under secured debt arrangements ($ in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | For the three months ended March 31, 2023 |
| Balance | | Amortized Cost of Collateral | | Maximum Month-End Balance | | Average Month-End Balance |
JPMorgan Facility | $ | 1,264,265 | | | $ | 2,115,700 | | | $ | 1,324,226 | | | $ | 1,295,325 | |
Deutsche Bank Facility | 385,818 | | | 569,703 | | | 385,818 | | | 385,818 | |
Goldman Sachs Facility | 33,755 | | | 56,173 | | | 70,249 | | | 58,084 | |
Atlas Facility | 688,126 | | | 939,299 | | | 688,126 | | | 650,791 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
HSBC Facility | 648,394 | | | 828,224 | | | 648,482 | | | 643,014 | |
Barclays Facility | 111,909 | | | 138,652 | | | 111,909 | | | 111,909 | |
| | | | | | | |
MUFG Securities Facility | 198,355 | | | 267,448 | | | 198,355 | | | 196,576 | |
Santander Facility - USD | 75,000 | | | 99,389 | | | 75,000 | | | 50,000 | |
Santander Facility - EUR | 54,202 | | | 72,270 | | | 54,227 | | | 53,755 | |
Barclays Private Securitization | 1,872,779 | | | 2,534,457 | | | 1,879,238 | | | 1,860,505 | |
Total | $ | 5,332,603 | | | $ | 7,621,315 | | | | | |
The table below summarizes the outstanding balances at December 31, 2022, as well as the maximum and average month-end balances for the year ended December 31, 2022 for our borrowings under secured debt arrangements ($ in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | For the year ended December 31, 2022 |
| Balance | | Amortized Cost of Collateral | | Maximum Month-End Balance | | Average Month-End Balance |
JPMorgan Facility | $ | 1,373,598 | | | $ | 2,376,154 | | | $ | 1,584,171 | | | $ | 1,411,644 | |
Deutsche Bank Facility | 385,818 | | | 565,387 | | | 432,455 | | | 400,337 | |
Goldman Sachs Facility | 70,249 | | | 116,619 | | | 164,607 | | | 140,599 | |
Atlas Facility | 632,747 | | | 855,119 | | | 633,143 | | | 541,245 | |
HSBC Facility | 637,313 | | | 813,716 | | | 660,004 | | | 501,674 | |
Barclays Facility | 111,909 | | | 138,510 | | | 172,693 | | | 102,664 | |
MUFG Securities Facility | 194,272 | | | 261,319 | | | 194,272 | | | 156,499 | |
Santander Facility | 53,320 | | | 71,093 | | | 53,320 | | | 50,450 | |
Barclays Private Securitization | 1,850,076 | | | 2,476,349 | | | 1,963,837 | | | 1,828,794 | |
Total | $ | 5,309,302 | | | $ | 7,674,266 | | | | | |
Debt Covenants
The guarantees related to our secured debt arrangements contain the following financial covenants: (i) tangible net worth must be greater than $1.25 billion plus 75% of the net cash proceeds of any equity issuance after March 31, 2017; (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 3.75:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or $30.0 million. Under these covenants, our General CECL Allowance is added back to our tangible net worth calculation. Additionally, in relation to our Revolving Credit Facility, we must maintain a minimum interest coverage ratio of 1.5:1.
We were in compliance with the covenants under each of our secured debt arrangements at March 31, 2023 and December 31, 2022.
Note 8 – Senior Secured Term Loans, Net
In May 2019, we entered into a $500.0 million senior secured term loan (the "2026 Term Loan"), which matures in May 2026 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The 2026 Term Loan bears interest at LIBOR plus 2.75% and was issued at a price of 99.5%.
In March 2021, we entered into an additional $300.0 million senior secured term loan, with substantially the same terms as the 2026 Term Loan, (the "2028 Term Loan" and, together with the 2026 Term Loan, the "Term Loans"), which matures in March 2028 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The 2028 Term Loan bears interest at LIBOR (with a floor of 0.50%) plus 3.50% and was issued at a price of 99.0%.
