Edgar Filing: Apollo Commercial Real Estate Finance, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company

ARI-2013.9.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________

(Mark One)



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

For the quarterly period ended September 30, 2013



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

For the transition period from to

Commission File Number: 001-34452

__________________________________

Apollo Commercial Real Estate Finance, Inc.

(Exact name of registrant as specified in its charter)

__________________________________



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

Apollo Commercial Real Estate Finance, Inc.

c/o Apollo Global Management, LLC

9 West 57th Street, 43rd Floor,

New York, New York 10019

(Address of registrant’s principal executive offices)

(212) 515–3200

(Registrant’s telephone number, including area code)

__________________________________

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

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

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

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

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

As of November 4, 2013, there were 36,883,467 shares, par value $0.01, of the registrant’s common stock issued and outstanding.

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	Page
Part I — Financial Information
ITEM 1. Financial Statements	3
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	34
ITEM 4. Controls and Procedures	35
Part II — Other Information
ITEM 1. Legal Proceedings	36
ITEM 1A. Risk Factors	36
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
ITEM 3. Defaults Upon Senior Securities	36
ITEM 4. Mine Safety Disclosures	36
ITEM 5. Other Information	36
ITEM 6. Exhibits	37

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Part I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands—except share and per share data)



	September 30, 2013			December 31, 2012
Assets:
Cash	$	86,824		$	108,619
Restricted cash	15,794			—
Securities available-for-sale, at estimated fair value	37,559			67,079
Securities, at estimated fair value	250,660			211,809
Commercial mortgage loans, held for investment	160,893			142,921
Subordinate loans, held for investment	394,554			246,246
Repurchase agreements, held for investment	—			6,598
Interest receivable	5,673			4,277
Deferred financing costs, net	794			678
Other assets	—			203
Total Assets	$	952,751		$	788,430
Liabilities and Stockholders’ Equity
Liabilities:
Borrowings under repurchase agreements	$	227,167		$	225,158
Investments purchased, not yet settled	21,299			—
Derivative instruments, net	—			155
Accounts payable and accrued expenses	1,719			1,265
Payable to related party	2,656			2,037
Dividends payable	17,023			12,891
Total Liabilities	269,864			241,506
Commitments and Contingencies (see Note 13)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and 3,450,000 shares issued and outstanding in 2013 and 2012	35			35
Common stock, $0.01 par value, 450,000,000 shares authorized, 36,883,467 and 28,044,106 shares issued and outstanding in 2013 and 2012, respectively	369			280
Additional paid-in-capital	696,337			546,065
Retained earnings (accumulated deficit)	(13,235		)	574
Accumulated other comprehensive loss	(619		)	(30		)
Total Stockholders’ Equity	682,887			546,924
Total Liabilities and Stockholders’ Equity	$	952,751		$	788,430

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Operations (Unaudited)

(in thousands—except share and per share data)



	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Net interest income:
Interest income from securities	$	2,533		$	3,674		$	8,634		$	12,227
Interest income from commercial mortgage loans	4,954			2,825			12,222			7,851
Interest income from subordinate loans	12,184			6,144			35,137			17,316
Interest income from repurchase agreements	—			2,361			2			5,920
Interest expense	(885		)	(1,768		)	(2,909		)	(6,939		)
Net interest income	18,786			13,236			53,086			36,375
Operating expenses:
General and administrative expenses (includes $784 and $2,095 of equity based compensation in 2013 and $1,276 and $3,244 in 2012, respectively)	(1,793		)	(2,430		)	(5,126		)	(7,229		)
Management fees to related party	(2,625		)	(1,518		)	(7,384		)	(4,099		)
Total operating expenses	(4,418		)	(3,948		)	(12,510		)	(11,328		)
Interest income from cash balances	3			—			19			1
Realized gain on sale of securities	—			—			—			262
Unrealized gain (loss) on securities	(1,472		)	3,010			(3,973		)	6,473
Loss on derivative instruments (includes $25 and $155 of unrealized gains in 2013 and $40 and $228 of unrealized gains in 2012, respectively)	1			(87		)	(1		)	(569		)
Net income	12,900			12,211			36,621			31,214
Preferred dividends	(1,859		)	(1,219		)	(5,580		)	(1,219		)
Net income available to common stockholders	$	11,041		$	10,992		$	31,041		$	29,995
Basic and diluted net income per share of common stock	$	0.29		$	0.52		$	0.88		$	1.43
Basic weighted average shares of common stock outstanding	36,883,002			20,571,478			34,647,941			20,567,772
Diluted weighted average shares of common stock outstanding	37,379,469			20,992,312			35,103,285			20,983,429
Dividend declared per share of common stock	$	0.40		$	0.40		$	1.20		$	1.20

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

(in thousands)



	Three months ended September 30,					Nine months ended September 30,
	2013		2012			2013			2012
Net income available to common stockholders	$	11,041	$	10,992		$	31,041		$	29,995
Change in net unrealized gain (loss) on securities available-for-sale	43		(876		)	(589		)	(464		)
Comprehensive income	$	11,084	$	10,116		$	30,452		$	29,531

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

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

(in thousands—except share data)



	Preferred Stock			Common Stock			Additional Paid In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income
	Shares	Par		Shares	Par		Additional Paid In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total
Balance at January 1, 2013	3,450,000	$	35	28,044,106	$	280	$	546,065		$	574		$	(30	)	$	546,924
Capital increase related to Equity Incentive Plan	—	—		—	—		2,065			—			—			2,065
Issuance of restricted common stock	—	—		34,361	*		—			—			—			—
Issuance of common stock	—	—		8,805,000	89		148,715			—			—			148,804
Offering costs	—	—		—	—		(508		)	—			—			(508		)
Net income	—	—		—	—		—			36,621			—			36,621
Change in net unrealized gain on securities available-for-sale	—	—		—	—		—			—			(589		)	(589		)
Dividends on common stock	—	—		—	—		—			(44,850		)	—			(44,850		)
Dividends on preferred stock	—	—		—	—		—			(5,580		)	—			(5,580		)
Balance at September 30, 2013	3,450,000	$	35	36,883,467	$	369	$	696,337		$	(13,235	)	$	(619	)	$	682,887


*	Rounds to zero.

