Edgar Filing: Apollo Commercial Real Estate Finance, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company

ARI-2014.09.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-34452

__________________________________

Apollo Commercial Real Estate Finance, Inc.

(Exact name of registrant as specified in its charter)

__________________________________



Maryland		27-0467113
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Apollo Commercial Real Estate Finance, Inc.

c/o Apollo Global Management, LLC

9 West 57th Street, 43rd Floor,

New York, New York 10019

(Address of registrant’s principal executive offices)

(212) 515–3200

(Registrant’s telephone number, including area code)

__________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

As of October 31, 2014, there were 46,848,675 shares, par value $0.01, of the registrant’s common stock issued and outstanding.

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	Page
Part I — Financial Information
ITEM 1. Financial Statements	3
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	37
ITEM 4. Controls and Procedures	38
Part II — Other Information
ITEM 1. Legal Proceedings	39
ITEM 1A. Risk Factors	39
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
ITEM 3. Defaults Upon Senior Securities	39
ITEM 4. Mine Safety Disclosures	39
ITEM 5. Other Information	39
ITEM 6. Exhibits	39

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Part I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands—except share and per share data)



	September 30, 2014			December 31, 2013
Assets:
Cash	$	58,649		$	20,096
Restricted cash	30,127			30,127
Securities available-for-sale, at estimated fair value	17,919			33,362
Securities, at estimated fair value	499,701			158,086
Securities, held-to-maturity	153,998			—
Commercial mortgage loans, held for investment	369,924			161,099
Subordinate loans, held for investment	585,504			497,484
Investment in unconsolidated joint venture	38,719			—
Derivative instrument	1,933			—
Interest receivable	17,072			6,022
Deferred financing costs, net	8,124			628
Other assets	1,342			600
Total Assets	$	1,783,012		$	907,504
Liabilities and Stockholders’ Equity
Liabilities:
Borrowings under repurchase agreements	$	537,766		$	202,033
Convertible senior notes, net	246,054			—
Participations sold	89,418			—
Investments purchased, not yet settled	26,540			—
Accounts payable and accrued expenses	3,602			2,660
Payable to related party	3,193			2,628
Dividends payable	20,753			17,227
Total Liabilities	927,326			224,548
Commitments and Contingencies (see Note 16)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 3,450,000 shares issued and outstanding ($86,250 aggregate liquidation preference)	35			35
Common stock, $0.01 par value, 450,000,000 shares authorized, 46,848,675 and 36,888,467 shares issued and outstanding, respectively	468			369
Additional paid-in-capital	867,598			697,610
Retained earnings (accumulated deficit)	(11,661		)	(14,188		)
Accumulated other comprehensive loss	(754		)	(870		)
Total Stockholders’ Equity	855,686			682,956
Total Liabilities and Stockholders’ Equity	$	1,783,012		$	907,504

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Operations (Unaudited)

(in thousands—except share and per share data)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Net interest income:
Interest income from securities	$	6,129		$	2,533		$	12,914		$	8,634
Interest income from securities, held to maturity	2,219			—			2,219			—
Interest income from commercial mortgage loans	8,025			4,954			18,475			12,222
Interest income from subordinate loans	18,983			12,184			51,951			35,137
Interest income from repurchase agreements	—			—			—			2
Interest expense	(8,786		)	(885		)	(15,802		)	(2,909		)
Net interest income	26,570			18,786			69,757			53,086
Operating expenses:
General and administrative expenses (includes $308 and $1,096 of equity based compensation in 2014 and $784 and $2,095 in 2013, respectively)	(1,434		)	(1,793		)	(4,355		)	(5,126		)
Management fees to related party	(3,193		)	(2,625		)	(8,725		)	(7,384		)
Total operating expenses	(4,627		)	(4,418		)	(13,080		)	(12,510		)
Income from unconsolidated joint venture	(88		)	—			(88		)	—
Interest income from cash balances	21			3			26			19
Unrealized gain (loss) on securities	(2,147		)	(1,472		)	4,787			(3,973		)
Foreign currency gain (loss)	(3,596		)	—			(2,637		)	—
Loss on derivative instruments (includes $3,026 and $1,933 of unrealized gains in 2014 and $25 and $155 of unrealized gains in 2013, respectively)	3,026			1			1,933			(1		)
Net income	19,159			12,900			60,698			36,621
Preferred dividends	(1,860		)	(1,859		)	(5,580		)	(5,580		)
Net income available to common stockholders	$	17,299		$	11,041		$	55,118		$	31,041
Basic and diluted net income per share of common stock	$	0.37		$	0.29		$	1.30		$	0.88
Basic weighted average shares of common stock outstanding	46,848,675			36,883,002			42,322,380			34,647,941
Diluted weighted average shares of common stock outstanding	47,068,929			37,379,469			42,538,744			35,103,285
Dividend declared per share of common stock	$	0.40		$	0.40		$	1.20		$	1.20

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

(in thousands)



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Net income available to common stockholders	$	17,299	$	11,041	$	55,118	$	31,041
Change in net unrealized gain (loss) on securities available-for-sale	39		43		116		(589		)
Comprehensive income	$	17,338	$	11,084	$	55,234	$	30,452

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(in thousands—except share data)



	Preferred Stock			Common Stock			Additional Paid In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income
	Shares	Par		Shares	Par		Additional Paid In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total
Balance at January 1, 2014	3,450,000	$	35	36,888,467	$	369	$	697,610		$	(14,188	)	$	(870	)	$	682,956
Capital decrease related to Equity Incentive Plan	—	—		240,277	2		217			—			—			219
Issuance of restricted common stock	—	—		13,931	*		—			—			—			—
Issuance of common stock	—	—		9,706,000	97		158,596			—			—			158,693
Offering costs	—	—		—	—		(270		)	—			—			(270		)
Convertible senior notes	—	—		—	—		11,445			—			—			11,445
Net income	—	—		—	—		—			60,698			—			60,698
Change in net unrealized gain on securities available-for-sale	—	—		—	—		—			—			116			116
Dividends on common stock	—	—		—	—		—			(52,591		)	—			(52,591		)
Dividends on preferred stock	—	—		—	—		—			(5,580		)	—			(5,580		)
Balance at September 30, 2014	3,450,000	$	35	46,848,675	$	468	$	867,598		$	(11,661	)	$	(754	)	$	855,686

* Rounds to zero.