The Term Loans are amortizing with repayments of 0.25% per quarter of the total committed principal. During the three months ended March 31, 2023 and 2022, we repaid $1.3 million of principal respectively related to the 2026 Term Loan. During the three months ended March 31, 2023 and 2022, we repaid $0.7 million of principal respectively related to the 2028 Term Loan.
The following table summarizes the terms of the Term Loans as of March 31, 2023 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Unamortized Issuance Discount(1) | Deferred Financing Costs(1) | Carrying Value | Spread | Maturity Date |
2026 Term Loan | $ | 481,250 | | $ | (1,101) | | $ | (3,742) | | $ | 476,407 | | 2.75 | % | 5/15/2026 |
2028 Term Loan | 294,000 | | (2,107) | | (5,594) | | 286,299 | | 3.50 | % | 3/11/2028 |
Total | $ | 775,250 | | $ | (3,208) | | $ | (9,336) | | $ | 762,706 | | | |
———————
(1) Unamortized issuance discount and deferred financing costs will be amortized to interest expense over remaining life of respective term loans.
The following table summarizes the terms of the Term Loans as of December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Unamortized Issuance Discount(1) | Deferred Financing Costs(1) | Carrying Value | Spread | Maturity Date |
2026 Term Loan | $ | 482,500 | | $ | (1,190) | | $ | (6,106) | | $ | 475,204 | | 2.75 | % | 5/15/2026 |
2028 Term Loan | 294,750 | | (2,214) | | (3,927) | | 288,609 | | 3.50 | % | 3/11/2028 |
Total | $ | 777,250 | | $ | (3,404) | | $ | (10,033) | | $ | 763,813 | | | |
———————
(1) Unamortized issuance discount and deferred financing costs will be amortized to interest expense over remaining life of respective term loans.
Covenants
The financial covenants of the Term Loans include the requirements that we maintain: (i) a maximum ratio of total recourse debt to tangible net worth of 4:1; and (ii) a maximum ratio of total unencumbered assets to total pari-passu indebtedness of 2.50:1. We were in compliance with the covenants under the Term Loans at March 31, 2023 and December 31, 2022.
Interest Rate Cap
During 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%. In connection with the interest rate cap, we incurred
upfront fees of $1.1 million for the year ended December 31, 2020, which we recorded as a deferred financing cost on our consolidated balance sheets. The deferred financing cost is being amortized over the duration of the interest rate cap with respective amortization recognized as part of interest expense in our condensed consolidated statement of operations.
During the three months ended March 31, 2023, LIBOR exceeded the cap rate of 0.75%. As such, during the three months ended March 31, 2023, we realized a gain from the interest rate cap in the amount of $4.7 million, which is included in gain (loss) on interest rate hedging instruments in our condensed consolidated statement of operations. The realized gain was a result of the increase in the current interest rate forward curve, partially offset by the nearing maturity of the cap.
Note 9 – Senior Secured Notes, Net
In June 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 deducting initial purchasers' discounts and commissions. The 2029 Notes will mature on June 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. The 2029 Notes had a carrying value of $495.0 million and $494.8 million, net of deferred financing costs of $5.0 million and $5.2 million, as of March 31, 2023 and December 31, 2022, respectively.
Covenants
The 2029 Notes include certain covenants including a requirement that we maintain a ratio of total unencumbered assets to total pari-passu indebtedness of at least 1.20:1. As of March 31, 2023 and December 31, 2022, we were in compliance with all covenants.
Note 10 – Convertible Senior Notes, Net
In two separate offerings during 2017, we issued an aggregate principal amount of $345.0 million of 4.75% Convertible Senior Notes due 2022 (the "2022 Notes"), for which we received $337.5 million, after deducting the underwriting discount and offering expenses. During the third quarter of 2022, we repaid the $345.0 million aggregate principal amount of the 2022 Notes in cash at par.
During the fourth quarter of 2018, we issued $230.0 million of 5.375% Convertible Senior Notes due 2023 (the "2023 Notes" and, together with the 2022 Notes, the "Convertible Notes"), for which we received $223.7 million after deducting the underwriting discount and offering expenses. At March 31, 2023, the 2023 Notes had a carrying value of $222.5 million and an unamortized discount of $0.4 million.