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows (Unaudited)

(in thousands)



	Nine months ended September 30, 2013			Nine months ended September 30, 2012
Cash flows provided by operating activities:
Net income	$	36,621		$	31,214
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization and (discount accretion), net	(4,181		)	569
Amortization of deferred financing costs	639			1,551
Equity-based compensation	2,095			3,244
Unrealized (gain) loss on securities	3,973			(6,473		)
Unrealized gain on derivative instruments	(155		)	(228		)
Realized gain on sale of security	—			(262		)
Changes in operating assets and liabilities:
Accrued interest receivable, less purchased interest	(6,441		)	2,608
Other assets	203			(190		)
Accounts payable and accrued expenses	509			405
Payable to related party	588			222
Net cash provided by operating activities	33,851			32,660
Cash flows used in investing activities:
Proceeds from sale of securities available-for-sale	—			121,338
Proceeds from sale of securities at estimated fair value	—			16,918
Fees received from commercial mortgage loans	280			—
Funding of securities at estimated fair value	(70,490		)	(70,676		)
Funding of commercial mortgage loans	(32,643		)	(17,883		)
Funding of subordinate loans	(213,515		)	(46,180		)
Principal payments received on securities available-for-sale	28,485			99,191
Principal payments received on securities at estimated fair value	49,164			92,009
Principal payments received on commercial mortgage loans	17,898			24,541
Principal payments received on subordinate loans	71,173			26
Principal payments received on repurchase agreements	6,598			36,464
Net cash provided by (used in) investing activities	(143,050		)	255,748
Cash flows from financing activities:
Proceeds from issuance of preferred stock	—			86,250
Proceeds from issuance of common stock	148,804			—
Payment of offering costs	(814		)	(3,083		)
Repayments of TALF borrowings	—			(251,327		)
Proceeds from repurchase agreement borrowings	70,195			313,860
Repayments of repurchase agreement borrowings	(68,187		)	(361,590		)
Increase in restricted cash related to financing activities	(15,794		)	—
Deferred financing costs	(504		)	(1,097		)
Dividends on common stock	(40,717		)	(24,995		)
Dividends on preferred stock	(5,579		)	—
Net cash provided by (used in) financing activities	87,404			(241,982		)
Net increase (decrease) in cash and cash equivalents	(21,795		)	46,426
Cash and cash equivalents, beginning of period	108,619			21,568
Cash and cash equivalents, end of period	$	86,824		$	67,994
Supplemental disclosure of cash flow information:
Interest paid	$	2,335		$	5,872
Supplemental disclosure of non-cash financing activities:
Dividend declared, not yet paid	$	17,023		$	10,114
Deferred financing costs, not yet paid	$	250		$	—
Offering costs payable	$	—		$	338

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands—except share and per share data)

Note 1 – Organization

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

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

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

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included.

The Company currently operates in one business segment.

Recent Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (the “FASB”) issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (Topic 210), Balance Sheet. The update addresses implementation issues about ASU 2011-11 and applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The guidance is effective January 1, 2013 and is to be applied retrospectively. This guidance does not amend when the Company currently offsets its derivative positions. As a result, the update did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued an update which includes amendments that require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income ("OCI") on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other required disclosures that provide additional detail about those amounts. The new requirement presents information on amounts reclassified out of accumulated OCI and their corresponding effect on net income in one place or in some cases, provides for cross-references to related footnote disclosures. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. During the three and nine months ended September 30, 2013, the Company had no amounts reclassified into or out of OCI.

In June 2013, the FASB issued guidance to change the assessment of whether an entity is an investment company by developing a new two-tiered approach that requires an entity to possess certain fundamental characteristics while allowing judgment in assessing certain typical characteristics. The fundamental characteristics that an investment company is required to have include the following: (1) it obtains funds from one or more investors and provides the investor(s) with investment management services; (2) it commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both; and (3) it does not obtain returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests. The typical characteristics of an investment company that an entity should consider before concluding whether it is an investment company include the following: (1) it has

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more than one investment; (2) it has more than one investor; (3) it has investors that are not related parties of the parent or the investment manager; (4) it has ownership interests in the form of equity or partnership interests; and (5) it manages substantially all of its investments on a fair value basis. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. The guidance includes disclosure requirements about an entity's status as an investment company and financial support provided or contractually required to be provided by an investment company to its investees. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. Earlier application is prohibited. The ASU prohibits REITs from qualifying for investment company accounting under ASC 946, as such, we have determined that we will not meet the definition of an investment company under this ASU when adopted.

Note 3 – Fair Value Disclosure

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

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

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

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

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

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

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

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



	Fair Value as of September 30, 2013
	Level I		Level II		Level III		Total
CMBS (Available-for-Sale)	$	—	$	37,559	$	—	$	37,559
CMBS (Fair Value Option)	—		179,978		—		179,978
CMBS – Hilton (Fair Value Option) *	—		70,682		—		70,682
Total	$	—	$	288,219	$	—	$	288,219

*The obligors are certain special purpose entities formed in 2010 to hold substantially all of the assets of Hilton Worldwide, Inc. (the “Hilton CMBS”).

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The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of December 31, 2012:



	Fair Value as of December 31, 2012
	Level I		Level II			Level III		Total
CMBS (Available-for-Sale)	$	—	$	67,079		$	—	$	67,079
CMBS (Fair Value Option)	—		138,248			—		138,248
CMBS – Hilton (Fair Value Option)	—		73,561			—		73,561
Interest rate swaps	—		(156		)	—		(156		)
Interest rate caps	—		1			—		1
Total	$	—	$	278,733		$	—	$	278,733

Note 4 – Debt Securities

At September 30, 2013, all of the Company's CMBS were pledged to secure borrowings under the Company’s master repurchase agreements with Wells Fargo Bank, N.A. (“Wells Fargo”) (the “Wells Facility”) and UBS AG, London Branch ("UBS") (the "UBS Facility"). (See Note 8 for a description of these facilities).

During 2013, the Company purchased CMBS with an aggregate face amount of $92,279 and an aggregate purchase price of $91,391. The CMBS were financed under the UBS Facility and the Company elected the Fair Value Option for these securities.

The amortized cost and estimated fair value of the Company’s debt securities at September 30, 2013 are summarized as follows:



Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
CMBS (Available-for-Sale)	$	36,925	$	38,178	$	—	$	(619	)	$	37,559
CMBS (Fair Value Option)	180,365		179,841		372		(235		)	179,978
CMBS – Hilton (Fair Value Option)	70,682		69,587		1,095		—			70,682
Total	$	287,972	$	287,606	$	1,467	$	(854	)	$	288,219

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

The amortized cost and estimated fair value of the Company’s debt securities at December 31, 2012 are summarized as follows:



Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
CMBS (Available-for-Sale)	$	65,410	$	67,109	$	249	$	(279	)	$	67,079
CMBS (Fair Value Option)	134,694		136,354		2,061		(167		)	138,248
CMBS – Hilton (Fair Value Option)	73,239		70,250		3,311		—			73,561
Total	$	273,343	$	273,713	$	5,621	$	(446	)	$	278,888

The Hilton CMBS has a current interest rate of one-month London InterBank Offered Rate (“LIBOR”)+2.30%, which increases to LIBOR+3.30% on November 12, 2013 and LIBOR+3.80% on November 12, 2014. The Hilton CMBS receives principal repayments according to a schedule that is approximately equivalent to a 16-year amortization schedule and has a yield of 5.6%.