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows (Unaudited)

(in thousands)



	Nine months ended September 30, 2014			Nine months ended September 30, 2013
Cash flows provided by operating activities:
Net income	$	60,698		$	36,621
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization and (discount accretion), net	(3,018		)	(4,181		)
Amortization of deferred financing costs	1,252			639
Equity-based compensation	220			2,095
Unrealized (gain) loss on securities	(4,787		)	3,973
Income from unconsolidated joint venture	88			—
Foreign currency (gain) loss	2,623			—
Unrealized gain on derivative instruments	(1,933		)	(155		)
Changes in operating assets and liabilities:
Accrued interest receivable, less purchased interest	(16,521		)	(6,441		)
Other assets	200			203
Accounts payable and accrued expenses	1,077			509
Payable to related party	565			588
Net cash provided by operating activities	40,464			33,851
Cash flows used in investing activities:
Fees received from commercial mortgage loans	—			280
Funding of securities at estimated fair value	(325,961		)	(70,490		)
Funding of commercial mortgage loans	(211,738		)	(32,643		)
Funding of subordinate loans	(353,386		)	(213,515		)
Funding of unconsolidated joint venture	(39,477		)	—
Funding of other assets	(1,258		)	—
Principal payments received on securities available-for-sale	15,289			28,485
Principal payments received on securities at estimated fair value	15,306			49,164
Principal payments received on commercial mortgage loans	666			17,898
Principal payments received on subordinate loans	117,003			71,173
Principal payments received on other assets	86			—
Principal payments received on repurchase agreements	—			6,598
Proceeds from sale of commercial mortgage loan	4,950			—
Net cash used in investing activities	(778,520		)	(143,050		)
Cash flows from financing activities:
Proceeds from issuance of common stock	158,693			148,804
Payment of offering costs	(308		)	(814		)
Proceeds from repurchase agreement borrowings	441,391			70,195
Repayments of repurchase agreement borrowings	(105,658		)	(68,187		)
Proceeds from issuance of convertible senior notes	256,970			—
Participations sold	89,012			—
Increase in restricted cash related to financing activities	—			(15,794		)
Payment of deferred financing costs	(8,846		)	(504		)
Dividends on common stock	(49,065		)	(40,717		)
Dividends on preferred stock	(5,580		)	(5,579		)
Net cash provided by financing activities	776,609			87,404
Net increase in cash and cash equivalents	38,553			(21,795		)
Cash and cash equivalents, beginning of period	20,096			108,619
Cash and cash equivalents, end of period	$	58,649		$	86,824
Supplemental disclosure of cash flow information:
Interest paid	$	14,565		$	2,335
Supplemental disclosure of non-cash financing activities:
Dividend declared, not yet paid	$	20,753		$	17,023
Deferred financing costs, not yet paid	$	213		$	250
Offering costs payable	$	71		$	—

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands—except share and per share data)

Note 1 – Organization

Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the “Company,” “ARI,” “we,” “us” and “our”) is a real estate investment trust (“REIT”) that primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities (“CMBS”) and other commercial real estate-related debt investments. These asset classes are referred to as the Company’s target assets.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the Company’s accounts and those of its consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s most significant estimates include the fair value of financial instruments and loan loss reserve. Actual results could differ from those estimates.

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included.

The Company currently operates in one business segment.

Significant Accounting Policies

Foreign Currency. The Company may enter into transactions not denominated in U.S., dollars. Foreign exchange gains and losses arising on such transactions are recorded as a gain or loss in the Company's consolidated statements of operations. Non-U.S. dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.

Principles of Consolidation. We consolidate all entities that we control through either majority ownership or voting rights. In addition, we consolidate all variable interest entities ("VIE") of which we are considered the primarily beneficiary. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.

Securitization/Sale and Financing Arrangements. We periodically sell our financial assets, such as commercial mortgage loans, CMBS and other assets. In connection with these transactions, we may retain or acquire senior or subordinated interests in the related assets. Gains and losses on such transactions are recognized using the guidance in Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, which is based on a financial components approach that focuses on control. Under this approach, after a transfer of financial assets that meets the criteria for treatment as a sale-legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint, and transferred control-an entity recognizes the financial assets it retains and any liabilities it has incurred, derecognizes the financial assets it has sold, and derecognizes liabilities when extinguished. We determine the gain or loss on sale of the assets by allocating the carrying value of the sold asset between the sold asset and the interests retained based on their relative fair values, as applicable. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the sold asset. If the sold asset is being accounted for pursuant to the fair value option, there is no gain or loss.

Recent Accounting Pronouncements

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In June 2013, the Financial Accounting Standards Board (the "FASB") issued guidance to change the assessment of whether an entity is an investment company by developing a new two-tiered approach that requires an entity to possess certain fundamental characteristics while allowing judgment in assessing certain typical characteristics. The fundamental characteristics that an investment company is required to have include the following: (1) it obtains funds from one or more investors and provides the investor(s) with investment management services; (2) it commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both; and (3) it does not obtain returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests. The typical characteristics of an investment company that an entity should consider before concluding whether it is an investment company include the following: (1) it has more than one investment; (2) it has more than one investor; (3) it has investors that are not related parties of the parent or the investment manager; (4) it has ownership interests in the form of equity or partnership interests; and (5) it manages substantially all of its investments on a fair value basis. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The guidance includes disclosure requirements about an entity’s status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. Earlier application is prohibited. The guidance prohibits REITs from qualifying for investment company accounting, as such, we have determined that we will not meet the definition of an investment company under this ASU.

In May 2014, the FASB issued guidance which broadly amends the accounting guidance for revenue recognition. This guidance is effective for the first interim or annual period beginning after December 15, 2016, and is to be applied prospectively. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company's consolidated financial statements.

In June 2014, the FASB issued guidance which amends the accounting guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings, and requires additional disclosure about certain transactions by the transferor. The guidance is effective for certain transactions that qualify for sales treatment for the first interim or annual period beginning after December 15, 2014. The new disclosure requirements for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that qualify for secured borrowing treatment is effective for annual periods beginning after December 15, 2014 and for interim periods beginning after March 15, 2014. The Company currently records repurchase arrangements as secured borrowings and does not anticipate this guidance will have an impact on the Company's consolidated financial statements.

In August 2014, the FASB issued guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance requires that management evaluate each annual and interim reporting period whether conditions exist that give rise to substantial doubt about the entity’s ability to continue as a going concern within one year from the financial statement issuance date, and if so, provide related disclosures. Disclosures are only required if conditions give rise to substantial doubt, whether or not the substantial doubt is alleviated by management’s plans. No disclosures are required specific to going concern uncertainties if an assessment of the conditions does not give rise to substantial doubt. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. If substantial doubt is alleviated as a result of the consideration of management’s plans, a company should disclose information that enables users of financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes): (1) principal conditions that initially give rise to substantial doubt, (2) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (3) management’s plans that alleviated substantial doubt. If substantial doubt is not alleviated after considering management’s plans, disclosures should enable investors to understand the underlying conditions, and include the following: (1) a statement indicating that there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date, (2) the principal conditions that give rise to substantial doubt, (3) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (4) management's plans that are intended to mitigate the adverse conditions. The new guidance applies to all companies. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company's consolidated financial statements.

Note 3 – Fair Value Disclosure

GAAP establishes a hierarchy of valuation techniques based on observable inputs utilized in measuring financial instruments at fair values. Market based or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

Level I — Quoted prices in active markets for identical assets or liabilities.

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Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.

While the Company anticipates that its valuation methods will be appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

The estimated fair value of the CMBS portfolio is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the Company would receive in an actual trade for the applicable instrument. Management performs additional analysis on prices received based on broker quotes to validate the prices and adjustments are made as deemed necessary by management to capture current market information. The estimated fair values of the Company’s securities are based on observable market parameters and are classified as Level II in the fair value hierarchy.

