Notes to Consolidated Financial Statements
Note 1 – Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the "Company," "ARI," "we," "us" and "our") is a corporation that has elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, and other commercial real estate related debt investments. These asset classes are referred to as our target assets.
We were formed in Maryland on June 29, 2009, commenced operations on September 29, 2009 and are externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, Inc. (together with its subsidiaries, "Apollo").
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain our tax qualification as a REIT, we are required to distribute at least 90% of our taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 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 allowances. Actual results could differ from those estimates.
We currently operate in one reporting segment.
Principles of Consolidation
We consolidate all entities that we control through either majority ownership or voting rights. In addition, we consolidate all VIEs of which we are considered the primary beneficiary. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly affect the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.
Consolidated Joint Venture
In the third quarter of 2022, we contributed an assemblage of properties in downtown Brooklyn, NY to a joint venture with WG Bowtie, LLC, a real estate developer. The entity was deemed to be a VIE of which we were deemed to be the primary beneficiary. Through our wholly-owned subsidiaries, we hold a 100% equity ownership interest in the joint venture and our partner is only entitled to profit upon achievement of certain returns under our joint venture agreement. See further discussion in Note 5 – Assets and Liabilities Related to Real Estate Owned."
Barclays Securitization
During the second quarter of 2020, we entered into a private securitization with Barclays Bank plc. We have determined
that the issuer of this securitization, ACRE Debt 2 PLC, is a VIE of which we were deemed to be the primary beneficiary, because we have the power to direct the activities of the VIE, and therefore, we consolidated the operations of this entity in accordance with GAAP. The collateral assets of the securitization are included in commercial mortgage loans, net on our consolidated balance sheets. The liabilities of the securitization to the senior noteholders, excluding the notes held by us, are included in secured debt arrangements, net on our consolidated balance sheet. See further discussion in "Note 7 - Secured Debt Arrangements, Net."
Unconsolidated Joint Ventures
In September 2018, we entered a joint venture with Turner Consulting II, LLC ("Turner Consulting"), through an entity which owns the underlying property that secures our loan. Turner Consulting contributed 10% of the venture’s equity and we contributed 90%. The entity was deemed to be a VIE and we determined that we are not the primary beneficiary of that VIE as we do not have the power to direct the entity's activities. See further discussion in "Note 4 – Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net."
In October 2020, we entered a joint venture with CCOF Design Venture, LLC ("CCOF"), which owns the underlying properties that secured our first mortgage loan. The entity in which we own an interest, and which owns the underlying properties was deemed to be a VIE and we determined that we are not the primary beneficiary of that VIE as we do not have the power to direct the entities activities. In the fourth quarter of 2022, the underlying properties were sold to a third party and proceeds of the sale were distributed to the joint venture partners. The joint venture is expected to be dissolved in the first quarter of 2023.
Risks and Uncertainties
Although more normalized activities have resumed and there has been improved global economic activity due to global and domestic vaccination efforts, there are still various uncertainties around the impact COVID-19 and its variants will have on our business and the economy as a whole, including longer-term macroeconomic effects on supply chains, inflation and labor shortages. For example, in response to recent inflationary pressure, the U.S. Federal Reserve and other global central banks have raised interest rates in 2022 and have indicated likely further interest rate increases. We believe the estimates used in preparing our financial statements and related footnotes are reasonable and supportable based on the best information available to us as of December 31, 2022. The uncertainty over the ultimate impact of COVID-19 and its variants, supply chain disruptions and labor shortages, rising inflation and increases in interest rates on the global economy generally and our business in particular may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and, as a result, actual results may vary significantly from estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent cash held in banks and liquid investments with original maturities of 90 days or less. Substantially all of the Company's cash on deposit is in interest bearing accounts with major financial institutions and exceeds federally insured limits. As of both December 31, 2022 and 2021, we had no restricted cash on our consolidated balance sheets.
Classification of Investments and Valuations of Financial Instruments
Our investments consist primarily of commercial mortgage loans, subordinate loans, and other lending assets that are classified as held-to-maturity.
Classification of Loans
Loans held to maturity are stated at the principal amount outstanding, adjusted for deferred fees and current allowance for loan losses, if any, in accordance with GAAP.
Loans held for sale are classified as such if there is a reasonable expectation to sell them in the short-term following the reporting date. Loans classified as held for sale are stated at the lower of amortized cost or fair value, in accordance with GAAP. As of both December 31, 2022 and 2021, there were no loans classified as held for sale on our consolidated balance sheets.
Securities, held-to-maturity
GAAP requires that at the time of purchase, we designate investment securities as held-to-maturity or trading, depending on our investment strategy and ability to hold such securities to maturity. Held-to-maturity securities where we have not elected to apply the fair value option are stated at cost plus any premiums or discounts, which are amortized or accreted through the consolidated statements of operations using the effective interest method.
Current Expected Credit Losses ("CECL")
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which we refer to as the "CECL Standard." In accordance with the CECL Standard, we record allowances for our commercial mortgage loans and subordinate loans and other lending assets that are held-to-maturity. These allowances are deducted from the carrying amount of the assets to present the net carrying value of the amounts expected to be collected on the assets. As a practical expedient in accordance with the CECL Standard, we record loan specific allowances ("Specific CECL Allowance") for assets that are collateral dependent and where the borrower or sponsor is experiencing financial difficulty. For the remainder of the loan
portfolio, we record a general allowance ("General CECL Allowance", and together with Specific CECL Allowance, "CECL Allowances") on a collective basis by assets with similar risk characteristics. We adopted the CECL Standard through a cumulative-effect adjustment to accumulated deficit on January 1, 2020. Subsequent changes to the CECL Allowance are recognized through net income on our consolidated statement of operations.
The CECL Standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The FASB recognizes the weighted average remaining maturity ("WARM") method as an acceptable approach for computing current expected credit losses. We utilize the WARM method to determine a General CECL Allowance for a majority of our portfolio. In the future, we may use other acceptable methods, such as a probability-of-default/loss-given-default method.
Specific CECL Allowance
Our loans are typically collateralized by commercial real estate. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flows 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. 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 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.
For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we have elected to apply a practical expedient in accordance with the CECL Standard. In accordance with the practical expedient approach, we determine the loan loss provision to be the difference between the fair value of the underlying collateral and the carrying value of the loan (prior to the loan loss allowance). When the repayment or satisfaction of a loan is dependent on a sale, rather than operations, of the collateral, the fair value is adjusted for the estimated cost to sell the collateral. The fair value of the underlying collateral is determined by using method(s) such as discounted cash flow, the market approach, or direct capitalization approach. The key unobservable inputs used to determine the fair value of the underlying collateral may vary depending on the information available to us and market conditions as of the valuation date. If we deem all or any portion of a loan balance uncollectible, that amount is written-off.
General CECL Allowance
In accordance with the WARM method, an annual historical loss rate is applied to the amortized cost of an asset or pool of assets over the remaining expected life. The WARM method requires consideration of the timing of expected future fundings of existing commitments and repayments over each asset’s remaining life. An annual loss factor, adjusted for macroeconomic estimates, is applied over each subsequent period and aggregated to arrive at the General CECL Allowance.
In determining the General CECL Allowance, we considered various factors including (i) historical loss experience in the commercial real estate lending market, (ii) timing of expected repayments and satisfactions, (iii) expected future funding, (iv) capital subordinate to us when we are the senior lender, (v) capital senior to us when we are the subordinate lender, and (vi) our current and future view of the macroeconomic environment. The standard requires the use of significant judgment to arrive at an estimated credit loss. There is significant uncertainty related to future macroeconomic conditions as the result of COVID-19.
We derived an annual historical loss rate based on a CMBS database with historical losses from 1998 through the fourth quarter of 2022 provided by a third party, Trepp LLC. We applied various filters to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. The annual historical loss rate was further adjusted to reflect our expectations of the macroeconomic environment for a reasonable and supportable forecast period.
The General CECL Allowance on subordinate loans is calculated by incorporating both the loan balance of the position(s) of the structurally senior third-party lender(s) and the balance of our subordinate loan(s). The subordinate loans, by virtue of being the first loss position, are required to absorb losses prior to the senior position(s) being impacted, resulting in a higher percentage allowance attributable to the subordinate loan. The General CECL Allowance on unfunded loan commitments is time-weighted based on our expected commitment to fund such obligations. The General CECL Allowance on unfunded commitments is recorded as a liability on our consolidated balance sheets within accounts payable, accrued expenses and other liabilities. At adoption, the General CECL Allowance was $30.9 million and was recorded in our consolidated statement of changes in stockholders’ equity.
Refer to "Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net" for further information regarding CECL.
Assets and Liabilities Related to Real Estate Owned
In order to maximize recovery against a defaulted loan, we may assume legal title or physical possession of the underlying collateral through foreclosure or the execution of a deed in lieu of foreclosure. Foreclosed properties are classified as real estate owned and recognized at fair value on our consolidated balance sheets in accordance with the acquisition method under Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” When determining the fair value of real estate assets and liabilities, we make certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon our estimate of a capitalization rate and discount rate.
Real estate assets and liabilities are evaluated for impairment on a quarterly basis. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows to be generated by the real estate asset over the estimated remaining holding period is less than the carrying value of such real estate asset. An impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value.
Real Estate Owned, Held for Investment
Real estate assets that are acquired for investment are assumed at their estimated fair value at acquisition and presented net of accumulated depreciation and impairments, if applicable. Upon acquisition, we allocate the value of acquired real estate assets based on the fair value of the acquired land, building, furniture, fixtures and equipment, and intangible assets, if applicable. Real estate assets are depreciated using the straight-line method over the assets' estimated useful lives of up to 40 years for buildings and up to 8 years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the real estate asset are capitalized and depreciated over their estimated useful lives. The cost of ordinary repairs and maintenance are expensed as incurred. For real estate projects under development, we capitalize costs incurred to prepare the property for its intended use in accordance with ASC Topic 970, "Real Estate — General." Such costs can include costs related to acquisition, construction, financing, development and real estate taxes.
Real Estate Owned, Held for Sale
Real estate owned is classified as held for sale in the period in which the six criteria under ASC Topic 360, "Property, Plant, and Equipment" are met: (1) we commit to a plan and have the authority to sell the asset; (2) the asset is available for sale in its current condition; (3) we have initiated an active marketing plan to locate a buyer for the asset; (4) the sale of the asset is both probable and expected to qualify for full sales recognition within a period of 12 months; (5) the asset is being actively marketed for sale at a price that is reflective of its current fair value; and (6) we do not anticipate changes to our plan to sell the asset. Real estate owned, held for sale is held at the lower of cost or fair market value. Once a real estate asset is classified as held for sale, depreciation expense is no longer recorded.
Deferred Financing Costs
Costs incurred in connection with financings are capitalized and amortized over the respective financing terms and are reflected on the accompanying consolidated statement of operations as a component of interest expense. At both December 31, 2022 and 2021, we had $27.7 million of capitalized financing costs, net of amortization, included as a direct deduction from the carrying amount of our debt.
Earnings per Share
GAAP requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.
The dilutive effect to earnings per share for the years ended December 31, 2022, 2021 and 2020 is determined using the "if converted" method whereby, if the conversion of the convertible notes would be dilutive, interest expense on the outstanding
notes is added back to the diluted earnings numerator and all of the potentially dilutive shares are included in the diluted common shares outstanding denominator for the computation of diluted earnings per share.
Foreign Currency
From time to time we enter into transactions denominated in currencies other than USD. Foreign exchange gains and losses arising on such transactions are recorded as a gain or loss in our consolidated statement of operations. Assets and liabilities denominated in currencies other than USD are translated to USD at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.
Hedging Instruments and Hedging Activities
Consistent with maintaining our qualification as a REIT, in the normal course of business, we use a variety of derivative financial instruments to manage, or hedge, interest rate and foreign currency risk. Derivatives are used for hedging purposes rather than speculation. There is a gain or loss associated with forward points on our foreign currency hedges, which reflect the interest rate differentials, at the time of entering into the hedge, between the applicable local base rate of our foreign currency investments and the comparable rate in the U.S.
GAAP requires an entity to recognize all derivatives as either assets or liabilities on the balance sheets and to measure those instruments at fair value. To the extent the instrument qualifies for hedge accounting, the fair value adjustments will be recorded as a component of other comprehensive income in stockholders’ equity until the hedged item is recognized in earnings. We have not designated any of our derivative instruments as hedges under GAAP and therefore, changes in the fair value of our derivatives are recorded directly in earnings.
We determine fair value of our derivative contracts using quotations from a third-party expert. The fair value is derived by comparing the contracted forward exchange rate to the current market exchange rate, as well as by using a discounted cash flow analysis on the expected cash flows of each derivative. If our hedging activities do not achieve the desired results, reported earnings may be adversely affected.
Income Taxes
We have elected to be taxed as a REIT under Sections 856-859 of the Internal Revenue Code of 1986, as amended. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains and determined without regard to the dividends paid deduction, as a dividend to its stockholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its stockholders.
We have elected to treat certain consolidated subsidiaries and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform noncustomary services for tenants and are subject to U.S. federal and state income tax at regular corporate tax rates. Our major tax jurisdictions are U.S. federal, New York State and New York City and the statute of limitations is open for all jurisdictions for the years 2019 through 2022. We do not have any unrecognized tax benefits and do not expect a change in our position for unrecognized tax benefits in the next 12 months.
Investments in Unconsolidated Joint Ventures
Investments are accounted for under the equity method when (i) requirements for consolidation are not met, and (ii) we have significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently adjusted for our share of net income or loss and cash contributions and distributions each period. This adjustment is made at the end of each reporting period, generally on a one quarter lag, based on the best information available to us. Investments in unconsolidated joint ventures are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the time the analyses are prepared. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy and rental rates of the underlying property and capital requirements that could differ materially from actual results.
Refer to Principals of Consolidation above for additional details related to two unconsolidated joint ventures concluded to be VIEs and assessed for consolidation.
Secured Debt Arrangements
Secured debt arrangements are accounted for as financing transactions, unless they meet the criteria for sale accounting.
Loans financed through a secured debt arrangement remain on our consolidated balance sheets as an asset and cash received from the purchaser is recorded on our consolidated balance sheets as a liability. Interest incurred in accordance with secured debt arrangements is recorded as interest expense.
Securitization/Sale and Financing Arrangements
We periodically sell our financial assets, such as commercial mortgage loans, subordinate loans and other lending assets. In connection with these transactions, we may retain or acquire senior or subordinated interests in the related assets. Gains and losses on such transactions are recognized using the guidance in ASC 860, "Transfers and Servicing", which is based on a financial-components approach that focuses on control. Under this approach, after a transfer of financial assets that meets the criteria for treatment as a sale-legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint, and transferred control an entity recognizes the financial assets it retains and any liabilities it has incurred, derecognizes the financial assets it has sold, and derecognizes liabilities when extinguished. We determine the gain or loss on sale of the assets by allocating the carrying value of the sold asset between the sold asset and the interests retained based on their relative fair values, as applicable. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the sold asset.
When a transfer does not meet the criteria of a sale under ASC 860, we account for such transfer as a secured borrowing on our consolidated balance sheets as both an asset and a non-recourse liability. The non-recourse liability is recorded under "Participations Sold" and the income earned is recorded as interest income and an identical amount is recorded as interest expense on our consolidated statements of operations.
