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 March 31, 2019
or
¨
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 No.)
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 principal executive offices) (Zip Code)
(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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer 
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ 
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 23, 2019, there were 136,281,597 shares, par value $0.01, of the registrant’s common stock issued and outstanding.
 




Table of Contents
 
 
Page
 
 


3




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands—except share data)
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
Cash and cash equivalents
$
109,343

 
$
109,806

Commercial mortgage loans, net (includes $3,679,993 and $3,197,900 pledged as collateral under secured debt arrangements in 2019 and 2018, respectively)
4,003,089

 
3,878,981

Subordinate loans, net
1,183,910

 
1,048,612

Loan proceeds held by servicer

 
1,000

Other assets
36,540

 
33,720

Derivative assets, net
8,715

 
23,700

Total Assets
$
5,341,597

 
$
5,095,819

Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Secured debt arrangements, net (net of deferred financing costs of $17,828 and $17,555 in 2019 and 2018, respectively)
$
2,141,939

 
$
1,879,522

Convertible senior notes, net
558,664

 
592,000

Accounts payable, accrued expenses and other liabilities
91,557

 
104,746

Payable to related party
9,613

 
9,804

Total Liabilities
2,801,773

 
2,586,072

Commitments and Contingencies (see Note 14)


 


Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series B preferred stock, 6,770,393 shares issued and outstanding ($169,260 liquidation preference)
68

 
68

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

 
69

Common stock, $0.01 par value, 450,000,000 shares authorized, 136,254,352 and 133,853,565 shares issued and outstanding in 2019 and 2018, respectively
1,363

 
1,339

Additional paid-in-capital
2,671,100

 
2,638,441

Accumulated deficit
(132,776
)
 
(130,170
)
Total Stockholders’ Equity
2,539,824

 
2,509,747

Total Liabilities and Stockholders’ Equity
$
5,341,597

 
$
5,095,819














See notes to unaudited condensed consolidated financial statements.

4




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 March 31,
 
2019
 
2018
Net interest income:
 
 
 
Interest income from commercial mortgage loans
$
78,286

 
$
52,114

Interest income from subordinate loans
40,839

 
33,853

Interest expense
(36,295
)
 
(22,740
)
Net interest income
82,830

 
63,227

Operating expenses:
 
 
 
General and administrative expenses (includes equity-based compensation of $3,901 and $3,342 in 2019 and 2018, respectively)
(6,151
)
 
(4,998
)
Management fees to related party
(9,613
)
 
(8,092
)
Total operating expenses
(15,764
)
 
(13,090
)
Other income
518

 
203

Foreign currency gain
6,894

 
10,125

Loss on derivative instruments (includes unrealized losses of $14,985 and $8,855 in 2019 and 2018, respectively)
(6,720
)
 
(11,032
)
Net income
$
67,758

 
$
49,433

Preferred dividends
(6,835
)
 
(6,835
)
Net income available to common stockholders
$
60,923

 
$
42,598

Net income per share of common stock:
 
 
 
Basic
$
0.45

 
$
0.38

Diluted
$
0.43

 
$
0.38

Basic weighted-average shares of common stock outstanding
134,607,107

 
110,211,853

Diluted weighted-average shares of common stock outstanding
164,683,086

 
111,871,429

Dividend declared per share of common stock
$
0.46

 
$
0.46























See notes to unaudited condensed consolidated financial statements.

5




Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(in thousands—except share and per share data)

 
Preferred Stock
 
Common Stock
 
Additional
Paid-In-Capital
 
Accumulated
Deficit
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
Balance at January 1, 2018
13,670,393

 
$
137

 
107,121,235

 
$
1,071

 
$
2,170,078

 
$
(83,143
)
 
$
2,088,143

Capital increase (decrease) related to Equity Incentive Plan

 

 
345,996

 
4

 
(1,389
)
 

 
(1,385
)
Issuance of common stock

 

 
15,525,000

 
155

 
275,724

 

 
275,879

Offering costs

 

 

 

 
(377
)
 

 
(377
)
Net income

 

 

 

 

 
49,433

 
49,433

Dividends declared on preferred stock

 

 

 

 

 
(6,835
)
 
(6,835
)
Dividends declared on common stock - $0.46 per share

 

 

 

 

 
(57,328
)
 
(57,328
)
Balance at March 31, 2018
13,670,393
 
$
137

 
122,992,231
 
$
1,230

 
$
2,444,036

 
$
(97,873
)
 
$
2,347,530


 
Preferred Stock
 
Common Stock
 
Additional
Paid-In-Capital
 
Accumulated
Deficit
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
Balance at January 1, 2019
13,670,393

 
$
137

 
133,853,565

 
$
1,339

 
$
2,638,441

 
$
(130,170
)
 
$
2,509,747

Capital decrease related to Equity Incentive Plan

 

 
433,426

 
4

 
(1,099
)
 

 
(1,095
)
Conversions of convertible senior notes for common stock

 

 
1,967,361

 
20

 
33,758

 

 
33,778

Net income

 

 

 

 

 
67,758

 
67,758

Dividends declared on preferred stock

 

 

 

 

 
(6,835
)
 
(6,835
)
Dividends declared on common stock - $0.46 per share

 

 

 

 

 
(63,529
)
 
(63,529
)
Balance at March 31, 2019
13,670,393

 
$
137

 
136,254,352

 
$
1,363

 
$
2,671,100

 
$
(132,776
)
 
$
2,539,824






















See notes to unaudited condensed consolidated financial statements.

6




Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
 
For the three months ended March 31,
 
2019
 
2018
Cash flows (used in) provided by operating activities:
 
 
 
     Net income
$
67,758

 
$
49,433

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
     Amortization of discount/premium and PIK
(19,611
)
 
(15,695
)
     Amortization of deferred financing costs
3,461

 
2,545

     Equity-based compensation
(1,095
)
 
(1,385
)
     Foreign currency gain
(5,828
)
 
(9,853
)
     Unrealized loss on derivative instruments
14,985

 
8,855

     Changes in operating assets and liabilities:
 
 
 
          Proceeds received from PIK

 
55,000

          Other assets
(2,898
)
 
(2,620
)
          Accounts payable, accrued expenses and other liabilities
620

 
2,075

          Payable to related party
(191
)
 
(76
)
Net cash (used in) provided by operating activities
57,201

 
88,279

Cash flows used in investing activities:
 
 
 
     New funding of commercial mortgage loans
(197,000
)
 
(476,951
)
     Add-on funding of commercial mortgage loans
(105,452
)
 
(13,185
)
     New funding of subordinate loans
(244,844
)
 
(11,687
)
     Add-on funding of subordinate loans
(4,879
)
 
(5,208
)
     Proceeds and payments received on commercial mortgage loans
191,317

 
90,547

     Proceeds and payments received on subordinate loans
130,010

 
257,548

     Origination and exit fees received on commercial mortgage and subordinate loans
6,069

 
19,085

     Decrease in collateral held related to derivative contracts
(18,180
)
 
(15,220
)
Net cash (used in) provided by investing activities
(242,959
)
 
(155,071
)
Cash flows from financing activities:
 
 
 