The estimated fair values of the Company’s derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The Company’s derivative instruments are classified as Level II in the fair value hierarchy.

The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of September 30, 2014 and December 31, 2013:



	Fair Value as of September 30, 2014								Fair Value as of December 31, 2013
	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
CMBS (Available-for-Sale)	$	—	$	17,919	$	—	$	17,919	$	—	$	33,362	$	—	$	33,362
CMBS (Fair Value Option)	—		499,701		—		499,701		—		158,086		—		158,086
Derivative instruments	—		1,933		—		1,933		—		—		—		—
Total	$	—	$	519,553	$	—	$	519,553	$	—	$	191,448	$	—	$	191,448

Note 4 – Debt Securities

At September 30, 2014, all of the Company's CMBS (Available-for-Sale) and CMBS (Fair Value Option) were pledged to secure borrowings under the Company’s master repurchase agreements with Wells Fargo Bank, N.A. (“Wells Fargo”) (the “Wells Facility”), UBS AG, London Branch ("UBS") (the "UBS Facility") and Deutsche Bank AG ("DB") (the "DB Facility"). (See Note 9 for a description of these facilities).

CMBS (Held-to-Maturity) represents a loan the Company closed during May 2014 that was subsequently contributed to a securitization during August 2014. During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. The property consists of 442 hotels rooms, 114 timeshare units, two casinos and approximately 131,500 square feet of retail space. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation. We evaluated this transaction and concluded due to our continuing involvement it should not be accounted for as a sale. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation. The whole loan has a three-year term with two one-year extension options and an appraised loan-to-value ("LTV") of approximately 60%.

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The amortized cost and estimated fair value of the Company’s debt securities at September 30, 2014 are summarized as follows:



Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Carrying Value
CMBS (Available-for-Sale)	$	17,777	$	18,673	$	—	$	(754	)	$	17,919
CMBS (Fair Value Option)	503,768		492,772		7,306		(377		)	499,701
CMBS (Held to Maturity)	155,000		153,998		—		—			153,998
Total	$	676,545	$	665,443	$	7,306	$	(1,131	)	$	671,618

The gross unrealized loss related to the available-for-sale securities results from the fair value of the securities falling below the amortized cost basis. The unrealized losses are primarily the result of market factors other than credit impairment and the Company believes the carrying value of the securities are fully recoverable over their expected holding period. Management does not intend to sell or expect to be forced to sell the securities prior to the Company recovering the amortized cost. As such, management does not believe any of the securities are other than temporarily impaired.

The amortized cost and estimated fair value of the Company’s debt securities at December 31, 2013 are summarized as follows:



Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
CMBS (Available-for-Sale)	$	33,066	$	34,232	$	—	$	(870	)	$	33,362
CMBS (Fair Value Option)	155,577		155,946		2,313		(173		)	158,086
Total	$	188,643	$	190,178	$	2,313	$	(1,043	)	$	191,448

The overall statistics for the Company’s CMBS (Available-for-Sale) and CMBS (Fair Value Option) investments calculated on a weighted average basis assuming no early prepayments or defaults as of September 30, 2014 and December 31, 2013 are as follows:



	September 30, 2014		December 31, 2013
Credit Ratings *	AAA - CCC-		AAA - CCC
Coupon	5.8	%	5.8	%
Yield	6.3	%	5.3	%
Weighted Average Life	2.5 years		3.1 years


*	Ratings per Fitch Ratings, Moody’s Investors Service or Standard & Poor's.

The percentage vintage, property type and location of the collateral securing the Company’s CMBS (Available-for-Sale) and CMBS (Fair Value Option) investments calculated on a weighted average basis as of September 30, 2014 and December 31, 2013 are as follows:



Vintage	September 30, 2014		December 31, 2013
2005	9.8	%	—	%
2006	19.6		3.0
2007	61.6		97.0
2008	9.0		—
Total	100	%	100	%

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Property Type	September 30, 2014		December 31, 2013
Office	33.5	%	33.2	%
Retail	28.4		25.1
Multifamily	13.7		15.3
Hotel	9.3		12.0
Other *	15.1		14.4
Total	100	%	100	%

* No other individual category comprises more than 10% of the total.



Location	September 30, 2014		December 31, 2013
South Atlantic	23.6	%	23.4	%
Middle Atlantic	20.9		22.8
Pacific	17.3		17.6
East North Central	11.0		—
Other *	27.2		36.2
Total	100	%	100	%

* No other individual category comprises more than 10% of the total.

Note 5 – Commercial Mortgage Loans

The Company’s commercial mortgage loan portfolio was comprised of the following at September 30, 2014:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon		Property Size
Hotel - NY, NY	Jan-10	Feb-15	$	32,000	$	31,115	$	31,115	Fixed		151 rooms
Office Condo (Headquarters) - NY, NY	Feb-10	Feb-15	28,000		26,968		26,968		Fixed		73,419 sq. ft.
Hotel - Silver Spring, MD	Mar-10	Apr-15	26,000		24,684		24,617		Fixed		263 rooms
Condo Conversion – NY, NY (1)	Dec-12	Jan-15	45,000		45,496		45,781		Floating		119,000 sq. ft.
Condo Conversion – NY, NY (2)	Aug-13	Sept-15	33,000		33,675		33,691		Floating		40,000 sq. ft.
Condo Construction - Potomac, MD (3)	Feb-14	Sept-16	25,000		25,000		24,436		Floating		50 units
Vacation Home Portfolio - Various	Apr-14	Apr-19	101,000		101,000		100,018		Fixed		229 properties
Hotel - Philadelphia, PA (1)	May-14	May-17	34,000		34,000		33,775		Floating		301 rooms
Condo Construction - Bethesda, MD (4)	Jun-14	Dec-16	20,000		20,000		19,497		Floating		40 units
Multifamily - Brooklyn, NY (5)	Jul-14	Aug-16	30,000		30,000		30,026		Floating		63 units
Total/Weighted Average			$	374,000	$	371,938	$	369,924	7.95	%


(1)	These loans include two one-year extension options subject to certain conditions and the payment of a fee for each extension.


(2)	This loan includes a one-year extension option subject to certain conditions and the payment of a fee.


(3)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee. As of September 30, 2014, the Company had $55,000 of unfunded loan commitments related to this loan.


(4)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee. As of September 30, 2014, the Company had $45,100 of unfunded loan commitments related to this loan.


(5)	This loan includes three one-year extension options subject to certain conditions and the payment of a fee for each extension. As of September 30, 2014, the Company had $4,500 of unfunded loan commitments related to this loan.