Senior Secured Notes
We include our senior secured notes in our consolidated balance sheets as a liability, net of original issue discount and deferred financing costs. Discount or transaction expenses are deferred and amortized through the maturity. Interest paid in accordance with our senior secured notes is recorded in interest expense.
Senior Secured Term Loans
We include our senior secured term loans (the "Term Loans") in our consolidated balance sheets as a liability, net of original issue discount and deferred financing costs. Discount or transaction expenses are deferred and amortized through the maturity. Interest paid in accordance with our Term Loans is recorded in interest expense. Interest is net of our interest rate swap, which was terminated in May 2020 and our interest rate cap, which was entered into in June 2020.
Convertible Senior Notes
We include our convertible senior notes in our consolidated balance sheets as a liability, net of original issue discount. Discounts are deferred and amortized through the maturity of the notes. Interest paid in accordance with our convertible senior notes is recorded in interest expense.
Revenue Recognition
Interest income on our lending assets is accrued based on the actual coupon rate adjusted for accretion of any purchase discounts, the amortization of any purchase premiums and the accretion of any deferred fees, in accordance with GAAP. Loans that are significantly past due may be placed on non-accrual if we determine it is probable that we will not collect all payments which are contractually due. When a loan is placed on non-accrual, interest is only recorded as interest income when it's received. Under certain circumstances, we may apply cost recovery under which interest collected on a loan reduces its amortized cost. The cost recovery method will no longer apply if collection of all principal and interest is reasonably assured. A loan may be placed back on accrual status if we determine it is probable that we will collect all payments which are contractually due.
Operating revenue from real estate owned, held for sale that is a hotel property represents revenue associated with the operations of the hotel property. Revenue from the operation of the hotel property is recognized when guestrooms are occupied or services have been rendered. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales and other hotel revenues.
Gains or losses on the sale of real estate assets, including residential property, are recognized in accordance with ASC 610-20, "Gains and Losses from the Derecognition of Nonfinancial Assets". We use specific identification method to allocate costs.
Share-based Payments
We account for share-based compensation to our independent directors, to the Manager and to employees of the Manager and its affiliates using the fair value-based methodology prescribed by GAAP. Compensation cost related to restricted common stock issued is measured at its fair value at the grant date and amortized into expense over the vesting period on a straight-line basis.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06 "Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity" ("ASU 2020-06"). The intention of ASU 2020-06 is to address the complexities in accounting for certain financial instruments with a debt and equity component. Under ASU 2020-06, the number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for the computation of diluted "Earnings per share" under ASC 260. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. We adopted ASU 2020-06 through the modified retrospective method on January 1, 2022 through an adjustment to additional paid-in capital, retained earnings, and the carrying values our Convertible Notes. The net impact to stockholders' equity of adopting ASU 2020-06 was $3.4 million.
In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference London Interbank Offered Rate ("LIBOR") or other reference rates expected to be discontinued as a result of reference rate reform. In December 2022, the FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848" ("ASU 2022-06"), which defers the expiration of ASC 848 from December 31, 2022, to December 31, 2024. We have loan agreements, debt agreements, and an interest rate cap that incorporate LIBOR as a referenced interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial markets. During the fourth quarter of 2021, we have adopted optional expedients per ASU 2020-04 for certain of our commercial mortgage loans and debt agreements denominated in British Pound Sterling ("GBP") and Euro ("EUR") with contracts that reference GBP LIBOR and EUR LIBOR, respectively. As prescribed by the optional expedients within ASU 2020-04, we have accounted for applicable modified contracts that incorporate alternative benchmarks as if they are not substantially different. We will continue to evaluate the possible adoption of any such expedients or exceptions for certain of our commercial mortgage loans and debt agreements denominated in USD.
In March 2022, the FASB issued ASU 2022-02 "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02"). The intention of ASU 2022-02 is to simplify the guidance surrounding loan modifications and restructurings and to eliminate the accounting guidance related to troubled debt restructurings ("TDR"). The new guidance deviates from TDR guidance as disclosures are now based on whether a modification or restructuring with a borrower experiencing financial difficulty results in principal forgiveness, an interest rate reduction, other-than-insignificant payment delay or term extension as opposed to simply a concession. The new guidance requires disclosure by class of financing receivables, of the types of modifications, the financial effects of those modifications and the performance of those modified receivables in the trailing twelve months after modification. Accounting for credit losses under ASC 326 "Financial Instruments—Credit Losses", is also updated to allow entities to use any acceptable method to determine credit losses as a result of modification or restructuring with a borrower experiencing financial difficulty. ASU 2022-02 also requires disclosure of gross write-offs recorded in the current period, on a year-to-date basis, by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. Entities are able to early adopt these amendments, including adoption in an interim period, and have the ability to early adopt the TDR enhancements separately from the vintage disclosures. If an entity adopts the amendments in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. During the third quarter of 2022, we have early adopted the TDR enhancements and new vintage disclosure requirements under of ASU 2022-02. Refer to "Note 4 -Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net."
Note 3 – Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair value. Market-based or observable inputs are the preferred source of values, followed by valuation models using management's assumptions in the absence of market-based or observable inputs. The three levels of the hierarchy as noted in ASC 820, "Fair Value Measurements and Disclosures" are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment
speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While we anticipate that our valuation methods are appropriate and consistent with valuation methods used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
The fair values of foreign exchange ("Fx") forwards are determined by comparing the contracted forward exchange rate to the current market exchange rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries. Our Fx forwards are classified as Level II in the fair value hierarchy.
The fair value of our interest rate cap is determined by using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rose above the strike rate of the interest rate cap. The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on a third-party expert's expectation of future interest rates derived from observable market interest rate curves and volatilities. Our interest rate cap is classified as Level II in the fair value hierarchy.
The following table summarizes the levels in the fair value hierarchy into which our assets and liabilities with recurring fair value measurements were categorized as of December 31, 2022 and December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2022 | | Fair Value as of December 31, 2021 |
| Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
Recurring fair value measurements: | | | | | | | | | | | | | | | |
Foreign currency forward, net | $ | — | | | $ | 119,499 | | | $ | — | | | $ | 119,499 | | | $ | — | | | $ | 15,340 | | | $ | — | | | $ | 15,340 | |
Interest rate cap asset | — | | | 9,141 | | | — | | | 9,141 | | | — | | | 1,448 | | | — | | | 1,448 | |
Total financial instruments | $ | — | | | $ | 128,640 | | | $ | — | | | $ | 128,640 | | | $ | — | | | $ | 16,788 | | | $ | — | | | $ | 16,788 | |
Non-recurring Fair Value Measurements
We are required to record real estate owned, a nonfinancial asset, at fair value on a non-recurring basis in accordance with GAAP. The fair value of real estate owned is determined by using the market approach, which utilizes the fair value of similar assets and liabilities in the market place, as well as, when necessary, the use of third-party valuation experts. We deem the inputs used in our approach to be significant unobservable inputs. As such the fair value of real estate owned falls within Level III of the fair value hierarchy.
On August 3, 2022, we acquired legal title of a multifamily development property through a deed-in-lieu of foreclosure. We determined the fair value of the real estate assumed to be $270.1 million, based on the market value of the land at the time acquisition. No impairments have been recorded as of December 31, 2022.
On May 24, 2021, we acquired legal title to a full-service luxury hotel through a deed-in-lieu of foreclosure, which is
classified as real estate owned on our consolidated balance sheets. We assumed the hotel’s assets and liabilities, including a
$110.0 million mortgage loan. We repaid the mortgage loan at par and now hold the property unlevered.
At the time of acquisition, we determined the fair value of the real estate assets to be $154.3 million. No impairments have
been recorded as of December 31, 2022 or December 31, 2021.
Refer to "Note 5 – Assets and Liabilities Related to Real Estate Owned" for additional discussions.
Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net
Our loan portfolio was comprised of the following at December 31, 2022 and December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | |
Loan Type | | December 31, 2022 | | December 31, 2021 |
Commercial mortgage loans, net(1) | | $ | 8,121,109 | | | $ | 7,012,312 | |
Subordinate loans and other lending assets, net | | 560,881 | | | 844,948 | |
Carrying value, net | | $ | 8,681,990 | | | $ | 7,857,260 | |
———————
(1)Includes $138.3 million and $97.8 million in 2022 and 2021, respectively, of contiguous financing structured as subordinate loans.
Our loan portfolio consisted of 98% floating rate loans, based on amortized cost, as of each of December 31, 2022 and December 31, 2021.
Activity relating to our loan portfolio for the year ended December 31, 2022 was as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance | | Deferred Fees/Other Items (1) | | Specific CECL Allowance | | Carrying Value, Net(2) |
December 31, 2021 | | $ | 8,072,377 | | | $ | (36,529) | | | $ | (145,000) | | | $ | 7,890,848 | |
New funding of loans | | 3,027,742 | | | — | | | — | | | 3,027,742 | |
Add-on loan fundings(3) | | 596,919 | | | — | | | — | | | 596,919 | |
Loan repayments and sales | | (2,214,621) | | | — | | | — | | | (2,214,621) | |
(Loss) gain on foreign currency translation | | (360,818) | | | 4,382 | | | — | | | (356,436) | |
Decrease in Specific CECL Allowance, net | | — | | | — | | | 11,500 | | | 11,500 | |
| | | | | | | | |
Realized (loss) on investment | | (22,147) | | | (2,747) | | | — | | | (24,894) | |
Transfer to real estate owned | | (225,036) | | | (1,423) | | | — | | | (226,459) | |
Deferred fees and other items | | — | | | (46,874) | | | — | | | (46,874) | |
Payment-in-kind interest and amortization of fees | | 18,351 | | | 32,138 | | | — | | | 50,489 | |
December 31, 2022 | | $ | 8,892,767 | | | $ | (51,053) | | | $ | (133,500) | | | $ | 8,708,214 | |
General CECL Allowance(4) | | | | | | | | (26,224) | |
Carrying value, net | | | | | | | | $ | 8,681,990 | |
———————
(1)Other items primarily consist of purchase discounts or premiums, cost recovery interest, exit fees, deferred origination expenses, and the activity of unconsolidated joint ventures.
(2)December 31, 2021 carrying value excludes General CECL Allowance of $33.6 million.
(3)Represents fundings committed prior to 2022.
(4)$4.3 million of the General CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our consolidated balance sheet.
The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Number of loans | | 61 | | | 67 | |
Principal balance | | $ | 8,892,767 | | | $ | 8,072,377 | |
Carrying value, net | | $ | 8,681,990 | | | $ | 7,857,260 | |
Unfunded loan commitments(1) | | $ | 1,041,654 | | | $ | 1,357,122 | |
Weighted-average cash coupon(2) | | 7.2 | % | | 4.5 | % |
Weighted-average remaining fully-extended term(3) | | 2.8 years | | 2.9 years |
Weighted-average expected term(4) | | 1.7 years | | 2.3 years |
———————
(1)Unfunded loan commitments are funded to finance construction costs, tenant improvements, leasing commissions, or carrying costs. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.
(2)For floating rate loans, based on applicable benchmark rates as of the specified dates. For loans placed on non-accrual the interest rate used in
calculating weighted-average cash coupon is 0%.
(3)Assumes all extension options are exercised.
(4)Expected term represents our estimated timing of repayments as of the specified dates. Excludes risk-rated 5 loans.
Property Type
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Property Type | | Carrying Value | | % of Portfolio(1) | | Carrying Value | | % of Portfolio(1) |
Hotel | | $ | 2,117,079 | | | 24.3 | % | | $ | 1,875,439 | | | 23.8 | % |
Office | | 1,671,006 | | | 19.2 | | | 1,700,779 | | | 21.6 | |
Residential | | 1,537,541 | | | 17.7 | | | 1,434,186 | | | 18.2 | |
Retail | | 1,364,752 | | | 15.7 | | | 1,126,332 | | | 14.3 | |
Healthcare | | 575,144 | | | 6.6 | | | 316,321 | | | 4.0 | |
Mixed Use | | 559,809 | | | 6.4 | | | 269,839 | | | 3.4 | |
Industrial | | 296,860 | | | 3.4 | | | 377,068 | | | 4.8 | |
Other(2) | | 586,023 | | | 6.7 | | | 790,884 | | | 9.9 | |
Total | | $ | 8,708,214 | | | 100.0 | % | | $ | 7,890,848 | | | 100.0 | % |
General CECL Allowance(3) | | (26,224) | | | | | (33,588) | | | |
Carrying value, net | | $ | 8,681,990 | | | | | $ | 7,857,260 | | | |
(1)Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.
(2)Other property types include parking garages (3.1%), caravan parks (2.3%) and urban predevelopment (1.3%) in 2022, and parking garages (3.3%), caravan parks (2.8%), multifamily development (2.2%), and urban predevelopment (1.6%) in 2021.
(3)$4.3 million and $3.1 million of the General CECL Allowance for 2022 and 2021, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
Geography
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Geographic Location | | Carrying Value | | % of Portfolio(1) | | Carrying Value | | % of Portfolio(1) |
United Kingdom | | $ | 2,470,532 | | | 28.4 | % | | $ | 2,297,286 | | | 29.1 | % |
New York City | | 2,049,493 | | | 23.5 | | | 2,000,661 | | | 25.4 | |
Other Europe(2) | | 1,542,462 | | | 17.7 | | | 1,295,870 | | | 16.4 | |
Southeast | | 642,542 | | | 7.4 | | | 708,920 | | | 9.0 | |
Midwest | | 592,756 | | | 6.8 | | | 689,274 | | | 8.7 | |
West | | 584,247 | | | 6.7 | | | 356,097 | | | 4.5 | |
Other(3) | | 826,182 | | | 9.5 | | | 542,740 | | | 6.9 | |
Total | | $ | 8,708,214 | | | 100.0 | % | | $ | 7,890,848 | | | 100.0 | % |
General CECL Allowance(4) | | (26,224) | | | | | (33,588) | | | |
Carrying value, net | | $ | 8,681,990 | | | | | $ | 7,857,260 | | | |
(1)Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.
(2)Other Europe includes Italy (5.4%), Germany (4.9%), Spain (3.8%), Sweden (2.8%) and Ireland (0.7%) in 2022 and Germany (6.1%), Sweden (3.6%), Spain (3.3%), Italy (2.6%), and Ireland (0.8%) in 2021.
(3)Other includes Northeast (5.5%), Southwest (2.3%), Mid-Atlantic (1.4%) and Other (0.3%) in 2022 and Southwest (3.5%), Mid-Atlantic (1.6%), Northeast (1.5%), and Other (0.3%) in 2021.