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The overall statistics for the Company’s CMBS investments (excluding the Hilton CMBS) calculated on a weighted average basis assuming no early prepayments or defaults as of September 30, 2013 and December 31, 2012 are as follows:



	September 30, 2013		December 31, 2012
Credit Ratings *	AAA-CCC		AAA
Coupon	5.8	%	5.6	%
Yield	5.3	%	4.1	%
Weighted Average Life	2.2 years		1.8 years


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

The percentage vintage, property type and location of the collateral securing the Company’s CMBS investments (excluding the Hilton CMBS) calculated on a weighted average basis as of September 30, 2013 and December 31, 2012 are as follows:



Vintage	September 30, 2013		December 31, 2012
2006	—	%	1	%
2007	100		99
Total	100	%	100	%



Property Type	September 30, 2013		December 31, 2012
Office	40.0	%	40.5	%
Retail	22.1		23.2
Hotel	13.0		10.5
Multifamily	12.3		12.9
Other *	12.6		12.9
Total	100	%	100	%

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



Location	September 30, 2013		December 31, 2012
Middle Atlantic	22.9	%	21.4	%
Pacific	21.7		23.8
South Atlantic	21.1		21.8
Other *	34.3		33.0
Total	100	%	100	%

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

Note 5 – Commercial Mortgage Loans

The Company’s commercial mortgage loan portfolio was comprised of the following at September 30, 2013:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon		Property Size
Hotel - NY, NY	Jan-10	Feb-15	$	32,000	$	31,385	$	31,385	Fixed		151 rooms
Office Condo (Headquarters) - NY, NY	Feb-10	Feb-15	28,000		27,235		27,235		Fixed		73,419 sq. ft.
Hotel - Silver Spring, MD	Mar-10	Apr-15	26,000		25,033		24,840		Fixed		263 rooms
Condo Conversion – NY, NY (1)	Dec-12	Jan-15	45,000		45,000		44,732		Floating		119,000 sq. ft.
Condo Conversion – NY, NY (2)	Aug-13	Sept-15	33,000		33,000		32,701		Floating		40,000 sq. ft.
Total/Weighted Average			$	164,000	$	161,653	$	160,893	8.83	%

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


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

During March 2013, the Company consented to the transfer of the controlling ownership of the borrower under the Silver Spring, Maryland loan. In conjunction with its consent, the Company received a $280 fee, which will be recognized over the remaining life of the loan.

During September 2013, two senior sub-participation interests in a first mortgage loan which was secured by over 20 acres of land in South Boston, Massachusetts were repaid at par. The senior sub-participation interests were purchased at 78% of par (including a 3% brokerage fee). Upon the repayment, the Company realized an internal rate of return ("IRR") of 25% on its investment. For a description of how the IRR is calculated, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Conditions and Results of Operations—Investments”.

The Company’s commercial mortgage loan portfolio was comprised of the following at December 31, 2012:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon		Property Size
Hotel - NY, NY	Jan-10	Feb-15	$	32,000	$	31,571	$	31,571	Fixed		151 rooms
Office Condo (Headquarters) - NY, NY	Feb-10	Feb-15	28,000		27,419		27,419		Fixed		73,419 sq. ft.
Hotel - Silver Spring, MD	Mar-10	Apr-15	26,000		25,273		25,273		Fixed		263 rooms
Mixed Use – South Boston, MA (1)	Apr-12	Dec-13	23,844		17,287		14,105		Floating		20 acres
Condo Conversion – NY, NY (2)	Dec-12	Jan-15	45,000		45,000		44,553		Fixed		119,000 sq. ft.
Total/Weighted Average			$	154,844	$	146,550	$	142,921	7.82	%


(1)	This loan is a senior sub-participation interest in a $120,000 first mortgage. In December 2012, the borrower exercised a one-year extension option which was subject to repayment of $33,000 of the entire first mortgage loan (of which the Company received its pro rata portion) and the payment of a fee on the outstanding balance of the entire first mortgage loan.


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

The Company evaluates its loans for possible impairment on a quarterly basis. The Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations are sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. The Company has determined that an allowance for loan losses was not necessary at September 30, 2013 and December 31, 2012.

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Note 6 – Subordinate Loans

The Company’s subordinate loan portfolio was comprised of the following at September 30, 2013:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon
Office - Michigan	May-10	Jun-20	$	9,000	$	8,879	$	8,879	Fixed
Ski Resort - California	Apr-11	May-17	40,000		40,000		39,812		Fixed
Hotel Portfolio – New York (1)	Aug-11	July-14	25,000		25,000		25,000		Floating
Retail Center – Virginia (2)	Oct-11	Oct-14	25,000		22,216		22,216		Fixed
Hotel– New York (3)	Jan-12	Feb-14	15,000		15,000		15,156		Fixed
Mixed Use – North Carolina	Jul-12	Jul-22	6,525		6,525		6,525		Fixed
Office Complex - Missouri	Sept-12	Oct-22	10,000		9,883		9,883		Fixed
Hotel Portfolio – Various (3)	Nov-12	Nov-15	50,000		48,697		48,616		Floating
Condo Conversion – NY, NY (4)	Dec-12	Jan-15	350		350		—		Floating
Condo Construction – NY, NY (3)	Jan-13	Jul-17	60,000		64,612		64,094		Fixed
Multifamily Conversion – NY, NY (3)	Jan-13	Dec-14	18,000		18,000		17,889		Floating
Hotel Portfolio – Rochester, MN	Jan-13	Feb-18	25,000		24,840		24,840		Fixed
Warehouse Portfolio - Various	May-13	May-23	32,000		32,000		32,000		Fixed
Multifamily Conversion – NY, NY (5)	May-13	Jun-14	44,000		44,000		43,781		Floating
Office Condo - NY, NY	Jul-13	Jul-22	14,000		14,000		13,557		Fixed
Condo Conversion – NY, NY (6)	Aug-13	Sept-15	294		294		—		Floating
Mixed Use - Pittsburgh, PA (7)	Aug-13	Aug-16	22,500		22,500		22,306		Floating
Total/Weighted Average			$	396,669	$	396,796	$	394,554	12.04	%


(1)	Includes two one-year extension options subject to certain conditions and the payment of a fee for the fourth and fifth year extensions.


(2)	Includes two one-year extension options subject to certain conditions.


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


(4)	Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension. As of September 30, 2013, the Company had $34,650 of unfunded loan commitments related to this loan.


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


(6)	Includes a one-year extension option subject to certain conditions and the payment of an extension fee. As of September 30, 2013, the Company had $29,106 of unfunded loan commitments related to this loan.


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

In February 2013, the Company received principal repayment on two mezzanine loans totaling $50,000 secured by a portfolio of retail shopping centers located throughout the United States. In connection with the repayment, the Company received a yield maintenance payment totaling $2,500. With the yield maintenance payment, the Company realized a 15% IRR on its mezzanine loan investment. For a description of how the IRR is calculated, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition and Results of Operations – Investments”.

In June 2013, the Company received the repayment of a $15,000 mezzanine loan secured by a hotel in New York City. In connection with the repayment, the Company received a yield maintenance payment totaling $1,233. With the yield maintenance payment, the Company realized a 19% IRR on its mezzanine loan investment. For a description of how the IRR is calculated, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition and Results of Operations – Investments”.