The following table summarizes the terms of the 2023 Notes as of March 31, 2023 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Coupon Rate | Effective Rate (1) | Conversion Rate (2) | Maturity Date | Remaining Period of Amortization |
| | | | | | |
2023 Notes | 222,910 | | 5.38 | % | 5.74 | % | 48.7187 | | 10/15/2023 | 0.54 |
Total | $ | 222,910 | | | | | | |
The following table summarizes the terms of the 2023 Notes as of December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Coupon Rate | Effective Rate (1) | Conversion Rate (2) | Maturity Date | Remaining Period of Amortization |
2023 Notes | 230,000 | | 5.38 | % | 5.85 | % | 48.7187 | | 10/15/2023 | 0.79 |
Total | $ | 230,000 | | | | | | |
———————
(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. The effective rate as of both March 31, 2023 and December 31, 2022 reflects adoption of ASU 2020-06 "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity" ("ASU 2020-06") and early extinguishment of debt.
(2)We have 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 one thousand principal amount of the Convertible Notes converted and includes adjustments relating to cash dividend payments made by us 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.
On January 1, 2022, we adopted ASU 2020-06, which no longer require the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. Prior to the adoption of ASU 2020-06, we attributed $15.4 million of the proceeds to the equity component of the Convertible Notes ($11.0 million to the 2022 Notes and $4.4 million to the 2023 Notes), which represented the excess proceeds received over the fair value of the liability component of the Convertible Notes at the date of issuance. The equity component of the Convertible Notes had been reflected within additional paid-in capital on our consolidated balance sheets until January 1, 2022 when we adopted ASU 2020-06 through the modified retrospective approach. Upon adoption, we (i) reclassified $12.0 million of previously recorded amortization related to the equity component of the Convertible Notes from retained earnings to additional paid-in-capital and (ii) reclassified the remaining unamortized balance of $3.4 million to additional paid-in-capital, which increased the cost basis of convertible notes and decreased additional paid-in-capital on the consolidated balance sheets.
We may not redeem the 2023 Notes prior to maturity except in limited circumstances. On March 20, 2023, we repurchased $7.1 million aggregate principal amount of the 2023 Notes at a price of 97%. As a result of this transaction, we recorded a gain of $0.2 million within realized gain on extinguishment of debt in our March 31, 2023 condensed consolidated statement of operations. The gain represents the difference between the repurchase price and the carrying amount of the 2023 Notes, net of the proportionate amount of unamortized debt issuance costs. The closing price of our common stock on March 31, 2023 of $9.31 was less than the per share conversion price of the 2023 Notes at such time.
The aggregate contractual interest expense was approximately $3.0 million and $7.2 million for the three months ended March 31, 2023 and 2022 respectively. With respect to the amortization of the discount on the liability component of the Convertible Notes as well as the amortization of deferred financing costs, we reported additional non-cash interest expense of approximately $0.4 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively.
Note 11 – Derivatives
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, EUR and SEK) for an agreed upon amount of USD at various dates through February 2027. 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.
The agreements with our derivative counterparties require that we post collateral to secure net liability positions. As of both March 31, 2023 and December 31, 2022, we were in a net asset position with all of our derivative counterparties and did not have any collateral posted under these derivative contracts.