(4)$4.3 million and $3.1 million of the General CECL Allowance for 2022 and 2021, respectively, is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
Risk Rating
We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan to value ("LTV") ratio, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:
1. Very low risk
2. Low risk
3. Moderate/average risk
4. High risk/potential for loss: a loan that has a risk of realizing a principal loss
5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss, or an impairment has been recorded
The following tables present the carrying value of our loan portfolio by year of origination and internal risk rating and gross write-offs by year of origination as of December 31, 2022 and December 31, 2021, respectively ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 |
| | | | | | | | | Amortized Cost by Year Originated |
Risk Rating | | Number of Loans | | Total | | % of Portfolio | | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior |
1 | | — | | | $ | — | | | — | % | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2 | | 2 | | | 65,943 | | | 0.8 | % | | | — | | | — | | | — | | | — | | | — | | | 65,943 | |
3 | | 54 | | | 8,401,925 | | | 96.5 | % | | | 2,575,455 | | | 2,462,499 | | | 687,329 | | | 1,637,050 | | | 479,769 | | | 559,823 | |
4 | | 2 | | | 27,451 | | | 0.3 | % | | | — | | | — | | | — | | | — | | | 19,951 | | | 7,500 | |
5 | | 3 | | | 212,895 | | | 2.4 | % | | | — | | | — | | | — | | | — | | | — | | | 212,895 | |
Total | | 61 | | | $ | 8,708,214 | | | 100.0 | % | | | $ | 2,575,455 | | | $ | 2,462,499 | | | $ | 687,329 | | | $ | 1,637,050 | | | $ | 499,720 | | | $ | 846,161 | |
General CECL Allowance(1) | | (26,224) | | | | | | | | | | | | | | | | |
Total carrying value, net | $ | 8,681,990 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Weighted Average Risk Rating | | 3.0 | | | | | | | | | | | | | |
Gross write-offs | | $ | 7,000 | | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
| | | | | | | | | Amortized Cost by Year Originated |
Risk Rating | | Number of Loans | | Total | | % of Portfolio | | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior |
1 | | — | | | $ | — | | | — | % | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2 | | 1 | | | 32,000 | | | 0.4 | % | | | — | | | — | | | — | | | — | | | — | | | 32,000 | |
3 | | 62 | | | 7,372,081 | | | 93.5 | % | | | 2,622,248 | | | 644,404 | | | 2,307,948 | | | 828,270 | | | 389,264 | | | 579,947 | |
4 | | 1 | | | 81,980 | | | 1.0 | % | | | — | | | — | | | — | | | — | | | 81,980 | | | — | |
5 | | 3 | | | 404,787 | | | 5.1 | % | | | — | | | — | | | — | | | — | | | 177,483 | | | 227,304 | |
Total | | 67 | | | $ | 7,890,848 | | | 100.0 | % | | | $ | 2,622,248 | | | $ | 644,404 | | | $ | 2,307,948 | | | $ | 828,270 | | | $ | 648,727 | | | $ | 839,251 | |
General CECL Allowance(1) | | (33,588) | | | | | | | | | | | | | | | | |
Total carrying value, net | $ | 7,857,260 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Weighted Average Risk Rating | | 3.1 | | | | | | | | | | | | | |
Gross write-offs | | $ | — | | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
———————
(1)$4.3 million and $3.1 million of the General CECL Allowance for 2022 and 2021, respectively, is excluded from the tables above because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our consolidated balance
sheets.
CECL
In accordance with ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments", which we refer to as the "CECL Standard", we record allowances for loans and held-to-maturity debt securities that are deducted from the carrying amount of the assets to present the net carrying value of the amounts expected to be collected on the assets. We record loan specific allowances as a practical expedient under the CECL Standard ("Specific CECL Allowance"), which we apply to assets that are collateral dependent and where the borrower or sponsor is experiencing financial difficulty. For the remainder of the portfolio, we record a general allowance ("General CECL Allowance", and together with the Specific CECL Allowance, "CECL Allowances"), in accordance with the CECL Standard on a collective basis by assets with similar risk characteristics. We have elected to use the weighted average remaining maturity ("WARM") method in determining a General CECL Allowance for a majority of our portfolio. In the future, we may use other acceptable methods, such as a probability-of-default/loss-given-default method.
The following schedule illustrates changes in CECL Allowances for the year ended December 31, 2022 and 2021, respectively ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Specific CECL Allowance(1) | | General CECL Allowance | | Total CECL Allowance | | CECL Allowance as % of Amortized Cost(1) | |
| | | Funded | Unfunded | Total | | | General | Total | |
December 31, 2021 | $ | 145,000 | | | $ | 33,588 | | $ | 3,106 | | $ | 36,694 | | | $ | 181,694 | | | 0.49 | % | 2.26 | % | |
Changes: | | | | | | | | | | | |
| Allowances (Reversals) | 13,396 | | | (7,364) | | 1,241 | | (6,123) | | | $ | 7,273 | | | | | |
| Write-offs | (24,896) | | | — | | — | | — | | | (24,896) | | | | | |
December 31, 2022 | $ | 133,500 | | | $ | 26,224 | | $ | 4,347 | | $ | 30,571 | | | $ | 164,071 | | | 0.36 | % | 1.86 | % | |
———————
(1)Loans evaluated for Specific CECL Allowance are excluded from General CECL Allowance pool
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Specific CECL Allowance(1) | | General CECL Allowance | | Total CECL Allowance | | CECL Allowance as % of Amortized Cost(1) |
| | | Funded | Unfunded | Total | | | General | Total |
December 31, 2020 | $ | 175,000 | | | $ | 38,102 | | $ | 3,365 | | $ | 41,467 | | | $ | 216,467 | | | 0.67 | % | 3.23 | % |
Changes: | | | | | | | | | | |
| Reversals | (20,000) | | | (4,514) | | (259) | | (4,773) | | | (24,773) | | | | |
| Write-offs | (10,000) | | | — | | — | | — | | | (10,000) | | | | |
December 31, 2021 | $ | 145,000 | | | $ | 33,588 | | $ | 3,106 | | $ | 36,694 | | | $ | 181,694 | | | 0.49 | % | 2.26 | % |
| | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | |
———————
(1)Loans evaluated for Specific CECL Allowance are excluded from General CECL Allowance pool
For information on General and Specific CECL allowance changes during the years ended December 31, 2022 and 2021, see below.
General CECL Allowance
In determining the General CECL Allowance using the WARM method, an annual historical loss rate, adjusted for macroeconomic estimates, is applied to the amortized cost of an asset, or pool of assets, over each subsequent period for the assets' remaining expected life. We considered various factors including (i) historical loss experience in the commercial real estate lending market, (ii) timing of expected repayments and satisfactions, (iii) expected future funding, (iv) capital subordinate to us when we are the senior lender, (v) capital senior to us when we are the subordinate lender, and (vi) our current and future view of the macroeconomic environment for a reasonable and supportable forecast period. The CECL Standard requires the use of significant judgment to arrive at an estimated credit loss. There is significant uncertainty related to future macroeconomic conditions as the result of COVID-19, including inflation, labor shortages and interest rates.
We derived an annual historical loss rate based on a commercial mortgage-backed securities ("CMBS") database with historical losses from 1998 through the fourth quarter of 2022 provided by a third party, Trepp LLC. We applied various filters
to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. The annual historical loss rate was further adjusted to reflect our expectations of the macroeconomic environment for a reasonable and supportable forecast period. The shortened four quarter forecast period was adopted at the onset of COVID-19 pandemic in response to heightened macroeconomic uncertainty brought by the pandemic. With the pandemic gradually subduing in response to global and domestic vaccination efforts and other public safety measures, we are reverting to a longer forecast period of six quarters effective December 31, 2022. In assessing the macroeconomic environment, we consider macroeconomic factors, including unemployment rate, commercial real estate prices, and market liquidity. We compared the historical data for each metric to historical commercial real estate losses in order to determine the correlation of the data. We used projections, obtained from third-party service providers, of each factor to approximate the impact the macroeconomic outlook may have on our loss rate.
The General CECL Allowance on subordinate loans is calculated by incorporating both the loan balance of the position(s) of the structurally senior third-party lender(s) and the balance of our subordinate loan(s). The subordinate loans, by virtue of being the first loss position, are required to absorb losses prior to the senior position(s) being impacted, resulting in a higher percentage allowance attributable to the subordinate loan. The General CECL Allowance on unfunded loan commitments is time-weighted based on our expected commitment to fund such obligations. The General CECL Allowance on unfunded commitments is recorded as a liability on our consolidated balance sheets within accounts payable, accrued expenses and other liabilities.
We have made an accounting policy election to exclude accrued interest receivable ($65.4 million and $41.2 million as of December 31, 2022 and 2021, respectively), included in other assets on our consolidated balance sheets, from the amortized cost basis of the related commercial mortgage loans and subordinate loans and other lending assets in determining the General CECL Allowance, as any uncollectible accrued interest receivable is written off in a timely manner.
Although our secured debt obligations and senior secured term loan financing have a minimum tangible net worth maintenance covenant, the General CECL Allowance has no impact on these covenants as we are permitted to add back the General CECL Allowance for the computation of tangible net worth as defined in the respective agreements.
The following schedule sets forth our General CECL Allowance as of December 31, 2022 and December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Commercial mortgage loans, net | | $ | 22,848 | | | $ | 22,554 | |
Subordinate loans and other lending assets, net | | 3,376 | | | 11,034 | |
Unfunded commitments(1) | | 4,347 | | | 3,106 | |
Total General CECL Allowance | | $ | 30,571 | | | $ | 36,694 | |
———————
(1)The General CECL Allowance on unfunded commitments is recorded as a liability on our consolidated balance sheets within accounts payable, accrued expenses and other liabilities.
Our General CECL allowance decreased by $6.1 million during the year ended December 31, 2022. The decrease was primarily related to portfolio seasoning and changes in expected loan repayment dates. The decrease was partially offset by a more adverse macroeconomic outlook.
Our General CECL Allowance decreased by $4.8 million during the year ended December 31, 2021. The decrease was primarily related to portfolio seasoning and improved macroeconomic outlook, which was partially offset by new loan originations.
Specific CECL Allowance
For collateral-dependent loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we have elected to apply a practical expedient in accordance with the CECL Standard in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a Specific CECL Allowance. The Specific CECL Allowance is determined as the difference between the fair value of the underlying collateral and the carrying value of the loan (prior to the Specific CECL Allowance). When the repayment or satisfaction of a loan is dependent on a sale, rather than operations, of the collateral, the fair value is adjusted for the estimated cost to sell the collateral. Collateral-dependent loans evaluated for a Specific CECL Allowance are removed from the General CECL pool. The fair value of the underlying collateral is determined by using method(s) such as discounted cash flow, the market approach, or direct capitalization approach. The key unobservable inputs used to determine the fair value of the underlying collateral may vary depending on the information available to us and market conditions as of the valuation date.
We regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis. The Specific CECL Allowance is evaluated on a quarterly basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the liquidation value of the underlying collateral. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such impairment analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.
The following table summarizes our risk rated 5 loans as of December 31, 2022, which were analyzed for Specific CECL Allowances ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Type | Property type | Location | Amortized cost prior to Specific CECL Allowance | Specific CECL Allowance | Amortized cost | Interest recognition status/ as of date | Risk rating |
Mortgage | | | | | | |
| Retail(1)(2) | Cincinnati, OH | $166,583 | $67,000 | $99,583 | Non-Accrual/ 10/1/2019 | 5 |
| Hotel(3) | Atlanta, GA | 97,832 | — | 97,832 | Non-Accrual/ 5/1/2022 | 5 |
Mortgage total: | | $264,415 | $67,000 | $197,415 | | |
| | | | | | | |
Mezzanine | | | | | | |
| Residential(4) | Manhattan, NY | $81,980 | $66,500 | $15,480 | Non-Accrual/ 7/1/2021 | 5 |
Mezzanine total: | | $81,980 | $66,500 | $15,480 | | |
| | | | | | | |
Total: | | $346,395 | $133,500 | $212,895 | | |
| | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | |
———————
(1)The fair value of retail collateral was determined by applying a capitalization rate of 8.5%.
(2)In September 2018, we entered a joint venture with Turner Consulting II, LLC ("Turner Consulting"), through an entity which owns the underlying property that secures our loan. Turner Consulting contributed 10% of the venture’s equity and we contributed 90%. The entity was deemed to be a VIE and we determined that we are not the primary beneficiary of that VIE as we do not have the power to direct the entity's activities. During the years ended December 31, 2022 and 2021, $1.8 million and $1.4 million, respectively of interest paid was applied towards reducing the carrying value of the loan. The related profit and loss from the joint venture was immaterial for the years ended December 31, 2022 and 2021.
(3)The fair value of the hotel collateral was determined by applying a capitalization rate of 9.3% and a discount rate of 11.3%. During the year ended December 31, 2022, $1.4 million of interest paid was applied towards reducing the carrying value of the loan. During the three months ended December 31, 2022, we wrote off the previously recorded Specific CECL Allowance and reduced the principal balance of the loan by $7.0 million, which was recorded as a realized loss within realized gain (loss) on investments in our December 31, 2022 consolidated statement of operations.
(4)The fair value of the residential collateral was determined by making certain projections and assumptions with respect to future performance and a discount rate of 10%.
We cease accruing interest on loans if we deem the interest to be uncollectible with any previously accrued uncollected interest on the loan charged to interest income in the same period. The amortized cost basis for loans on non-accrual was $468.0 million and $639.6 million as of December 31, 2022 and December 31, 2021, respectively. Under certain circumstances, we may apply the cost recovery method under which interest collected on a loan reduces the loan's amortized cost. For the years ended December 31, 2022 and 2021, we received $3.2 million and $1.4 million, respectively, in interest that reduced amortized cost under the cost recovery method.
As of December 31, 2022 and 2021, the amortized cost basis for loans with accrued interest past due 90 or more days was $581.3 million and $757.6 million, respectively. As of December 31, 2022, there were no loans with accrued interest between 30 and 89 days past due. As of December 31, 2021, the amortized cost basis for loans with accrued interest between 30 and 89 days past due was $19.0 million.
During the third quarter of 2022, we refinanced our three mezzanine loans, and originated a commercial mortgage loan as part of an overall recapitalization. All of the loans are secured by an ultra-luxury residential property in Manhattan, NY. These loans have an aggregate amortized cost at December 31, 2022 of $736.3 million (inclusive of $82.5 million of payment- in-kind interest). As of December 31, 2022, these loans include (i) a $274.1 million commercial mortgage loan (“Senior Loan”), (ii) a $191.6 million senior mezzanine loan (“Senior Mezzanine Loan”), (iii) a $255.1 million junior mezzanine loan (“Junior Mezzanine A Loan”), and (iv) a $15.5 million junior mezzanine loan (net of a $66.5 million Specific CECL Allowance) (“Junior Mezzanine B Loan” together with the Junior Mezzanine A Loan collectively referred to as “Junior Mezzanine Loan”).
In refinancing the Senior Mezzanine Loan and Junior Mezzanine Loan, we modified the loan terms with the borrower by modifying the interest rates from LIBOR+15.7% to SOFR+9.0% on the Senior Mezzanine Loan, from LIBOR+22.5% to SOFR+15.0% on the Junior Mezzanine A Loan, and from LIBOR+17.5% to SOFR+15.0% on the Junior Mezzanine B Loan. We also extended the term on all three loans from July 2022 to September 2024. Based on our analysis under ASC 310-20 “Receivables – Nonrefundable Fees and Other Costs” (“ASC 310-20”), we have deemed this refinance to be a continuation of our existing loans. We opted to cease accruing interest on the Junior Mezzanine A Loan and Junior Mezzanine B Loan as of July 1, 2021 based on a waterfall sharing arrangement with a subordinate capital provider. We will continue to not accrue interest on the Junior Mezzanine Loan following this refinancing.