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The Company’s commercial mortgage loan portfolio was comprised of the following at December 31, 2013:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon		Property Size
Hotel - NY, NY	Jan-10	Feb-15	$	32,000	$	31,317	$	31,317	Fixed		151 rooms
Office Condo (Headquarters) - NY, NY	Feb-10	Feb-15	28,000		27,169		27,169		Fixed		73,419 sq. ft.
Hotel - Silver Spring, MD	Mar-10	Apr-15	26,000		24,947		24,785		Fixed		263 rooms
Condo Conversion – NY, NY (1)	Dec-12	Jan-15	45,000		45,000		44,867		Floating		119,000 sq. ft.
Condo Conversion – NY, NY (2)	Aug-13	Sept-15	33,000		33,167		32,961		Floating		40,000 sq. ft.
Total/Weighted Average			$	164,000	$	161,600	$	161,099	8.82	%


(1)	This loan includes two one-year extension options subject to certain conditions and the payment of a fee for each extension.


(2)	This loan includes a one-year extension option subject to certain conditions and the payment of a fee.

The Company evaluates its loans for possible impairment on a quarterly basis. The Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations are sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. The Company has determined that an allowance for loan losses was not necessary at September 30, 2014 and December 31, 2013.

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Note 6 – Subordinate Loans

The Company’s subordinate loan portfolio was comprised of the following at September 30, 2014:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon
Office - Michigan	May-10	Jun-20	$	9,000	$	8,828	$	8,828	Fixed
Ski Resort - California	Apr-11	May-17	40,000		40,000		39,714		Fixed
Mixed Use – North Carolina	Jul-12	Jul-22	6,525		6,525		6,525		Fixed
Office Complex - Missouri	Sept-12	Oct-22	10,000		9,747		9,747		Fixed
Hotel Portfolio – Various (1)	Nov-12	Nov-15	50,000		47,172		47,260		Floating
Condo Conversion – NY, NY (2)	Dec-12	Jan-15	35,000		35,545		35,722		Floating
Condo Construction – NY, NY (1)	Jan-13	Jul-17	60,000		73,844		73,457		Fixed
Multifamily Conversion – NY, NY (1)	Jan-13	Dec-14	18,000		14,608		14,683		Floating
Hotel Portfolio – Rochester, MN	Jan-13	Feb-18	25,000		24,560		24,560		Fixed
Warehouse Portfolio - Various	May-13	May-23	32,000		32,000		32,000		Fixed
Multifamily Conversion – NY, NY (3)	May-13	Dec-14	44,000		44,000		43,907		Floating
Office Condo - NY, NY	Jul-13	Jul-22	14,000		14,000		13,588		Fixed
Condo Conversion – NY, NY (4)	Aug-13	Sept-15	29,400		29,601		29,491		Floating
Mixed Use - Pittsburgh, PA (1)	Aug-13	Aug-16	22,500		22,500		22,445		Floating
Mixed Use - Various (2)	Dec-13	Dec-18	17,000		18,791		18,608		Fixed
Mixed Use - London, England	Apr-14	Jan-15	54,926		52,034		52,034		Fixed
Hotel - NY, NY	Jun-14	Dec-14	28,250		28,250		28,250		Fixed
Healthcare Portfolio - Various (5)	Jun-14	Jun-16	50,000		50,000		50,000		Floating
Hotel - NY, NY (5)	Jul-14	Jul-16	20,000		20,000		19,834		Floating
Ski Resort - Big Sky, Montana	Aug-14	Sept-20	15,000		15,000		14,851		Fixed
Total/Weighted Average			$	580,601	$	587,005	$	585,504	11.20	%


(1)	Includes a one-year extension option subject to certain conditions and the payment of an extension fee.


(2)	Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension.


(3)	Includes a three-month extension option subject to certain conditions and the payment of an extension fee.


(4)	Includes a one-year extension option subject to certain conditions and the payment of an extension fee.


(5)	Includes three one-year extensions options subject to certain conditions and the payment of a fee for each extension.

During January 2014, the Company received a $15,000 principal repayment from a subordinate loan secured by a pledge of the equity interests in the owner of a New York City hotel. The Company realized a 14% internal rate of return ("IRR") on this subordinate loan. See below for a description of how the IRR is calculated.

During June 2014, the Company received a $47,000 principal repayment from a mezzanine loan secured by a pledge of the equity interests in a portfolio of skilled nursing facilities. The Company realized a 12% IRR on this mezzanine loan.

During August 2014, the Company received the final repayment from a $50,000 mezzanine loan secured by a pledge of the equity interests in a borrower that owns a portfolio of seven office parks throughout Florida. The Company realized a 13% IRR on this mezzanine loan.

IRR is the annualized effective compounded return rate that accounts for the time-value of money and represents the rate of return on an investment over a holding period expressed as a percentage of the investment. It is the discount rate that makes the net present value of all cash outflows (the costs of investment) equal to the net present value of cash inflows (returns on investment). It is derived from the negative and positive cash flows resulting from or produced by each transaction (or for a transaction involving more than one investment, cash flows resulting from or produced by each of the investments), whether positive, such as investment returns, or negative, such as transaction expenses or other costs of investment, taking into account the dates on which such cash flows occurred or are expected to occur, and compounding interest accordingly.

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The Company’s subordinate loan portfolio was comprised of the following at December 31, 2013:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon
Office - Michigan	May-10	Jun-20	$	9,000	$	8,866	$	8,866	Fixed
Ski Resort - California	Apr-11	May-17	40,000		40,000		39,781		Fixed
Hotel– New York (1)	Jan-12	Feb-14	15,000		15,000		15,207		Fixed
Mixed Use – North Carolina	Jul-12	Jul-22	6,525		6,525		6,525		Fixed
Office Complex - Missouri	Sept-12	Oct-22	10,000		9,849		9,849		Fixed
Hotel Portfolio – Various (1)	Nov-12	Nov-15	50,000		48,431		48,397		Floating
Condo Conversion – NY, NY (2)	Dec-12	Jan-15	35,000		35,000		34,734		Floating
Condo Construction – NY, NY (1)	Jan-13	Jul-17	60,000		66,800		66,340		Fixed
Multifamily Conversion – NY, NY (1)	Jan-13	Dec-14	18,000		18,000		17,906		Floating
Hotel Portfolio – Rochester, MN	Jan-13	Feb-18	25,000		24,771		24,771		Fixed
Warehouse Portfolio - Various	May-13	May-23	32,000		32,000		32,000		Fixed
Multifamily Conversion – NY, NY (3)	May-13	Jun-14	44,000		44,000		43,859		Floating
Office Condo - NY, NY	Jul-13	Jul-22	14,000		14,000		13,565		Fixed
Condo Conversion – NY, NY (4)	Aug-13	Sept-15	294		295		2		Floating
Mixed Use - Pittsburgh, PA (1)	Aug-13	Aug-16	22,500		22,500		22,342		Floating
Healthcare Portfolio - Various	Oct-13	Jun-14	47,000		47,000		47,000		Floating
Mixed Use - Florida (2)	Nov-13	Oct-18	50,000		50,000		49,535		Floating
Mixed Use - Various (2)	Dec-13	Dec-18	17,000		17,000		16,805		Fixed
Total/Weighted Average			$	495,319	$	500,037	$	497,484	11.60	%


(1)	Includes a one-year extension option subject to certain conditions and the payment of an extension fee.


(2)	Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension.


(3)	Includes a three-month extension option subject to certain conditions and the payment of an extension fee.