     Proceeds from issuance of common stock

 
275,879

     Payment of offering costs

 
(38
)
     Proceeds from secured debt arrangements
412,434

 
416,549

     Repayments of secured debt arrangements
(156,747
)
 
(538,562
)
     Exchanges and conversions of convertible senior notes
(704
)
 

     Payment of deferred financing costs
(91
)
 
(2,234
)
     Dividends on common stock
(62,762
)
 
(57,328
)
     Dividends on preferred stock
(6,835
)
 
(6,835
)
Net cash (used in) provided by financing activities
185,295

 
87,431

Net increase (decrease) in cash and cash equivalents
(463
)
 
20,639

Cash and cash equivalents, beginning of period
109,806

 
77,671

Cash and cash equivalents, end of period
$
109,343

 
$
98,310

Supplemental disclosure of cash flow information:
 
 
 
     Interest paid
$
32,428

 
$
26,517

Supplemental disclosure of non-cash financing activities:
 
 
 
     Exchange of convertible senior notes for common stock
$
33,778

 
$

     Dividend declared, not yet paid
$
70,364

 
$
63,598

     Offering costs payable
$

 
$
339

     Loan proceeds held by servicer
$

 
$
1,000

     Deferred financing costs, not yet paid
$
3,643

 
$






See notes to unaudited condensed consolidated financial statements.

7




Apollo Commercial Real Estate Finance Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the "Company," "ARI," "we," "us" and "our") is a corporation that has elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We were formed in Maryland on June 29, 2009, commenced operations on September 29, 2009 and are externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, LLC (together with its subsidiaries, "Apollo").
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain our tax qualification as a REIT, we are required to distribute at least 90% of our taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates include loan loss reserves and impairment. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (the "SEC"). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows have been included. Our results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year or any other future period.
We currently operate in one reporting segment.
Recent Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting" ("ASU 2018-07"). The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018 and is applied retrospectively. We adopted ASU 2018-07 in the first quarter of 2019 and it did not have any impact on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326)" ("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. While we are currently evaluating the impact ASU 2016-13 will have on our condensed consolidated financial statements, we expect that the adoption will result in higher provisions for potential loan losses.    

8




Note 3 – Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair values. Market based, or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy as noted in ASC 820 "Fair Value Measurements and Disclosures" are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While we anticipate that our 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. We 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 values of our derivative instruments are determined using a discounted cash flow analysis on the
expected cash flows of each derivative. The fair values of interest rate caps are determined using the market standard
methodology of discounting the future expected cash receipts (or payments) that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected cash flows are based on an
expectation of future interest rates derived from observable market interest rate curves and volatilities. The fair values of
foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange
rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for
the underlying countries. Our 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 our financial instruments were categorized as of March 31, 2019 and December 31, 2018 ($ in thousands): 
 
Fair Value as of March 31, 2019
 
Fair Value as of December 31, 2018
 
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
Derivative assets, net
$

 
$
8,715

 
$

 
$
8,715

 
$

 
$
23,700

 
$

 
$
23,700

Total
$

 
$
8,715

 
$

 
$
8,715

 
$

 
$
23,700

 
$

 
$
23,700


Note 4 – Commercial Mortgage and Subordinate Loans, Net
Our loan portfolio was comprised of the following at March 31, 2019 and December 31, 2018 ($ in thousands):
Loan Type
 
March 31, 2019
 
December 31, 2018
Commercial mortgage loans, net
 
$
4,003,089

 
$
3,878,981

Subordinate loans, net
 
1,183,910

 
1,048,612

Total loans, net
 
$
5,186,999

 
$
4,927,593


Our loan portfolio consisted of 93% and 91% floating rate loans, based on amortized cost, as of March 31, 2019 and December 31, 2018, respectively.
 








9




Activity relating to our loan investment portfolio, for the three months ended March 31, 2019, was as follows ($ in thousands):
 
 
Principal Balance
 
Deferred Fees/Other Items (1)
 
Provision for Loan Loss (2)
 
Carrying Value
December 31, 2018
 
$
4,982,514

 
$
(17,940
)
 
$
(36,981
)
 
$
4,927,593

New loan fundings
 
441,844

 

 

 
441,844

Add-on loan fundings (3)
 
110,331

 

 

 
110,331

Loan repayments
 
(322,354
)
 

 

 
(322,354
)
Gain (loss) on foreign currency translation
 
15,033

 
(136
)
 

 
14,897

Deferred fees
 

 
(6,069
)
 

 
(6,069
)
PIK interest and amortization of fees
 
14,321

 
6,436

 

 
20,757

March 31, 2019
 
$
5,241,689

 
$
(17,709
)
 
$
(36,981
)
 
$
5,186,999

———————
(1) Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses.
(2) In addition to the $37.0 million provision for loan loss, we recorded an impairment of $3.0 million against an investment previously recorded under other assets on our condensed consolidated balance sheet.
(3) Represents fundings for loans closed prior to 2019.


The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
 
 
March 31, 2019
 
December 31, 2018
Number of loans
 
69

 
69

Principal balance
 
$
5,241,689

 
$
4,982,514

Carrying value
 
$
5,186,999

 
$
4,927,593

Unfunded loan commitments (1)
 
$
1,039,089

 
$
1,095,598

Weighted-average cash coupon (2)
 
8.4
%
 
8.4
%
Weighted-average remaining term (3)
 
2.9 years

 
2.8 years

  ———————
(1)
Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
(2)
For floating rate loans, based on applicable benchmark rates as of the specified dates.
(3)
Assumes all extension options are exercised.


The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
 
 
March 31, 2019
 
December 31, 2018
Property Type
 
Carrying
Value
 
% of
Portfolio
 
Carrying
Value
 
% of
Portfolio
Hotel
 
$
1,330,842

 
25.7
%
 
$
1,286,590

 
26.1
%
Residential-for-sale: construction
 
631,501

 
12.1
%
 
528,510

 
10.7
%
Residential-for-sale: inventory
 
421,815

 
8.1
%
 
577,053

 
11.7
%
Office
 
956,989

 
18.5
%
 
832,620

 
16.9
%
Urban Predevelopment
 
610,888

 
11.8
%
 
683,886

 
13.9
%
Multifamily
 
521,087

 
10.0
%
 
448,899

 
9.1
%
Industrial
 
227,206

 
4.4
%
 
32,000

 
0.6
%
Retail Center
 
156,008

 
3.0
%
 
156,067

 
3.2
%
Healthcare
 
144,310

 
2.8
%
 
156,814

 
3.2
%
Mixed Use
 
114,284

 
2.2
%
 
73,957

 
1.5
%
Other
 
72,069

 
1.4
%
 
151,197

 
3.1
%
Total
 
$
5,186,999

 
100.0
%
 
$
4,927,593

 
100.0
%

10





The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
 
 
March 31, 2019
 
December 31, 2018
Geographic Location
 
Carrying
Value
 
% of
Portfolio
 
Carrying
Value
 
% of
Portfolio
Manhattan, NY
 
$
1,825,136

 
35.2
%
 
$
1,669,145

 
33.9
%
Brooklyn, NY
 
547,139

 
10.5
%
 
346,056

 
7.0
%
Northeast
 
18,751

 
0.4
%
 
23,479

 
0.5
%
West
 
635,733

 
12.3
%
 
614,160

 
12.5
%
Midwest
 
617,599

 
11.9
%
 
631,710

 
12.8
%
Southeast
 
567,794

 
10.9
%
 
559,043

 
11.3
%
Southwest
 
120,127

 
2.3
%
 
96,345

 
2.0
%
Mid Atlantic
 
110,754

 
2.1
%
 
211,775

 
4.3
%
United Kingdom
 
668,507

 
12.9
%
 
700,460

 
14.2
%
Other International
 
75,459

 
1.5
%
 
75,420

 
1.5
%
Total
 
$
5,186,999

 
100.0
%
 
$
4,927,593

 
100.0
%

We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio ("LTV"), debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:
1.    Very low risk
2.    Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or has been impaired