In accordance with ASC 326 and adoption of ASU 2022-02, we have classified the refinancing of the Senior Mezzanine Loan and Junior Mezzanine Loan as an interest rate reduction and term extension. The aggregate amortized cost of the Senior Mezzanine Loan and Junior Mezzanine Loan as of December 31, 2022 totaled $462.2 million, or 5.3% of our aggregate commercial mortgage loans and subordinate loans and other lending assets by amortized cost. As of March 31, 2022, sales velocity on the underlying property lagged behind the borrower's business plan and management's expectations. Based on this information as of March 31, 2022, we deemed the borrower to be experiencing financial difficulty and accordingly changed the risk rating to a 5 and recorded $30.0 million of Specific CECL Allowance on the Junior Mezzanine B Loan. During the quarter ended December 31, 2022, we recorded an additional $36.5 million Specific CECL Allowance on the Junior Mezzanine B Loan, bringing the total loan Specific CECL Allowance to $66.5 million, due to slower sales pace across the ultra-luxury residential segment at the end of 2022 in response to broader market uncertainty. The modified loan terms as discussed above have been reflected in our calculation of CECL for the quarter ended December 31, 2022. Refer to "CECL" section above for additional information regarding our calculation of CECL allowance. As of December 31, 2022, our amortized cost basis in this loan was $15.5 million, and its risk rating remained as a 5.
In March 2017, we originated a first mortgage secured by a hotel in Atlanta, GA. As of May 1, 2022, due to slower than expected recovery from the COVID-19 pandemic, we deemed the borrower to be experiencing financial difficulty and ceased accruing interest. During the second quarter of 2022, we recorded a $7.0 million Specific CECL Allowance. Additionally, during 2022, we modified the loan to provide two short term extensions to the borrower.
During the fourth quarter of 2022, the loan went into maturity default. We are in discussions with the sponsor regarding consensual foreclosure, and expect to reach an agreement in the first quarter of 2023. In anticipation of the upcoming foreclosure, we wrote off the previously recorded Specific CECL Allowance, and recorded a $7.0 million realized loss on the loan within realized gain (loss) on investments in the consolidated statement of operations. As of December 31, 2022, the loan had a principal balance of $98.2 million and amortized cost of $97.8 million. As of December 31, 2022 the loan has a risk rating of 5.
As of December 31, 2022, there were $9.5 million of unfunded commitments related to borrowers experiencing financial difficulty for the entire loan portfolio.
In October 2020, we entered a joint venture with CCOF Design Venture, LLC, which owns the underlying properties that secured our first mortgage loan. The entity in which we own an interest, and which owns the underlying properties, was deemed to be a VIE and we determined that we are not the primary beneficiary of that VIE as we do not have the power to direct the entity's activities. The related profit and loss from the joint venture was immaterial for the years ended December 31, 2022, 2021 and 2020. During the third quarter of 2022, $53.0 million of the previously recorded $68.0 million Specific CECL Allowance was reversed based on the fair value of the property prior to the sale. During the fourth quarter of 2022, we recorded an additional Specific CECL Allowance of $2.9 million, based on higher estimated costs to sell. Shortly thereafter in the fourth quarter of 2022, we sold the property and recognized a realized loss on investment of $17.9 million in the consolidated statement of operations, which represented a write-off of the $17.9 million previously recorded Specific CECL Allowance. In conjunction with the sale of the underlying property, we provided $133.0 million ($119.0 million funded at close) of seller financing in the form of a floating-rate first mortgage.
In 2018, we originated a $38.5 million commercial mortgage loan secured by a hotel in Pittsburgh, Pennsylvania. During the fourth quarter of 2020, the loan was recapitalized with the minority equity holder in the property. In connection with this recapitalization, the sponsor committed to contribute $11.4 million in new equity and we received approximately $5.9 million of principal that paid down the existing loan. We wrote down our principal by $11.0 million which was recorded as a realized loss within realized gain (loss) on investments in our December 31, 2020 consolidated statement of operations. The realized loss included a $9.5 million write-off of previously recorded Specific CECL Allowance. As of December 31, 2022 and 2021, the recapitalized loan had a principal balance of $27.1 million and $25.7 million, respectively and amortized cost of $27.0 million and $25.6 million, respectively. As of December 31, 2022 and 2021, the loan has a risk rating of 3.
In 2015, we originated a $157.8 million loan secured by a hotel in New York City. During the second quarter of 2020, the loan was restructured. In connection with this restructuring, the borrower committed to contribute additional equity of $15.0 million and concurrently we wrote down our principal on this loan by $15.0 million, which had been previously recorded
as a Specific CECL Allowance. We recorded a $15.0 million realized loss within realized gain (loss) on investments in our December 31, 2020 consolidated statement of operations. As of December 31, 2022 and 2021, the loan had a principal balance of $142.8 million and an amortized cost of $145.9 million and $145.3 million, respectively. Additionally, as of both December 31, 2022 and 2021, the loan has a risk rating of 3 and is on accrual status.
Other Loan and Lending Assets Activity
We recognized payment-in-kind interest of $10.0 million, $47.7 million, and $46.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
We recognized $3.8 million, $1.5 million, and $0.2 million in pre-payment penalties and accelerated fees for the years ended December 31, 2022, 2021 and 2020.
We recognized $3.7 million of shared appreciation fees for the year ended December 31, 2021 related to a first mortgage loan secured by a portfolio of residential-for-rent assets located in the United States, which is recorded in other income in the consolidated statement of operations.
As of December 31, 2022 and 2021, our portfolio included other lending assets, which are subordinate risk retention interests in securitization vehicles. The underlying mortgages related to our subordinate risk retention interests are secured by a portfolio of properties located throughout the United States. Our maximum exposure to loss from the subordinate risk retention interests is limited to the book value of such interests. The book value as of December 31, 2022 was $51.1 million, consisting of one interest with a weighted average maturity of 1.4 years and the book value as of December 31, 2021 was $64.6 million consisting of two interests with a weighted average maturity of 4.5 years. We are not obligated to provide, and do not intend to provide financial support to these subordinate risk retention interests. These interests are accounted for as held-to-maturity and recorded at carrying value on our consolidated balance sheets.
In November 2020, the borrower under a £309.2 million commercial mortgage loan ($422.7 million assuming conversion into U.S. Dollars ("USD")), of which we owned £247.5 million ($338.4 million assuming conversion into USD), secured by an urban retail property located in London, United Kingdom, entered into administration triggering an event of default. In accordance with the loan agreement, we were entitled to collect default interest in addition to the contractual interest we had been earning. During the first quarter of 2022, our commercial mortgage loan was fully satisfied and all accrued contractual and default interest was collected.
During the third quarter of 2022 one of our commercial mortgage loans collateralized by an office building located in London, United Kingdom was not repaid upon its contractual maturity, triggering an event of default. To provide the borrower with additional time to refinance the loan, we agreed to a conditional waiver of the event of default and modified the terms of the loan agreement to include (i) a short-term extension and (ii) default interest of 2.0%, which we commenced accruing in addition to our contractual rate. At December 31, 2022, the loan had an amortized cost basis of £93.7 million ($113.3 million assuming conversion into USD), including £20.8 million ($25.1 million assuming conversion into USD) of subordinate participation sold accounted for as secured borrowing. In January 2023, the loan was fully satisfied, including all contractual and default interest accrued to date. See "Note 20 - Subsequent Events" for further discussion.
Loan Sales
From time to time, we may enter into sale transactions with other parties. All sale transactions are evaluated in accordance with ASC 860. The following loan sale occurred in 2022:
During the third quarter of 2022, we transferred a portion of our unfunded commitment of £293.4 million ($327.7 million assuming conversion into USD) in a commercial mortgage loan secured by a mixed use property located in London, United Kingdom to entities managed by affiliates of the Manager. In addition to transferring the unfunded commitment, we also transferred a proportionate share of the origination fee associated with such unfunded commitment, resulting in a reduction to our amortized cost basis. We evaluated the transfer under ASC 860 and determined the transfer met the criteria for sale accounting. We recorded no gain or loss on the sale.
In the fourth quarter of 2022, we sold our interest in a $100.0 million subordinate loan secured by an office building located in Manhattan, NY. We determined that this transaction qualifies as a sale and accounted for it as such. We recorded no gain or loss related to this sale.
The following loan sales occurred in 2021:
In the fourth quarter of 2021, we sold our interest in a $31.2 million subordinate loan secured by a residential-for-sale inventory property located in Boston, MA. We determined that this transaction qualifies as a sale and accounted for it as such. We recorded no gain or loss related to this sale.
Additionally, during the fourth quarter of 2021, we sold our interest in a subordinate loan, previously classified as held for sale. The subordinate loan was secured by a mixed-used property with an outstanding principal of $41.9 million. We determined that this transaction qualifies as a sale and accounted for it as such. We recorded a loss of approximately $0.8 million in connection with this sale within realized gain (loss) on investments in the December 31, 2021 consolidated statement of operations.
The following loan sales occurred in 2020:
In the first quarter of 2020, we sold £62.2 million ($81.3 million assuming conversion into USD) in a mezzanine loan and £50.0 million ($65.3 million assuming conversion into USD) unfunded commitment of a senior mortgage secured by a mixed-use property in London, United Kingdom to a fund managed by an affiliate of the Manager, that was originated by us in December 2019. We determined that this transaction qualified as a sale and accounted for it as such. We recorded no gain or loss related to this sale.
In the second quarter of 2020, we sold interests in three construction loans, with aggregate commitments of $376.9 million (of which approximately $127.0 million was funded at the time of sale). The sales were made to entities managed by affiliates of the Manager. We determined that these transactions qualified as sales and accounted for them as such. We recorded a loss of approximately $1.4 million in connection with these sales within realized gain (loss) on investments in our December 31, 2020 consolidated statement of operations.
In the third quarter of 2020, we sold our interest in a foreign residential-for-sale inventory loan, with outstanding principal of £97.5 million ($124.2 million assuming conversion into USD). We determined this transaction qualifies as a sale and accounted for it as such. We recorded a loss of approximately $1.0 million in connection with this sale within realized gain (loss) on investments in our December 31, 2020 consolidated statement of operations.
In the fourth quarter of 2020, we sold our interest in a residential-for-sale inventory loan secured by property in New York, NY, with outstanding principal of $73.4 million. We determined this transaction qualified as a sale and accounted for it as such. We recorded a loss of approximately $2.7 million in connection with this sale within realized gain (loss) on investments in our December 31, 2020 consolidated statement of operations.
Note 5 – Assets and Liabilities Related to Real Estate Owned
Assets and Liabilities Related to Real Estate Owned, Held for Sale
In 2017, we originated a subordinate loan junior to a $33.0 million third-party mortgage, secured by a hotel in Anaheim, CA. In December 2020, due to non-performance, we assumed legal title through the execution of a deed-in-lieu of foreclosure. We intended to sell the hotel and, as such, as of the date of the title assumption, we recorded the hotel property on our consolidated balance sheets at its fair market value less costs to sell, net of a realized loss of $2.4 million, that was previously recorded as Specific CECL Allowance.
As of March 31, 2021, there was an increase in our expected costs to sell the property, and therefore, we recorded a $0.6 million loss during the three months ended March 31, 2021, as realized losses and impairments on real estate owned in our consolidated statement of operations. During the second quarter of 2021 the property was sold at our cost basis and no additional gain or loss was recorded. The $33.0 million first mortgage was repaid upon the sale of the property.
In 2017, we originated a $20.0 million junior mezzanine loan which was subordinate to: (i) a $110.0 million mortgage loan, and (ii) a $24.5 million senior mezzanine loan, secured by a full-service luxury hotel in Washington, D.C. During the first quarter of 2020, we recorded a $10.0 million Specific CECL Allowance and placed our junior mezzanine loan on non-accrual status.
On May 24, 2021, we purchased the $24.5 million senior mezzanine loan at par and acquired legal title to the hotel through a deed-in-lieu of foreclosure. We assumed the hotel’s assets and liabilities (including the $110.0 million mortgage loan) and recorded an additional $10.0 million charge reflecting the difference between the fair value of the hotel’s net assets and the carrying amount of the loan. This $10.0 million loss on title assumption plus the previously recorded Specific CECL Allowance of $10.0 million resulted in a $20.0 million realized loss on investments included within realized gain (loss) on investments in our 2021 consolidated statement of operations.
On May 24, 2021, in accordance with ASC 805, "Business Combinations," we allocated the fair value of the hotel’s acquired assets and assumed debt. The non-recurring fair value measurement was classified as Level III within the fair value hierarchy due to the use of significant unobservable inputs. On June 29, 2021, we repaid the $110.0 million mortgage loan against the property. As of March 1, 2022, the hotel assets and liabilities met the criteria to be classified as held for sale under ASC Topic 360, "Property, Plant, and Equipment." As of March 1, 2022, we ceased recording depreciation on the building and furniture, fixtures, and equipment on the consolidated statement of operations.
Below are the hotel's assets and liabilities as of December 31, 2022 on our consolidated balance sheet ($ in thousands):
| | | | | | | |
| December 31, 2022 | | |
Assets: | | | |
Cash | $ | 5,677 | | | |
Land | 58,742 | | | |
Buildings | 87,021 | | | |
Furniture, fixtures, and equipment | 9,053 | | | |
Accumulated depreciation | (3,349) | | | |
Other assets | 5,253 | | | |
Total Assets | $ | 162,397 | | | |
Liabilities: | | | |
| | | |
Accounts payable, accrued expenses and other liabilities | 6,493 | | | |
Total Liabilities | $ | 6,493 | | | |
Net Real Estate Assets | $ | 155,904 | | | |
For the years ended December 31, 2022 and 2021, we recorded the operating revenue, expenses and fixed asset depreciation and amortization in our consolidated income statement as shown below ($ in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 |
Operations related to real estate owned: | | | | | | | |
Revenue from operations | | | | | $ | 62,062 | | | $ | 18,917 | |
Operating expenses | | | | | (52,368) | | | (19,923) | |
Depreciation and amortization | | | | | (704) | | | (2,645) | |
Net income (loss) from real estate owned | | | | | $ | 8,990 | | | $ | (3,651) | |
Assets and Liabilities Related to Real Estate Owned, Held for Investment
In 2015, we originated a $122.2 million multifamily development commercial mortgage loan secured by an assemblage of properties in downtown Brooklyn, NY. In 2020, the loan went into default and we recorded a $30.0 million Specific CECL Allowance, due to the deterioration of market conditions attributable to COVID-19. As a result of improved market conditions we reversed $20 million of Specific CECL Allowance during the second quarter of 2021. In the second quarter of 2022, we reversed the remaining $10 million Specific CECL Allowance as a result of market rent growth and value created from development activities at the underlying property.
On August 3, 2022, we acquired legal title of the property through a deed-in-lieu of foreclosure and accounted for the asset acquisition in accordance with ASC 805, "Business Combinations." At that time, our amortized cost basis in the commercial mortgage loan was $226.5 million. We recorded the real estate assumed at a fair value of $270.1 million based on the market value of the land. We recognized a realized gain of $43.6 million, recorded within realized gain (loss) on investments on our consolidated statement of operations, which reflects the difference between the fair value of the property and the carrying value of the loan at the time of acquisition. The non-recurring fair value measurement was classified as Level III within the fair value hierarchy due to the use of significant unobservable inputs, including comparable sales of similar properties in the market. Since title acquisition we have capitalized an additional $32.7 million of construction and financing costs. As of December 31, 2022, our cost basis in the property was $302.7 million.
