Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
¨
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):
Large accelerated filer 
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
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 November 1, 2016, there were 80,841,530 shares, par value $0.01, of the registrant’s common stock issued and outstanding.
 

Table of Contents

Table of Contents
 
 
Page
 
 

2
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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, 2016
 
December 31, 2015
Assets:
 
 
 
Cash
$
254,643

 
$
67,415

Restricted cash
62,324

 
30,127

Securities, at estimated fair value
347,456

 
493,149

Securities, held-to-maturity
147,190

 
153,193

Commercial mortgage loans, held for investment
1,426,990

 
994,301

Subordinate loans, held for investment
882,214

 
931,351

Investment in unconsolidated joint venture
23,765

 
22,583

Derivative assets
5,037

 
3,327

Interest receivable
18,025

 
16,908

Other assets
31,303

 
236

Total Assets
$
3,198,947

 
$
2,712,590

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Borrowings under repurchase agreements (net of deferred financing costs of $7,875 and $7,353 in 2016 and 2015, respectively)
$
1,013,162

 
$
918,421

Convertible senior notes, net
249,528

 
248,173

Participations sold
110,924

 
118,201

Accounts payable and accrued expenses
26,367

 
9,246

Payable to related party
5,903

 
5,297

Dividends payable
46,028

 
37,828

Total Liabilities
1,451,912

 
1,337,166

Commitments and Contingencies (see Note 16)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A preferred stock, 3,450,000 shares issued and outstanding ($86,250 aggregate liquidation preference) in 2016 and 2015
35

 
35

Series B preferred stock, 8,000,000 shares issued and outstanding ($200,000 aggregate liquidation preference) in 2016 and 2015
80

 
80

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

 
—

Common stock, $0.01 par value, 450,000,000 shares authorized, 80,826,566 and 67,195,252 shares issued and outstanding in 2016 and 2015, respectively
808

 
672

Additional paid-in-capital
1,803,667

 
1,410,138

Accumulated deficit
(54,950
)
 
(32,328
)
Accumulated other comprehensive loss
(2,674
)
 
(3,173
)
Total Stockholders’ Equity
1,747,035

 
1,375,424

Total Liabilities and Stockholders’ Equity
$
3,198,947

 
$
2,712,590


See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Operations (Unaudited)
(in thousands—except share and per share data)
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
2015
 
2016
2015
Net interest income:
 
 
 
 
 
Interest income from securities
$
8,029

$
8,293

 
$
23,685

$
24,846

Interest income from securities, held to maturity
2,875

2,956

 
8,597

9,050

Interest income from commercial mortgage loans
27,460

15,184

 
72,727

37,246

Interest income from subordinate loans
32,207

25,445

 
89,649

65,206

Interest expense
(17,256
)
(13,187
)
 
(47,620
)
(36,287
)
Net interest income
53,315

38,691

 
147,038

100,061

Operating expenses:
 
 
 
 
 
General and administrative expenses (includes $1,828 and $5,434 of equity based compensation in 2016 and $756 and $2,695 in 2015, respectively)
(8,352
)
(2,099
)
 
(21,456
)
(6,512
)
Management fees to related party
(5,903
)
(4,097
)
 
(16,374
)
(11,325
)
Total operating expenses
(14,255
)
(6,196
)
 
(37,830
)
(17,837
)
Income from unconsolidated joint venture
80

108

 
207

495

Other income
309

239

 
334

252

Provision for loan losses
—

—

 
(15,000
)
—

Realized loss on sale of securities
(225
)
—

 
(225
)
(443
)
Unrealized gain (loss) on securities
(9,798
)
(6,926
)
 
(36,601
)
(5,792
)
Foreign currency gain (loss)
(4,369
)
(2,165
)
 
(21,926
)
3,424

Bargain purchase gain
40,021

—


40,021

—

Gain (loss) on derivative instruments (includes unrealized gains(losses) of ($10,297) and $1,731 in 2016 and $2,096 and $(4,144) in 2015, respectively)
4,815

2,096

 
22,831

(4,144
)
Net income
69,893

25,847

 
98,849

76,016

Preferred dividends
$
(9,310
)
$
(2,304
)
 
$
(20,985
)
$
(6,023
)
Net income available to common stockholders
60,583

23,543

 
77,864

69,993

Basic and diluted net income per share of common stock
$
0.83

$
0.39

 
$
1.11

$
1.24

Basic weighted average shares of common stock outstanding
71,919,549

59,355,613

 
68,913,362

55,818,731

Diluted weighted average shares of common stock outstanding
72,861,611

59,934,008

 
69,865,603

56,415,082

Dividend declared per share of common stock
$
0.46

$
0.44

 
$
1.38

$
1.32



See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Comprehensive Income (Unaudited)
(in thousands)
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income available to common stockholders
$
60,583

 
$
23,543

 
$
77,864

 
$
69,993

Change in net unrealized gain (loss) on securities available-for-sale
—

 
—

 
—

 
678

Foreign currency translation adjustment
73

 
53

 
499

 
(307
)
Comprehensive income
$
60,656

 
$
23,596

 
$
78,363

 
$
70,364



See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(in thousands—except share data)
 
Preferred Stock
 
Common Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Shares
 
Par
 
Shares
 
Par
 
 
 
 
Total
Balance at January 1, 2016
11,450,000

 
$
115

 
67,195,252

 
$
672

 
$
1,410,138

 
$
(32,328
)
 
$
(3,173
)
 
$
1,375,424

Capital increase related to Equity Incentive Plan
—

 
—

 
215,672

 
2

 
2,804

 
—

 
—

 
2,806

Issuance of preferred stock - Merger
6,900,000

 
69

 
—

 
—

 
172,431

 
—

 
—

 
172,500

Issuance of restricted common stock
—

 
—

 
17,056

 
*

 
—

 
—

 
—

 
—

Issuance of common stock- Merger
—

 
—

 
13,398,586


134

 
218,263

 
—

 
 
 
218,397

Offering costs
—

 
—

 
—

 
—

 
31

 
—

 
—

 
31

Net income
—

 
—

 
—

 
—

 
—

 
98,849

 
—

 
98,849

Change in other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
499

 
499

Dividends on common stock
—

 
—

 
—

 
—

 
—

 
(100,485
)
 
—

 
(100,485
)
Dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
(20,986
)
 
—

 
(20,986
)
Balance at September 30, 2016
18,350,000

 
$
184

 
80,826,566

 
$
808

 
$
1,803,667

 
$
(54,950
)
 