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The Company’s subordinate loan portfolio was comprised of the following at December 31, 2012:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon
Senior Mezz - Retail - Various	Dec-09	Dec-19	$	30,000	$	30,000	$	30,000	Fixed
Junior Mezz - Retail - Various	Dec-09	Dec-19	20,000		20,000		20,000		Fixed
Office - Michigan	May-10	Jun-20	9,000		8,912		8,912		Fixed
Ski Resort - California	Apr-11	May-17	40,000		40,000		39,831		Fixed
Hotel Portfolio – New York (1)	Aug-11	July-13	25,000		25,000		25,000		Floating
Retail Center – Virginia (2)	Oct-11	Oct-14	25,000		26,243		26,243		Fixed
Hotel– New York (3)	Jan-12	Feb-14	15,000		15,000		15,013		Fixed
Hotel– New York (4)	Mar-12	Mar-14	15,000		15,000		15,000		Floating
Mixed Use – North Carolina	Jul-12	Jul-22	6,525		6,525		6,525		Fixed
Office Complex - Missouri	Sept-12	Oct-22	10,000		9,979		9,979		Fixed
Hotel Portfolio - Various (5)	Nov-12	Nov-15	50,000		49,950		49,743		Floating
Condo Conversion – NY, NY (6)	Dec-12	Jan-15	350		350		—		Floating
Total/Weighted Average			$	245,875	$	246,959	$	246,246	12.46	%


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


(2)	Includes two one-year extension options subject to certain conditions.


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


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


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


(6)	Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension. As of December 31, 2012, the Company had $34,650 of unfunded loan commitments related to this loan.

The Company evaluates its loans for possible impairment on a quarterly basis. See “Note 5 – Commercial Mortgage Loans” for a summary of the metrics reviewed. The Company has determined that an allowance for loan loss was not necessary at September 30, 2013 and December 31, 2012.

Note 7 – Repurchase Agreement

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

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

In January 2013, the repurchase agreement was repaid in full. Upon the repayment, the Company realized a 17% IRR on its investment. For a description of how the IRR is calculated, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Conditions and Results of Operations—Investments”.

Note 8 – Borrowings

At September 30, 2013 and December 31, 2012, the Company had borrowings outstanding under the Company’s master repurchase agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) (the “JPMorgan Facility”), the Wells Facility and the UBS Facility.

At September 30, 2013 and December 31, 2012, the Company’s borrowings had the following debt balances, weighted average maturities and interest rates:

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	September 30, 2013						December 31, 2012
	Debt Balance		Weighted Average Remaining Maturity		Weighted Average Rate		Debt Balance		Weighted Average Remaining Maturity		Weighted Average Rate
Wells Facility borrowings	$	156,969	0.9 years		1.4	%	$	225,155	1.1 years	*	1.8	%	**
UBS Facility borrowings	70,195		5.0 years	*	2.9	%	n/a		n/a		n/a		Fixed
JPMorgan Facility borrowings	3		1.3 years	*	2.7	%	3		0.0 years		2.7	%	L+250
Total borrowings	$	227,167	2.2 years		1.9	%	$	225,158	1.1 years		1.8	%


*	Assumes extension options are exercised.


**	At December 31, 2012, borrowings outstanding under the Wells Facility bore interest at LIBOR plus 125 basis points, 150 basis points or 235 basis points depending on the collateral pledged. At September 30, 2013, borrowings outstanding under the Wells Facility bore interest at LIBOR plus 105 basis points or 175 basis points depending on the collateral pledged.

At September 30, 2013, the Company’s borrowings had the following remaining maturities:



	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Wells Facility borrowings	$	156,969	$	—	$	—	$	—	$	156,969
UBS Facility borrowings *	—		—		70,195		—		70,195
JPMorgan Facility borrowings *	—		3		—		—		3
Total	$	156,969	$	3	$	70,195	$	—	$	227,167


*	Assumes extension options are exercised.

At September 30, 2013, the Company’s collateralized financings were comprised of borrowings outstanding under the JPMorgan Facility, the UBS Facility and the Wells Facility. The table below summarizes the outstanding balances at September 30, 2013, as well as the maximum and average balances for the nine months ended September 30, 2013.



			For the nine months ended September 30, 2013
	Balance at September 30, 2013		Maximum Month-End Balance		Average Month-End Balance
Wells Facility borrowings	$	156,969	$	225,156	$	197,146
UBS Facility borrowings	70,195		70,195		7,020
JPMorgan Facility borrowings	3		3		3
Total	$	227,167

During September 2013, the Company through an indirect wholly-owned subsidiary entered into the UBS Facility with UBS pursuant to which the Company may borrow up to $133,333 in order to finance the acquisition of CMBS. The UBS Facility has a term of four years, with a one-year extension available at our option, subject to certain restrictions. Advances under the UBS Facility accrue interest at a per annum pricing rate equal to a spread of 1.55% per annum over the rate implied by the fixed rate bid under a fixed for floating interest rate swap for the receipt of payments indexed to six-month US Dollar LIBOR. The Company borrows 100% of the estimated fair value of the collateral pledged and posts margin equal to 22.5% of that borrowing amount in cash. The margin posted is classified as restricted cash on the Company's condensed consolidated balance sheets. Additionally, beginning on the 121st day following the closing date and depending on the utilization rate of the facility, a portion of the undrawn amount may be subject to non-use fees. The UBS Facility contains customary terms and conditions for repurchase facilities of this type and financial covenants to be met by the Company, including a minimum net asset value covenant (which shall not be less than an amount equal to $500,000 and a maximum total debt to consolidated tangible net worth covenant (3:1)). The Company has agreed to provide a full guarantee of the obligations of its indirect wholly-owned subsidiary under the UBS Facility.

In February 2013, the Company, through two of the Company’s subsidiaries, entered into a Second Amended and Restated Master Repurchase Agreement with JPMorgan (the “Amended JPMorgan Master Repurchase Agreement”). The Amended JPMorgan Master Repurchase Agreement extended the maturity date of the JPMorgan Facility to January 31, 2014, with an option to further extend the maturity date for 364 days, subject to the Company’s satisfaction of certain customary

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conditions. The interest rate on the JPMorgan Facility is LIBOR+2.5%. The Company paid JPMorgan an upfront structuring fee of 0.50% of the facility amount for the first year of the term and, if the 364-day extension option is exercised, it will be required to pay an extension fee of 0.25% of the facility amount. The Company has agreed to provide a full guarantee of the obligations of its borrower subsidiaries under the Amended JPMorgan Master Repurchase Agreement.