The following table summarizes our non-designated Fx forwards and our interest rate cap as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
Type of Derivatives | Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity | | Weighted-Average Years to Maturity |
Fx contracts - GBP | 118 | | 900,736 | | GBP | | April 2023 - February 2027 | | 1.67 |
Fx contracts - EUR | 105 | | 440,260 | | EUR | | April 2023 - November 2025 | | 1.61 |
Fx contracts - SEK | 18 | | 716,316 | | SEK | | May 2023 - May 2026 | | 2.75 |
Interest rate cap | 1 | | 500,000 | | USD | | June 2023 | | 0.21 |
The following table summarizes our non-designated Fx forwards and our interest rate cap as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
Type of Derivatives | Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity | | Weighted-Average Years to Maturity |
Fx contracts - GBP | 124 | | 936,930 | | GBP | | January 2023 - February 2027 | | 1.78 |
Fx contracts - EUR | 130 | | 576,240 | | EUR | | January 2023 - November 2025 | | 1.78 |
Fx contracts - SEK | 19 | | 730,432 | | SEK | | February 2023 - May 2026 | | 2.95 |
Interest rate cap | 1 | | 500,000 | | USD | | June 2023 | | 0.46 |
We have not designated any of our derivative instruments as hedges as defined in ASC 815, "Derivatives and Hedging" and, therefore, changes in the fair value of our derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on our condensed consolidated statements of operations related to our derivatives for the three months ended March 31, 2023 and 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amount of gain (loss) recognized in income |
| | | | | Three months ended March 31, |
| Location of Gain (Loss) Recognized in Income | | | | | | 2023 | | 2022 | | |
Forward currency contracts | Unrealized gain (loss) on derivative instruments | | | | | | $ | (35,851) | | | $ | 18,142 | | | |
Forward currency contracts | Realized gain on derivative instruments | | | | | | 21,716 | | | 4,620 | | | |
Total | | | | | | | $ | (14,135) | | | $ | 22,762 | | | |
In June 2020, we entered into an interest rate cap for approximately $1.1 million. We use our interest rate cap to manage exposure to variable cash flows on our borrowings under the senior secured term loan by effectively limiting LIBOR from exceeding 0.75%. This effectively limits the maximum all-in coupon on our senior secured term loan to 3.50%. The unrealized gain or loss related to the interest rate cap is recorded net under unrealized gain on interest rate hedging instruments in our consolidated statement of operations. During the three months ended March 31, 2023, LIBOR exceeded the cap rate of 0.75%. As such, during the three months ended March 31, 2023, we realized a gain from the interest rate cap in the amount of $4.7 million, which is included in gain (loss) on interest rate hedging instruments in our condensed consolidated statement of operations. The realized gain was a result of the increase in the current interest rate forward curve, partially offset by the nearing maturity of the cap. There was no realized gain recorded during the three months ended March 31, 2022. The following table summarizes the amounts recognized on our condensed consolidated statements of operations related to our interest rate cap for the three months ended March 31, 2023 and 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount of gain (loss) recognized in income |
| | | Three months ended March 31, |
| Location of gain (loss) recognized in income | | 2023 | | | 2022 | | | | |
Interest rate cap(1) | Unrealized gain (loss) on interest rate hedging instruments | | $ | (4,813) | | | | $ | 6,321 | | | | | |
Interest rate cap(1) | Realized gain on interest rate hedging instruments | | 4,706 | | | | — | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | | $ | (107) | | | | $ | 6,321 | | | | | |
———————
(1)With a notional amount of $500.0 million at March 31, 2023 and 2022.
The following tables summarize the gross asset and liability amounts related to our derivatives at March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in our Condensed Consolidated Balance Sheet | | Net Amounts of Assets Presented in our Condensed Consolidated Balance Sheet | | Gross Amount of Recognized Assets | | Gross Amounts Offset in our Consolidated Balance Sheet | | Net Amounts of Assets Presented in our Consolidated Balance Sheet |
Forward currency contracts | $ | 106,825 | | | $ | (23,176) | | | $ | 83,649 | | | $ | 143,285 | | | $ | (23,786) | | | $ | 119,499 | |
Interest rate cap | 5,256 | | | — | | | 5,256 | | | 9,141 | | | — | | | 9,141 | |
Total derivative assets (liabilities) | $ | 112,081 | | | $ | (23,176) | | | $ | 88,905 | | | $ | 152,426 | | | $ | (23,786) | | | $ | 128,640 | |
Note 12 – Participations Sold
Participations sold represents the subordinate interests in loans we originated and subsequently partially sold. We account for participations sold as secured borrowings on our condensed consolidated balance sheet with both assets and non-recourse liabilities because the participations do not qualify as a sale under ASC 860. The income earned on the participations sold is recorded as interest income and an identical amount is recorded as interest expense in our condensed consolidated statements of operations.