$
(2,674
)
 
$
1,747,035


* Rounds to zero

See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Cash flows provided by operating activities:
 
 
 
Net income
$
98,849

 
$
76,016

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Premium amortization and (discount accretion) on assets, net
(7,443
)
 
(7,782
)
Amortization of deferred financing costs
3,199

 
2,219

Equity-based compensation
2,808

 
2,573

Unrealized (gain) loss on securities
36,601

 
5,916

Provision for loan losses
15,000

 
—

Income from unconsolidated joint venture
(207
)
 
(511
)
Foreign currency (gain) loss
21,122

 
1,703

Realized (gain) loss on derivative instruments
(21,100
)
 
—

Unrealized (gain) loss on derivative instruments
(1,731
)
 
4,151

Realized (gain) loss on sale of security
225

 
443

Bargain purchase gain
(40,021
)

—

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable, less purchased interest
(17,638
)
 
(20,711
)
Other assets
(121
)
 
396

Accounts payable and accrued expenses
(10,410
)
 
(3,202
)
Payable to related party
606

 
860

Net cash provided by operating activities
79,739

 
62,071

Cash flows used in investing activities:
 
 
 
Funding of commercial mortgage loans
(541,582
)
 
(483,090
)
Funding of subordinate loans
(51,001
)
 
(483,480
)
Funding of unconsolidated joint venture
(362
)
 
(3,929
)
Funding of other assets
—

 
(8
)
Funding of derivative instruments
—

 
(327
)
Proceeds on settlements of derivative instruments
21,100

 
—

Increase in collateral held related to derivative contracts
13,110

 
—

Increase in restricted cash related to financing activities
(32,197
)
 
—

Proceeds from sale of securities available-for-sale
—

 
17,291

Proceeds from sale of securities at estimated fair value
86,451

 
6,338

Proceeds from sale of investment in unconsolidated joint venture
—

 
20,794

Principal payments received on securities at estimated fair value
22,424

 
32

Principal payments received on securities, held-to-maturity
5,970

 
1,000

Principal payments received on commercial mortgage loans
118,120

 
41,479

Principal payments received on subordinate loans
81,524

 
146,775

Principal payments received on other assets
107

 
167

 Proceeds from sale of AMTG assets, net
1,474,111

 
—

ARI investment in AMTG, net of cash acquired
189,795


—

Net cash used in investing activities
1,387,570

 
(736,958
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
—

 
343,430

Payment of offering costs
(45
)
 
(956
)
Proceeds from repurchase agreement borrowings
448,177

 
553,214

Repayments of repurchase agreement borrowings
(352,914
)
 
(439,971
)
Repayments of AMTG repurchase agreement borrowings
(1,254,517
)
 
—

Proceeds from participations sold
—

 
30,484

Repayments of participations sold
(3,770
)
 
(733
)
Payment of deferred financing costs
(3,741
)
 
(2,900
)
Dividends on common stock
(94,625
)
 
(71,135
)
Dividends on preferred stock
(18,646
)
 
(5,580
)
Net cash provided by financing activities
(1,280,081
)
 
405,853

Net decrease in cash and cash equivalents
187,228

 
(20,483
)
Cash and cash equivalents, beginning of period
67,415

 
40,641

Cash and cash equivalents, end of period
$
254,643

 
$
20,158

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
47,093

 
$
36,563

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Dividend declared, not yet paid
$
46,028

 
$
32,060

Offering costs payable
$
220

 
$
325

Fair value of assets acquired from AMTG
$
1,936,260

 
$
—

Fair value of liabilities assumed from AMTG
$
(1,285,183
)
 
$
—

Fair value of common stock issued to AMTG
$
218,397

 
$
—

Fair value of preferred stock issued to AMTG
$
172,500

 
$
—


See notes to unaudited condensed consolidated financial statements.
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Apollo Commercial Real Estate Finance Inc. and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in thousands—except share and per share data)
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the “Company,” “ARI,” “we,” “us” and “our”) is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The Company 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 condensed consolidated financial statements include the Company’s accounts and those of its consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s most significant estimates include the fair value of financial instruments 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, 2015, as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. The Company's results of operations for the quarterly period ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year or any other future period.
On August 31, 2016, the Company, pursuant to the terms and conditions of the Agreement and Plan of Merger, dated February 26, 2016 (as amended, the “Merger Agreement”) acquired Apollo Residential Mortgage, Inc., a Maryland corporation (“AMTG”). AMTG merged with and into the Company (“Merger”) with the Company continuing as the surviving entity. As a result, all operations of AMTG and its former subsidiaries are consolidated with the operations of the Company. As of September 30, 2016, substantially all of the assets acquired from AMTG had been sold.
Under Financial Accounting Standards Board (the "FASB") ASC Topic 805, "Business Combinations", or ASC 805, the acquirer in a business combination must recognize, with certain exceptions, the fair values of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. We applied the provisions of ASC 805 in accounting for our acquisition of AMTG. In doing so, we recorded provisional amounts for certain items as of the date of the acquisition, including the fair value of certain assets and liabilities. During the measurement period, a period which shall not exceed one year, we retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of such date that, if known, would have affected the measurement of the amounts recognized. See further discussion in Note 19 "Business Combination".
The Company currently operates in one business segment.
Recent Accounting Pronouncements
In May 2014, the FASB issued guidance which broadly amends the accounting guidance for revenue recognition. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. The Company is currently assessing the impact that this accounting guidance will have on the Company's condensed consolidated financial statements when adopted.
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

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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 condensed consolidated financial statements.
In February 2015, the FASB issued guidance which amends the guidance related to accounting for the consolidation of certain legal entities. The modifications impact limited partnerships and similar legal entities, the evaluation of (i) fees paid to a decision maker or a service provider as a variable interest, (ii) fee arrangements, and (iii) related parties on the primary beneficiary determination. The Company adopted this guidance and determined there was no material impact on the Company's condensed consolidated financial statements.
In April 2015, the FASB issued guidance that simplifies the presentation of debt issuance costs by amending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amendments are consistent with the accounting guidance related to debt discounts. The Company adopted this guidance and applied its provisions retrospectively. This resulted in the reclassification of unamortized deferred financing costs from deferred financing costs, net to reductions in borrowings under repurchase agreements of $7,875 and $7,353 for the period ended September 30, 2016 and December 31, 2015, respectively. Other than this reclassification, the adoption of this guidance did not have an impact on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” or ASU 2016-09. ASU 2016-09 requires all income tax effects of share-based payment awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares for tax withholding purposes than is permitted under current guidance without triggering liability accounting. Finally, the guidance allows a policy election to account for employee forfeitures as they occur. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for any entity in any interim or annual period. The Company is currently assessing the impact that this accounting guidance will have on the Company's condensed consolidated financial statements when adopted.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326),” or ASU 2016-13. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  The guidance will replace the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently assessing the impact of the guidance will have on the Company's condensed consolidated financial statements when adopted.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230),” or ASU 2016-15. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance addresses the classification of various transactions including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, distributions received from equity method investments, beneficial interests in securitization transactions, and others. The Company is currently assessing the impact that this guidance will have on the Company's condensed consolidated financial statements when adopted.