The following table allocates the carrying value of our loan portfolio based on our internal risk ratings at the dates indicated ($ in thousands):
 
 
March 31, 2019
 
December 31, 2018
Risk Rating
 
Number of Loans
 
Carrying Value
 
% of Loan Portfolio
 
Number of Loans
 
Carrying Value
 
% of Loan Portfolio
1
 
 
$

 
%
 
 
$

 
%
2
 
2
 
58,847

 
1
%
 
3
 
138,040

 
3
%
3
 
64
 
4,915,843

 
95
%
 
63
 
4,573,930

 
93
%
4
 
 

 
%
 
 

 
%
5
 
3
 
212,309

 
4
%
 
3
 
215,623

 
4
%
 
 
69
 
$
5,186,999

 
100
%
 
69
 
$
4,927,593

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average risk rating
 
 
 
3.1

 
 
 
 
 
3.1


We evaluate our loans for possible impairment on a quarterly basis. We regularly evaluate 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 is sufficient to cover the debt service

11




requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.
    
We evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR") and/or substantial modification, under ASC Topic 310, "Receivables." During the second quarter of 2018, we determined that a modification of one commercial mortgage loan, secured by a retail center in Cincinnati, OH, with a principal balance of $169.0 million constituted a TDR as the interest rate spread was reduced from 5.5% over LIBOR to 3.0% over LIBOR. The entity in which we own an interest and which owns the underlying property was deemed to be a variable interest entity ("VIE") and it was determined that we are not the primary beneficiary of that VIE. During the fourth quarter of 2018, we recorded a $15.0 million loan loss provision against this loan. After the loan loss provision, the amortized cost of the loan was $156.0 million as of March 31, 2019 and December 31, 2018. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using the direct capitalization method. The significant unobservable inputs used in determining the collateral value were in-place net operating income and capitalization rate which were $10.5 million and 6.8%, respectively. The loan is on accrual status and we continue to receive contractual interest due. As of March 31, 2019 and 2018, this loan was assigned a risk rating of 5.
We recorded a $10.0 million loan loss provision and impairment against a commercial mortgage loan secured by a fully-built, for-sale residential condominium units located in Bethesda, MD. This was comprised of (i) $5.0 million loan loss recorded during the second quarter of 2018, and (ii) $2.0 million loan loss provision and $3.0 million of impairment recorded during the second quarter of 2017. The impairment was recorded on an investment previously recorded under other assets on our condensed consolidated balance sheet. After the loan loss provisions and related impairment, the amortized cost balance of the loan was $24.2 million and $27.2 million as of March 31, 2019 and December 31, 2018, respectively. The loan loss provision and impairment were based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of $662 per square foot across properties and 15%, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and account for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance). As of March 31, 2019 and December 31, 2018, this loan was assigned a risk rating of 5.
During 2016, we recorded a loan loss provision of $10.0 million on a commercial mortgage loan and $5.0 million on a contiguous subordinate loan secured by a multifamily property located in Williston, ND. After the loan loss provisions, the amortized cost of the loan was $32.1 million and $32.4 million as of March 31, 2019 and December 31, 2018, respectively. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were 11% and 10%, respectively. The entity in which we own an interest and which owns the underlying property was deemed to be a VIE and it was determined that we are not the primary beneficiary of the VIE. We ceased accruing interest associated with the loan and only recognize interest income upon receipt of cash. As of March 31, 2019 and December 31, 2018, this loan was assigned a risk rating of 5.
During the year ended December 31, 2018, we sold a $75.0 million ($17.7 million funded) subordinate position of our $265.0 million loans for the construction of an office campus in Renton, Washington. As of March 31, 2019, our exposure to the property is limited to a $190.0 million ($96.1 million funded) mortgage loan. This transaction was evaluated under ASC 860 - Transfers and Servicing and we determined that it qualifies as a sale and accounted for as such.
As of March 31, 2019 and December 31, 2018, the aggregate loan loss provision was $37.0 million for commercial mortgage loans and subordinate loans.
We recognized payment-in-kind ("PIK") interest of $14.5 million and $10.6 million for the three months ended March 31, 2019 and 2018, respectively.

12




We recognized pre-payment penalties and accelerated fees of $3.7 million for the three months ended March 31, 2019. There were no pre-payment penalties and accelerated fees for the three months ended March 31, 2018.
Note 5 – Loan Proceeds Held by Servicer
Loan proceeds held by servicer represents principal payments held by our third-party loan servicer as of the balance sheet date which were remitted to us subsequent to the balance sheet date. Loan proceeds held by servicer was $1.0 million as of December 31, 2018. There were no loan proceeds held by servicer as of March 31, 2019.
Note 6 – Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands):
 
March 31, 2019
 
December 31, 2018
Interest receivable
$
36,085

 
$
33,399

Other
455

 
321

Total
$
36,540

 
$
33,720


Note 7 – Secured Debt Arrangements, Net
At March 31, 2019 and December 31, 2018, our borrowings had the following secured debt arrangements, maturities and weighted-average interest rates ($ in thousands):
 
 
 
March 31, 2019 (2)
 
December 31, 2018 (2)
 
 
Maximum Amount of Borrowings
 
Borrowings Outstanding
 
Maturity (1)
 
Maximum Amount of Borrowings
 
Borrowings Outstanding
 
Maturity (1)
 
JPMorgan Facility (USD)
$
1,305,435

 
$
873,771

 
June 2021
 
$
1,333,503

 
$
680,141

 
June 2021
 
JPMorgan Facility (GBP)
49,565

 
49,565

 
June 2021
 
48,497

 
48,497

 
June 2021
 
DB Repurchase Facility (USD)
858,919

 
475,871

 
March 2021
 
904,181

 
419,823

 
March 2021
 
DB Repurchase Facility (GBP)
141,081

 
141,081

 
March 2021
 
150,819

 
150,819

 
March 2021
 
Goldman Facility
500,000

 
233,312

 
November 2021
 
300,000

 
210,072

 
November 2020
 
CS Facility (USD)
188,037

 
188,037

 
September 2019
 
187,117

 
187,117

 
June 2019
 
CS Facility (GBP)
148,219

 
148,219

 
September 2019
 
151,773

 
151,773

 
June 2019
 
HSBC Facility (GBP)
49,911

 
49,911

 
December 2019
 
48,835

 
48,835

 
December 2019
 
Sub-total
3,241,167

 
2,159,767

 

 
3,124,725

 
1,897,077

 
 
 
less: deferred financing costs
N/A

 
(17,828
)
 
 
 
N/A

 
(17,555
)
 
 
 
Total / Weighted-Average
$
3,241,167

 
$
2,141,939

  
$
3,124,725

 
$
1,879,522

 
 
———————
(1) Maturity date assumes extensions at our option are exercised.
(2) Weighted-average rates as of March 31, 2019 and December 31, 2018 were USD L + 2.19% / GBP L + 2.30% and USD L + 2.17% / GBP L + 2.28%, respectively.