Upon taking title, we concurrently contributed the property to a joint venture with a third-party real estate developer. The entity was deemed to be a VIE and we determined that we are the primary beneficiary. Through our wholly owned
subsidiaries, we hold a 100% equity ownership interest in the joint venture and our partner is only entitled to profit upon achievement of certain returns under our joint venture agreement. Concurrently with taking title to the property, we obtained $164.8 million in construction financing on the property. As of December 31, 2022, the carrying value of the construction financing was $160.3 million, net of $4.5 million in deferred financing cost and was included within debt related to real estate owned, held for investment, net on our consolidated balance sheet.
The construction financing includes a maximum commitment of $388.4 million, an interest rate of term one month SOFR+2.55%, and current maturity of August 2026, with an option for us to extend for one year contingent upon meeting certain conditions. The construction financing agreement contains the following financial covenants: (i) our unencumbered liquidity must be greater $100.0 million and (ii) our net worth must be greater than $600.0 million. Under these covenants, our General CECL Allowance is added back to our net worth calculation. At December 31, 2022, we were in compliance with these covenants.
Note 6 – Other Assets
The following table details the components of our other assets at the dates indicated ($ in thousands): | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Interest receivable | $ | 65,383 | | | $ | 41,219 | |
| | | |
Loan proceeds held by servicer | 3,371 | | | 3,179 | |
Other(1) | 1,853 | | | 3,355 | |
Total | $ | 70,607 | | | $ | 47,753 | |
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(1)Includes $3.1 million of other assets from real estate owned at December 31, 2021. Refer to "Note 5 – Assets and Liabilities Related to Real Estate Owned, Held for Sale" for additional information.
Note 7 – Secured Debt Arrangements, Net
We utilize our secured debt arrangements to finance the origination activity in our loan portfolio. Our secured debt arrangements comprise secured credit facilities and a private securitization. During the year ended December 31, 2022, we entered into two new credit facilities, which provided $252.1 million of additional liquidity, and upsized three of our existing credit facilities by $1.1 billion.
Our borrowings under secured debt arrangements at December 31, 2022 and December 31, 2021 are detailed in the following table ($ in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | |
| Maximum Amount of Borrowings(1) | | Borrowings Outstanding(1) | | Maturity (2) | | Maximum Amount of Borrowings(1) | | Borrowings Outstanding(1) | | Maturity (2) | |
JPMorgan Facility - USD(3)(4) | $ | 1,532,722 | | | $ | 1,306,320 | | | September 2026 | | $ | 1,344,283 | | | $ | 1,329,923 | | | September 2026 | |
JPMorgan Facility - GBP(3)(4) | 67,278 | | | 67,278 | | | September 2026 | | 87,497 | | | 86,849 | | | September 2026 | |
JPMorgan Facility - EUR(3)(4) | — | | | — | | | N/A | | 68,220 | | | 68,220 | | | September 2026 | |
Deutsche Bank Facility - USD(3) | 700,000 | | | 385,818 | | | March 2026 | | 700,000 | | | 259,073 | | | March 2023 | |
Credit Suisse Facility - USD | 635,653 | | | 632,747 | | | August 2026(6)(7) | | 161,609 | | | 148,720 | | | February 2025(6)(7) | |
HSBC Facility - GBP | 364,423 | | | 364,423 | | | April 2025 | | — | | | — | | | N/A | |
HSBC Facility - EUR | 272,890 | | | 272,890 | | | January 2026(7) | | 167,756 | | | 162,937 | | | July 2022 | |
Goldman Sachs Facility - USD | 300,000 | | | 70,249 | | | November 2025(5) | | 300,000 | | | 168,231 | | | November 2025(5) | |
Barclays Facility - USD | 200,000 | | | 111,909 | | | June 2027(6) | | 200,000 | | | 32,693 | | | March 2024 | |
MUFG Securities Facility - GBP | 194,272 | | | 194,272 | | | June 2025(6) | | — | | | — | | | N/A | |
Santander Facility - EUR | 57,807 | | | 53,320 | | | August 2024 | | — | | | — | | | N/A | |
Total Secured Credit Facilities | 4,325,045 | | | 3,459,226 | | | | | 3,029,365 | | | 2,256,646 | | | | |
Barclays Private Securitization - GBP, EUR, SEK | 1,850,076 | | | 1,850,076 | | | February 2026(7) | | 1,902,684 | | | 1,902,684 | | | August 2024(7) | |
Total Secured Debt Arrangements | 6,175,121 | | | 5,309,302 | | | | | 4,932,049 | | | 4,159,330 | | | | |
Less: deferred financing costs | N/A | | (12,477) | | | | | N/A | | (9,062) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Secured Debt Arrangements, net(8)(9)(10) | $ | 6,175,121 | | | $ | 5,296,825 | | | | | $ | 4,932,049 | | | $ | 4,150,268 | | | |
|
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(1)As of December 31, 2022, GBP, EUR, and Swedish Krona ("SEK") borrowings were converted to USD at a rate of 1.21, 1.07, and 0.10, respectively. As of December 31, 2021, GBP, EUR and SEK borrowings were converted to USD at a rate of 1.35, 1.14 and 0.11, respectively.
(2)Maturity date assumes extensions at our option are exercised with consent of financing providers, where applicable.
(3)Facility enables us to elect to receive advances in USD, GBP, or EUR.
(4)The JPMorgan Facility allows for $1.6 billion of maximum borrowings in total as of December 31, 2022. The facility was temporarily upsized from $1.5 billion to $1.6 billion during August 2022 and the maximum borrowings will decrease to $1.5 billion as of January 2023.
(5)Assumes facility enters the two-year amortization period subsequent to the November 2023 maturity, which allows for the refinancing or pay down of assets under the facility.
(6)Assumes financings are extended in line with the underlying loans.
(7)Represents weighted average maturity across various financings with the counterparty. See below for additional details.
(8)Weighted-average borrowing costs as of December 31, 2022 and December 31, 2021 were applicable benchmark rates and credit spread adjustments, plus spreads of USD: +2.28% / GBP: +2.02% / EUR: +1.54% / SEK: +1.50% and USD: +2.00% / GBP: +1.86% / EUR: +1.42%/ SEK: +1.50%, respectively.
(9)Weighted average advance rates based on cost as of December 31, 2022 and December 31, 2021 were 68.8% (63.9% (USD) / 74.0% (GBP) / 72.1% (EUR) / 80.5% (SEK)) and 69.8% (67.1% (USD) / 72.7% (GBP) / 68.9% (EUR) / 80.7% (SEK)), respectively.
(10)As of December 31, 2022 and December 31, 2021, approximately 58% and 50% of the outstanding balance under these secured borrowings were recourse to us.
Terms of our secured credit facilities are designed to keep each lender's credit exposure generally constant as a percentage of the underlying value of the assets pledged as security to it. If the credit of the underlying collateral value decreases, the amount of leverage to us may be reduced. As of December 31, 2022 and December 31, 2021, the weighted average haircut under our secured debt arrangements was approximately 31.2% and 30.2%, respectively. Our secured credit facilities do not contain capital markets-based mark-to-market provisions.
Barclays Private Securitization
We are party to a private securitization with Barclays Bank plc (the "Barclays Private Securitization"). Commercial mortgage loans currently financed under the Barclays Securitization are denominated in GBP, EUR and SEK.
The Barclays Private Securitization does not include daily margining provisions and grants us significant discretion to modify certain terms of the underlying collateral including waiving certain loan-level covenant breaches and deferring or waiving of debt service payments for up to 18 months. The securitization includes loan-to-value based covenants with deleveraging requirements that are based on significant declines in the value of the collateral as determined by an annual third-party (engaged by us) appraisal process tied to the provisions of the underlying loan agreements. We believe this provides us with both cushion and predictability to avoid sudden unexpected outcomes and material repayment requirements.
The table below provides principal balances and the carrying value for commercial mortgage loans pledged to the Barclays Private Securitization as of December 31, 2022 and December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
Local Currency | Count | | Outstanding Principal | | Carrying Value |
GBP | 7 | | $ | 1,495,616 | | | $ | 1,475,241 | |
EUR | 5 | | 752,531 | | 747,240 |
SEK | 1 | | 248,064 | | | 245,714 | |
Total | 13 | | $ | 2,496,211 | | | $ | 2,468,195 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Local Currency | Count | | Outstanding Principal | | Carrying Value |
GBP | 7 | | $ | 1,767,063 | | | $ | 1,748,367 | |
EUR | 2 | | 533,164 | | 528,344 |
SEK | 1 | | 286,822 | | | 282,555 | |
Total | 10 | | $ | 2,587,049 | | | $ | 2,559,266 | |
The table below provides the borrowings outstanding (on an as converted basis) and weighted-average fully-extended maturities by currency for the assets financed under the Barclays Private Securitization as of December 31, 2022 ($ in thousands): | | | | | | | | | | | |
| Borrowings outstanding(1) | | Fully-Extended Maturity(2) |
Total/Weighted-Average GBP | $ | 1,125,420 | | | May 2026 |
Total/Weighted-Average EUR | 526,204 | | July 2025(3) |
Total/Weighted-Average SEK | 198,452 | | May 2026 |
Total/Weighted-Average Securitization | $ | 1,850,076 | | | February 2026 |
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(1)As of December 31, 2022, we had £931.4 million, €491.6 million, and kr2.1 billion of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans.
(2)Assumes underlying loans extend to fully extended maturity and extensions at our option are exercised.
(3)The EUR portion of the Barclays Private Securitization has an "evergreen" feature such that the facility continues for one year and can be terminated by either party on certain dates with, depending on the date of notice, a minimum of nine to twelve months' notice.
The table below provides the borrowings outstanding (on an as converted basis) and weighted-average fully-extended maturities by currency for the assets financed under the Barclays Private Securitization as of December 31, 2021 ($ in thousands): | | | | | | | | | | | |
| Borrowings outstanding | | Fully-Extended Maturity(1) |
Total/Weighted-Average GBP | $ | 1,299,321 | | | June 2025 |
Total/Weighted-Average EUR | 373,904 | | November 2022(2) |
Total/Weighted-Average SEK | 229,458 | | November 2022 |
Total/Weighted-Average Securitization | $ | 1,902,683 | | | August 2024 |
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(1)Assumes underlying loans extend to fully extended maturity and extensions at our option are exercised.
(2)The EUR portion of the Barclays Private Securitization has an "evergreen" feature such that the facility continues for one year and can be terminated by either party on certain dates with, depending on the date of notice, a minimum of nine to twelve months' notice.
The table below provides the assets and liabilities of the Barclays Private Securitization VIE included in our consolidated balance sheets ($ in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Assets: | | | |
Cash | $ | 758 | | | $ | 3,456 | |
Commercial mortgage loans, net(1) | 2,468,195 | | | 2,559,266 | |
Other Assets | 30,992 | | | 20,765 | |
Total Assets | $ | 2,499,945 | | | $ | 2,583,487 | |
Liabilities: | | | |
Secured debt arrangements, net (net of deferred financing costs of $2.3 million and $2.0 million in 2022 and 2021, respectively) | $ | 1,847,799 | | | $ | 1,900,640 | |
Accounts payable, accrued expenses and other liabilities(2) | 8,814 | | | 2,671 | |
Total Liabilities | $ | 1,856,613 | | | $ | 1,903,311 | |
———————
(1)Net of the General CECL Allowance of $8.2 million and $11.8 million as of December 31, 2022 and December 31, 2021, respectively.
(2)Includes General CECL Allowance related to unfunded commitments on commercial mortgage loans, net of $2.9 million and $0.4 million as of December 31, 2022 and December 31, 2021, respectively.
The table below provides the net income of the Barclays Private Securitization VIE included in our consolidated statement of operations ($ in thousands):
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 |
Net Interest Income: | | | | | | | |
Interest income from commercial mortgage loans | | | | | $ | 126,847 | | | $ | 86,377 | |
Interest expense | | | | | (51,487) | | | (25,661) | |
Net interest income | | | | | $ | 75,360 | | | $ | 60,716 | |
| | | | | | | |
Decrease (increase) in current expected credit loss allowance, net | | | | | 1,101 | | | (7,148) | |
Foreign currency translation gain (loss) | | | | | (62,058) | | | (13,102) | |
Net Income | | | | | $ | 14,403 | | | $ | 40,466 | |
At December 31, 2022, our borrowings had the following remaining maturities ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than 5 years | | Total |
JPMorgan Facility | $ | 228,077 | | | $ | 549,279 | | | $ | 596,242 | | | $ | — | | | $ | 1,373,598 | |
Deutsche Bank Facility | 188,051 | | | 31,200 | | | 166,567 | | | — | | | 385,818 | |
Credit Suisse Facility | — | | | 164,747 | | | 468,000 | | | — | | | 632,747 | |
HSBC Facility | — | | | 483,899 | | | 153,414 | | | — | | | 637,313 | |
Goldman Sachs Facility | 35,499 | | | 34,750 | | | — | | | — | | | 70,249 | |
Barclays Facility | — | | | — | | | 111,909 | | | — | | | 111,909 | |
MUFG Securities Facility | — | | | 194,272 | | | — | | | — | | | 194,272 | |
Santander Facility | — | | | 53,320 | | | — | | | — | | | 53,320 | |
Barclays Private Securitization | — | | | 563,819 | | | 1,286,257 | | | — | | | 1,850,076 | |
Total | $ | 451,627 | | | $ | 2,075,286 | | | $ | 2,782,389 | | | $ | — | | | $ | 5,309,302 | |
The table above reflects the fully extended maturity date of the facility and assumes facilities with an "evergreen" feature continue to extend through the fully-extended maturity of the underlying asset and assumes underlying loans are extended with consent of financing providers.