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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.
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. The Company believes that these dealers who are usually market makers in these securities utilize various valuation techniques and inputs including, but not limited to, observable trades, discounted cash flow, market yield and duration to price these securities. Broker quotes are only indicative of fair value and may not necessarily represent what the Company would receive in an actual trade for the applicable instrument. Management performs additional analysis on prices received based on broker quotes to validate the prices and adjustments are made as deemed necessary by management to capture current market information. 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. In accordance with GAAP, the Company elects the fair value option for these securities at the date of purchase in order to allow the Company to measure these securities at fair value with the change in estimated fair value included as a component of earnings in order to reflect the performance of investment in a timely manner.
The estimated fair values of the Company’s derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The fair values of foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange rate.  The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries.   The Company’s derivative instruments are classified as Level II in the fair value hierarchy.
The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of September 30, 2016 and December 31, 2015:
 
 
Fair Value as of September 30, 2016
 
Fair Value as of December 31, 2015
 
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
CMBS (Fair Value Option)
$
—

 
$
347,456

 
$
—

 
$
347,456

 
$
—

 
$
493,149

 
$
—

 
$
493,149

Derivative instruments
—

 
5,037

 
—

 
5,037

 
—

 
3,327

 
—

 
3,327

Total
$
—

 
$
352,493

 
$
—

 
$
352,493

 
$
—

 
$
496,476

 
$
—

 
$
496,476


Note 4 – Debt Securities
At September 30, 2016, all of the Company's CMBS (Fair Value Option) were pledged to secure borrowings under the Company’s master repurchase agreements with UBS AG, London Branch ("UBS") (the "UBS Facility") and Deutsche Bank AG ("DB") (the "DB Facility"). See "Note 8 - Borrowings Under Repurchase Agreements" for further information regarding these facilities.

10
Table of Contents

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. The Company evaluated this transaction and concluded due to its continuing involvement the transaction should not be accounted for as a sale. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation. The whole loan has a three-year term with two one-year extension options and an appraised loan-to-value ("LTV") of approximately 60%.
The amortized cost and estimated fair value of the Company’s debt securities at September 30, 2016 are summarized as follows:
 
Security Description
Face
Amount
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated Fair
Value
CMBS (Fair Value Option)
$
402,392

 
$
395,160

 
$
116

 
$
(47,820
)
 
$
347,456

CMBS (Held-to-Maturity)
147,280

 
147,190

 
—

 
—

 
147,190

Total
$
549,672

 
$
542,350

 
$
116

 
$
(47,820
)
 
$
494,646

During August 2016, the Company sold CMBS with an amortized cost of $86,676 resulting in a net realized loss of $225, which was comprised of realized gains of $90 and realized losses of $315. The sale generated proceeds of $16,222 after the repayment of $70,229 of borrowings under the Company's master repurchase agreement with Deutsche Bank AG ("DB") (the "DB Facility").
The amortized cost and estimated fair value of the Company’s debt securities at December 31, 2015 are summarized as follows:
 
Security Description
Face
Amount
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Estimated
Fair
Value
CMBS (Fair Value Option)
$
511,482

 
$
504,253

 
$
2,614

 
$
(13,718
)
 
$
493,149

CMBS (Held-to-Maturity)
153,250

 
153,193

 
—

 
—

 
153,193

Total
$
664,732

 
$
657,446

 
$
2,614

 
$
(13,718
)
 
$
646,342

During February 2015, the Company sold CMBS with an amortized cost of $24,038 resulting in a net realized loss of $443, which was comprised of realized gains of $43 and realized losses of $486. As a result of the sale, $678 was reclassified out of accumulated other comprehensive income. The sale generated proceeds of $1,341 after the repayment of $22,254 of borrowings under the Company's master repurchase agreement with Wells Fargo Bank, N.A. ("Wells Fargo") (the "Wells Facility").
The overall statistics for the Company’s CMBS (Fair Value Option) investments calculated on a weighted average basis assuming no early prepayments or defaults as of September 30, 2016 and December 31, 2015 are as follows:
 
 
September 30, 2016
 
December 31, 2015
Credit Ratings *
B+ - D

 
BB-D

Coupon
5.9
%
 
5.9
%
Yield
5.9
%
 
6.5
%
RemainingWeighted Average Life
2.0 years

 
1.6 years

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

11
Table of Contents

The percentage vintage, property type and location of the collateral securing the CMBS (Fair Value Option) investments calculated on a weighted average basis as of September 30, 2016 and December 31, 2015 are as follows:
 
Vintage
September 30, 2016
 
December 31, 2015
2005
1.2
%
 
8.3
%
2006
15.5

 
20.0

2007
71.6

 
62.4

2008
11.7

 
9.3

Total
100.0
%
 
100.0
%
 
Property Type
September 30, 2016
 
December 31, 2015
Office
34.6
%
 
32.0
%
Retail
27.8

 
30.2

Multifamily
13.3

 
13.5

Other *
24.3

 
24.3

Total
100.0
%
 
100.0
%
 *    No other individual category comprises more than 10% of the total.
 