(4)	Includes a one-year extension option subject to certain conditions and the payment of an extension fee. As of December 31, 2013, the Company had $29,106 of unfunded loan commitments related to this loan.

During February 2013, the Company received principal repayment on two mezzanine loans totaling $50,000 secured by a portfolio of retail shopping centers located throughout the United States. In connection with the repayment, the Company received a yield maintenance payment totaling $2,500. With the yield maintenance payment, the Company realized a 15% IRR on its mezzanine loan investment.

During June 2013, the Company received the repayment of a $15,000 mezzanine loan secured by a hotel in New York City. In connection with the repayment, the Company received a yield maintenance payment totaling $1,233. With the yield maintenance payment, the Company realized a 19% IRR on its mezzanine loan investment.

The Company evaluates its loans for possible impairment on a quarterly basis. See “Note 5 – Commercial Mortgage Loans” for a summary of the metrics reviewed. The Company has determined that an allowance for loan loss was not necessary at September 30, 2014 and December 31, 2013.

Note 7 – Unconsolidated Joint Venture

On September 30, 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ Limited Partnership (“Champ LP”) following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in KBC Bank Deutschland AG ("KBC Bank"), the German subsidiary of Belgian KBC Group NV. The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 ($39,477). The Company committed to invest up to approximately €38,000 ($50,000). Through its interest in Champ LP, the Company holds an indirect ownership interest in KBC Bank of approximately 21%. The Company together with other affiliated investors, in aggregate, own 100% of Champ LP. Champ LP together with certain unaffiliated third party investors, in aggregate, own 100% of KBC Bank.

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KBC Bank specializes in corporate banking and financial services for medium-sized German companies. It also provides professional real estate financing, acquisition finance, institutional asset management and private wealth management services for German high-net-worth individuals. Following the closing of the transaction, KBC Bank was renamed Bremer Kreditbank AG and will operate under the name BKB Bank.

The Company determined that Champ LP met the definition of a VIE and that it was not the primary beneficiary; therefore, we did not consolidate the assets and liabilities of the partnership. Our investment in Champ LP is accounted for as an equity method investment. Additionally, due to the nature of its investment in KBC Bank, we determined Champ LP is an Investment Company under GAAP, and is therefore reflected at fair value.

Note 8 – Repurchase Agreement

During 2011, the Company funded a $47,439 investment structured in the form of a repurchase facility secured by a Class A-2 collateralized debt obligation (“CDO”) bond. The $47,439 of borrowings provided under the facility financed the purchase of a CDO bond with an aggregate face amount of $68,726, representing an advance rate of 69% on the CDO bond’s face amount. The CDO was comprised of 58 senior and subordinate commercial real estate debt positions and commercial real estate securities with the majority of the debt and securities underlying the CDO being first mortgages.

The repurchase facility had an interest rate of 13.0% (10.0% current pay with a 3.0% accrual) on amounts outstanding and had an initial term of 18 months with three six-month extensions options available to the borrower. Any principal repayments that occurred prior to the 21st month were subject to a make-whole provision at the full 13.0% interest rate.

In January 2013, the repurchase agreement was repaid in full. Upon the repayment, the Company realized a 17% IRR on its investment.

Note 9 – Borrowings Under Repurchase Agreements

At September 30, 2014 and December 31, 2013, the Company had borrowings outstanding under the Company’s master repurchase agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) (the “JPMorgan Facility”), the Wells Facility, the UBS Facility and the DB Facility.

At September 30, 2014 and December 31, 2013, the Company’s borrowings had the following debt balances, weighted average maturities and interest rates:



	September 30, 2014						December 31, 2013
	Debt Balance		Weighted Average Remaining Maturity		Weighted Average Rate		Debt Balance		Weighted Average Remaining Maturity		Weighted Average Rate
Wells Facility borrowings	$	20,990	0.4 years		1.0	%	$	47,751	0.2 years	*	1.2	%	**
UBS Facility borrowings	133,899		4.0 years	*	2.8	%	133,899		4.7 years		2.8	%	Fixed
DB Facility borrowings	260,155		3.5 years		3.8	%	—		0.0 years		—	%	***
JPMorgan Facility borrowings	122,722		0.3 years		2.7	%	20,383		1.1 years		2.7	%	L+250
Total borrowings	$	537,766	2.8 years		3.2	%	$	202,033	3.3 years		2.4	%

*Assumes extension options are exercised.

**At December 31, 2013, borrowings outstanding under the Wells Facility bore interest at LIBOR plus 105 basis points. At September 30, 2014, borrowings outstanding under the Wells Facility bore interest at LIBOR plus 80 basis points.

*** Advances under the DB Facility accrue interest at a per annum pricing rate based on the rate implied by the fixed rate bid under a fixed for floating interest rate swap for the receipt of payments indexed to three-month U.S. dollar LIBOR, plus a financing spread ranging from 1.80% to 2.32% based on the rating of the collateral pledged.

At September 30, 2014, the Company’s borrowings had the following remaining maturities:

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	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Wells Facility borrowings	$	20,990	$	—	$	—	$	—	$	20,990
UBS Facility borrowings *	—		133,899		—		—		133,899
DB Facility borrowings	5,530		153,463		101,162		—		260,155
JPMorgan Facility borrowings	122,722		—		—		—		122,722
Total	$	149,242	$	287,362	$	101,162	$	—	$	537,766

*Assumes extension option is exercised.

At September 30, 2014, the Company’s collateralized financings were comprised of borrowings outstanding under the Wells Facility, the UBS Facility, the DB Facility and the JPMorgan Facility. The table below summarizes the outstanding balances at September 30, 2014, as well as the maximum and average balances for the nine months ended September 30, 2014.



			For the nine months ended September 30, 2014
	Balance at September 30, 2014		Maximum Month-End Balance		Average Month-End Balance
Wells Facility borrowings	$	20,990	$	47,751	$	31,436
UBS Facility borrowings	133,899		133,899		133,899
DB Facility borrowings	260,155		260,155		99,611
JPMorgan Facility borrowings	122,722		169,066		92,026
Total	$	537,766

DB Facility. During April 2014, the Company through an indirect wholly-owned subsidiary entered into the DB Facility with DB pursuant to which the Company may borrow up to $100,000 in order to finance the acquisition of CMBS. As of September 30, 2014, the DB Facility was amended to permit the Company to borrow up to $275,000. Subsequent to September 30, 2014, the DB Facility was further amended to permit the Company to borrow up to $300,000. The DB Facility has a term of four years, subject to certain restrictions. Advances under the DB Facility accrue interest at a per annum pricing rate based on the rate implied by the fixed rate bid under a fixed for floating interest rate swap for the receipt of payments indexed to three-month U.S. dollar LIBOR, plus a financing spread ranging from 1.80% to 2.32% based on the rating of the collateral pledged. The Company borrows an amount equal to the product of the estimated fair value of the collateral pledged divided by a margin ratio ranging from 125.00% to 181.82% depending on the collateral pledged.