In February 2013, the Company amended the Wells Facility to reduce the interest rate as follows: (i) with respect to the outstanding borrowings used to provide financing for the AAA-rated CMBS, the interest rate was reduced to LIBOR+1.05% from LIBOR+1.25%-1.50% (depending on the collateral pledged); and (ii) with respect to the outstanding borrowings used to provide financing for the Hilton CMBS, the interest rate was reduced to LIBOR+1.75% from LIBOR+2.35%. In addition, the maturity date of the Wells Facility with respect to the outstanding borrowings used to provide financing for the AAA-rated CMBS was extended to March 2014 and the Maximum Amount (as defined in the Wells Facility) was reduced to the outstanding balance of $212,343. The portion available to finance the Hilton CMBS matures in November 2014 and may be extended for an additional year upon the payment of an extension fee equal to 0.50% on the then aggregate outstanding repurchase price for all such assets.

The Company was in compliance with the financial covenants under its repurchase agreements at September 30, 2013 and December 31, 2012.

Note 9 – Derivative Instruments

From time to time, the Company uses interest rate swaps and caps to manage exposure to variable cash flows on portions of its borrowings under repurchase agreements. Some of the Company’s repurchase agreements bear interest at a LIBOR-based variable rate and increases in LIBOR could negatively impact earnings. Interest rate swap and cap agreements allow the Company to receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure.

The Company entered into interest rate swaps and forward-starting caps in an effort to economically hedge a portion of its floating-rate interest payments due under the Wells Facility as well as potential extensions of the collateral securing the Wells Facility borrowings. All of the Company's derivative instruments matured during the third quarter of 2013. The Company’s derivative instruments consist of the following at December 31, 2012:



		December 31, 2012
	Balance Sheet Location	Notional Value			Estimated Fair Value
Interest rate swaps	Derivative instruments	$	80,881		$	(156	)
Interest rate caps	Derivative instruments	203,248		*	1
Total derivative instruments					$	(155	)


*	Represents the notional values at December 31, 2012, but does not include forward-starting notionals.

The Company has an agreement with its derivative counterparty that contains a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The following table summarizes the amounts recognized on the consolidated statements of operations related to the Company’s derivatives for the three and nine months ended September 30, 2013 and 2012.



		Three months ended September 30,						Nine months ended September 30,
	Location of Loss Recognized in Income	2013			2012			2013			2012
Interest rate swaps	Loss on derivative instruments – realized *	$	(24	)	$	(127	)	$	(156	)	$	(796	)
Interest rate swaps	Gain on derivative instruments – unrealized	25			50			155			414
Interest rate caps	Loss on derivative instruments - unrealized	—			(10		)	—			(187		)
Total		$	1		$	(87	)	$	(1	)	$	(569	)


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

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The following table summarizes the gross asset and liability amounts related to the Company’s derivatives at December 31, 2012.



	December 31, 2012
	Gross Amount of Assets Recognized as Liabilities		Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Liabilities Presented in the Statement of Financial Position
Interest rate swaps	$	—	$	(156	)	$	(156	)
Interest rate caps	1		—			1
Total derivative instruments	$	1	$	(156	)	$	(155	)

Note 10 – Related Party Transactions

Management Agreement

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

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

The current term of the Management Agreement expires on September 29, 2014 and shall be automatically renewed for successive one-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by the Company’s independent directors on March 12, 2013 with respect to the Management Agreement, which included a discussion of the Manager’s performance and the level of the management fees thereunder, the Company determined not to seek termination of the Management Agreement.

For the three and nine months ended September 30, 2013, respectively, the Company incurred approximately $2,625 and $7,384 in base management fees. For the three and nine months ended September 30, 2012, respectively, the Company incurred approximately $1,518 and $4,099 in base management fees. In addition to the base management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company or for certain services provided by the Manager to the Company. For the three and nine months ended September 30, 2013, respectively, the Company recorded expenses totaling $208 and $542 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. For the three and nine months ended September 30, 2012, respectively, the Company recorded expenses totaling $203 and $721 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. Expenses incurred by the Manager and reimbursed by the Company are reflected in the respective consolidated statement of operations expense category or the consolidated balance sheet based on the nature of the item.

Included in payable to related party on the consolidated balance sheet at September 30, 2013 is approximately $2,625 for base management fees incurred but not yet paid and $31 related to a payment due to the Manager in connection with a restricted stock unit ("RSU") delivery during 2013. Included in payable to related party on the consolidated balance sheet at December 31, 2012 is approximately $2,037 for base management fees incurred but not yet paid.

KBC Bank Deutschland AG

In September 2013, the Company announced that it has entered into an agreement to invest up to approximately €38,000 ($50,000) in a limited partnership (the "KBCD Partnership"), a wholly-owned subsidiary of which has agreed to acquire, alongside certain third party purchasers, in aggregate all of the shares of KBC Bank Deutschland AG (“KBCD”), the German

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subsidiary of Belgian KBC Group NV. The general partner and the other limited partners in the KBCD Partnership are indirect subsidiaries of or are indirectly managed by Apollo Global Management, LLC (“Apollo”), the indirect parent company of the Company's external manager, ACREFI Management, LLC. The acquisition is subject to antitrust and regulatory approval, which is expected to take approximately nine months. Consequently, there is no assurance that the acquisition will close.

As of December 31, 2012, KBCD had total assets of approximately €2,607,000. KBCD specializes in corporate banking and financial services for medium-sized German companies. KBCD also is active in real estate financing, acquisition finance, institutional cash, interest and currency management and private wealth management for German high net worth individuals. KBCD’s existing real estate loan portfolio is focused on development and investment financing, primarily in Germany, across a number of property sectors.

The Company's limited partnership interest in the KBCD Partnership is expected to represent approximately 21% of the indirect ownership of KBCD. Upon closing of the KBCD acquisition it is expected that the KBCD Partnership will incur a structuring fee payable to an indirect subsidiary of Apollo equal to approximately 1.62% of the equity commitments to the KBCD Partnership. In addition, a subsidiary of the KBCD Partnership will be entitled to acquire additional shares in KBCD representing up to 10% of KBCD in connection with certain exit events, based on the achievement of certain rates of return on the investments by the KBCD Partnership and the other direct and indirect acquirers of KBCD; the Company’s indirect interest in KBCD will be diluted in connection with any such acquisition.

Note 11 – Share-Based Payments

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

The Company recognized stock-based compensation expense of $784 and $2,095 for the three and nine months ended September 30, 2013, respectively, related to restricted stock and RSU vesting. The Company recognized stock-based compensation expense of $1,276 and $3,244 for the three and nine months ended September 30, 2012, respectively, related to restricted stock and RSU vesting. The following table summarizes the grants of restricted common stock and RSUs during the nine months ended September 30, 2013:

Type

Date

Restricted Stock

RSUs

Estimate Fair Value
on Grant Date

Initial Vesting

Final Vesting

Grant

February 2013

20,000

—

352

December 2013

December 2015

Grant

February 2013

—

180,000

3,166

December 2013

December 2015

Grant

April 2013

11,304

—

200

July 2013

April 2016

Grant

May 2013

—

15,000

261

December 2013

December 2015

Forfeiture *

June 2013

—

(5,000

)

n/a

Grant

September 2013

—

10,000

153

September 2013

Total

31,304

200,000

* Represents RSUs forfeited by a former employee of the Manager in connection with such employee’s resignation from the

Manager.