The table below summarizes the outstanding balances at December 31, 2022, as well as the maximum and average month-end balances for the year ended December 31, 2022 for our borrowings under secured debt arrangements ($ in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | For the year ended December 31, 2022 |
| Balance | | Amortized Cost of Collateral | | Maximum Month-End Balance | | Average Month-End Balance |
JPMorgan Facility | $ | 1,373,598 | | | $ | 2,376,154 | | | $ | 1,584,171 | | | $ | 1,411,644 | |
Deutsche Bank Facility | 385,818 | | | 565,387 | | | 432,455 | | | 400,337 | |
Goldman Sachs Facility | 70,249 | | | 116,619 | | | 164,607 | | | 140,599 | |
Credit Suisse Facility | 632,747 | | | 855,119 | | | 633,143 | | | 541,245 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
HSBC Facility | 637,313 | | | 813,716 | | | 660,004 | | | 501,674 | |
Barclays Facility | 111,909 | | | 138,510 | | | 172,693 | | | 102,664 | |
| | | | | | | |
MUFG Securities Facility | 194,272 | | | 261,319 | | | 194,272 | | | 156,499 | |
Santander Facility | 53,320 | | | 71,093 | | | 53,320 | | | 50,450 | |
Barclays Private Securitization | 1,850,076 | | | 2,476,349 | | | 1,963,837 | | | 1,828,794 | |
Total | $ | 5,309,302 | | | $ | 7,674,266 | | | | | |
The table below summarizes the outstanding balances at December 31, 2021, as well as the maximum and average month-end balances for the year ended December 31, 2021 for our borrowings under secured debt arrangements ($ in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | For the year ended December 31, 2021 |
| Balance | | Amortized Cost of Collateral | | Maximum Month-End Balance | | Average Month-End Balance |
JPMorgan Facility | $ | 1,484,992 | | | $ | 2,259,376 | | | $ | 1,484,992 | | | $ | 1,219,072 | |
Deutsche Bank Facility | 259,073 | | | 389,238 | | | 520,217 | | | 407,428 | |
Goldman Sachs Facility | 168,231 | | | 261,848 | | | 331,154 | | | 228,312 | |
Credit Suisse Facility | 148,720 | | | 214,124 | | | 369,182 | | | 224,351 | |
HSBC Facility | 162,937 | | | 211,813 | | | 174,717 | | | 165,958 | |
Barclays Facility | 32,693 | | | 50,241 | | | 35,193 | | | 33,526 | |
Barclays Private Securitization | 1,902,684 | | | 2,571,067 | | | 1,902,684 | | | 1,396,411 | |
Total | $ | 4,159,330 | | | $ | 5,957,707 | | | | | |
Debt Covenants
The guarantees related to our secured debt arrangements contain the following financial covenants: (i) tangible net worth must be greater than $1.25 billion plus 75% of the net cash proceeds of any equity issuance after March 31, 2017; (ii) our ratio of total indebtedness to tangible net worth cannot be greater than 3.75:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or $30.0 million. Under these covenants, our General CECL Allowance is added back to our tangible net worth calculation.
We were in compliance with the covenants under each of our secured debt arrangements at December 31, 2022 and December 31, 2021.
Note 8 – Senior Secured Term Loans, Net
In May 2019, we entered into a $500.0 million senior secured term loan (the "2026 Term Loan"), which matures in May 2026 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The 2026 Term Loan bears interest at LIBOR plus 2.75% and was issued at a price of 99.5%.
In March 2021, we entered into an additional $300.0 million senior secured term loan, with substantially the same terms as the 2026 Term Loan, (the "2028 Term Loan" and, together with the 2026 Term Loan, the "Term Loans"), which matures in March 2028 and contains restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. The 2028 Term Loan bears interest at LIBOR (with a floor of 0.50%) plus 3.50% and was issued at a price of 99.0%.
The Term Loans are amortizing with repayments of 0.25% per quarter of the total committed principal. We repaid $5.0 million of principal related to the 2026 Term Loan during each of the years ended December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021, we repaid $3.0 million and $2.3 million of principal related to the 2028 Term Loan, respectively.
The following table summarizes the terms of the Term Loans as of December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Unamortized Issuance Discount(1) | Deferred Financing Costs(1) | Carrying Value | Spread | Maturity Date |
2026 Term Loan | $ | 482,500 | | $ | (1,190) | | $ | (6,106) | | $ | 475,204 | | 2.75 | % | 5/15/2026 |
2028 Term Loan | 294,750 | | (2,214) | | (3,927) | | 288,609 | | 3.50 | % | 3/11/2028 |
Total | $ | 777,250 | | $ | (3,404) | | $ | (10,033) | | $ | 763,813 | | | |
———————
(1) Unamortized issuance discount and deferred financing costs will be amortized to interest expense over remaining life of respective term loans.
The following table summarizes the terms of the Term Loans as of December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Unamortized Issuance Discount(1) | Deferred Financing Costs(1) | Carrying Value | Spread | Maturity Date |
2026 Term Loan | $ | 487,500 | | $ | (1,548) | | $ | (7,933) | | $ | 478,019 | | 2.75 | % | 5/15/2026 |
2028 Term Loan | 297,750 | | (2,643) | | (4,801) | | 290,306 | | 3.50 | % | 3/11/2028 |
Total | $ | 785,250 | | $ | (4,191) | | $ | (12,734) | | $ | 768,325 | | | |
———————
(1) Unamortized issuance discount and deferred financing costs will be amortized to interest expense over remaining life of respective term loans.
Covenants
During the fourth quarter of 2021, we modified the financial covenants of the Term Loans which included the following: (i) increased our maximum ratio of total recourse debt to tangible net worth from 3:1 to 4:1; (ii) increased our maximum ratio of total unencumbered assets to total pari-passu indebtedness from 1.25:1 to 2.50:1; and (iii) amended the definition of unencumbered asset to include the carrying value of the residual equity in the entities where we hold assets financed under repurchase obligations. In conjunction with the modifications, we incurred $5.2 million in fees, $3.9 million of which were consent fees paid to borrowers recorded as deferred financing costs and $1.3 million of arrangement fees paid to the Term Loan arranger recorded as general and administrative expenses.
We were in compliance with the covenants under the Term Loans at December 31, 2022 and December 31, 2021.
Interest Rate Cap
During the second quarter of 2020, we entered into a three-year interest rate cap to cap LIBOR at 0.75%. This effectively limits the maximum all-in coupon on our 2026 Term Loan to 3.50%. In connection with the interest rate cap, we incurred upfront fees of $1.1 million for the year ended December 31, 2020, which we recorded as a deferred financing cost on our consolidated balance sheets. The deferred financing cost is being amortized over the duration of the interest rate cap with respective amortization recognized as part of interest expense in our consolidated statement of operations.
During the year ended December 31, 2022, LIBOR exceeded the cap rate of 0.75%. As such, during the year ended December 31, 2022, we realized a gain from the interest rate cap in the amount of $5.7 million, which is included in gain (loss) on interest rate hedging instruments in our consolidated statement of operations. The realized gain was a result of the increase in the current interest rate forward curve, partially offset by the nearing maturity of the cap. There was no realized gain recorded during the year ended December 31, 2021.
Note 9 – Senior Secured Notes, Net
In June 2021, we issued $500.0 million of 4.625% Senior Secured Notes due 2029 (the "2029 Notes"), for which we received net proceeds of $495.0 million, after deducting initial purchasers' discounts and commissions. The 2029 Notes will mature on June 15, 2029, unless earlier repurchased or redeemed. The 2029 Notes are secured by a first-priority lien, and rank pari passu in right of payment with all of our existing and future first lien obligations, including indebtedness under the Term Loans. The 2029 Notes were issued at par and contain covenants relating to liens, indebtedness, and investments in non-wholly owned entities. The 2029 Notes had a carrying value of $494.8 million and $494.1 million, net of deferred financing costs of $5.2 million and $5.9 million, as of December 31, 2022 and December 31, 2021, respectively.
Covenants
The 2029 Notes include certain covenants including a requirement that we maintain a ratio of total unencumbered assets to total pari-passu indebtedness of at least 1.20:1. As of December 31, 2022 and December 31, 2021, we were in compliance with all covenants.
Note 10 – Convertible Senior Notes, Net
In two separate offerings during 2017, we issued an aggregate principal amount of $345.0 million of 4.75% Convertible Senior Notes due 2022 (the "2022 Notes"), for which we received $337.5 million, after deducting the underwriting discount and offering expenses. During the third quarter of 2022, we repaid the $345.0 million aggregate principal amount of the 2022 Notes in cash at par.
During the fourth quarter of 2018, we issued $230.0 million of 5.375% Convertible Senior Notes due 2023 (the "2023
Notes" and, together with the 2022 Notes, the "Convertible Notes"), for which we received $223.7 million after deducting the underwriting discount and offering expenses. At December 31, 2022, the 2023 Notes had a carrying value of $229.4 million and an unamortized discount of $0.6 million.
The following table summarizes the terms of the 2023 Notes as of December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Principal Amount | Coupon Rate | Effective Rate (1) | Conversion Rate (2) | Maturity Date | Remaining Period of Amortization |
| | | | | | |
2023 Notes | 230,000 | | 5.38 | % | 5.85 | % | 48.7187 | | 10/15/2023 | 0.79 |
Total | $ | 230,000 | | | | | | |
The following table summarizes the terms of the Convertible Notes as of December 31, 2021 ($ 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 | % | 50.2260 | | 8/23/2022 | 0.64 |
2023 Notes | 230,000 | | 5.38 | % | 6.16 | % | 48.7187 | | 10/15/2023 | 1.79 |
Total | $ | 575,000 | | | | | | |
———————
(1)Effective rate includes the effect of the adjustment for the conversion option (See footnote (2) below), the value of which reduced the initial liability and was recorded in additional paid-in-capital. The effective rate as of December 31, 2022 reflects adoption of ASU 2020-06.
(2)We have the option to settle any conversions in cash, shares of common stock or a combination thereof. The conversion rate represents the number of shares of common stock issuable per one thousand principal amount of the Convertible Notes converted and includes adjustments relating to cash dividend payments made by us to stockholders that have been deferred and carried-forward in accordance with, and are not yet required to be made pursuant to, the terms of the applicable supplemental indenture.
We may not redeem the 2023 Notes prior to maturity except in limited circumstances. The closing price of our common stock on December 31, 2022 of $10.76 was less than the per share conversion price of the 2023 Notes.
On January 1, 2022, we adopted ASU 2020-06, which no longer require the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. Prior to the adoption of ASU 2020-06, we attributed $15.4 million of the proceeds to the equity component of the Convertible Notes ($11.0 million to the 2022 Notes and $4.4 million to the 2023 Notes), which represented the excess proceeds received over the fair value of the liability component of the Convertible Notes at the date of issuance. The equity component of the Convertible Notes had been reflected within additional paid-in capital on our consolidated balance sheets until January 1, 2022 when we adopted ASU 2020-06 through the modified retrospective approach. Upon adoption, we (i) reclassified $12.0 million of previously recorded amortization related to the equity component of the Convertible Notes from retained earnings to additional paid-in-capital and (ii) reclassified the remaining unamortized balance of $3.4 million to additional paid-in-capital, which increased the cost basis of convertible notes and decreased additional paid-in-capital on the consolidated balance sheets.
The aggregate contractual interest expense was approximately $22.9 million, $28.8 million and $28.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. With respect to the amortization of the discount on the liability component of the Convertible Notes as well as the amortization of deferred financing costs, we reported additional non-cash interest expense of approximately $2.5 million, $6.3 million and $6.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Note 11 – Derivatives
We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD.
We have entered into a series of forward contracts to sell an amount of foreign currency (GBP, EUR and SEK) for an agreed upon amount of USD at various dates through February 2027. These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments.
The agreements with our derivative counterparties require that we post collateral to secure net liability positions. As of both December 31, 2022 and 2021, we were in a net asset position with all of our derivative counterparties and did not have any collateral posted under these derivative contracts.
The following table summarizes our non-designated Fx forwards and our interest rate cap as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
Type of Derivatives | Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity | | Weighted-Average Years to Maturity |
Fx contracts - GBP | 124 | | 936,930 | | GBP | | January 2023 - February 2027 | | 1.78 |
Fx contracts - EUR | 130 | | 576,240 | | EUR | | January 2023 - November 2025 | | 1.78 |
Fx contracts - SEK | 19 | | 730,432 | | SEK | | February 2023 - May 2026 | | 2.95 |
Interest rate cap | 1 | | 500,000 | | USD | | June 2023 | | 0.46 |
The following table summarizes our non-designated Fx forwards and our interest rate cap as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Type of Derivatives | Number of Contracts | | Aggregate Notional Amount (in thousands) | | Notional Currency | | Maturity | | Weighted-Average Years to Maturity |
Fx contracts - GBP | 125 | | 738,178 | | GBP | | January 2022 - February 2026 | | 2.14 |
Fx contracts - EUR | 90 | | 508,541 | | EUR | | January 2022 - November 2025 | | 1.88 |
Fx contracts - SEK | 20 | | 765,138 | | SEK | | February 2022 - May 2026 | | 3.74 |
Interest rate cap | 1 | | 500,000 | | USD | | June 2023 | | 1.45 |
We have not designated any of our derivative instruments as hedges as defined in ASC 815, "Derivatives and Hedging" and, therefore, changes in the fair value of our derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on our consolidated statements of operations related to our derivatives for the years ended December 31, 2022, 2021, and 2020 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amount of gain (loss) recognized in income |
| | | | | Year ended December 31, |
| Location of Gain (Loss) Recognized in Income | | | | | | 2022 | | 2021 | | 2020 |
Forward currency contracts | Unrealized gain (loss) on derivative instruments | | | | | | $ | 104,159 | | | $ | 46,714 | | | $ | (26,499) | |
Forward currency contracts | Realized gain (loss) on derivative instruments | | | | | | 42,822 | | | (5,040) | | | 16,756 | |
Total | | | | | | | $ | 146,981 | | | $ | 41,674 | | | $ | (9,743) | |
In connection with our 2026 Term Loan, in May 2019, we entered into an interest rate swap to fix LIBOR at 2.12% or an all-in interest rate of 4.87%. We used our interest rate swap to manage exposure to variable cash flows on our borrowings under the senior secured term loan. Our interest rate swap allowed us to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure. However during the second quarter of 2020, we terminated our interest rate swap due to a significant decrease in LIBOR and recognized a realized loss on the accompanying consolidated statement of operations.
In June 2020, we entered into an interest rate cap for approximately $1.1 million. We use our interest rate cap to manage exposure to variable cash flows on our borrowings under the senior secured term loan by effectively limiting LIBOR from exceeding 0.75%. This effectively limits the maximum all-in coupon on our senior secured term loan to 3.50%. The unrealized gain or loss related to the interest rate cap is recorded net under unrealized gain on interest rate hedging instruments in our consolidated statement of operations. During the year ended December 31, 2022, LIBOR exceeded the cap rate of 0.75%. As such, during the year ended December 31, 2022, we realized a gain from the interest rate cap in the amount of $5.7 million, which is included in gain (loss) on interest rate hedging instruments in our consolidated statement of operations. The realized gain was a result of the increase in the current interest rate forward curve, partially offset by the nearing maturity of the cap. There was no realized gain recorded during the year ended December 31, 2021. The following table summarizes the amounts
recognized on our consolidated statements of operations related to our interest rate cap and interest rate swap for the years ended December 31, 2022, 2021, and 2020 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount of gain (loss) recognized in income |
| | | Year ended December 31, |
| Location of gain (loss) recognized in income | | 2022 | | | 2021 | | 2020 | | |
Interest rate cap(1) | Unrealized gain on interest rate hedging instruments | | $ | 7,692 | | | | $ | 1,314 | | | $ | 134 | | | |
Interest rate cap(1) | Realized gain on interest rate hedging instruments | | 5,671 | | | | — | | | — | | | |
Interest rate swap(2) | Unrealized gain on interest rate swap | | — | | | | — | | | 14,470 | | | |
Interest rate swap(2) | Realized loss on interest rate swap | | — | | | | — | | | (53,851) | | | |
Total | | | $ | 13,363 | | | | $ | 1,314 | | | $ | (39,247) | | | |
———————
(1)With a notional amount of $500.0 million at December 31, 2022, 2021, and 2020.
(2)With a notional amount of $0 at December 31, 2022, 2021, and $500.0 million at December 31, 2020.