Additionally, beginning on December 7, 2014 and depending on the utilization rate of the facility, a portion of the undrawn amount may be subject to non-use fees. The DB Facility contains customary terms and conditions for repurchase facilities of this type and financial covenants to be met by the Company, including minimum shareholder's equity of 50% of the gross capital proceeds of its initial public offering and any subsequent public or private offerings.

JPMorgan Facility. On April 25, 2014, the Company, through two subsidiaries (the "Funding Subsidiaries"), entered into a letter agreement to temporarily waive, for a period of up to 30 days, compliance with the minimum liquidity covenant under the JPMorgan Facility that requires the Company to maintain minimum liquidity of the greater of 10% of total consolidated recourse indebtedness and $12,500.

On May 9, 2014, the Company and the Funding Subsidiaries entered into an amendment letter to temporarily increase the maximum permitted borrowing under the JPMorgan Facility from $100,000 to approximately $146,814 and to amend the terms of the JPMorgan Facility in order to finance the acquisition of certain mezzanine real estate loans. This letter expired on May 23, 2014.

On May 22, 2014, the Company and the Funding Subsidiaries entered into an amendment letter to extend, until June 6, 2014, (i) the temporary increase of the maximum permitted borrowing under the JPMorgan Facility from $100,000 to approximately $146,814 and (ii) the waiver of compliance with the minimum liquidity covenant under the JPMorgan Facility that was previously granted on April 25, 2014.

On June 6, 2014, the Company and the Funding Subsidiaries entered into amendment letters to extend, as applicable, (i) until June 12, 2014, the temporary increase of the maximum permitted borrowing under the JPMorgan Facility from $100,000 to approximately $146,814, and (ii) until July 1, 2014, the waiver of compliance with the minimum liquidity covenant under the JPMorgan Facility that was previously granted on April 25, 2014.

On June 12, 2014, the Company and the Funding Subsidiaries entered into a third amendment and restatement of the JP Morgan Facility (the “Third Amendment and Restatement”) with JPMorgan. The Third Amendment and Restatement amended

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the JPMorgan Facility to facilitate the financing of mezzanine loans under the JPMorgan Facility and increased the maximum permitted borrowing to $175,000. In connection with the Third Amendment and Restatement, the guarantee provided by the Company for the obligations of the Funding Subsidiaries was also amended to require the Company to hold minimum liquidity equal to the greater of 5% of its total recourse indebtedness and $15,000. The Third Amendment and Restatement contains affirmative and negative covenants and provisions regarding events of default that are customary for similar repurchase facilities. The Third Amendment and Restatement expires in January 2015.

Wells Facility. In February 2014, the maturity date of the Wells Facility was extended to March 2015. In addition, the Company reduced the interest rate to LIBOR plus 80 basis points from LIBOR plus 105 basis points.

The Company was in compliance with the financial covenants under its repurchase agreements at September 30, 2014 and December 31, 2013.

Note 10 – Convertible Senior Notes

On March 17, 2014, the Company issued $143,750 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "March 2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $139,037. At September 30, 2014, the March 2019 Notes had a carrying value of $139,564 and an unamortized discount of $4,186.

On August 18, 2014, the Company issued an additional $111,000 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "August 2019 Notes", and together with the March 2019 Notes, the "2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $109,593. At September 30, 2014, the August 2019 Notes had a carrying value of $106,490 and an unamortized discount of $4,511.

The following table summarizes the terms of the 2019 Notes.



	Principal Amount		Coupon Rate		Effective Rate (1)		Conversion Rate (2)	Maturity Date	Remaining Period of Amortization
March 2019 Notes	$	143,750	5.50	%	6.25	%	55.3649	3/15/2019	4.46 years
August 2019 Notes	$	111,000	5.50	%	6.50	%	55.3649	3/15/2019	4.46 years


(1)	Effective rate includes the effect of the adjustment for the conversion option (See footnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital.

(2)

The Company has the option to settle any conversions in cash, shares of common stock or a combination thereof. The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of 2019 Notes converted. The if-converted value of the 2019 Notes does not exceed their principal amount at September 30, 2014 since the closing market price of the Company’s common stock of $15.71 per share does not exceed the implicit conversion prices of $18.06 for the 2019 Notes.

GAAP requires 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. GAAP requires that the initial proceeds from the sale of the 2019 Notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Company at such time. The Company measured the fair value of the debt components of the 2019 Notes as of their issuance date based on effective interest rates. As a result, the Company attributed approximately $11,445 of the proceeds to the equity component of the 2019 Notes, which represents the excess proceeds received over the fair value of the liability component of the 2019 Notes at the date of issuance. The equity component of the 2019 Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of September 30, 2014. The resulting debt discount is being amortized over the period during which the 2019 Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the 2019 Notes will increase in subsequent reporting periods through the maturity date as the 2019 Notes accrete to their par value over the same period. The aggregate contractual interest expense was approximately $2,706 and $4,990 for the three and nine months ended September 30, 2014, respectively. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately $299 and $529 for the three and nine months ended September 30, 2014.

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As of September 30, 2014 potential shares of common stock contingently issuable upon the conversion of the 2019 Notes were excluded from the calculation of diluted income per share because it is management's intent and ability to settle the obligation in cash.

Note 11 – Participations Sold

During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation in the loan. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation and classified it as CMBS (Held-to-Maturity) on its consolidated financial statements.

Participations sold represent the interest in the Aruba loan the Company originated and subsequently sold. The Company presents the participation sold as both assets and non-recourse liabilities because the participation does not qualify as a sale according to GAAP. At September 30, 2014, the Company had one such participation sold with a face amount of $90,000 and a carrying amount of $89,418. The participation sold has a cash coupon of LIBOR plus 440 basis points. The income earned on the participation sold is recorded as interest income and an identical amount is recorded as interest expense on the Company's consolidated statements of operations.

Note 12 – Derivative Instruments

The Company used interest rate swaps and caps to manage exposure to variable cash flows on portions of its borrowings under repurchase agreements. Interest rate swap and cap agreements allow the Company to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure. All of the Company's interest rate swaps and caps matured during the third quarter of 2013.

During April 2014, the Company entered into a forward contract whereby it agreed to sell £34,389 in exchange for $57,631 in January 2015. The forward contract was executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received related to a foreign denominated loan investment which closed in the second quarter of 2014.

The Company has not designated any of its derivative instruments as hedges under GAAP and therefore, changes in the fair value of the Company's derivatives are recorded directly in earnings. The following table summarizes the amounts recognized on the consolidated statements of operations related to the Company’s derivatives for the three and nine months ended September 30, 2014 and 2013.



		Three months ended September 30,					Nine months ended September 30,
	Location of Loss Recognized in Income	2014		2013			2014		2013
Interest rate swaps	Loss on derivative instruments – realized *	$	—	$	(24	)	$	—	$	(156	)
Interest rate swaps	Gain on derivative instruments – unrealized	—		25			—		155
Forward currency contract	Loss on derivative instruments - unrealized	3,026		—			1,933		—
Total		$	3,026	$	1		$	1,933	$	(1	)


*	Realized losses represent net amounts accrued for the Company’s derivative instruments during the period.