JPMorgan Facility
In May 2017, through two indirect wholly-owned subsidiaries, we entered into a Fifth Amended and Restated Master Repurchase Agreement with JPMorgan Chase Bank, National Association (as amended, the "JPMorgan Facility"). The JPMorgan Facility provides for maximum total borrowing capacity of $1.4 billion, comprised of a $1.25 billion repurchase facility and a $105.0 million asset specific financing and enables us to elect to receive advances in either U.S. dollars, British pounds ("GBP"), or Euros ("EUR"). The repurchase facility matures in June 2020, plus a one-year extension available at our option, subject to certain conditions. The asset specific financing matures in May 2019. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of our indirect wholly-owned subsidiaries under the JPMorgan Facility.

13




As of March 31, 2019, we had $923.3 million (including £38.0 million assuming conversion into U.S. dollars) of borrowings outstanding under the JPMorgan Facility secured by certain of our commercial mortgage loans.
DB Repurchase Facility
In April 2018, through an indirect wholly-owned subsidiary, we entered into a Second Amended and Restated Master Repurchase Agreement with Deutsche Bank AG, Cayman Islands Branch and Deutsche Bank AG, London Branch (as amended, the "DB Repurchase Facility"), which was upsized in September 2018, and provides for advances of up to $1.0 billion for the sale and repurchase of eligible first mortgage loans secured by commercial or multifamily properties located in the United States, United Kingdom and the European Union, and enables us to elect to receive advances in either U.S. dollars, British pounds, or Euros. The repurchase facility matures in March 2020, plus a one-year extension available at our option, subject to certain conditions. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $617.0 million (including £108.2 million assuming conversion into U.S. dollars) of borrowings outstanding under the DB Repurchase Facility secured by certain of our commercial mortgage loans.
Goldman Facility
In November 2017, through an indirect wholly-owned subsidiary, we entered into a master repurchase and securities contract agreement with Goldman Sachs Bank USA (the "Goldman Facility"), which was upsized in March 2019 from $300.0 million to $500.0 million and matures in November 2019, plus two one-year extensions available at our option, subject to certain conditions. Margin calls may occur any time at specified margin deficit thresholds. We have agreed to provide a limited guarantee of the obligations of the seller under the Goldman Facility.
As of March 31, 2019, we had $233.3 million of borrowings outstanding under the Goldman Facility.
CS Facility - USD
In July 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - USD"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - USD matures six months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $188.0 million of borrowings outstanding under the CS Facility - USD secured by certain of our commercial mortgage loans.
CS Facility - GBP
In June 2018, through an indirect wholly-owned subsidiary, we entered into a Master Repurchase Agreement with Credit Suisse AG, acting through its Cayman Islands Branch and Alpine Securitization Ltd (the "CS Facility - GBP"), which provides for advances for the sale and repurchase of eligible commercial mortgage loans secured by real estate. The CS Facility - GBP matures six months after either party notifies the other party of intention to terminate. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $148.2 million (£113.7 million assuming conversion into U.S. dollars) of borrowings outstanding under the CS Facility - GBP secured by one of our commercial mortgage loans.
HSBC Facility
In September 2018, through an indirect wholly-owned subsidiary, we entered into a secured debt arrangement with HSBC Bank plc (the "HSBC Facility"), which provides for a single asset financing. The facility matures in December 2019 and unless terminated by either party, automatically extends for further periods prior to maturity. Margin calls may occur any time at specified aggregate margin deficit thresholds. We have agreed to provide a guarantee of the obligations of our indirect wholly-owned subsidiaries under this facility.
As of March 31, 2019, we had $49.9 million (£38.3 million assuming conversion into U.S. dollars) of borrowings outstanding under the HSBC Facility secured by one of our commercial mortgage loans.


14





At March 31, 2019, our borrowings had the following remaining maturities ($ in thousands): 
 
Less than
1 year
 (1)
 
1 to 3
years
 (1)
 
3 to 5
years
 
More than
5 years
 
Total
JPMorgan Facility
$
159,854

 
$
763,482

 
$


$

 
$
923,336

DB Repurchase Facility
109,142

 
507,810

 



 
616,952

Goldman Facility

 
233,312

 

 

 
233,312

CS Facility - USD
188,037

 

 

 

 
188,037

CS Facility - GBP
148,219

 

 

 

 
148,219

HSBC Facility
49,911

 

 

 

 
49,911

Total
$
655,163

 
$
1,504,604

 
$

 
$

 
$
2,159,767

———————
(1) Assumes underlying assets are financed through the fully extended maturity date of the facility.


The table below summarizes the outstanding balances at March 31, 2019, as well as the maximum and average month-end balances for the three months ended March 31, 2019 for our borrowings under secured debt arrangements ($ in thousands).
 
As of March 31, 2019
 
For the three months ended March 31, 2019
 
Balance
 
Amortized Cost of Collateral
 
Maximum Month-End
Balance
 
Average Month-End
Balance
JPMorgan Facility
$
923,336

 
$
1,612,510

 
$
929,496

 
$
925,679

DB Repurchase Facility
616,952

 
1,013,662

 
672,477

 
636,283

Goldman Facility
233,312

 
517,122

 
259,167

 
250,286

CS Facility - USD
188,037

 
254,090

 
188,037

 
187,424

CS Facility - GBP
148,219

 
211,468

 
150,811

 
145,814

HSBC Facility
49,911

 
71,141

 
50,784

 
50,296

Total
$
2,159,767

 
$
3,679,993

 
 
 
 
We were in compliance with the covenants under each of our secured debt arrangements at March 31, 2019 and December 31, 2018.
Note 8 – Convertible Senior Notes, Net
In two separate offerings during 2014, we issued an aggregate principal amount of $254.8 million of 5.50% Convertible Senior Notes due 2019 (the "2019 Notes"), for which we received $248.6 million, after deducting the underwriting discount and offering expenses. The 2019 Notes were exchanged or converted for shares of our common stock and cash as follows:
(i) On August 2, 2018, we entered into privately negotiated exchange agreements with a limited number of holders of the 2019 Notes pursuant to which we exchanged $206.2 million of the 2019 Notes for an aggregate of (a) 10,020,328 newly issued shares of our common stock, and (b) $39.3 million in cash. We recorded $166.0 million of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions,
(ii) Certain holders elected to convert $47.9 million of the 2019 Notes, which were settled for an aggregate of (a) 2,775,509 newly issued shares of our common stock, and (b) $0.2 million in cash. We recorded $13.9 million of additional paid-in-capital in the condensed consolidated statement of changes in stockholders' equity in connection with these transactions. These conversions occurred from August 2018 through maturity.
The remaining $0.7 million in principal amount of the 2019 Notes were repaid at maturity on March 15, 2019.
During the year ended December 31, 2018, we recorded a loss on early extinguishment of debt of $2.6 million, in connection with the exchanges and conversions of the 2019 Notes. This includes fees and accelerated amortization of