The following tables summarize the gross asset and liability amounts related to our derivatives at December 31, 2022 and December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in our Consolidated Balance Sheet | | Net Amounts of Assets Presented in our Consolidated Balance Sheet | | Gross Amount of Recognized Assets | | Gross Amounts Offset in our Consolidated Balance Sheet | | Net Amounts of Assets Presented in our Consolidated Balance Sheet |
Forward currency contracts | $ | 143,285 | | | $ | (23,786) | | | $ | 119,499 | | | $ | 28,781 | | | $ | (13,441) | | | $ | 15,340 | |
Interest rate cap | 9,141 | | | — | | | 9,141 | | | 1,448 | | | — | | | 1,448 | |
Total derivative assets (liabilities) | $ | 152,426 | | | $ | (23,786) | | | $ | 128,640 | | | $ | 30,229 | | | $ | (13,441) | | | $ | 16,788 | |
Note 12 – Participations Sold
Participations sold represents the subordinate interests in loans we originated and subsequently partially sold. We account for participations sold as secured borrowings on our consolidated balance sheet with both assets and non-recourse liabilities because the participations do not qualify as a sale under ASC 860, "Transfers and Servicing." The income earned on the participations sold is recorded as interest income and an identical amount is recorded as interest expense in our consolidated statements of operations.
In October 2020, we sold a $25.0 million interest, at par, in a mezzanine loan collateralized by a ground-up condominium development in New York City that we originated in December 2017. The participation interest sold accrued payment-in-kind interest, was accounted for as a secured borrowing on our consolidated balance sheets, and was subordinate to our remaining mezzanine loan. The mezzanine loan was repaid at par in June 2021, and therefore, we de-recognized the related participating interest of $27.7 million, which included $2.7 million in payment-in-kind interest.
In December 2020, we sold a £6.7 million ($8.9 million assuming conversion into USD at time of transfer) interest, at par, in a first mortgage loan collateralized by an office building located in London, United Kingdom that was originated by us in December 2017. In connection with this sale, we transferred our remaining unfunded commitment of £19.1 million ($25.3 million assuming conversion into USD at time of transfer). The participation interest sold is subordinate to our remaining £72.9 million ($88.1 million assuming conversion into USD) first mortgage loan and is accounted for as a secured borrowing on our consolidated balance sheet.
During the year ended December 31, 2022, the participation sold on commercial mortgage loans balance decreased by $1.9 million due to unrealized loss on foreign currency translation. Refer to "Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for further discussion of default interest being accrued on the whole position. In January 2023, the loan was fully satisfied, including all contractual and default interest accrued to date. See "Note 20 - Subsequent Events" for further discussion.
The table below details participations sold included in our consolidated balance sheets ($ in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Participation sold on commercial mortgage loans | $ | 25,130 | | | $ | 27,064 | |
| | | |
Total participations sold | $ | 25,130 | | | $ | 27,064 | |
Note 13 – Accounts Payable, Accrued Expenses and Other Liabilities
The following table details the components of our accounts payable, accrued expense and other liabilities ($ in thousands): | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Collateral held under derivative agreements | $ | 138,620 | | | $ | 21,420 | |
Accrued dividends payable | 53,203 | | | 52,833 | |
Accrued interest payable | 23,943 | | | 16,166 | |
Accounts payable and other liabilities(1) | 7,247 | | | 9,084 | |
General CECL Allowance on unfunded commitments(2) | 4,347 | | | 3,106 | |
Total | $ | 227,360 | | | $ | 102,609 | |
———————
(1)Includes $1.1 million and $7.2 million of accounts payable and other liabilities on the balance sheet of the Real Estate Owned, Held for Investment at December 31, 2022 and 2021, respectively
(2)Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional disclosure related to the General CECL Allowance on unfunded commitments as of December 31, 2022 and 2021, respectively.
Note 14 – Related Party Transactions
Management Agreement
In connection with our initial public offering in September 2009, we entered into a management agreement (the "Management Agreement") with the Manager, which describes the services to be provided by the Manager and its compensation for those services. The Manager is responsible for managing our day-to-day operations, subject to the direction and oversight of our board of directors.
Pursuant to the terms of the Management Agreement, the Manager is paid a base management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
The term of the Management Agreement was automatically renewed for a successive one-year term on September 29, 2022 and will automatically renew on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of our independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to ARI or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.
We incurred approximately $38.4 million, $38.4 million and $39.8 million in base management fees under the Management Agreement for the years ended December 31, 2022, 2021, and 2020 respectively.
In addition to the base management fee, we are also responsible for reimbursing the Manager for certain expenses paid by the Manager on our behalf or for certain services provided by the Manager to us. For the years ended December 31, 2022, 2021, and 2020, we paid expenses totaling $5.5 million, $4.0 million and $4.5 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 consolidated statement of operations expense category or our consolidated balance sheets based on the nature of the item.
Included in payable to related party on our consolidated balance sheets at December 31, 2022 and 2021 is approximately $9.7 million and $9.8 million, respectively, for base management fees incurred but not yet paid under the Management
Agreement.
Loans receivable
In June 2015, we originated a $20.0 million mezzanine loan secured by pledges of equity interests in the property recorded as real estate owned - held for sale on our consolidated balance sheets at December 31, 2022. The mezzanine loan was subordinate to (i) a $110.0 million mortgage loan, originated by a third party, and (ii) a $24.5 million senior mezzanine loan, originated by an affiliate of the Manager. On May 24, 2021, we purchased the $24.5 million senior mezzanine loan at par from the affiliate and acquired legal title to the hotel through a deed-in-lieu of foreclosure. Refer to "Note 5 – Assets and Liabilities Related to Real Estate Owned" for additional information.
In January 2020, we sold £62.2 million ($81.3 million assuming conversion into USD) in a mezzanine loan and £50.0 million ($65.3 million assuming conversion into USD) unfunded commitment of a senior mortgage secured by a mixed-use property in London, United Kingdom to a fund managed by an affiliate of the Manager, that was originated by us in December 2019. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information.
In the second quarter of 2020, we sold our interests in three construction loans to entities managed by affiliates of the
Manager. Refer to "Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net" for additional
information related to these sales.
We own three mezzanine loans and a commercial mortgage that are secured by the same ultra-luxury residential property currently under construction in Manhattan, NY. During the third quarter of 2021, a vehicle managed by an affiliate of the Manager transferred its Junior Mezzanine B Loan position to the Company and in connection with this transfer, one of the property’s subordinate capital providers paid the vehicle a price representing the original principal balance on the Junior Mezzanine B Loan position with the vehicle agreeing to forego its accrued interest on the Junior Mezzanine B Loan. During the third quarter of 2022, we refinanced our mezzanine loans, and originated a commercial mortgage loan as part of an overall recapitalization. The mezzanine positions held by entities managed by affiliates of the Manager were repaid. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information.
During the third quarter of 2022, we transferred £293.4 million ($327.7 million assuming conversion into USD) of unfunded commitments related to a mixed-use development property located in London, UK to entities managed by affiliates of the Manager. Refer to "Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional disclosure.
Term Loan
In March 2021, Apollo Global Funding, LLC, an affiliate of the Manager, served as one of the eight arrangers for the issuance of our 2028 Term Loan and received $0.2 million of arrangement fees. In addition, funds managed by an affiliate of the Manager invested in $30.0 million of the 2028 Term Loan.
Senior Secured Notes
In June 2021, Apollo Global Securities, LLC, an affiliate of the Manager, served as one of the eight initial purchasers in the issuance of our 2029 Notes and received $0.4 million of initial purchasers' discounts and commissions.
Italian Direct Lending Structure
In the fourth quarter of 2021, we formed an Italian closed-end alternative investment fund (the "AIF"), managed by Apollo Investment Management Europe (Luxembourg) S.A R.L, a regulated alternative investment fund manager (the "AIFM"), an affiliate of the Manager. During the year ended December 31, 2022, the AIF incurred $60,117 in fees payable to the AIFM, which is recorded in payable to related party on our consolidated balance sheet. The fees incurred during the year ended December 31, 2021 were immaterial.
Note 15 – Share-Based Payments
On September 23, 2009, our board of directors approved the Apollo Commercial Real Estate Finance, Inc. 2009 Equity Incentive Plan ("2009 LTIP") and on April 16, 2019, our board of directors approved the Amended and Restated Apollo Commercial Real Estate Finance, Inc. 2019 Equity Incentive Plan ("2019 LTIP," and together with the 2009 LTIP, the "LTIPs"), which amended and restated the 2009 LTIP. Following the approval of the 2019 LTIP by our stockholders at our 2019 annual meeting of stockholders on June 12, 2019, no additional awards have been or will be granted under the 2009 LTIP and all outstanding awards granted under the 2009 LTIP remain in effect in accordance with the terms in the 2009 LTIP.
The 2019 LTIP provides for grants of restricted common stock, restricted stock units ("RSUs") and other equity-based awards up to an aggregate of 7,000,000 shares of our common stock. The LTIPs are administered by the compensation committee of our board of directors (the "Compensation Committee") and all grants under the LTIPs must be approved by the Compensation Committee.
We recognized stock-based compensation expense of $18.3 million, $17.6 million, and $16.8 million during the years ended December 31, 2022, 2021, and 2020 respectively, related to restricted stock and RSU vesting.
The following table summarizes the grants, vesting and forfeitures of restricted common stock and RSUs during the years ended December 31, 2022, 2021, and 2020: | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Restricted Stock | | RSUs | | Grant Date Fair Value ($ in millions) |
Outstanding at December 31, 2019 | | 25,356 | | | 2,007,355 | | | |
| Granted | | 82,235 | | | 1,446,155 | | | $ | 16.4 | |
| Vested | | (25,356) | | | (962,518) | | | N/A |
| Forfeiture | | — | | | (35,139) | | | N/A |
Outstanding at December 31, 2020 | | 82,235 | | | 2,455,853 | | | |
| Granted | | 45,185 | | | 1,323,487 | | | $ | 18.2 | |
| Vested | | (82,235) | | | (1,136,525) | | | N/A |
| Forefeiture | | — | | | (44,874) | | | N/A |
Outstanding at December 31, 2021 | | 45,185 | | | 2,597,941 | | | |
| Granted | | 49,434 | | | 1,541,135 | | | $ | 18.2 | |
| Vested | | (38,517) | | | (1,260,456) | | | N/A |
| Forfeiture | | — | | | (13,466) | | | N/A |
Outstanding at December 31, 2022 | | 56,102 | | | 2,865,154 | | | |
Below is a summary of restricted stock and RSU vesting dates as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
Vesting Year | | Restricted Stock | | RSUs | | Total Awards |
| | | | | | |
| | | | | | |
2023 | | 52,768 | | | 1,397,011 | | | 1,449,779 | |
2024 | | 3,334 | | | 954,415 | | | 957,749 | |
2025 | | — | | | 513,728 | | | 513,728 | |
Total | | 56,102 | | | 2,865,154 | | | 2,921,256 | |
At December 31, 2022, we had unrecognized compensation expense of approximately $0.3 million and $34.1 million related to the vesting of restricted stock awards and RSUs, respectively, noted in the table above.
RSU Deliveries
During the years ended December 31, 2022, 2021, and 2020 we delivered 652,501, 553,008 and 508,968 shares of common stock for 1,145,090, 953,397 and 877,262 vested RSUs, respectively. We allow RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on our consolidated statement of changes in stockholders' equity. The adjustment was $7.0 million, $4.4 million, and $6.5 million for the years ended December 31, 2022, 2021 and 2020 respectively. The adjustment is a reduction of capital related to our equity incentive plan and is presented net of increases of capital related to our equity incentive plan in our consolidated statement of changes in stockholders' equity.
Note 16 – Stockholders’ Equity
Our authorized capital stock consists of 450,000,000 shares of common stock, $0.01 par value per share and 50,000,000 shares of preferred stock, $0.01 par value per share. As of December 31, 2022, 140,595,995 shares of common stock were issued and outstanding, and 6,770,393 shares of 7.25% Series B-1 Preferred Stock were issued and outstanding.
On July 15, 2021, we exchanged all 6,770,393 shares outstanding of our 8.00% Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share ("Series B Preferred Stock"), with a liquidation preference of $25.00 per share, for 6,770,393 shares of 7.25% Series B-1 Preferred Stock, par value $0.01 per share ("Series B-1 Preferred Stock"), with a liquidation preference of $25.00 per share, pursuant to an exchange agreement with the two existing holders of the Series B Preferred Stock.
Dividends. The following table details our dividend activity:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
Dividends declared per share of: | | | | | 2022 | | 2021 | | 2020 |
Common Stock | | | | | $1.40 | | $1.40 | | $1.45 |
Series B Preferred Stock | | | | | N/A | | 1.00 | | 2.00 |
Series B-1 Preferred Stock | | | | | 1.81 | | 0.90 | | N/A |
———————
(1) As our aggregate 2022 distributions did not exceed our earnings and profits, $0.1185 of the January 2023 distribution declared in the fourth quarter of 2022,
and payable to common stockholders of record as of December 31, 2022, will be treated as a 2022 distribution for U.S. federal income tax purposes.
Common Stock Repurchases. During the year ended December 31, 2020, there was 14,832,632 shares of common stock repurchased at a weighted-average share price of $8.61. There was no common stock repurchase activity during the years ended December 31, 2022 and 2021. As of December 31, 2022 there was $172.2 million remaining authorized under our stock repurchase program.
Note 17 – Commitments and Contingencies
Legal Proceedings. From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. On June 28, 2018, AmBase Corporation, 111 West 57th Street Manager Funding LLC and 111 West 57th Investment LLC commenced a now-dismissed action captioned AmBase Corporation et al v. ACREFI Mortgage Lending, LLC et al (No 653251/2018) in New York Supreme Court (the "Apollo Action"). The complaint named as defendants (i) a wholly-owned subsidiary of the Company ("Subsidiary"), (ii) the Company, and (iii) certain funds managed by Apollo, who were co-lenders on a mezzanine loan against the development of a residential condominium building in Manhattan, New York. The plaintiffs alleged that the defendants tortiously interfered with the plaintiffs’ joint venture agreement with the developers of the project, and that the defendants aided and abetted breaches of fiduciary duty by the developers of the project. The plaintiffs alleged the loss of a $70.0 million investment plus punitive damages. The defendants' motion to dismiss was granted on October 23, 2019 and the Court entered judgment dismissing the complaint in its entirety on November 8, 2019. Plaintiffs appealed, the parties fully briefed the appeal, and then Plaintiffs dropped the appeal, and the case remains dismissed.
Plaintiffs amended the complaint in a separate action in 2021, 111 West 57th Investment LLC v. 111W57 Mezz Investor LLC (No. 655031/2017) also in New York Supreme Court (the "April 2021 Action") to name Apollo Global Management, Inc., the Subsidiary, the Company, and certain funds managed by Apollo as defendants. The April 2021 Action concerns overlapping claims and the same condominium development project that the Apollo Action concerned. We believe the claims in this action are without merit, including as barred by the dismissal of the Apollo Action. The defendants filed a motion to dismiss, which was granted in part and denied in part on December 15, 2022. The Court dismissed the claim against Apollo Global Management, Inc. and the Company. The claim against the Apollo entities who were co-lenders on the mezzanine loan, including the subsidiary, remains in the case. Apollo will appeal the decision with respect to the remaining claim. No reasonable estimate of possible loss, if any, can be made at this time. The Company believes the claims in this action are without merit.