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Below is a summary of expected restricted common stock and RSU vesting dates as of September 30, 2013.



Vesting Date	Shares Vesting	RSU Vesting	Total Awards
October 2013	2,925	416	3,341
December 2013	6,664	63,327	69,991
January 2014	2,504	93,335	95,839
March 2014	—	6,667	6,667
April 2014	2,508	417	2,925
July 2014	1,740	—	1,740
July 2014	500	—	500
October 2014	1,736	—	1,736
December 2014	6,668	63,332	70,000
January 2015	1,744	—	1,744
March 2015	—	6,667	6,667
April 2015	1,744	—	1,744
July 2015	944	—	944
July 2015	500	—	500
October 2015	944	—	944
December 2015	6,668	63,341	70,009
January 2016	944	—	944
April 2016	944	—	944
	39,677	297,502	337,179

Note 12 – Stockholders’ Equity

Dividends. For 2013, the Company declared the following dividends on its common stock:



Declaration Date	Record Date	Payment Date	Amount
February 27, 2013	March 28, 2013	April 12, 2013	$	0.40
May 1, 2013	June 28, 2013	July 12, 2013	$	0.40
July 31, 2013	September 30, 2013	October 11, 2013	$	0.40

For 2013, the Company declared the following dividends on its 8.625% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”):



Declaration Date	Record Date	Payment Date	Amount
March 15, 2013	March 28, 2013	April 15, 2013	$	0.5391
June 12, 2013	June 28, 2013	July 15, 2013	$	0.5391
September 16, 2013	September 30, 2013	October 15, 2013	$	0.5391

Common Offering. During March 2013, the Company completed a follow-on public offering of 8,805,000 shares of its common stock, including the partial exercise of the underwriters’ option to purchase additional shares, at a price of $16.90 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $148,333 after deducting estimated offering expenses payable by the Company.

ATM Program. In May 2013, the Company entered into an ATM Equity Offering Sales Agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated and JMP Securities LLC (the "Agents"), relating to shares of the Company's common stock. In accordance with the terms of the agreement, the Company may offer and sell shares of common stock having an aggregate offering price of up to $100,000 from time to time through the Agents. Sales of the shares, if any, will be made by means of ordinary brokers' transactions or otherwise at market prices prevailing at the time of sale, at prices related to

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prevailing market prices or at negotiated prices, or as otherwise agreed with the applicable Agent. To date, the Company has not directed the Agents to sell any shares.

Stock Repurchase Program. In July 2013, the Company's board of directors approved a stock repurchase program to authorize the Company to repurchase up to an aggregate of $50,000 of its shares of common stock. To date, the Company has not repurchased any shares pursuant to the stock repurchase program.

Note 13 – Commitments and Contingencies

KBC Bank Deutschland AG. In September 2013, the Company, together with other affiliates of Apollo, reached an agreement to make an investment in an entity that has agreed to acquire a minority participation in KBCD. The Company committed to invest up to approximately $50,000 (€38,000), representing approximately 21% of the ownership in KBCD. The acquisition is subject to antitrust and regulatory approval, which is expected to take approximately nine months. Consequently, there is no assurance that the acquisition will close.

Loan Commitments. As described in Note 6, at September 30, 2013 and December 31, 2012, the Company had $34,650 of unfunded loan commitments related to the condominium conversion loan that closed in December 2012. At September 30, 2013, the Company had $29,106 of unfunded loan commitments related to the condominium conversion loan that closed in August 2013.

Note 14 – Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the consolidated balance sheet at September 30, 2013 and December 31, 2012:



	September 30, 2013						December 31, 2012
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Cash and cash equivalents	$	86,824		$	86,824		$	108,619		$	108,619
Restricted cash	15,794			15,794			—			—
Commercial first mortgage loans	160,893			165,063			142,921			150,144
Subordinate loans	394,554			400,099			246,246			250,520
Repurchase agreements	—			—			6,598			6,598
Borrowings under repurchase agreements	(227,167		)	(227,175		)	(225,158		)	(225,158		)

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

Note 15 – Net Income per Share

GAAP requires use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.

The remaining earnings are allocated to common stockholders and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding shares of common stock and all potential shares of common stock assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential shares of common stock.

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The table below presents basic and diluted net (loss) income per share of common stock using the two-class method for the three and nine months ended September 30, 2013 and 2012:



	For the three months ended September 30,						For the nine months ended September 30,
	2013			2012			2013			2012
Numerator:
Net income	$	12,900		$	12,211		$	36,621		$	31,214
Preferred dividends	(1,859		)	(1,219		)	(5,580		)	(1,219		)
Net income available to common stockholders	11,041			10,992			31,041			29,995
Dividends declared on common stock	(14,753		)	(8,228		)	(44,253		)	(16,453		)
Dividends on participating securities	(202		)	(168		)	(596		)	(337		)
Net income (loss) attributable to common stockholders	$	(3,914	)	$	2,596		$	(13,808	)	$	13,205
Denominator:
Basic weighted average shares of common stock outstanding	36,883,002			20,571,478			34,647,941			20,567,772
Diluted weighted average shares of common stock outstanding	37,379,469			20,992,312			35,103,285			20,983,429
Basic and diluted net income (loss) per weighted average share of common stock
Distributable Earnings	$	0.40		$	0.40		$	1.28		$	0.80
Undistributed income (loss)	$	(0.11	)	$	0.12		$	(0.40	)	$	0.63
Basic and diluted net income per share of common stock	$	0.29		$	0.52		$	0.88		$	1.43

Note 16 – Subsequent Events

Dividends. On November 4, 2013, the Company declared a dividend of $0.40 per share of common stock, which is payable on January 13, 2014 to common stockholders of record on December 31, 2013.

Investment Activity. During October 2013, the Company purchased $47,000 of mezzanine participations secured by a pledge of the equity interests in a borrower that owns a healthcare portfolio consisting of 193 skilled nursing facilities, long-term acute care hospitals and senior housing facilities. The mezzanine participations, which the Company purchased at par, have a remaining nine-month term and are part of a $92,000 floating-rate senior mezzanine loan. The Company’s loan basis, inclusive of cash held for collateral, represents an underwritten loan-to-value ("LTV") of 58%. The mezzanine participations were underwritten to generate an IRR of approximately 12%. For a description of how the IRR is calculated, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Conditions and Results of Operations—Investments”.

During fourth quarter of 2013, the Company fully funded the $34,650 remaining commitment related to the condominium conversion loan that closed in December 2012.

During the fourth quarter of 2013, the Company deployed $4,049 of equity to acquire additional legacy CMBS originally rated AAA, with an aggregate purchase price of $17,994 and a weighted average life of approximately 3.6 years. To finance the purchase of the CMBS, the Company used $17,994 of borrowings under the UBS Facility and pledged $4,049 of cash.