Location
September 30, 2016
 
December 31, 2015
South Atlantic
23.0
%
 
23.0
%
Middle Atlantic
16.0

 
18.1

Pacific
15.8

 
17.8

East North Central
11.3

 
12.5

Other *
33.9

 
28.6

Total
100.0
%
 
100.0
%
 *    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, 2016:
 

12
Table of Contents

Description
 
Maturity
Date
 
 
Current Principal Balance
 
Carrying
Value
 
Fixed/Floating
 
Property Size
Condominium – New York, NY (1)
 
Nov-16
 
 
3,175

 
3,198

 
Floating
 
40,000 sq. ft.
Condominium – Bethesda, MD (1)(2)
 
Apr-17
 
 
49,893

 
50,337

 
Floating
 
50 units
Vacation Home Portfolio - Various (1)
 
Apr-19
 
 
91,015

 
90,270

 
Fixed
 
229 properties
Hotel - Philadelphia, PA (1)(3)
 
May-17
 
 
34,000

 
33,980

 
Floating
 
301 keys
Condo Construction - Bethesda, MD (4)
 
Dec-16
 
 
51,419

 
51,737

 
Floating
 
40 units
Multifamily - Brooklyn, NY (1)(5)
 
Oct-16
 
 
34,500

 
34,984

 
Floating
 
63 units
Mixed Use - Cincinnati, OH (1)(3)
 
May-18
 
 
165,000

 
163,517

 
Floating
 
65 acres
Multifamily - Williston, ND (1)(3)
 
Nov-17
 
 
49,706

 
39,715

 
Floating
 
366 units/homes
Vacation Home Portfolio - Various U.S. (1)(3)
 
Nov-19
 
 
59,500

 
59,167

 
Fixed
 
29 properties
Mixed Use - Brooklyn, NY (1)(8)
 
Mar-17
 
 
85,770

 
86,051

 
Floating
 
330,000 sq. ft.
Retail Redevelopment - Miami, FL (1)(7)
 
Jan-17
 
 
45,000

 
45,308

 
Floating
 
63,300 sq. ft.
Retail - Brooklyn, NY (1)
 
Mar-17
 
 
23,000

 
22,982

 
Floating
 
10,500 sq. ft.
Hotel - New York, NY (1)(9)
 
Sept-18
 
 
101,764

 
101,463

 
Floating
 
317 keys
Retail - Brooklyn, NY
 
Mar-17
 
 
5,910

 
5,904

 
Floating
 
5,500 sq. ft.
Hotel - U.S. Virgin Islands (1)(10)
 
Jan-18
 
 
42,000

 
41,747

 
Floating
 
180 keys
Office - Richmond, VA (1)(11)
 
Jan-18
 
 
54,000

 
53,750

 
Floating
 
262,000 sq. ft.
Retail Redevelopment - Miami, FL (1)(12)
 
Jan-18
 
 
220,000

 
218,173

 
Floating
 
113,000 sq. ft.
Office - Boston, MA (6)(1)
 
Mar-18
 
 
28,570

 
28,392

 
Floating
 
114,000 sq. ft.
Mixed Use - New York, NY (13)(1)
 
Jun-18
 
 
45,069

 
44,717

 
Floating
 
91,584 sq. ft.
Condo Conversion - Brooklyn, NY (14)(1)
 
Jun-18
 
 
40,600

 
40,295

 
Floating
 
133,550 sq. ft.
Hotel - New York, NY (15)
 
Aug-18
 
 
78,140

 
77,141

 
Floating
 
612 keys
Mixed Use - Chicago, IL (16)
 
Oct-18
 
 
128,000

 
126,721

 
Floating
 
737,382 sq. ft.
Retail - Brooklyn, NY
 
Mar-17
 
 
7,500

 
7,441

 
Floating
 
6,500 sq. ft.
Total
 
 
 
 
$
1,443,531

 
$
1,426,990

 

 
 
 
(1)
At September 30, 2016, this loan was pledged to secure borrowings under the Company’s repurchase agreements entered into with JPMorgan Chase Bank, N.A. (the “JPMorgan Facility”) or Goldman Sachs Bank USA (the “Goldman Loan”). See "Note 8 – Borrowings Under Repurchase Agreements" for a description of these agreements.
(2)
This loan includes a six-month extension option subject to certain conditions and the payment of a fee.
(3)
This loan includes two one-year extension options subject to certain conditions and the payment of a fee.
(4)
This loan includes a six-month extension option subject to certain conditions and the payment of a fee.
(5)
This loan includes three one-year extension options subject to certain conditions and the payment of a fee.
(6)
This loan includes one six-month extension option subject to certain conditions and the payment of a fee. At September 30, 2016, the Company had $2,430 of unfunded loan commitments related to this loan.
(7)
This loan includes two six- month extension options subject to certain conditions and the payment of a fee for each extension.
(8)
At September 30, 2016, the Company had $6,730 of unfunded loan commitments related to this loan.
(9)
This loan includes two one-year extension options subject to certain conditions and the payment of a fee. At September 30, 2016, the Company had $36,643 of unfunded loan commitments related to this loan.
(10)
This loan includes three one-year extension options subject to certain conditions and the payment of a fee for such extension. At September 30, 2016, the Company had $1,500 of unfunded loan commitments related to this loan.
(11)
This loan includes two one-year extension options subject to certain conditions and the payment of a fee. At September 30, 2016, the Company had $1,000 of unfunded loan commitments related to this loan.
(12)
This loan includes a one-year extension option subject to certain conditions and the payment of a fee.
(13)
This loan includes a six-month extension option subject to certain conditions and the payment of a fee. At September 30, 2016, the Company had $4,931 of unfunded loan commitments related to this loan.
(14)
At September 30, 2016, the Company had $4,900 of unfunded loan commitments related to this loan.
(15)
This loan includes three one-year extension options subject to certain conditions and the payment of a fee. At September 30, 2016, the Company had $26,860 of unfunded loan commitments related to this loan.
(16)
This loan includes two one-year extension options subject to certain conditions and the payment of a fee. At September 30, 2016, the Company had $5,000 of unfunded loan commitments related to this loan.