15




capitalized costs. There was no such loss related to the 2019 Notes during the three months ended March 31, 2019.
In two separate offerings during 2017, we issued an aggregate principal amount of $345.0 million of 4.75% Convertible Senior Notes due 2022 (the "2022 Notes"), for which we received $337.5 million, after deducting the underwriting discount and offering expenses. At March 31, 2019, the 2022 Notes had a carrying value of $335.9 million and an unamortized discount of $9.1 million.
During the fourth quarter of 2018, we issued $230.0 million of 5.375% Convertible Senior Notes due 2023 ("2023 Notes," and together with the 2019 Notes and 2022 Notes, the "Notes"), for which we received $223.7 million after deducting the underwriting discount and offering expenses. At March 31, 2019, the 2023 Notes had a carrying value of $222.8 million and an unamortized discount of $7.2 million.
The following table summarizes the terms of the Notes ($ in thousands):
 
Principal Amount
Coupon Rate
Effective Rate (1)
Conversion Rate (2)
Maturity Date
Remaining Period of Amortization
2022 Notes
$
345,000

4.75
%
5.60
%
50.226

8/23/2022
3.4
2023 Notes
230,000

5.38
%
6.16
%
48.7187

10/15/2023
4.55
Total
$
575,000

 
 
 
 
 
———————
(1)
Effective rate includes the effect of the adjustment for the conversion option (See endnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital.
(2)
We have the option to settle any conversions in cash, shares of common stock or a combination thereof.  The conversion rate represents the number of shares of common stock issuable per one thousand principal amount of the Notes converted, and includes adjustments relating to cash dividend payments made by us to stockholders that have been deferred and carried-forward in accordance with, and are not yet required to be made pursuant to, the terms of the applicable supplemental indenture.

In accordance with ASC 470 - Debt, the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) is to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. GAAP requires that the initial proceeds from the sale of the 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 us at such time. We measured the fair value of the debt components of the Notes as of their issuance date based on effective interest rates.  As a result, we attributed approximately $15.4 million of the proceeds to the equity component of the Notes ($11.0 million to the 2022 Notes and $4.4 million to the 2023 Notes), which represents the excess proceeds received over the fair value of the liability component of the Notes at the date of issuance. The equity component of the Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of March 31, 2019. The resulting debt discount is being amortized over the period during which the 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 Notes will increase in subsequent reporting periods through the maturity date as the Notes accrete to their par value over the same period.
The aggregate contractual interest expense was approximately $7.6 million and $7.6 million for the three months ended March 31, 2019 and 2018, respectively. With respect to the amortization of the discount on the liability component of the Notes as well as the amortization of deferred financing costs, we reported additional non-cash interest expense of approximately $1.7 million and $1.8 million for the three months ended March 31, 2019 and 2018, respectively.
Note 9 – Derivatives, Net
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than U.S. dollars.
We have entered into a series of forward contracts to sell an amount of foreign currency (British pound and Euro) for an agreed upon amount of U.S. dollars at various dates through December 2021. These forward contracts were executed to economically fix the U.S. dollar amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments.
    



16






The following table summarizes our non-designated foreign exchange ("Fx") forwards as of March 31, 2019:

March 31, 2019
 
Number of Contracts
 
Aggregate Notional Amount (in thousands)
 
Notional Currency
 
Maturity
 
Weighted-Average Years to Maturity
Fx Contracts - GBP
78
 
259,604
 
GBP
 
April 2019- December 2021
 
1.07


The following table summarizes our non-designated Fx forwards as of December 31, 2018:
 
December 31, 2018
 
Number of Contracts
 
Aggregate Notional Amount (in thousands)
 
Notional Currency
 
Maturity
 
Weighted-Average Years to Maturity
Fx Contracts - GBP
43
 
270,161
 
GBP
 
January 2019 - November 2020
 
0.69

We have not designated any of our derivative instruments as hedges as defined in ASC 815 "Derivatives and Hedging" and, therefore, changes in the fair value of our derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the condensed consolidated statements of operations related to our derivatives for the three months ended March 31, 2019 and 2018 ($ in thousands):
 
 
 
 
Amount of gain (loss)
recognized in income
 
 
 
Three months ended March 31,
 
Location of Gain (Loss) Recognized in Income
 
2019
 
2018
Forward currency contracts
Loss on derivative instruments - unrealized
 
$
(14,985
)
 
$
(8,859
)
Forward currency contracts
Gain (loss) on derivative instruments - realized
 
8,265

 
(2,177
)
Interest rate caps(1)
Gain on derivative instruments - unrealized
 

 
4

Total
 
 
$
(6,720
)
 
$
(11,032
)
———————
(1)
With a notional amount of $33.6 million and $38.9 million at March 31, 2019, and 2018, respectively.
The following table summarizes the gross asset and liability amounts related to our derivatives at March 31, 2019 and December 31, 2018 ($ in thousands).
 
 
March 31, 2019
 
December 31, 2018

Gross
Amount of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
 
Net Amounts
of Assets
Presented in
the Condensed Consolidated Balance Sheet
 
Gross Amount of Recognized Assets
 
Gross
Amounts
Offset in the Condensed
Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet
Forward currency contracts
9,852

 
(1,137
)
 
8,715

 
23,753

 
(53
)
 
23,700

Total derivative instruments
$
9,852

 
$
(1,137
)
 
$
8,715

 
$
23,753


$
(53
)

$
23,700





17




Note 10 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands):
 
March 31, 2019
 
December 31, 2018
Accrued dividends payable
$
69,799

 
$
69,033

Collateral deposited under derivative agreements
1,820

 
20,000

Accrued interest payable
13,488

 
14,208

Accounts payable and other liabilities
6,450

 
1,505

Total
$
91,557

 
$
104,746


Note 11 – Related Party Transactions
Management Agreement
In connection with our initial public offering in September 2009, we entered into a management agreement (the "Management Agreement") with the Manager, which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing our day-to-day operations, subject to the direction and oversight of our board of directors.
Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The current term of the Management Agreement was renewed during the period and expires on September 29, 2019 and is automatically renewed for successive one-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of our independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to ARI or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by our independent directors in February 2019, which included a discussion of the Manager’s performance and the level of the management fees thereunder, we determined not to seek termination of the Management Agreement.
We incurred approximately $9.6 million in base management fees under the Management Agreement for the three months ended March 31, 2019 as compared to approximately $8.1 million for the three months ended March 31, 2018.
In addition to the base management fee, we are also responsible for reimbursing the Manager for certain expenses paid by the Manager on our behalf or for certain services provided by the Manager to us.
For the three months ended March 31, 2019 and 2018, we paid expenses totaling $0.7 million and $0.6 million, respectively, related to reimbursements for certain expenses paid by the Manager on our behalf under the Management Agreement. Expenses incurred by the Manager and reimbursed by us are reflected in the respective condensed consolidated statement of operations expense category or the condensed consolidated balance sheet based on the nature of the item.
Included in payable to related party on the condensed consolidated balance sheet at March 31, 2019 and December 31, 2018 are approximately $9.6 million and $9.8 million, respectively, for base management fees incurred but not yet paid under the Management Agreement.
Loans receivable
In June 2017, we increased our outstanding loan commitment through the acquisition of an additional $25.0 million of interests in an existing subordinate loan from a fund managed by an affiliate of the Manager, increasing our total outstanding loan commitment to $100.0 million. Furthermore, in September 2017 we funded an additional $25.0 million to acquire a portion of the same pre-development subordinate loan from a fund managed by an affiliate of the Manager, increasing our total outstanding loan commitment to $125.0 million. In May 2018, we increased our outstanding principal balance through the