In December 2020, we sold a £6.7 million ($8.9 million assuming conversion into USD at time of transfer) interest, at par, in a first mortgage loan collateralized by an office building located in London, UK that was originated by us in December 2017. In connection with this sale, we transferred our remaining unfunded commitment of £19.1 million ($25.3 million assuming conversion into USD at time of transfer). The participation interest sold was subordinate to our first mortgage loan and was accounted for as a secured borrowing on our consolidated balance sheet. In January 2023, the first mortgage loan, including participations sold, was fully satisfied, including all contractual and default interest accrued to date.
The table below details participations sold included in our condensed consolidated balance sheets ($ in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Participation sold on commercial mortgage loans | $ | — | | | $ | 25,130 | |
| | | |
Total participations sold | $ | — | | | $ | 25,130 | |
Note 13 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands): | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Collateral held under derivative agreements | $ | 87,790 | | | $ | 138,620 | |
Accrued dividends payable | 53,006 | | | 53,203 | |
Accrued interest payable | 35,537 | | | 23,943 | |
Accounts payable and other liabilities(1) | 12,429 | | | 7,247 | |
General CECL Allowance on unfunded commitments(2) | 4,695 | | | 4,347 | |
Total | $ | 193,457 | | | $ | 227,360 | |
———————
(1)Includes $11.7 million and $1.1 million of accounts payable and other liabilities on the balance sheet of the Real Estate Owned, Held for Investment at March 31, 2023 and December 31, 2022, respectively.
(2)Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional disclosure related to the General CECL Allowance on unfunded commitments as of March 31, 2023 and December 31, 2022, respectively.
Note 14 – Related Party Transactions
Management Agreement
In connection with our initial public offering in September 2009, we 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 our day-to-day operations, subject to the direction
and oversight of our 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 our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The term of the Management Agreement was automatically renewed for a successive one-year term on September 29, 2022 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 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 of our independent directors in March 2023, 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.
We incurred approximately $9.5 million and $9.4 million in base management fees under the Management Agreement for the three months ended March 31, 2023 and 2022, respectively.
In addition to the base management fee, we are also responsible for reimbursing the Manager for certain expenses paid by the Manager on our behalf or for certain services provided by the Manager to us. For the three months ended March 31, 2023 and 2022, we paid expenses totaling $1.2 million and $0.9 million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement. Expenses incurred by the Manager and reimbursed by us are reflected in the respective condensed consolidated statement of operations expense category or our condensed consolidated balance sheets based on the nature of the item.
Included in payable to related party on our condensed consolidated balance sheets at March 31, 2023 and December 31, 2022 is approximately $9.5 million and $9.7 million, respectively, for base management fees incurred but not yet paid under the Management Agreement.
Loans receivable
We own three mezzanine loans and a commercial mortgage that are secured by the same ultra-luxury residential property currently under construction in Manhattan, NY. During the third quarter of 2021, a vehicle managed by an affiliate of the Manager transferred its Junior Mezzanine B Loan position to the Company and in connection with this transfer, one of the property’s subordinate capital providers paid the vehicle a price representing the original principal balance on the Junior Mezzanine B Loan position with the vehicle agreeing to forego its accrued interest on the Junior Mezzanine B Loan. During the third quarter of 2022, we refinanced our mezzanine loans, and originated a commercial mortgage loan as part of an overall recapitalization. The mezzanine positions held by entities managed by affiliates of the Manager were repaid. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information.
During the third quarter of 2022, we transferred £293.4 million ($327.7 million assuming conversion into USD) of unfunded commitments related to a mixed-use development property located in London, UK to entities managed by affiliates of the Manager.
During the first quarter of 2023, we transferred interests in, (i) three commercial mortgage loans secured by various properties in Europe, with aggregate commitments of €205.7 million (of which €115.0 million was funded at the time of sale), and (ii) a partial interest of £15.0 million in a commercial mortgage loan secured by a mixed-use property located in London, UK. These transfers were made to entities managed by affiliates of the Manager. Refer to "Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional disclosure.
Term Loan
In March 2021, Apollo Global Funding, LLC, an affiliate of the Manager, served as one of the eight arrangers for the issuance of our 2028 Term Loan and received $0.2 million of arrangement fees. In addition, funds managed by an affiliate of the Manager invested in $30.0 million of the 2028 Term Loan.