Note 13 – Related Party Transactions

Management Agreement

In connection with the Company’s initial public offering in September 2009, the Company entered into a management agreement (the “Management Agreement”) with ACREFI Management, LLC (the “Manager”), which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors.

Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.

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The current term of the Management Agreement expired on September 29, 2014 and was automatically renewed for successive one-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by the Company’s independent directors in February 2014, which included a discussion of the Manager’s performance and the level of the management fees thereunder, the Company determined not to seek termination of the Management Agreement.

For the three and nine months ended September 30, 2014, respectively, the Company incurred approximately $3,193 and $8,725 in base management fees. For the three and nine months ended September 30, 2013, respectively, the Company incurred approximately $2,625 and $7,384 in base management fees. In addition to the base management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company or for certain services provided by the Manager to the Company. For the three and nine months ended September 30, 2014, respectively, the Company recorded expenses totaling $312 and $712 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. For the three and nine months ended September 30, 2013, respectively, the Company recorded expenses totaling $208 and $542 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. Expenses incurred by the Manager and reimbursed by the Company are reflected in the respective consolidated statement of operations expense category or the consolidated balance sheet based on the nature of the item.

Included in payable to related party on the consolidated balance sheet at September 30, 2014 and December 31, 2013, respectively is approximately $3,193 and $2,628 for base management fees incurred but not yet paid.

Unconsolidated Joint Venture

On September 30, 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ LP following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in KBC Bank, the German subsidiary of Belgian KBC Group NV. The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 ($39,477). The Company committed to invest up to approximately €38,000 ($50,000). Through its interest in Champ LP, the Company holds an indirect ownership interest in KBC Bank of approximately 21%. The Company together with other affiliated investors, in aggregate, own 100% of Champ LP. Champ LP together with certain unaffiliated third party investors, in aggregate, own 100% of KBC Bank.

Note 14 – Share-Based Payments

On September 23, 2009, the Company’s board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (the “LTIP”). The LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7.5% of the issued and outstanding shares of the Company’s common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of the Company’s board of directors (the “Compensation Committee”) and all grants under the LTIP must be approved by the Compensation Committee.

The Company recognized stock-based compensation expense of $308 and $1,096 for the three and nine months ended September 30, 2014, respectively, related to restricted stock and RSU vesting. The Company recognized stock-based compensation expense of $784 and $2,095 for the three and nine months ended September 30, 2013, respectively, related to restricted stock and RSU vesting. The following table summarizes the grants, exchanges and forfeitures of restricted common stock and RSUs during the nine months ended September 30, 2014:

Type

Date

Restricted Stock

RSUs

Estimate Fair Value
on Grant Date

Initial Vesting

Final Vesting

Outstanding at December 31, 2013

208,416

503,750

Canceled upon delivery

January 2014

—

(288,750

)

n/a

Grant

April 2014

13,931

—

$235

July 2014

April 2017

Canceled upon delivery

April 2014

—

(5,000

)

n/a

Grant

June 2014

—

10,254

$169

December 2014

December 2016

Outstanding at September 30, 2014

222,347

220,254

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Below is a summary of expected restricted common stock and RSU vesting dates as of September 30, 2014.



Vesting Date	Shares Vesting	RSU Vesting	Total Awards
October 2014	3,313	—	3,313
December 2014	6,668	66,750	73,418
January 2015	3,320	—	3,320
March 2015	—	6,667	6,667
April 2015	3,321	—	3,321
July 2015	2,522	—	2,522
July 2015	500	—	500
October 2015	2,522	—	2,522
December 2015	6,668	66,759	73,427
January 2016	2,521	—	2,521
April 2016	2,522	—	2,522
July 2016	1,578	—	1,578
October 2016	1,577	—	1,577
December 2016	—	3,418	3,418
January 2017	1,161	—	1,161
April 2017	1,164	—	1,164
	39,357	143,594	182,951

At September 30, 2014, the Company had unrecognized compensation expense of approximately $540 and $1,611, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.

RSU Deliveries

During the nine months ended September 30, 2014, the Company delivered 240,277 shares of common stock for 283,750 vested RSUs. The Company allows RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on the consolidated statement of changes in stockholders' equity. The adjustment was $876 for the nine months ended September 30, 2014, and is included as a component of the capital decrease related to the Company's equity incentive plan in the consolidated statement of changes in stockholders’ equity.

Note 15 – Stockholders’ Equity

Common Stock Offering. During the second quarter of 2014, the Company completed a follow-on public offering of 9,706,000 shares of its common stock, including the partial exercise of the underwriters’ option to purchase additional shares, at a price of $16.35 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $158,439 after deducting estimated offering expenses payable by the Company.

Dividends. For 2014, the Company declared the following dividends on its common stock:



Declaration Date	Record Date	Payment Date	Amount
February 26, 2014	March 31, 2014	April 15, 2014	$	0.40
April 29, 2014	June 30, 2014	July 15, 2014	$	0.40
July 28, 2014	September 30, 2014	October 15, 2014	$	0.40

For 2014, the Company declared the following dividends on its 8.625% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”):

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Declaration Date	Record Date	Payment Date	Amount
March 17, 2014	March 31, 2014	April 15, 2014	$	0.5391
June 9, 2014	June 30, 2014	July 15, 2014	$	0.5391
September 8, 2014	September 30, 2014	October 15, 2014	$	0.5391

Note 16 – Commitments and Contingencies

KBC Bank Deutschland AG. In September 2013, the Company, together with other affiliates of Apollo, reached an agreement to make an investment in an entity that has agreed to acquire a minority participation in KBC Bank. The Company committed to invest up to approximately €38,000 ($50,000), representing approximately 21% of the ownership in KBC Bank. The acquisition closed during September 2014 and the Company funded an initial investment of €30,724 ($39,477).

Loan Commitments. As described in Note 5, at September 30, 2014, the Company had $104,600 of unfunded loan commitments.

Note 17 – Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the consolidated balance sheet at September 30, 2014 and December 31, 2013:



	September 30, 2014						December 31, 2013
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Cash and cash equivalents	$	58,649		$	58,649		$	20,096		$	20,096
Restricted cash	30,127			30,127			30,127			30,127
Securities, held-to-maturity	153,998			154,984			—			—
Commercial first mortgage loans	369,924			372,228			161,099			164,405
Subordinate loans	585,504			589,818			497,484			503,267
Borrowings under repurchase agreements	(537,766		)	(536,612		)	(202,033		)	(202,148		)
Convertible senior notes, net	(246,054		)	(253,476		)	—			—
Participations sold	(89,418		)	(89,996		)	—			—

To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. The Company’s commercial first mortgage loans, subordinate loans and repurchase agreements are carried at amortized cost on the condensed consolidated financial statements and are classified as Level III in the fair value hierarchy.

Note 18 – Net Income per Share

GAAP requires 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.