13
Table of Contents




The Company’s commercial mortgage loan portfolio was comprised of the following at December 31, 2015:
 
Description
 
Maturity
Date
 
 
Current Principal Balance

 
Carrying
Value
 
Fixed/Floating
 
Property Size
Condominium – New York, NY (1)
 
Sept-16
 
 
$
24,114

 
$
24,289

 
Floating
 
40,000 sq. ft.
Condominium- Bethesda, MD (2)
 
Sept-16
 
 
65,125

 
65,087

 
Floating
 
50 units
Vacation Home Portfolio - Various (1)
 
Apr-19
 
 
94,147

 
93,277

 
Fixed
 
229 properties
Hotel - Philadelphia, PA (1)(3)
 
May-17
 
 
34,000

 
33,994

 
Floating
 
301 keys
Condo Construction - Bethesda, MD (4)
 
Dec-16
 
 
50,000

 
49,960

 
Floating
 
40 units
Multifamily - Brooklyn, NY (1)(5)
 
Aug-16
 
 
34,500

 
34,886

 
Floating
 
63 units
Mixed Use - Cincinnati, OH (1)(3)
 
May-18
 
 
165,000

 
163,173

 
Floating
 
65 acres
Condo Conversion - New York, NY (1)
 
Jun-16
 
 
67,300

 
67,038

 
Floating
 
86,000 sq. ft.
Multifamily - Williston, ND (1)(3)
 
Nov-17
 
 
49,691

 
49,665

 
Floating
 
366 units/homes
Vacation Home Portfolio - Various U.S. (1)(3)
 
Nov-19
 
 
50,000

 
49,595

 
Fixed
 
24 properties
Mixed Use - Brooklyn, NY (1)(6)
 
Mar-17
 
 
85,770

 
85,658

 
Floating
 
330,000 sq. ft.
Retail Redevelopment - Miami, FL (1)(7)
 
Jan-17
 
 
45,000

 
44,925

 
Floating
 
63,300 sq. ft.
Retail Redevelopment - Miami, FL (1)
 
Jul-17
 
 
33,000

 
32,804

 
Floating
 
16,600 sq. ft.
Retail - Brooklyn, NY (1)(8)
 
Mar-17
 
 
1,653

 
1,636

 
Floating
 
10,500 sq. ft.
Hotel - New York, NY (1)(9)
 
Sept-18
 
 
98,373

 
97,381

 
Floating
 
317 keys
Retail - Brooklyn, NY (1)
 
Mar-17
 
 
5,910

 
5,858

 
Floating
 
5,500 sq. ft.
Hotel - U.S. Virgin Islands (10)
 
Jan-18
 
 
42,000

 
41,600

 
Floating
 
180 keys
Office - Richmond, VA (11)
 
Jan-18
 
 
54,000

 
53,475

 
Floating
 
262,000 sq. ft.
Total/Weighted Average
 
 
 
 
$
999,583

 
$
994,301

 

 
 
 
(1)
At December 31, 2015, this loan was pledged to secure borrowings under the JPMorgan Facility or the Goldman Loan. See "Note 8 – Borrowings Under Repurchase Agreements" for a description of these agreements.
(2)
This loan includes a six-month extension option subject to certain conditions and the payment of a fee.
(3)
This loan includes two one-year extension options subject to certain conditions and the payment of a fee.
(4)
This loan includes a six-month extension option subject to certain conditions and the payment of a fee. At December 31, 2015 , the Company had $15,100 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.
(6)
At December 31, 2015, the Company had $6,730 of unfunded loan commitments related to this loan.
(7)
This loan includes two six-month extension options subject to certain conditions and the payment of a fee.
(8)
At December 31, 2015, the Company had $9,000 of unfunded loan commitments related to this loan.
(9)
This loan includes two one-year extension options subject to certain conditions and the payment of a fee for each extension. At December 31, 2015, the Company had $40,034 of unfunded loan commitments related to this loan.
(10)
This loan includes three one-year extension options subject to certain conditions and the payment of a fee. At December 31, 2015, the Company had $1,500 of unfunded loan commitments related to this loan.
(11)
This loan includes a two one-year extension options subject to certain conditions and the payment of a fee. At December 31, 2015, the Company had $1,000 of unfunded loan commitments related to this loan.

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,

14
Table of Contents

real estate sector and geographic sub-market in which the borrower operates. Such loan loss analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan.

During the three and nine months ended September 30, 2016, respectively, the Company recorded a loan loss provision of $0 and $10,000 on a multifamily commercial mortgage loan in Williston, ND. As of September 30, 2016, the aggregate loan loss provision was $10,000. The Company has ceased accruing payment in kind ("PIK") interest associated with the loan. As of December 31, 2015, there was no provision for loan loss.
Note 6 – Subordinate Loans
The Company’s subordinate commercial loan portfolio was comprised of the following at September 30, 2016:
 

15
Table of Contents

Description
 
Maturity
Date
 
 
Current Principal Balance
 
Carrying
Value
 
Fixed/Floating
 
Property Size
Subordinate to the Company's commercial mortgage loans
 
 
 
 
 
 
 
 
 
Hotel - New York, NY (1)
 
Sept-18
 
 
$
6,374

 
$
6,284

 
   Floating
 
317 keys
Multifamily - Williston, ND (2)
 
Nov-17
 
 
5,000

 
—

 
   Floating
 
366 units
Total - Subordinate to the Company's commercial mortgage loans
 
 
$
11,374

 
$
6,284

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinate to third party commercial mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mixed Use – North Carolina
 
Aug-22
 
 
$
6,525

 
$
6,525

 
Fixed
 
170,897 sq. ft.
Office Complex - Missouri
 
Oct-22
 
 
9,454

 
9,454

 
Fixed
 
845,241 sq. ft.
Hotel Portfolio – Rochester, MN
 
Feb-18
 
 
23,947

 
23,947

 
Fixed
 
1,222 keys
Warehouse Portfolio - Various
 
May-23
 
 
32,000

 
32,000

 
Fixed
 
2,767,047 sq. ft.
Office Condo - New York, NY
 
Jul-22
 
 
14,000

 
13,665

 
Fixed
 
436,598 sq. ft.
Healthcare Portfolio - Various (2)
 
Jun-17
 
 
38,858

 
38,858

 
Floating
 
18,403 beds
Ski Resort - Big Sky, MT
 
Sept-20
 
 
15,000

 
14,758

 
Fixed
 
632 keys
Mixed Use - New York, NY (2)
 
Dec-17
 
 
96,856

 
96,758

 
Floating
 
363 units
Senior Housing - United Kingdom (2)
 
Dec-17
 
 
69,400

 
69,400

 
Floating
 
2,128 beds
Hotel - Burbank, CA
 
Jan-20
 
 
20,000

 
20,000

 
Fixed
 
488 keys
Multifamily Portfolio - Florida (3)
 
May-17
 
 
22,000

 
21,947

 
Floating
 
621 units
Multifamily Portfolio - Florida (3)
 
May-17
 
 
15,500

 
15,462

 
Floating
 
621 units
Mixed Use - Various (3)
 
May-17
 
 
45,000

 
45,076

 
Floating
 
3,535,774 sq. ft.
Hotel - Phoenix, AZ
 
Jul-25
 
 
25,000

 
25,000

 
Fixed
 
744 keys
Hotel - Washington, DC (2)
 