Senior Secured Notes
In June 2021, Apollo Global Securities, LLC, an affiliate of the Manager, served as one of the eight initial purchasers in the issuance of our 2029 Notes and received $0.4 million of initial purchasers' discounts and commissions.
Italian Direct Lending Structure
In the fourth quarter of 2021, we formed an Italian closed-end alternative investment fund (the "AIF"), managed by
Apollo Investment Management Europe (Luxembourg) S.A R.L, a regulated alternative investment fund manager (the
"AIFM"), an affiliate of the Manager. During the three months ended March 31, 2023, the AIF had a balance of $16.8 thousand in fees payable to the AIFM, which is recorded in payable to related party on our condensed consolidated balance sheet. The fees incurred during the three months ended March 31, 2022 were de minimis.
Atlas Facility
On February 8, 2023, in connection with the acquisition by certain subsidiaries of Atlas, which is a wholly-owned investment of a fund managed by an affiliate of the Manager, the Credit Suisse Facility was acquired by Atlas. In order to effect the assignment of the Credit Suisse Facility and related agreements, the Company and one of its subsidiaries, similar to the other sellers and guarantors party to the subject agreements in the Transaction, entered into an Omnibus Assignment, Assumption and Amendment Agreement as well as certain related agreements with Credit Suisse AG and Atlas. At the time of acquisition, we had $632.3 million of secured debt on the Credit Suisse Facility consisting of four commercial mortgage loans. During the three months ended March 31, 2023, one commercial mortgage loan was added to the Atlas Facility totaling $83 million in secured debt. Refer to "Note 7 – Secured Debt Arrangements, Net" " for additional discussion.
Note 15 – Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc. 2009 Equity Incentive Plan ("2009 LTIP") and on April 16, 2019, our board of directors approved the Amended and Restated Apollo Commercial Real Estate Finance, Inc. 2019 Equity Incentive Plan ("2019 LTIP," and together with the 2009 LTIP, the "LTIPs"), which amended and restated the 2009 LTIP. Following the approval of the 2019 LTIP by our stockholders at our 2019 annual meeting of stockholders on June 12, 2019, no additional awards have been or will be granted under the 2009 LTIP and all outstanding awards granted under the 2009 LTIP remain in effect in accordance with the terms in the 2009 LTIP.
The 2019 LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7,000,000 shares of our common stock. The LTIPs are administered by the compensation committee of our board of directors (the "Compensation Committee") and all grants under the LTIPs must be approved by the Compensation Committee.
We recognized stock-based compensation expense of $4.4 million and $4.7 million during the three months ended March 31, 2023 and 2022 respectively, related to restricted stock and RSU vesting.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the three months ended March 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Restricted Stock | | RSUs | | Grant Date Fair Value ($ in millions) |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding at December 31, 2022 | | 56,102 | | | 2,865,154 | | | |
| Granted | | — | | | — | | | N/A |
| Vested | | — | | | — | | | N/A |
| Forfeiture | | — | | | — | | | N/A |
Outstanding at March 31, 2023 | | 56,102 | | | 2,865,154 | | | |
Below is a summary of restricted stock and RSU vesting dates as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
Vesting Year | | Restricted Stock | | RSUs | | Total Awards |
| | | | | | |
| | | | | | |
2023 | | 52,768 | | | 1,397,011 | | | 1,449,779 | |
2024 | | 3,334 | | | 954,415 | | | 957,749 | |
2025 | | — | | | 513,728 | | | 513,728 | |
Total | | 56,102 | | | 2,865,154 | | | 2,921,256 | |
At March 31, 2023, we had unrecognized compensation expense of approximately $0.1 million and $29.9 million related to the vesting of restricted stock awards and RSUs, respectively, noted in the table above.
RSU Deliveries
During the three months ended March 31, 2023 and 2022 we delivered 670,044 and 647,349 shares of common stock for 1,233,711 and 1,136,525 vested RSUs, respectively. We allow 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 our condensed consolidated statement of changes in stockholders' equity. The adjustment was $6.7 million and $7.0 million for the three months ended March 31, 2023 and 2022, respectively. The adjustment is a reduction of capital related to our equity incentive plan and is presented net of increases of capital related to our equity incentive plan in our condensed consolidated statement of changes in stockholders' equity.