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The table below presents basic and diluted net (loss) income per share of common stock using the two-class method for the three and nine months ended September 30, 2014 and 2013:



	For the three months ended September 30,						For the nine months ended September 30,
	2014			2013			2014			2013
Numerator:
Net income	$	19,159		$	12,900		$	60,698		$	36,621
Preferred dividends	(1,860		)	(1,859		)	(5,580		)	(5,580		)
Net income available to common stockholders	17,299			11,041			55,118			31,041
Dividends declared on common stock	(18,739		)	(14,753		)	(52,329		)	(44,253		)
Dividends on participating securities	(88		)	(202		)	(262		)	(596		)
Net income (loss) attributable to common stockholders	$	(1,528	)	$	(3,914	)	$	2,527		$	(13,808	)
Denominator:
Basic weighted average shares of common stock outstanding	46,848,675			36,883,002			42,322,380			34,647,941
Diluted weighted average shares of common stock outstanding	47,068,929			37,379,469			42,538,744			35,103,285
Basic and diluted net income per weighted average share of common stock
Distributable Earnings	$	0.40		$	0.40		$	1.24		$	1.28
Undistributed income (loss)	$	(0.03	)	$	(0.11	)	$	0.06		$	(0.40	)
Basic and diluted net income per share of common stock	$	0.37		$	0.29		$	1.30		$	0.88

Note 19 – Subsequent Events

Dividends. On October 28, 2014, the Company declared a dividend of $0.40 per share of common stock, which is payable on January 15, 2015 to common stockholders of record on December 31, 2014.

Repurchase Agreements. On October 1, 2014, the DB Facility was amended to increase the maximum permitted borrowing under the DB Facility from $275,000 to $300,000.

Investment Activity. During the fourth quarter of 2014, the Company deployed $4,657 of equity to acquire legacy CMBS with an aggregate purchase price of $23,283. The Company financed the CMBS utilizing $18,626 of borrowings under the DB Facility. The CMBS have a weighted average life of 3.0 years and have been underwritten to generate an IRR of approximately 15%.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the SEC, press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such Section. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets or the general economy or the demand for commercial real estate loans; the Company’s business and investment strategy; the Company’s operating results; actions and initiatives of the U.S. government and changes to U.S. government policies and the execution and impact of these actions, initiatives and policies; the state of the U.S. economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including securitizations; the anticipated shortfall of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the scope of the Company’s target assets; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in interest rates and the market value of the Company’s target assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which hedging strategies may or may not protect the Company from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes; the Company’s ability to remain excluded from registration under the Investment Company Act of 1940, as amended; the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; and the Company’s understanding of its competition.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. See “Item 1A - Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

The Company is a REIT that primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, CMBS and other commercial real estate-related debt investments. These asset classes are referred to as the Company’s target assets.

The Company is externally managed and advised by the Manager, an indirect subsidiary of Apollo, a leading global alternative investment manager with a contrarian and value oriented investment approach in private equity, credit and real estate with assets under management of approximately $167 billion as of June 30, 2014.

The Manager is led by an experienced team of senior real estate professionals who have significant expertise in underwriting and structuring commercial real estate financing transactions. The Company benefits from Apollo’s global infrastructure and operating platform, through which the Company is able to source, evaluate and manage potential investments in the Company’s target assets.

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Market Overview

The commercial real estate market has largely recovered from the downturn experienced as part of the correction in the global financial markets which began in mid-2007. Property values in many markets and across multiple property types have recovered and the lending market is functioning with both established and new entrants. Based on the current market dynamics, including increasing real estate transaction activity and over $1 trillion of commercial real estate debt scheduled to mature through 2017, there remains a compelling opportunity for the Company to source and originate investments in its target assets at attractive risk adjusted returns. The Company will continue to focus on underlying real estate value, and transactions that benefit from the Company’s ability to execute complex and sophisticated transactions.

During and immediately following the financial crisis, due to the prevalence of lenders granting extensions across the commercial mortgage loan industry, the demand for new capital to refinance maturing commercial mortgage debt was somewhat tempered. This trend has abated to a certain extent in more recent periods as many borrowers have refinanced legacy loans and pursued new acquisitions. While the frequency of extensions and modifications had a meaningful impact on the timing of loan maturities, the Company believes the next phase will involve rising volumes of commercial mortgage lending activity which should allow lenders to capitalize on the impending maturity wall. Additionally, as the European senior lending market continues to expand and strengthen, we expect to see an increase in the number and availability of target opportunities.

With the continued tapering of its bond purchases, the Federal Reserve continues to demonstrate a desire to continue reducing the amount of stimulus in the economy, while still maintaining an accommodative monetary policy. As a result, while the Federal Reserve has decreased the pace of its bond purchases, the low interest rate environment is expected to persist, remain attractive to borrowers and is projected to continue to drive significant refinancing activity across all property types during 2014.

After seeing substantial growth in 2012 and 2013, new-issue CMBS volume in the first three quarters of 2014 was approximately $71 billion, slightly ahead of the the $69 billion of volume during the same period in the prior year. In 2013, approximately $86 billion of CMBS were issued in the United States, an increase of approximately 78% over 2012 and an increase of 163% over 2011. While not directly related to many of the transactions we often pursue, the active CMBS market can be viewed as an indication of the strength and recovery of the commercial real estate lending market.

However, current volumes of CMBS issuance are still moderate relative to the peak of the market, which saw more than $229 billion in CMBS issuance in 2007. We perceive that lenders still appear to be focused on stabilized cash flowing assets with LTV ratios lower than peak. As a result, we expect to continue to see opportunities to originate mezzanine and first mortgage financings in transactions which benefit from the Company’s ability to source, structure and execute complex transactions.

Critical Accounting Policies

A summary of the Company’s accounting policies is set forth in its Annual Report on Form 10-K for the year ended December 31, 2013 under “Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates.”

Significant Accounting Policies

Foreign Currency. The Company may enter into transactions not denominated in U.S. dollars. Foreign exchange gains and losses arising on such transactions are recorded as a gain or loss in the Company's consolidated statements of operations. Non-U.S. dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.

Principles of Consolidation. We consolidate all entities that we control through either majority ownership or voting rights. In addition, we consolidate all VIEs of which we are considered the primarily beneficiary. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.

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any liabilities it has incurred, derecognizes the financial assets it has sold, and derecognizes liabilities when extinguished. We determine the gain or loss on sale of the assets by allocating the carrying value of the sold asset between the sold asset and the interests retained based on their relative fair values, as applicable. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the sold asset. If the sold asset is being accounted for pursuant to the fair value option, there is no gain or loss.

Financial Condition and Results of Operations

(in thousands—except share and per share data)

Investments

The following table sets forth certain information regarding the Company’s investments at September 30, 2014:



Description	Face Amount		Amortized Cost		Weighted Average Yield		Remaining Weighted Average Life (years)	Debt		Cost of Funds		Remaining Debt Term (years) (1)	Equity at cost (2)		Current Weighted Average Underwritten IRR (3) (4)		Levered Weighted Average Underwritten IRR (3) (4)
First mortgages	$	371,938	$	369,924	8.9	%	2.9	$	122,722	2.7	%	0.3	$	247,202	13.0	%	15.6	%
Subordinate loans	587,005		585,504		12.0		3.2	—		—		—	585,504		12.8