Jul-17
 
 
20,000

 
19,968

 
Floating
 
581 keys
Condo Development - New York, NY (6)
 
Jul-19
 
 
50,616

 
50,266

 
Floating
 
60 units
Condo Conversion - New York, NY (2)
 
Aug-18
 
 
57,750

 
57,459

 
Floating
 
223 units
Mixed Use - New York, NY (7)
 
Oct-18
 
 
30,000

 
29,896

 
Floating
 
363 units
Destination Resort - Various (8)
 
May-18
 
 
75,000

 
72,502

 
Floating
 
5,243 keys
Multifamily - New York, NY (9)(10)
 
Nov-18
 
 
55,000

 
54,696

 
Floating
 
185,000 sq. ft.
Hotel - New York, NY (4)(10)
 
Mar-17
 
 
50,000

 
49,956

 
Floating
 
468 keys
Condo Pre-development - United Kingdom
 
Sep-17
 
 
71,346

 
71,346

 
Floating
 
41 units
Condo Conversion - New York, NY (5)
 
Jul-19
 
 
37,646

 
36,991

 
Floating
 
139 units
Total - Subordinate to third party commercial mortgage loans
 
 
$
880,898

 
$
875,930

 
 
 
 
Total/Weighted Average
 
 
 
 
$
892,272

 
$
882,214

 

 
 

(1)
Includes two one-year extension options subject to certain conditions and the payment of an extension fee. At September 30, 2016, the Company had $8,699 of unfunded loan commitments related to this loan.
(2)
Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension.
(3)
Includes three one-year extension options subject to certain conditions and the payment of an extension fee.
(4)
Includes a three-month extension option subject to certain conditions and the payment of a fee.
(5)
Includes a one-year extension option subject to certain conditions and the payment of an extension fee. At September 30, 2016, the Company had $39,354 of unfunded loan commitments related to this loan.
(6)
Includes a one-year extension option subject to certain conditions and the payment of a fee for each extension. At September 30, 2016, the Company had $35,633 of unfunded loan commitments related to this loan.
(7)
Includes a one-year extension option subject to certain conditions and the payment of an extension fee.
(8)
Includes four one-year extension options subject to certain conditions and the payment of an extension fee.
(9)
Includes a six-month extension option subject to certain conditions and the payment of a fee.

16
Table of Contents

(10)
At September 30, 2016, this loan was pledged to secure borrowings under the JPMorgan Facility or the Goldman Loan. See "Note 8 - Borrowings Under Repurchase Agreements" for a description of these agreements.

The Company’s subordinate commercial loan portfolio was comprised of the following at December 31, 2015:

17
Table of Contents

 
Description
 
Maturity
Date
 
 
Current Principal Balance
 
Carrying
Value
 
Fixed/Floating
 
Subordinate to the Company's commercial mortgage loans
 
 
 
 
 
 
 
 
Condominium – New York, NY (1)
 
Sept-16
 
 
$
6,386

 
$
6,415

 
Floating
 
Mixed Use - Brooklyn, NY (1)
 
 Mar-17
 
 
12,347

 
12,222

 
   Floating
 
Hotel - New York, NY (1)(2)
 
Sept-18
 
 
2,595

 
2,458

 
   Floating
 
Multifamily - Williston, ND (1)(3)
 
Nov-17
 
 
5,000

 
5,000

 
   Floating
 
Total - Subordinate to the Company's commercial mortgage loans
 
 
$
26,328

 
$
26,095

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinate to third party commercial mortgage loans
 
 
 
 
 
 
 
 
 
 
Office - Michigan
 
Jun-20
 
 
$
8,753

 
$
8,753

 
Fixed
 
Mixed Use – North Carolina
 
Aug-22
 
 
6,525

 
6,525

 
Fixed
 
Office Complex - Missouri
 
Oct-22
 
 
9,566

 
9,566

 
Fixed
 
Hotel Portfolio – Rochester, MN
 
Feb-18
 
 
24,182

 
24,182

 
Fixed
 
Warehouse Portfolio - Various
 
May-23
 
 
32,000

 
32,000

 
Fixed
 
Office Condo - New York, NY
 
Jul-22
 
 
14,000

 
13,631

 
Fixed
 
Mixed Use - Various (3)
 
Dec-16
 
 
19,500

 
19,377

 
Fixed
 
Mixed Use - London, England
 
Jan-16
 
 
50,676

 
50,676

 
Fixed
 
Healthcare Portfolio - Various (4)
 
Jun-16
 
 
39,223

 
39,223

 
Floating
 
Ski Resort - Big Sky, MT
 
Sept-20
 
 
15,000

 
14,878

 
Fixed
 
Mixed Use - New York, NY (5)
 
Dec-17
 
 
88,368

 
87,818

 
Floating
 
Senior Housing - United Kingdom (3)
 
Dec-17
 
 
79,735

 
79,735

 
Floating
 
Hotel - Burbank, CA
 
Jan-20
 
 
20,000

 
20,000

 
Fixed
 
Multifamily Portfolio - Florida (4)
 
May-17
 
 
22,000

 
21,895

 
Floating
 
Multifamily Portfolio - Florida (4)
 
May-17
 
 
15,500

 
15,426

 
Floating
 
Mixed Use - Various (4)
 
May-17
 
 
45,000

 
44,854

 
Floating
 
Hotel - Phoenix, AZ
 
Jul-25
 
 
25,000

 
25,000

 
Fixed
 
Hotel - Washington, DC (3)
 
Jul-17
 
 
20,000

 
19,934

 
Floating
 
Condo Development - New York, NY (6)
 
Jul-19
 
 
34,184

 
33,567

 
Floating
 
Condo Conversion - New York, NY (3)
 
Aug-18
 
 
52,418

 
51,941

 
Floating
 
Mixed Use - New York, NY (7)
 
 Oct-18
 
 
30,000

 
29,785

 
   Floating
 
Destination Resort - Various (8)
 
May-18
 
 
75,000

 
71,362

 
   Floating
 
Multifamily - New York, NY (9)
 
Nov-18
 
 
55,000

 
54,558

 
   Floating
 
Hotel - New York, NY (10)
 
Mar-17
 
 
50,000

 
49,522

 
   Floating
 
Condo Pre-development - United Kingdom (10)
 
Sept-16
 
 
81,048

 
81,048

 
   Floating
 
Total - Subordinate to third party commercial mortgage loans
 
 
$
912,678

 
$
905,256

 
 