Loan Commitments. As described in "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" at December 31, 2022, we had $1.04 billion of unfunded commitments related to our commercial mortgage and subordinate loans. The timings and amounts of fundings are uncertain as these commitments relate to loans for construction costs, capital expenditures, leasing costs, interest and carry costs, among others. As such, the timings and amounts of future fundings depend on the progress and performance of the underlying assets of our loans. Certain of our lenders are contractually obligated to fund their ratable portion of these loan commitments over time, while other lenders have some degree of discretion over future loan funding obligations. The total unfunded commitment is expected to be funded over the remaining 3.6 years weighted average tenor of these loans.
COVID-19. The COVID-19 pandemic has brought forth uncertainty and disruption to the global economy, including longer-term macroeconomic effects on supply chains, inflation and labor shortages. The ultimate impact of the COVID-19 pandemic, including the continued impact and uncertainty resulting from COVID-19 variants, supply chain disruptions and
labor shortages, rising inflation and increases in interest rates on the global economy could materially disrupt our business operations and impact our financial performance.
As of December 31, 2022, we have not recorded any contingencies on our consolidated balance sheets related to COVID-19. To the extent COVID-19 continues to cause dislocations in the global economy, our financial condition, results of operations, and cash flows may continue to be adversely impacted. Refer to "Note 2 - Summary of Significant Accounting Policies" for further discussion regarding COVID-19.
Note 18 – Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of our financial instruments not carried at fair value on our consolidated balance sheets at December 31, 2022 and December 31, 2021 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Cash and cash equivalents | $ | 222,030 | | | $ | 222,030 | | | $ | 343,106 | | | $ | 343,106 | |
Commercial mortgage loans, net | 8,121,109 | | | 8,083,410 | | | 7,012,312 | | | 6,945,038 | |
Subordinate loans and other lending assets, net(1) | 560,881 | | | 558,740 | | | 844,948 | | | 725,906 | |
| | | | | | | |
Secured debt arrangements, net | (5,296,825) | | | (5,296,825) | | | (4,150,268) | | | (4,150,268) | |
Term loans, net | (763,813) | | | (731,709) | | | (768,325) | | | (782,995) | |
Senior secured notes, net | (494,844) | | | (400,950) | | | (494,051) | | | (489,175) | |
2022 Notes | — | | | — | | | (343,117) | | | (347,552) | |
2023 Notes | (229,361) | | | (225,366) | | | (226,862) | | | (231,150) | |
Participations sold | (25,130) | | | (25,130) | | | (27,064) | | | (27,064) | |
| | | | | | | |
———————
(1)Includes subordinate risk retention interests in securitization vehicles with an estimated fair value that approximates their carrying value.
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, are used to discount contractual cash flows. The estimated fair values are not necessarily indicative of the amount we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. Estimates of fair value for cash and cash equivalents, convertible senior notes, net, secured debt arrangements net and Term Loans, net are measured using observable Level I inputs as defined in "Note 3 - Fair Value Disclosure." Estimates of fair value for all other financial instruments in the table above are measured using significant estimates, or unobservable Level III inputs as defined in "Note 3 - Fair Value Disclosure."
Note 19 – Net Income per Share
ASC 260, "Earnings per share" requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.
The table below presents the computation of basic and diluted net income per share of common stock for the years ended December 31, 2022, 2021 and 2020 ($ in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | 2020 |
Basic Earnings | | | | | | | | |
Net income | | | | | $ | 265,232 | | | $ | 223,515 | | $ | 18,377 | |
Less: Preferred dividends | | | | | (12,272) | | | (12,964) | | (13,540) | |
Net income available to common stockholders | | | | | $ | 252,960 | | | $ | 210,551 | | $ | 4,837 | |
Less: Dividends on participating securities | | | | | (4,132) | | | (3,877) | | (3,431) | |
Basic Earnings | | | | | $ | 248,828 | | | $ | 206,674 | | $ | 1,406 | |
| | | | | | | | |
Diluted Earnings | | | | | | | | |
Basic Earnings | | | | | $ | 248,828 | | | $ | 206,674 | | $ | 1,406 | |
Add: Dividends on participating securities | | | | | 4,132 | | | 3,877 | | — | |
Add: Interest expense on Convertible Notes | | | | | 25,385 | | | 35,020 | | — | |
Diluted Earnings | | | | | $ | 278,345 | | | $ | 245,571 | | $ | 1,406 | |
| | | | | | | | |
Number of Shares: | | | | | | | | |
Basic weighted-average shares of common stock outstanding | | | | | 140,534,635 | | | 139,869,244 | | 148,004,385 | |
Diluted weighted-average shares of common stock outstanding | | | | | 165,504,660 | | | 168,402,515 | | 148,004,385 | |
| | | | | | | | |
Earnings Per Share Attributable to Common Stockholders | | | | | | | | |
Basic | | | | | $ | 1.77 | | | $ | 1.48 | | $ | 0.01 | |
Diluted | | | | | $ | 1.68 | | | $ | 1.46 | | $ | 0.01 | |
| | | | | | | | |
The dilutive effect to earnings per share is determined using the "if-converted" method whereby interest expense on the outstanding Convertible Notes is added back to the diluted earnings per share numerator, and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the years ended December 31, 2022 and 2021, 22,314,191 and 28,533,271, weighted-average potentially issuable shares with respect to the Convertible Notes, respectively, were included in the dilutive earnings per share denominator. For the year ended December 31, 2020, 28,533,271 weighted-average potentially issuable shares with respect to the Convertible Notes were excluded from the calculation of diluted net income per share because the effect was anti-dilutive. Refer to "Note 10 - Convertible Senior Notes, Net" for further discussion.
For the year ended December 31, 2022, 2,655,833 weighted-average unvested RSUs were included in the calculation of diluted net income per share because the effect was dilutive. For the years ended December 31, 2021 and 2020, 2,456,409 and 2,030,467 weighted-average unvested RSUs, respectively, were excluded in the calculation of diluted net income per share because the effect was anti-dilutive.
Note 20 – Subsequent Events
Subsequent to the year ended December 31, 2022, the following events took place:
Investment activity: We funded approximately $51.1 million for previously closed loans. We capitalized an additional $9.3 million of construction and financing costs related to our real estate owned, held for investment.
Loan Repayments: We received approximately $23.1 million from loan repayments
Other Loan Activity: We received £72.2 million ($88.4 million assuming conversion to USD) full repayment of one of our commercial mortgage loans secured by an office property in London, UK, including all default interest accrued to date. In conjunction with the repayment we are no longer recording the previously sold subordinate interest as a secured borrowing on our consolidated balance sheet.
Apollo Commercial Real Estate Finance, Inc.
Schedule IV — Mortgage Loans on Real Estate
As of December 31, 2022
($ in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Number of Loans | | Property Type/location | | Contractual Interest Rate (1) | | Maturity Date(2) | | Periodic Payment | | Principal Balance | | Carrying Value | | Principal Amount of Mortgages Subject to Delinquent Principal or Interest |
Commercial mortgage loans individually >3% | | | | | | | | | | | | |
Loan A | | | | Retail/United Kingdom | | 6.7% | | Apr 2027 | | Interest Only | | $ | 455,732 | | | $ | 451,718 | | | $ | — | |
Loan B | | | | Retail/United Kingdom | | 6.6% | | Oct 2026 | | Interest Only | | 394,878 | | | 391,805 | | — | | — | |
Loan C | | | | Healthcare/Northeast | | 8.1% | | Mar 2027 | | Interest Only | | 374,793 | | | 370,835 | | | — | |
Loan D | | | | Mixed Use/United Kingdom | | 8.2% | | Jun 2025 | | Interest Only | | 306,366 | | | 304,655 | | | — | |
Loan E | | | | Residential/New York City | | 8.6% | | Sept 2024 | | Interest Only | | 276,610 | | | 274,105 | | | — | |
Loan F | | | | Parking Garage/Various US | | 8.3% | | May 2026 | | Interest Only | | 271,141 | | | 270,199 | | | — | |
Loan G | | | | Hotel/Spain | | 4.8% | | Aug 2024 | | Interest Only | | 334,224 | | | 334,224 | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Commercial mortgage loans individually <3% | | | | | | | | | | | | |
First Mortgage(3) | | 17 | | Hotel/Various | | 4.8%-11.6% | | 2022-2027 | | Principal and Interest/ Interest Only | | $ | 1,745,133 | | | $ | 1,739,394 | | | $ | 98,246 | |
First Mortgage(4) | | 10 | | Office/Various | | 4.6%-11.0% | | 2022-2027 | | Interest Only | | 1,534,092 | | | 1,525,489 | | | 112,429 | |
First Mortgage | | 9 | | Residential/Various | | 6.7%-8.3% | | 2023-2027 | | Principal and Interest/ Interest Only | | 805,304 | | | 801,237 | | | |
First Mortgage | | 3 | | Retail/Various | | 6.6%-8.5% | | 2023-2027 | | Interest Only | | 561,383 | | | 487,447 | | | 171,099 | |
First Mortgage | | 3 | | Mixed Use/Various | | 7.9%-9.3% | | 2023-2027 | | Interest Only | | 255,196 | | | 255,154 | | | |
First Mortgage | | 1 | | Industrial/Sweden | | 4.7% | | May 2026 | | Interest Only | | 248,064 | | | 246,409 | | | |
First Mortgage | | 1 | | Healthcare/United Kingdom | | 7.7% | | Oct 2024 | | Principal and Interest | | 154,759 | | | 153,212 | | | |
First Mortgage(5) | | 3 | | Other/Various | | 4.4%-8.8% | | 2025 to 2028 | | Interest Only | | 542,586 | | | 538,074 | | | |
Total Commercial mortgage loans | | | | | | | | $ | 8,260,261 | | | $ | 8,143,957 | | | $ | 381,774 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Number of Loans | | Property Type/location | | Contractual Interest Rate (1) | | Maturity Date(2) | | Periodic Payment | | Principal Balance | | Carrying Value | | Principal Amount of Mortgages Subject to Delinquent Principal or Interest |
Subordinate loans and other lending assets individually <3% | | | | | | | | | | | | |
Subordinate Mortgage | | 3 | | Residential/New York City | | 0.0%-13.1% | | Sep 2024 | | Principal and Interest/ Interest Only | | $ | 530,398 | | | $ | 462,198 | | | $ | 337,493 | |
Other Lending Asset | | 1 | | Healthcare/Various US | | 9.6% | | Jun 2024 | | Interest Only | | $ | 51,097 | | | $ | 51,097 | | | |
Subordinate Mortgage | | 2 | | Hotel/Various US | | 10.4%-11.5% | | 2023-2025 | | Principal and Interest/ Interest Only | | 43,511 | | | 43,462 | | | |
Subordinate Mortgage | | 1 | | Office/Midwest | | 11.0% | | Sep 2024 | | Interest Only | | 7,500 | | | 7,500 | | | |
Total Subordinate loans and other lending assets(6) | | | | | | | | $ | 632,506 | | | $ | 564,257 | | | $ | 337,493 | |
Total loans(7) | | | | | | | | $ | 8,892,767 | | | $ | 8,708,214 | | | $ | 719,267 | |
General CECL Allowance(8) | | | | | | | | | | (26,224) | | | |
Carrying value, net | | | | | | | | | | $ | 8,681,990 | | | |
———————
(1) Assumes applicable benchmark rate as of December 31, 2022 for all floating rate loans.
(2) Assumes all extension options are exercised.
(3) Includes one loan that was in maturity default as of December 31, 2022.
(4) Includes one loan that was in maturity default as of December 31, 2022 and was paid in full on January 13, 2023.
(5) Includes a loan collateralized by a portfolio of office, industrial, and retail property types.
(6) Subject to prior liens of approximately $1.3 billion.
(7) The aggregate cost for U.S. federal income tax purposes is $8.8 billion.
(8) Excludes $4.3 million of General CECL Allowance related to unfunded commitments on commercial mortgage loans, subordinate loans and other lending assets, net in 2022.
The following table summarizes the changes in the carrying amounts of our loan portfolio during 2022 and 2021 ($ in thousands):
| | | | | | | | | | | | | | |
Reconciliation of Carrying Amount of Loans | | December 31, 2022 | | December 31, 2021 |
Balance at beginning of year | | $ | 7,857,260 | | | $ | 6,496,977 | |
| | | | |
Loan fundings | | 3,624,661 | | | 3,334,062 | |
Loan repayments | | (2,214,621) | | | (1,881,211) | |
Loss on foreign currency translation | | (356,436) | | | (93,241) | |
Realized loss on investments (1) | | (24,894) | | | (20,767) | |
Transfer to real estate owned, held for sale | | (226,459) | | | (45,289) | |
Decrease in Specific CECL Allowance (2) | | 11,500 | | | 30,000 | |
Decrease in General CECL Allowance (3) | | 7,364 | | | 4,514 | |
Deferred Fees | | (46,874) | | | (42,911) | |
PIK interest, amortization of fees and other items (4) | | 50,489 | | | 75,126 | |
Balance at the close of year | | $ | 8,681,990 | | | $ | 7,857,260 | |
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1)During the year ended December 31, 2022, we recorded a realized loss on investments represented with a write-off of a previously recorded Specific CECL Allowance comprising of (i) a $17.9 million on a first mortgage loan secured by an urban predevelopment property following the sale of the underlying property, and (ii) a $7.0 million, related to a first mortgage secured by a hotel property in anticipation of consensual foreclosure in the first quarter of 2023. During the year ended December 31, 2021, we recorded a $20.0 million realized loss on investments reflecting the difference between the fair value of a hotel acquired through a deed-in-lieu of foreclosure and the amortized cost of the loan at the time of foreclosure and an $0.8 million loss on the sale of our interest in a subordinate loan secured by a mixed-use property.
2)The $11.5 million decrease during the year ended December 31, 2022 was comprised of i) a reversal and a write-off of a previously recorded Specific CECL Allowance of $53.0 million and $15.0 million, respectively, on an urban predevelopment first mortgage loan in Miami, FL and ii) a $10.0 million reversal of a previously recorded Specific CECL Allowance on a loan related to a multifamily development in Brooklyn, NY. These write-offs and reversals recorded during the year ended December 31, 2022 were offset by the Specific CECL Allowance of $66.5 million recorded in relation to a mezzanine loan secured by our interest in an ultra-luxury residential property in Manhattan, NY. The $30.0 million decrease of our Specific CECL Allowance during the year ended December 31, 2021 was comprised of i) a $20.0 million reversal of a previously recorded Specific CECL Allowance on a multifamily development loan located in Brooklyn, NY due to a more favorable market outlook as compared to when the allowance was taken and ii) a $10.0 million write-off of a previously recorded Specific CECL Allowance recorded in connection with a deed-in-lieu foreclosure on a mezzanine loan secured by an interest in a luxury hotel in Washington, D.C.
3) $4.3 million and $3.1 million as of December 31, 2022 and 2021, respectively of the General CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability on our consolidated balance sheets.
4)Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses, as well as $3.2 million and $1.4 million in cost recovery proceeds in 2022 and 2021, respectively.