18




acquisition of an additional $28.2 million interest in the same subordinate loan from a fund managed by an affiliate of the Manager. The pre-development subordinate loan is for the construction of a residential condominium building in New York, New York and is part of a $300.0 million subordinate loan.
In June 2018, we increased our outstanding loan commitment through the acquisition of £4.8 million ($6.4 million assuming conversion into U.S. dollars) pari-passu interest in an existing subordinate loan from a fund managed by an affiliate of the Manager. The subordinate loan is secured by a healthcare portfolio located in the United Kingdom.
Note 12 – Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc., 2009 Equity Incentive Plan (as amended from time to time, the "LTIP"). The LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7.5% of the issued and outstanding shares of our common stock (on a fully diluted basis). The LTIP is administered by the compensation committee of our board of directors (the "Compensation Committee") and all grants under the LTIP must be approved by the Compensation Committee.
We recognized stock-based compensation expense of $3.9 million and $3.3 million for the three months ended March 31, 2019 and 2018, respectively, related to restricted stock and RSU vesting. We adopted ASU 2018-07 on January 1, 2019 and the stock-based compensation expense for grants before the adoption of ASU 2018-07 is based on the closing price of our common stock of $16.66 on December 31, 2018, which was the last business day before we adopted ASU 2018-07. Refer to "Note 2 - Summary of Significant Accounting Policies" for further discussion on our adoption of ASU 2018-07.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the three months ended March 31, 2019:
 
Type
 
Restricted Stock
 
RSUs
 
Grant Date Fair Value ($ in thousands)
Outstanding at December 31, 2018
 
65,697

 
1,852,957

 
 
 
Vested
 
(1,419
)
 

 
N/A
 
Forfeiture
 

 
(4,174
)
 
N/A
Outstanding at March 31, 2019
 
64,278

 
1,848,783

 
 

Below is a summary of restricted stock and RSU vesting dates as of March 31, 2019
Vesting Year
 
Restricted Stock
 
RSU
 
Total Awards
2019
 
40,671

 
887,222

 
927,893

2020
 
14,251

 
626,738

 
640,989

2021
 
9,356

 
334,823

 
344,179

Total
 
64,278

 
1,848,783

 
1,913,061


At March 31, 2019, we had unrecognized compensation expense of approximately $0.6 million and $27.1 million, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.

RSU Deliveries
During the three months ended March 31, 2019 and 2018, we delivered 433,426 and 354,996 shares of common stock for 730,717 and 603,677 vested RSUs, respectively. We allow RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on the condensed consolidated statement of changes in stockholders' equity. The adjustment was $5.0 million and $4.7 million for the three months ended March 31, 2019 and 2018, respectively. The adjustment is a reduction of capital related to our equity incentive plan and is presented net of increases of capital related to our equity incentive plan in the condensed consolidated statement of changes in stockholders' equity.


19




Note 13 – Stockholders’ Equity
Our authorized capital stock consists of 450,000,000 shares of common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of March 31, 2019, 136,254,352 shares of common stock were issued and outstanding, 6,770,393 shares of 8.00% Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock ("Series B Preferred Stock") were issued and outstanding and $6,900,000 shares of 8.00% Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock") were issued and outstanding.
Dividends. During 2019, we declared the following dividends:
 
 
Three months ended
Dividend declared per share of:
 
March 31, 2019
 
March 31, 2018
Common Stock
 
$0.46
 
$0.46
Series B Preferred Stock
 
0.50
 
0.50
Series C Preferred Stock
 
0.50
 
0.50
Common Stock Offerings. During the first quarter of 2018, we completed a follow-on public offering of 15,525,000 shares of our common stock, at a price of $17.77 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were $275.9 million after deducting offering expenses.
During the first quarter of 2019, we issued 1,967,361 shares of our common stock, at a per share conversion price of $17.17, related to conversions of the 2019 Notes, the remainder of which matured on March 15, 2019. We recorded a $33.8 million increase in additional paid in capital in the condensed consolidated statement of changes in stockholders' equity. Refer to "Note 8 - Convertible Senior Notes, Net" for a further discussion on the conversions of the 2019 Notes.
Note 14 – Commitments and Contingencies
Legal Proceedings. From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced an action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No. 653251/2018) in New York Supreme Court.  The complaint names as defendants (i) ACREFI Mortgage Lending, LLC, a subsidiary of the Company, (ii) the Company, and (iii) certain funds managed by Apollo, who are co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs allege that the defendants tortiously interfered with the contractual equity put right in the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project.  The plaintiffs allege the loss of a $70.0 million investment as part of total damages of $700.0 million, which includes punitive damages. The defendants moved to dismiss the complaint on August 17, 2018, and the motion was fully briefed in October 2018. Oral argument took place on March 12, 2019, and the court’s decision is pending. We believe the claims are without merit and plan to vigorously defend the case. We do not believe this will have a material adverse effect on our condensed consolidated financial statements.
Loan Commitments. As described in "Note 4 - Commercial Mortgage and Subordinate Loans, Net," at March 31, 2019, we had $1,039.1 million of unfunded commitments related to our commercial mortgage and subordinate loan portfolios.
Note 15 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of our financial instruments not carried at fair value on the condensed consolidated balance sheet at March 31, 2019 and December 31, 2018 ($ in thousands):

20




 
March 31, 2019
 
December 31, 2018
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Cash and cash equivalents
$
109,343

 
$
109,343

 
$
109,806

 
$
109,806

Commercial first mortgage loans, net
4,003,089

 
4,025,760

 
3,878,981

 
3,894,947

Subordinate loans, net
1,183,910

 
1,187,128

 
1,048,612

 
1,047,854

Secured debt arrangements
(2,159,767
)
 
(2,159,767
)
 
(1,897,077
)
 
(1,897,077
)
2019 Notes

 

 
(34,278
)
 
(35,276
)
2022 Notes
(335,894
)
 
(337,762
)
 
(335,291
)
 
(326,025
)
2023 Notes
(222,770
)
 
(225,770
)
 
(222,431
)
 
(221,964
)
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and convertible senior notes, net are measured using observable Level I inputs as defined in "Note 3 - Fair Value Disclosure." Estimates of fair value for all other financial instruments in the table above are measured using significant estimates, or unobservable Level III inputs as defined in "Note 3 - Fair Value Disclosure."
Note 16 – Net Income per Share
ASC 260 "Earnings per share" requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.