Note 16 – Stockholders’ Equity
Our 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 March 31, 2023, 141,266,039 shares of common stock were issued and outstanding, and 6,770,393 shares of 7.25% Series B-1 Preferred Stock were issued and outstanding. The Series B-1 Preferred Stock, with a par value $0.01 per share, have a liquidation preference of $25.00 per share.
Dividends. The following table details our dividend activity:
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
Dividends declared per share of: | | | | | 2023 | | 2022 | | |
Common Stock | | | | | $0.35 | | $0.35 | | |
| | | | | | | | | |
Series B-1 Preferred Stock | | | | | 0.45 | | 0.45 | | |
Common Stock Repurchases. There was no common stock repurchase activity during the three months ended March 31, 2023 and 2022. As of March 31, 2023, there was $172.2 million remaining authorized under our stock repurchase program.
Note 17 – Commitments and Contingencies
Legal Proceedings. From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced a now-dismissed action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No 653251/2018) in New York Supreme Court (the "Apollo Action"). The complaint named as defendants (i) a wholly-owned subsidiary of the Company (the "Subsidiary"), (ii) the Company, and (iii) certain funds managed by Apollo, who were co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs alleged that the defendants tortiously interfered with the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project. The plaintiffs alleged the loss of a $70.0 million investment plus punitive damages. The defendants' motion to dismiss was granted on October 23, 2019 and the Court entered judgment dismissing the complaint in its entirety on November 8, 2019. Plaintiffs appealed, the parties fully briefed the appeal, and then Plaintiffs dropped the appeal, and the case remains dismissed.
Plaintiffs amended the complaint in a separate action in 2021, 111 West 57th Investment LLC v. 111W57 Mezz Investor LLC (No. 655031/2017) also in New York Supreme Court (the "April 2021 Action") to name Apollo Global Management, Inc., the Subsidiary, the Company, and certain funds managed by Apollo as defendants. The April 2021 Action concerns overlapping claims and the same condominium development project that the Apollo Action concerned. The defendants filed a motion to dismiss, which was granted in part and denied in part on December 15, 2022. The Court dismissed the claim against Apollo Global Management, Inc. and the Company. Plaintiff has cross-appealed the dismissal to revive the claim against Apollo Global Management, Inc. The claim against the Apollo entities who were co-lenders on the mezzanine loan, including the Subsidiary, remains in the case. Apollo will appeal the decision with respect to the remaining claim. No reasonable estimate of possible loss, if any, can be made at this time. The Company believes the claims in this action are without merit.
Loan Commitments. As described in "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" at March 31, 2023, we had $0.87 billion of unfunded commitments related to our commercial mortgage and subordinate loans. The timings and amounts of fundings are uncertain as these commitments relate to loans for construction costs, capital expenditures, leasing costs, interest and carry costs, among others. As such, the timings and amounts of future
fundings depend on the progress and performance of the underlying assets of our loans. Certain of our lenders are contractually obligated to fund their ratable portion of these loan commitments over time, while other lenders have some degree of discretion over future loan funding obligations. The total unfunded commitment is expected to be funded over the remaining 3.6 years weighted average tenor of these loans.
COVID-19. Although more normalized activities have resumed and there has been improved global economic activity due to global and domestic vaccination efforts, there are still various uncertainties around the impact COVID-19 and its variants had and will continue to have on our business and the economy as a whole, including longer-term macroeconomic effects on supply chains, inflation and labor shortages.
As of March 31, 2023, we have not recorded any contingencies on our condensed consolidated balance sheets related to COVID-19. To the extent COVID-19 continues to cause dislocations in the global economy, our financial condition, results of operations, and cash flows may continue to be adversely impacted. Refer to "Note 2 - Summary of Significant Accounting Policies" for further discussion regarding COVID-19.