Loan Repayment. During October 2013, the Company received a full principal repayment from a $25,000 mezzanine loan secured by a portfolio of hotels in New York City. The Company realized a 12% IRR on its investment.

Election of Director - On November 4, 2013, the Board of Directors elected Scott Prince as an independent director of the Board. Mr. Prince also was elected as a member of the Audit Committee of the Board.

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

FORWARD-LOOKING INFORMATION

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

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. See “Item 1A - Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

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

The Company is externally managed and advised by the Manager, an indirect subsidiary of Apollo Global Management, LLC, (together with its subsidiaries, “Apollo”), a leading global alternative investment manager with a contrarian and value oriented investment approach in private equity, credit and real estate with assets under management of approximately $113 billion as of June 30, 2013.

The Manager is led by an experienced team of senior real estate professionals who have significant experience in commercial property investing, financing and ownership. The Manager benefits from the investment, finance and managerial expertise of Apollo’s private equity, credit and real estate investment professionals. The Company believes its relationship with Apollo provides the Company with significant advantages in sourcing, evaluating, underwriting and managing investments in the Company’s target assets.

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Market Overview

The commercial real estate lending market continues to recover from the downturn experienced as part of the correction in the global financial markets which began in mid-2007. However, as Property values have recovered to peak levels according to certain metrics, the lending market has yet to fully return to levels seen during the period leading up to 2007. Based on the current market dynamics, including over $1 trillion of commercial real estate debt scheduled to mature through 2017, there remains a compelling opportunity for the Company to invest capital in its target assets at attractive risk adjusted returns.

During and immediately following the financial crisis, due to the prevalence of lenders granting extensions across the commercial mortgage loan industry, the demand for new capital to refinance maturing commercial mortgage debt was somewhat tempered. This trend has abated to a certain extent in more recent periods as many borrowers have begun to refinance legacy loans and pursue new acquisitions. While the frequency of extensions and modifications had a meaningful impact on the timing of loan maturities, the Company believes the next phase will involve rising volumes of commercial mortgage lending activity which should allow lenders to capitalize on the impending maturity wall.

At the end of the second quarter of 2013, many market participants expected the Federal Reserve to begin tapering its asset purchases towards the end of the year. However, economic indicators and recent events have delayed the expectation of any tapering, resulting in a projected low-interest rate environment through the end of 2013 and at least into the beginning of 2014. It is expected that the low interest rate environment will remain attractive to borrowers and will continue to drive significant refinancing activity across all property types during the remainder of 2013 and into 2014.

There has also been a continued growth and recovery in the CMBS market. In 2012, approximately $48 billion of CMBS were issued in the United States, an increase of approximately 48% over 2011. In the first three quarters of 2013, approximately $60.5 billion of CMBS were issued in the United States, approximately 2.0 times the volume issued during the first three quarters of 2012. We believe the continued growth and recovery of the CMBS market is evidence that the lending market for commercial real estate has largely stabilized since the financial crisis.

However, current volumes of CMBS issuance are still moderate relative to the peak of the market, which saw more than $229 billion in CMBS issuance in 2007. We perceive that lenders still appear to be focused on stabilized cash flowing assets with loan-to-value ratios lower than peak. As a result, we expect to continue to see opportunities to originate mezzanine and first mortgage financings with respect to those parts of the financing capital structure which are unsuitable to be sold as part of a CMBS offering.

Critical Accounting Policies

A summary of the Company’s accounting policies is set forth in its Annual Report on Form 10-K for the year ended December 31, 2012 under “Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical accounting policies and use of estimates.”

Financial Condition and Results of Operations

(in thousands—except share and per share data)

Investment Activity

Investment activity. In January 2013, the Company provided a $60,000 mezzanine loan commitment ($56,099 of which has been funded to date) secured by a pledge of preferred equity interests in the owner of a to-be-developed 352,624 net saleable square foot, 57-story, 146-unit condominium tower located in the TriBeCa neighborhood of New York City. The Company has funded $56,099 of financing to date and expects to provide an additional $3,901 within six months following the initial loan closing. When fully funded and based upon current presales of units, the Company’s loan basis is expected to represent an underwritten loan-to-net sellout of approximately 48%. The mezzanine loan has a term of 54 months with one extension option of 12-months and has been underwritten to generate an IRR of approximately 16%. See “—Investments” below for a discussion of IRR.

In February 2013, the Company provided an $18,000 mezzanine loan secured by a pledge of the equity interests in the owner of two buildings in midtown Manhattan. The buildings contain a total of 181,637 rentable square feet that is being converted into 215 multifamily rental units. The mezzanine loan is part of a $90,000, three-year (two-year initial term with one one-year extension option) interest-only, floating rate financing comprised of the mezzanine loan and a $72,000 first mortgage loan. When the first mortgage loan is fully funded, the Company expects that the mezzanine loan will have a loan-to-value (“LTV”) of approximately 60% and the mezzanine loan has been underwritten to generate an IRR of approximately 13%. See “—Investments” below for a discussion of IRR.

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In February 2013, the Company provided a $25,000 mezzanine loan secured by a pledge of the equity interests in the owner of a portfolio of four hotels totaling 1,231 rooms located in Rochester, Minnesota. The hotels are within walking distance of the Mayo Clinic, an internationally renowned health care facility that treats over one million patients annually from around the world. The mezzanine loan is part of a $145,000 five-year, fixed rate loan, comprised of a $120,000 first mortgage loan and the mezzanine loan, which was provided in connection with the acquisition of the portfolio. The mezzanine loan has an appraised LTV of approximately 69% and has been underwritten to generate an IRR of approximately 12%. See “—Investments” below for a discussion of IRR.

In May 2013, the Company provided a $32,000 mezzanine loan secured by a pledge of the equity interests in a borrower that owns a portfolio of 15 warehouse facilities, totaling 2.8 million square feet, spanning nine states. The mezzanine loan is part of a $322,000, 10-year fixed rate loan comprised of a $220,000 first mortgage loan (with a 25-year amortization schedule), a $70,000 senior mezzanine loan and the Company's $32,000 junior mezzanine loan. The mezzanine loan has an appraised LTV of 75% and has been underwritten to generate an IRR of approximately 12%. See “—Investments” below for a discussion of IRR.

In May 2013, the Company provided a $44,000 mezzanine loan secured by the pledge of the equity interests in a borrower that acquired five adjacent commercial buildings totaling approximately 411,000 gross square feet that are expected to be converted into multifamily rental apartments in the Gramercy Park neighborhood of New York City. The mezzanine loan is part of a $128,000, fifteen-month (one-year initial term with one three-month extension option) floating rate loan comprised of a $84,000 first mortgage and the Company's $44,000 mezzanine loan. The mezzanine loan has an appraised LTV of 78% and has been underwritten to generate an IRR of approximately 14%. See “—Investments” below for a discussion of IRR.