 
Total/Weighted Average
 
 
$
939,006

 
$
931,351

 

 

(1)
At December 31, 2015, this loan was pledged to secure borrowings under the JPMorgan Facility. See "Note 8 –Borrowings Under Repurchase Agreements" for a description of this facility.
(2)
Includes two one-year extension options subject to certain conditions and the payment of an extension fee. As of December 31, 2015, the Company had $12,478 of unfunded loan commitments related to this loan.
(3)
Includes two one-year extension options subject to certain conditions and the payment of an extension fee.
(4)
Includes three one-year extension options subject to certain conditions and the payment of an extension fee.
(5)
Includes two one-year extension options subject to certain conditions and the payment of an extension fee. As of December 31, 2015, the Company had $785 of unfunded loan commitments related to this loan.
(6)
Includes a one-year extension option subject to certain conditions and the payment of an extension fee. As of December 31, 2015, the Company had $41,160 of unfunded loan commitments related to this loan.

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(7)
Includes a one-year extension option subject to certain conditions and the payment of an extension fee.
(8)
Includes four one-year extension options subject to certain conditions and the payment of an extension fee.
(9)
Includes a six-month extension option subject to certain conditions and the payment of a fee.
(10)
Includes a three-month extension option subject to certain conditions and the payment of a fee.

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. During the three and nine months ended September 30, 2016, respectively, the Company recorded a loan loss provision of $0 and $5,000 on a multifamily subordinate loan in Williston, ND. As of September 30, 2016, the aggregate loan loss provision was $5,000. The Company has ceased accruing PIK interest associated with the loan. As of December 31, 2015, there was no provision for loan loss.
Note 7 – Unconsolidated Joint Venture
In September 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 Bremer Kreditbank AG ("BKB"). The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 (or $39,477). The Company committed to invest up to approximately €38,000 (or $50,000). The Company together with certain other affiliated investors and unaffiliated third party investors, in aggregate, own 100% of Champ LP. Champ LP together with certain unaffiliated third party investors, in aggregate, own 100% of BKB.
BKB specializes in corporate banking and financial services for medium-sized German companies. It also provides professional real estate financing, acquisition finance, institutional asset management and private wealth management services for German high-net-worth individuals.
In January 2015, the Company funded an additional investment of €3,331 (or $3,929) related to its investment in Champ LP. In February 2015, the Company sold approximately 48% of its ownership interest in Champ LP at cost to an investment fund managed by Apollo Global Management, LLC (together with its subsidiaries, "Apollo") for €16,314 (or $20,794) (of which $2,614 related to foreign exchange losses which were previously included in accumulated other comprehensive loss). In June 2016, the Company transferred €427 of its unfunded commitment to Apollo. As of September 30, 2016, the Company’s unfunded commitment to Champ LP was €2,802 (or $3,149). Through its interest in Champ LP, as of September 30, 2016, the Company held an indirect ownership interest of approximately 9.34% in BKB. 
The Company determined that Champ LP met the definition of a variable interest entity ("VIE") and that it was not the primary beneficiary; therefore, the Company did not consolidate the assets and liabilities of the partnership. Additionally, Champ LP is an Investment Company under GAAP, and is therefore reflected at fair value. Our investment in Champ LP is accounted for as an equity method investment and therefore we record our proportionate share of the net asset value.
Note 8 – Borrowings Under Repurchase Agreements
At September 30, 2016 and December 31, 2015, the Company’s borrowings had the following outstanding balances, maturities and weighted average interest rates:
 

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September 30, 2016
 
December 31, 2015
Lender
Maximum Amount of Borrowings
 
Borrowings Outstanding
 
Maturity (1)
 
Weighted
Average
Rate (2)
 
Maximum Facility Size
 
Borrowings Outstanding
 
Maturity (1)
 
Weighted
Average
Rate (2)
JPMorgan Facility (3)
$
943,000

 
$
648,086

 
January 2019
 
L+2.26%

 
$
600,000

 
$
445,942

 
January 2019
 
L+2.25%

DB Repurchase Facility
300,000

 
—

 
September 2019
 
N/A

 
N/A

 
N/A

 
N/A
 
N/A

Goldman Loan
N/A

 
42,796

 
April 2019
 
L+3.50%

 
N/A

 
45,928

 
April 2019
 
L+3.50%

Sub-total


 
690,882

 
 
 
L+2.33%

 
 
 
491,870

 
 
  
L+2.37%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UBS Facility
N/A

 
133,899

 
September 2018
 
2.79
%
 
N/A

 
133,899

 
September 2018
 
2.79
%
DB Facility (4)
N/A

 
196,256

 
April 2018
 
3.66
%
 
N/A

 
300,005

 
April 2018
 
3.69
%
Sub-total
 
 
330,155

 
 
 
3.31
%
 
 
 
433,904

 
 
 
3.39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
less: deferred financing costs
 
 
(7,875
)
 
 
 
 
 
 
 
(7,353
)
 
 
 
 
Total / Weighted Average


 
$
1,013,162

  
 
 
3.01
%
 
 
 
$
918,421

 
 
  
2.92
%
(1) Maturity date assumes all extensions are exercised.
(2) Assumes one-month LIBOR at September 30, 2016 and December 31, 2015 was 0.53% and 0.43%, respectively.
(3) As of September 30, 2016, the JP Morgan Facility provided for maximum total borrowings comprised of the$800.0 million repurchase facility and a $143.0 million asset specific financing.
(4) 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, 2016, the Company’s borrowings had the following remaining maturities:
 
 
Less than
1 year
 
1 to 3
years
 
3 to 5
years
 
More than
5 years
 
Total
JPMorgan Facility
$
313,547

 
$
334,539

 
$
—

 
$
—

 
$
648,086

DB Repurchase Facility
—

 
—

 
—

 
—

 
—

Goldman Loan
5,290

 
37,506

 
—

 
—

 
42,796

UBS Facility *
260

 
133,639

 
—

 
—

 
133,899

DB Facility
185

 
174,718

 
8,643

 
12,710

 
196,256

Total
$
319,282

 
$
680,402

 
$
8,643

 
$
12,710

 
$
1,021,037

*Assumes extension option is exercised.
At September 30, 2016, the Company’s collateralized financings were comprised of borrowings outstanding under the JPMorgan Facility, the Goldman Loan, the UBS Facility and the DB Facility. No borrowings were outstanding under the master repurchase agreement with Deutsche Bank AG (the "DB Repurchase Facility"), which the Company entered into on September 29, 2016. The table below summarizes the outstanding balances at September 30, 2016, as well as the maximum and average month-end balances for the nine months ended September 30, 2016 for the Company's borrowings under repurchase agreements.
 