Note 18 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of our financial instruments not carried at fair value on our condensed consolidated balance sheets at March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Cash and cash equivalents | $ | 331,533 | | | $ | 331,533 | | | $ | 222,030 | | | $ | 222,030 | |
Commercial mortgage loans, net | 7,879,205 | | | 7,818,304 | | | 8,121,109 | | | 8,083,410 | |
Subordinate loans and other lending assets, net(1) | 592,863 | | | 590,409 | | | 560,881 | | | 558,740 | |
| | | | | | | |
Secured debt arrangements, net | (5,316,853) | | | (5,316,853) | | | (5,296,825) | | | (5,296,825) | |
Term loans, net | (762,706) | | | (671,528) | | | (763,813) | | | (731,709) | |
Senior secured notes, net | (495,040) | | | (346,250) | | | (494,844) | | | (400,950) | |
2023 Notes | (222,467) | | | (217,600) | | | (229,361) | | | (225,366) | |
Debt related to real estate owned, held for investment, net | (160,611) | | | (160,611) | | | (160,294) | | | (160,294) | |
Participations sold | — | | | — | | | (25,130) | | | (25,130) | |
| | | | | | | |
———————
(1)Includes subordinate risk retention interests in securitization vehicles with an estimated fair value that approximates their carrying value.
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 we 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 equivalents, convertible senior notes, net, and Term Loans, 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 19 – 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 the computation of basic and diluted net income per share of common stock for the three months ended March 31, 2023 and 2022 ($ in thousands except per share data):
| | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 | |
Basic Earnings | | | | | | | | |
Net income | | | | | $ | 48,916 | | | $ | 15,238 | | |
Less: Preferred dividends | | | | | (3,068) | | | (3,068) | | |
Net income available to common stockholders | | | | | $ | 45,848 | | | $ | 12,170 | | |
Less: Dividends on participating securities | | | | | (1,003) | | | (899) | | |
Basic Earnings | | | | | $ | 44,845 | | | $ | 11,271 | | |
| | | | | | | | |
Diluted Earnings | | | | | | | | |
Basic Earnings | | | | | $ | 44,845 | | | $ | 11,271 | | |
Add: Dividends on participating securities | | | | | 1,003 | | | — | | |
Add: Interest expense on Convertible Notes | | | | | 3,445 | | | — | | |
Diluted Earnings | | | | | $ | 49,293 | | | $ | 11,271 | | |
| | | | | | | | |
Number of Shares: | | | | | | | | |
Basic weighted-average shares of common stock outstanding | | | | | 141,072,471 | | | 140,353,386 | | |
Diluted weighted-average shares of common stock outstanding | | | | | 155,483,979 | | | 140,353,386 | | |
| | | | | | | | |
Earnings Per Share Attributable to Common Stockholders | | | | | | | | |
Basic | | | | | $ | 0.32 | | | $ | 0.08 | | |
Diluted | | | | | $ | 0.32 | | | $ | 0.08 | | |
| | | | | | | | |
The dilutive effect to earnings per share is determined using the "if-converted" method whereby interest expense on the outstanding Convertible Notes is added back to the diluted earnings per share numerator, and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three months ended March 31, 2023, 11,189,949 weighted-average potentially issuable shares with respect to the Convertible Notes were included in the dilutive earnings per share denominator because the effect was dilutive. For the three months ended March 31, 2022, 28,533,271 weighted-average potentially issuable shares with respect to the Convertible Notes were excluded in the dilutive earnings per share denominator because the effect was anti-dilutive. Refer to "Note 10 - Convertible Senior Notes, Net" for further discussion.
For the three months ended March 31, 2023, 3,221,559 weighted-average unvested RSUs were included in the calculation of diluted net income per share because the effect was dilutive. For the three months ended March 31, 2022, 2,571,417 weighted-average unvested RSUs, were excluded in the calculation of diluted net income per share because the effect was anti-dilutive.
Note 20 – Subsequent Events
Subsequent to the quarter ended March 31, 2023, the following events took place:
Investment Activity: We funded approximately $30.5 million for previously closed loans and capitalized an additional $4.2 million of construction and financing costs related to our real estate owned, held for investment.
Loan Repayments: We received approximately $29.0 million from loan repayments.
Other Loan Activity: We received $60.0 million full repayment of one of our commercial mortgage loans secured by a luxury hotel in Tucson, AZ.