In July 2013, the Company provided a $14,000 mezzanine loan (purchased for $13,551 or approximately 97% of face value) secured by a pledge of the equity interest in a borrower that owns the office component of a 432,717 square foot building located in downtown New York City. The mezzanine loan is part of a $105,000, 10-year fixed rate loan (with 9 years remaining) comprised of a $91,000 first mortgage loan and the Company's $14,000 mezzanine loan. The mezzanine loan has an underwritten LTV of 70% and has been underwritten to generate an IRR of approximately 13%. See “—Investments” above for a discussion of IRR.

In August 2013, the Company provided a $22,500 mezzanine loan secured by a pledge of the equity interest in a borrower that owns a mixed use property located in the central business district of Pittsburgh, PA and consists of (i) a 27-story multi-tenant office building, (ii) an adjoining 616-key convention center hotel and (iii) a 479-space underground parking garage. The mezzanine loan is part of a $105,000, five-year (three-year initial term with two one-year extension options)floating rate loan comprised of an $82,500 first mortgage loan and the Company's $22,500 mezzanine loan. The mezzanine loan has an appraised LTV of 69% and has been underwritten to generate an IRR of approximately 12%. See “—Investments” above for a discussion of IRR.

In August 2013, the Company provided a $62,400 whole loan, which is split into a $33,000 first mortgage and a $29,400 mezzanine loan secured by a pledge of the equity interests in a borrower that owns an eight-story commercial building in the Greenwich Village section of New York City. The whole loan will fund the conversion of the existing building into a 12-story luxury residential condominium consisting of approximately 37,000 square feet comprising eight residential units and approximately 3,600 square feet of ground-floor retail space. The whole loan has a two year term, including one 12-month extension option, at the borrower’s option, subject to certain conditions. On a fully funded basis, the whole loan represents an appraised loan-to-net-sellout of 55%. The whole loan has been underwritten to generate an IRR of approximately 14%. See “—Investments” above for a discussion of IRR.

In September 2013, the Company deployed $20,563 of equity to acquire legacy CMBS originally rated AAA with an aggregate face amount of $92,279 and a weighted average life of approximately 3.8 years. The Company financed the balance utilizing $91,391 of borrowings under the UBS Facility and additionally pledged $20,563 of cash. See "Liquidity and Capital Resources" below for a description of the UBS Facility. The CMBS investments have been underwritten to generate a weighted average IRR of approximately 15%. See “—Investments” above for a discussion of IRR.

Investments

The following table sets forth certain information regarding the Company’s investments at September 30, 2013:

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Description	Face Amount		Amortized Cost		Weighted Average Yield		Remaining Weighted Average Life (years)	Debt		Cost of Funds		Remaining Debt Term (years) (1)	Equity at cost (2)		Current Weighted Average IRR (3)		Levered Weighted Average IRR (4)
First mortgages	$	161,653	$	160,893	9.4	%	2.2	$	3	2.7	%	1.3	$	160,890	10.7	%	14.5	%
Subordinate loans	396,796		394,554		12.7		4.1	—		—		—	394,554		13.4		13.4
CMBS	217,290		218,019		5.3		2.2	180,626		1.9		2.2	36,760		15.4		15.4
CMBS - Hilton	70,682		69,587		12.3		0.1	46,538		1.9		2.1	23,049		16.6		16.6
Total	$	846,421	$	843,053	10.2	%	3.0	$	227,167	1.9	%	2.2	$	615,253	12.9	%	13.9	%


(1)	Assumes extension options on the Wells Facility, the UBS Facility and JPMorgan Facility are exercised. See “—Liquidity and Capital Resources - Borrowings Under Various Financing Arrangements” below for a discussion of the Company's repurchase agreements.


(2)	Includes $15,794 of restricted cash related to the UBS Facility and $16,427 of future borrowings related to unsettled trades at September 30, 2013.

(3)

The internal rates of return (“IRR”) for the investments shown in the above table reflect the returns underwritten by the Manager, calculated on a weighted average basis assuming no dispositions, early prepayments or defaults but assuming that extension options are exercised and that the cost of borrowings and derivative instruments under the Wells Facility remains constant over the remaining terms and extension terms under this facility. With respect to certain loans, the IRR calculation assumes certain estimates with respect to the timing and magnitude of future fundings for the remaining commitments and associated loan repayments, and assumes no defaults. IRR is the annualized effective compounded return rate that accounts for the time-value of money and represents the rate of return on an investment over a holding period expressed as a percentage of the investment. It is the discount rate that makes the net present value of all cash outflows (the costs of investment) equal to the net present value of cash inflows (returns on investment). It is derived from the negative and positive cash flows resulting from or produced by each transaction (or for a transaction involving more than one investment, cash flows resulting from or produced by each of the investments), whether positive, such as investment returns, or negative, such as transaction expenses or other costs of investment, taking into account the dates on which such cash flows occurred or are expected to occur, and compounding interest accordingly. There can be no assurance that the actual IRRs will equal the underwritten IRRs shown in the table. See “Item 1A—Risk Factors—The Company may not achieve its underwritten internal rate of return on its investments which may lead to future returns that may be significantly lower than anticipated” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of some of the factors that could adversely impact the returns received by the Company from the investments shown in the table or elsewhere in this quarterly report over time.

(4)

Substantially all of the Company’s borrowings under the JPMorgan Facility were repaid upon the closing of the Company’s Series A Preferred Stock offering in August 2012. The Company’s ability to achieve its underwritten leveraged weighted average IRR with regard to its portfolio of first mortgage loans is additionally dependent upon the Company reborrowing approximately $53,000 under the JPMorgan Facility or any replacement facility. Without such reborrowing, the leveraged weighted average IRRs will be as indicated in the current weighted average IRR column above.

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Net Income Available to Common Stockholders

For the three and nine months ended September 30, 2013, respectively, the Company’s net income available to common stockholders was $11,041, or $0.29 per share, and $31,041, or $0.88 per share. For the three and nine months ended September 30, 2012, respectively, the Company’s net income available to common stockholders was $10,992, or $0.52 per share, and $29,995, or $1.43 per share.

Net Interest Income

The following table sets forth certain information regarding the Company’s net investment income for the three and nine months ended September 30, 2013 and 2012:



	Three months ended September 30,											Nine months ended September 30,
	2013			2012			Change (amount)			Change (%)		2013			2012			Change (amount)			Change (%)
Interest income from:
Securities	$	2,533		$	3,674		$	(1,141	)	(31.1	)%	$	8,634		$	12,227		$	(3,593	)	(29.4	)%
Commercial mortgage loans	4,954			2,825			2,129			75.4	%	12,222			7,851			4,371			55.7	%
Subordinate loans	12,184			6,144			6,040			98.3	%	35,137			17,316			17,821			102.9	%
Repurchase agreements	—			2,361			(2,361		)	(100.0	)%	2			5,920			(5,918		)	(100.0	)%
Interest expense	(885		)	(1,768		)	883			(49.9	)%	(2,909		)	(6,939		)