 
 
 
For the nine months ended September 30, 2016
 
Balance at September 30, 2016
 
Maximum Month-End
Balance
 
Average Month-End
Balance
JPMorgan Facility borrowings
$
648,086

 
$
800,917

 
$
675,061

DB Repurchase Facility
—

 
—

 
—

Goldman Loan
42,796

 
45,928

 
44,105

UBS Facility borrowings
133,899

 
133,899

 
133,899

DB Facility borrowings
196,256

 
300,005

 
266,056

Total
$
1,021,037

 
 
 
 

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The Company was in compliance with the financial covenants under its borrowing agreements at September 30, 2016 and December 31, 2015.
Note 9 – 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, 2016, the March 2019 Notes had a carrying value of $141,299 and an unamortized discount of $2,451.
On August 18, 2014, the Company issued an additional $111,000 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "August 2019 Notes," and together with the March 2019 Notes, the "2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $109,615. At September 30, 2016, the August 2019 Notes had a carrying value of $108,229 and an unamortized discount of $2,771.
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%
56.5584
3/15/2019
2.46 years
August 2019 Notes
$111,000
5.50%
6.50%
56.5584
3/15/2019
2.46 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, as adjusted as of October 11, 2016, in accordance with the applicable supplemental indenture as a result of cash dividend payments. The if-converted value of the 2019 Notes does not exceed their principal amount at September 28, 2016 since the closing market price of the Company’s common stock does not exceed the implicit conversion prices of $17.68 at September 30, 2016 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, 2016. The resulting debt discount is being amortized over the period during which the 2019 Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the 2019 Notes will increase in subsequent reporting periods through the maturity date as the 2019 Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately $3,503 and $10,508 for the three and nine months ended September 30, 2016, respectively.  The aggregate contractual interest expense was approximately $3,503 and $10,508 for the three and nine months ended September 30, 2015, 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 $895 and $2,654 for the three and nine months ended September 30, 2016, respectively. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately $867 and $2,566 for the three and nine months ended September 30, 2015, respectively.
As of September 30, 2016, potential shares of common stock contingently issuable upon the conversion of the 2019 Notes were excluded from the calculation of diluted income per share of common stock because it is management's intent and the Company currently has the ability to settle the obligation in cash.
Note 10 - Federal Home Loan Bank of Indianapolis Membership

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In February 2015, the Company's wholly owned subsidiary, ACREFI Insurance Services, LLC, was accepted for membership in the Federal Home Loan Bank of Indianapolis (“FHLBI”). As a member of the FHLBI, ACREFI Insurance Services, LLC has access to a variety of products and services offered by the FHLBI, including secured advances. As of September 30, 2016, ACREFI Insurance Services, LLC had not requested any advances from the FHLBI.
On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) adopted a final rule revising its regulations governing Federal Home Loan Bank membership. As a result, the FHLBI may not make any advances to ACREFI Insurance Services, LLC and is required to terminate the membership of ACREFI Insurance Services, LLC no later than February 19, 2017 (one year after the effective date of the final rule).
Upon termination of ACREFI Insurance Services, LLC's membership, FHLBI will be required to redeem at par value the FHLBI stock that had been purchased and held by ACREFI Insurance Services, LLC as a condition to membership in the FHLBI. At September 30, 2016, the Company had stock in the FHLBI totaling $8, which is included in other assets on the condensed consolidated balance sheet at September 30, 2016.
Note 11 – Participations Sold
Participations sold represent the interests in loans the Company originated and subsequently partially sold. The Company presents the participations sold as both assets and non-recourse liabilities because the participation does not qualify as a sale according to GAAP. The income earned on the participation sold is recorded as interest income and an identical amount is recorded as interest expense on the Company's condensed consolidated statements of operations.
During January 2015, the Company closed a £34,519 (or $51,996) floating-rate mezzanine loan secured by a portfolio of 44 senior housing facilities located throughout the United Kingdom. During February 2015, closed an additional £20,000 (or $30,672) and participated that balance to an investment fund affiliated with Apollo. At September 30, 2016, the participation had a face amount of £19,626 (or $25,459), a carrying amount of£19,626 (or $25,459) and a cash coupon of LIBOR plus 825 basis points.
During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation in the loan. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation and classified it as CMBS (Held-to-Maturity) on its condensed consolidated financial statements. At September 30, 2016, the participation had a face amount of $85,517, a carrying amount of $85,465 and a cash coupon of LIBOR plus 440 basis points.
Note 12 – Derivative Instruments
The Company uses forward currency contracts to economically hedge interest and principal payments due under its loans denominated in currencies other than U.S. dollars.

The Company has entered into a series of forward contracts to sell an amount of foreign currency (British pound ("GBP")) for an agreed upon amount of U.S. dollars at various dates through September 2017. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by the Company related to foreign denominated loan investments.

The following table summarizes our non-designated foreign exchange (“Fx”) forwards as of September 30, 2016:
Type of Derivative
September 30, 2016
 
Number of Contracts
 
Aggregate Notional Amount
 
Notional Currency
 
Maturity
Fx Contracts - GBP
5
 
97,732

 
GBP
 
October 2016- September 2017

The following table summarizes our non-designated Fx forwards as of December 31, 2015:

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Table of Contents

Type of Derivative
December 31, 2015
 
Number of Contracts
 
Aggregate Notional Amount
 
Notional Currency
 
Maturity
Fx Contracts - GBP
5
 
130,272

 
GBP
 
January 2016- October 2016

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 derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to the Company’s derivative instruments for the three and nine months ended September 30, 2016 and 2015.
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
Location of Loss Recognized in Income
2016
 
2015
 
2016
 
2015
Forward currency contract
Gain (loss) on derivative instruments - unrealized
$
(10,304
)
 
$
2,240

 
$
1,812

 
$
(3,938
)
Forward currency contract
Gain (loss) on derivative instruments - realized
15,112

 
—

 
21,100

 
—

Interest rate caps
Loss on derivative instruments - unrealized
7

 
(144
)
 
(81
)
 
(206
)
Total
 
$
4,815

 
$
2,096

 
$
22,831

 
$
(4,144
)