21




The table below presents the computation of basic and diluted net income per share of common stock for the three months ended March 31, 2019 and 2018 ($ in thousands except per share data): 
 
For the three months ended March 31,
 
2019
 
2018
Basic Earnings
 
 
 
Net Income
$
67,758

 
$
49,433

Less: Preferred dividends
(6,835
)
 
(6,835
)
Net income available to common stockholders
$
60,923

 
$
42,598

Less: Dividends on participating securities
(851
)
 
(751
)
Basic Earnings
$
60,072

 
$
41,847

 
 
 
 
Diluted Earnings
 
 
 
Net Income
$
67,758

 
$
49,433

Less: Preferred dividends
(6,835
)
 
(6,835
)
Net income available to common stockholders
$
60,923

 
$
42,598

Add: Interest expense on Notes
9,262

 
N/A

Diluted Earnings
$
70,185

 
$
42,598

 
 
 
 
Number of Shares:
 
 
 
Basic weighted-average shares of common stock outstanding
134,607,107

 
110,211,853

Diluted weighted-average shares of common stock outstanding
164,683,086

 
111,871,429

 
 
 


Earnings Per Share Attributable to Common Stockholders
 
 
 
Basic
$
0.45

 
$
0.38

Diluted
$
0.43

 
$
0.38

Prior to the three months ended September 30, 2018, we asserted our intent and ability to settle the principal amount of the Notes in cash and, as a result, the Notes did not have any impact on our diluted earnings per share. As of September 30, 2018, we no longer asserted our intent to fully settle the principal amount of the Notes in cash upon conversion. Accordingly, the dilutive effect to earnings per share for the current year periods is determined using the "if-converted" method whereby interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three months ended March 31, 2019, 30,093,312 weighted-average potentially issuable shares from the Notes were included in the dilutive earnings per share denominator. Refer to "Note 8 - Convertible Senior Notes, Net" for further discussion.
For the three months ended March 31, 2019 and 2018, 1,849,564 and 1,659,576 weighted-average unvested RSUs, respectively, were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.
Note 17 – Subsequent Events
Investment activity. Subsequent to the quarter ended March 31, 2019, we committed capital of $75.6 million (£58.0 million) to a first mortgage loan.
In addition, we funded approximately $41.3 million for loans closed prior to the quarter.
Loan Repayments. Subsequent to the end of the quarter, we received approximately $13.1 million from loan repayments.

22




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING INFORMATION

We make 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, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, it intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; the demand for commercial real estate loans; our business and investment strategy; our operating results; actions and initiatives of the U.S. government and governments outside of the United States, changes to government policies and the execution and impact of these actions, initiatives and policies; the state of the economy generally or in specific geographic regions; economic trends and economic recoveries; our ability to obtain and maintain financing arrangements, including secured debt arrangements and securitizations; the availability of debt financing from traditional lenders; the volume of short-term loan extensions; the demand for new capital to replace maturing loans; expected leverage; general volatility of the securities markets in which we participate; changes in the value of our assets; the scope of our target assets; interest rate mismatches between our target assets and any borrowings used to fund such assets; changes in interest rates and the market value of our target assets; changes in prepayment rates on our target assets; effects of hedging instruments on our target assets; rates of default or decreased recovery rates on our target assets; the degree to which hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulations, tax law and rates, accounting, legal or regulatory issues or guidance and similar matters; our continued maintenance of our qualification as a REIT for U.S. federal income tax purposes; our continued exclusion from registration under the Investment Company Act of 1940, as amended; the availability of opportunities to acquire commercial mortgage-related, real estate-related and other securities; the availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our present and potential future competition; and unexpected costs or unexpected liabilities, including those related to litigation.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. See "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those included in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a Maryland corporation and have elected to be taxed as a REIT for U.S. federal income tax purposes. We primarily originate, acquire, invest in and manage performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We are externally managed and advised by the Manager, an indirect subsidiary of Apollo, a 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 $280.3 billion as of December 31, 2018.
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. We benefit from Apollo’s global infrastructure and operating platform, through which we are able to source, evaluate and manage potential investments in our target assets.
Market Overview
    
Based on the current market dynamics, including significant upcoming commercial real estate debt maturities, we believe there remains compelling opportunities for us to invest capital in our target assets at attractive risk adjusted returns. We continue to focus on underlying real estate value, and transactions that benefit from our ability to execute complex and sophisticated transactions.

23




We believe the challenges faced by conduit lenders and the general uncertainty around value and pricing could create attractive risk adjusted investment opportunities for us. As a result, we expect to continue to see opportunities to originate first mortgage and subordinate financings in transactions which benefit from our ability to source, structure and execute complex transactions.
Critical Accounting Policies

A summary of our critical accounting policies is set forth in our Annual Report on Form 10-K for the year ended December 31, 2018 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates." There have been no material changes to our critical accounting policies described in our Annual Report on Form 10-K filed with the SEC on February 13, 2019.
Results of Operations
All non-U.S. dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.
Loan Portfolio Overview
The following table sets forth certain information regarding our commercial real estate debt portfolio as of March 31, 2019 ($ in thousands):
Description
 
Amortized
Cost
 
Weighted-Average Coupon (1)
 
Weighted Average All-in Yield (1)(2)
 
Secured Debt (3)
 
Cost of Funds
 
Equity at
cost
(4)
 
Commercial mortgage loans, net
 
$
4,003,089

 
7.0
%
 
7.8
%
 
$
2,159,767

 
4.1
%
 
$
1,843,322

Subordinate loans, net
 
1,183,910

 
12.9
%
 
14.3
%
 

 

 
1,183,910

Total/Weighted-Average
 
$
5,186,999


8.4
%

9.3
%

$
2,159,767


4.1
%

$
3,027,232

———————    
(1)
Weighted-Average Coupon and Weighted-Average All-in Yield are based on the applicable benchmark rates as of March 31, 2019 on the floating rate loans.
(2)
Weighted-Average All-in Yield includes the amortization of deferred origination fees, loan origination costs and accrual of both extension and exit fees.
(3)
Gross of deferred financing costs of $17.8 million.
(4)
Represents loan portfolio at amortized cost less secured debt outstanding.
The following table provides details of our commercial mortgage and subordinate loan portfolios, on a loan-by-loan basis, as of March 31, 2019 ($ in millions):
Commercial Mortgage Loan Portfolio
Property Type
Risk Rating
Origination Date
Amortized Cost
Unfunded Commitment
Construction Loan(4)
Fully-extended Maturity
Location
Urban Predevelopment
3
01/2016
$213
 
07/2019
Miami, FL
Residential-for-sale: inventory
3
03/2018
211
 
03/2021
London, UK
Hotel
3
09/2016
210
 
01/2022
Manhattan, NY
Industrial
3
01/2019
195
7
 
02/2024
Brooklyn, NY
Urban Predevelopment
3
04/2017
182
 
09/2019
London, UK
Office
3
10/2018
178
21
 
10/2021
Manhattan, NY
Office
3
11/2017
169
 
01/2023
Chicago, IL
Office
3
11/2017
157
91
Y
12/2022
Manhattan, NY
Retail Center (3)
5
11/2014
156
 
09/2020
Cincinnati, OH
Hotel
3
04/2018
151
2
 
04/2023
Honolulu, HI
Urban Predevelopment
3
03/2017
144
20
 
12/2020
Brooklyn, NY
Hotel (1)
3
09/2015
140
 
06/2023
Manhattan, NY
Hotel
3
05/2018
139
 
06/2023
Miami, FL

24




Hotel
3
03/2017
105
 
03/2022
Atlanta, GA
Office
3
10/2018
101
84
Y
10/2023
Manhattan, NY
Hotel
3
11/2018
99
 
12/2023
Vail, CO
Office
3
01/2018
94
94
Y
01/2022
Renton, WA
Hotel
3
12/2017
90
 
12/2022
Manhattan, NY
Hotel
3
07/2018
86
 
08/2021
Detroit, MI
Residential-for-sale: construction
3
05/2018
78
5
Y
06/2020
Brooklyn, NY
Office
3
12/2017
76
57
 
03/2022
London, UK
Multifamily
3
04/2014
76
 
07/2023
Various
Residential-for-sale: inventory
3
06/2018
76
 
06/2020
Manhattan, NY
Urban Predevelopment
3
12/2016
73
 
12/2020
Los Angeles, CA
Multifamily
3
06/2018
71
 
06/2020
London, UK
Multifamily
3
10/2017
67
 
11/2021
Brooklyn, NY
Hotel
3
04/2018
63
 
05/2023
Scottsdale, AZ
Office
3
03/2018
63
25
 
04/2023
Chicago, IL
Residential-for-sale: construction
3
12/2018
60
92
Y
12/2023
Manhattan, NY
Hotel
2
01/2017
60
 
01/2022
Miami, FL
Multifamily
3
11/2014
57
 
11/2021
Various
Multifamily
3
05/2016
50
2
 
06/2019
Brooklyn, NY
Residential-for-sale: inventory
3
05/2018
50
 
04/2021
Manhattan, NY
Multifamily
3
10/2017
43
 
10/2022
London, UK
Hotel
3
12/2015
42
2
 
12/2020
St. Thomas, USVI
Multifamily
3
12/2017
42
 
01/2020
Manhattan, NY
Hotel
3
02/2018
38
 
03/2023
Pittsburgh, PA
Residential-for-sale: construction
3
01/2018
33
47
Y
01/2023
Manhattan, NY
Multifamily (3)
5
11/2014
32
 
11/2019
Williston, ND
Residential-for-sale: inventory (3)
5
02/2014
24
 
04/2020
Bethesda, MD
Mixed Use
3
07/2017
14
 
08/2019
Manhattan, NY
Residential-for-sale: construction
3
12/2018
(1)
103
Y
01/2024
Hallandale Beach, FL
Residential-for-sale: construction
2
03/2018
(1)
115
Y
03/2023
San Francisco, CA
Office
3
08/2018
(2)
201
Y
12/2022
London, UK
Sub-total / Weighted Average
Commercial mortgage loans
3.1
 
$4,003
$968
13%
2.7 Years
 


Subordinate Loan Portfolio
Property Type
Risk Rating
Origination Date
Amortized Cost
Unfunded Commitment
Construction Loan(4)
Fully-extended Maturity
Location
Residential-for-sale: construction (2)
3
06/2015
$189
Y
02/2021
Manhattan, NY
Office
3
01/2019
99
 
12/2025
Manhattan, NY
Healthcare
3
01/2019
95
 
01/2024
Various
Residential-for-sale: construction
3
12/2017
86
24
Y
06/2022
Manhattan, NY
Residential-for-sale: construction
3
01/2016
83
Y
02/2021
Manhattan, NY
Other
3
09/2017
72
 
09/2022
Various
Multifamily
3
10/2015
63
 
07/2019
Manhattan, NY
Residential-for-sale: construction
3
12/2017
61
Y
04/2023
Los Angeles, CA
Healthcare
3
01/2015
49
 
12/2019
Various

25




Residential-for-sale: construction (2)
3
11/2017
43
Y
02/2021
Manhattan, NY
Mixed Use
3
01/2017
42
 
02/2027
Cleveland, OH
Mixed Use
3
02/2019
38
Y
12/2022
London, UK
Residential-for-sale: inventory
3
10/2016
36
 
10/2020
Manhattan, NY
Industrial
3
05/2013
32
 
05/2023
Various
Residential-for-sale: inventory
3
06/2017
25
 
12/2020
Manhattan, NY
Hotel
3
06/2015
25
 
07/2025
Phoenix, AZ
Multifamily
3
05/2018
20
 
05/2028
Cleveland, OH
Hotel
3
06/2015
20
 
12/2022
Washington, DC
Hotel
3
06/2018
20
 
06/2023
Las Vegas, NV
Hotel
3
02/2015
20
 
01/2020
Burbank, CA
Hotel (1)
3
09/2015
15
9
 
06/2023
Manhattan, NY
Office
3
07/2013
14
 
07/2022
Manhattan, NY
Mixed Use
3
12/2018
14
38
Y
12/2023
Brooklyn, NY
Hotel
3
05/2017
8
 
06/2027
Anaheim, CA
Office
3
08/2017
8
 
09/2024
Troy, MI
Mixed Use
3
07/2012
7
 
08/2022
Chapel Hill, NC
Sub total / Weighted-Average- Subordinate loans
3.0
 
$1,184
$71
43%
3.4 Years
 
 
 
 
 
 
 
 
 
Total / Weighted-Average
Loan Portfolio
3.1
 
$5,187
$1,039
20%
2.9 Years
 
———————
(1) Both loans are secured by the same property.
(2) Both loans are secured by the same property.
(3) Amortized cost for these loans is net of the recorded provisions for loan losses and impairments.
(4) Weighted-average construction loan % is based on the amortized cost of the loans.

Our average asset and debt balances for the three months ended March 31, 2019, were ($ in thousands):
 
 
Average month-end balances for the three months ended March 31, 2019
Description
 
Assets
 
Related debt
Commercial mortgage loans, net
 
$
4,038,172

 
$
2,195,782

Subordinate loans, net
 
1,169,429

 

Investment Activity
During the three months ended March 31, 2019, we committed $448.7 million of capital to loans ($441.8 million of which was funded during the three months ended March 31, 2019). In addition, during the three months ended March 31, 2019, we funded $110.3 million for loans closed prior to 2019, and received $322.4 million in repayments.

Net Income Available to Common Stockholders
For the three months ended March 31, 2019 and 2018, respectively, our net income available to common stockholders was $60.9 million, or $0.43 per diluted share of common stock, and $42.6 million, or $0.38 per diluted share of common stock.






26




Operating Results
The following table sets forth information regarding our consolidated results of operations and certain key operating metrics ($ in thousands):

 
Three months ended March 31,
 
2019 vs 2018
 
2019
 
2018
 
 
Net interest income:
 
 
 
 
 
Interest income from commercial mortgage loans
$
78,286

 
$
52,114

 
$
26,172

Interest income from subordinate loans
40,839

 
33,853

 
6,986

Interest expense
(36,295
)
 
(22,740
)
 
(13,555
)
Net interest income