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-2015.03.31-10Q

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 March 31, 2015



¨	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 April 30, 2015, there were 58,429,155 shares, par value $0.01, of the registrant’s common stock issued and outstanding.

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	Page
Part I — Financial Information
ITEM 1. Financial Statements	3
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	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	36

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Part I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands—except share and per share data)



	March 31, 2015			December 31, 2014
Assets:
Cash	$	39,962		$	40,641
Restricted cash	30,127			30,127
Securities available-for-sale, at estimated fair value	—			17,105
Securities, at estimated fair value	520,449			522,730
Securities, held-to-maturity	154,446			154,283
Commercial mortgage loans, held for investment	563,390			458,520
Subordinate loans, held for investment	672,070			561,182
Investment in unconsolidated joint venture	18,901			37,016
Derivative instrument	1,026			4,070
Interest receivable	12,634			10,829
Deferred financing costs, net	9,090			7,444
Other assets	276			1,200
Total Assets	$	2,022,371		$	1,845,147
Liabilities and Stockholders’ Equity
Liabilities:
Borrowings under repurchase agreements	$	575,433		$	622,194
Convertible senior notes, net	246,881			246,464
Participations sold	119,314			89,584
Accounts payable and accrued expenses	3,319			7,578
Payable to related party	3,341			3,240
Dividends payable	27,601			21,018
Total Liabilities	975,889			990,078
Commitments and Contingencies (see Note 15)
Stockholders’ Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 3,450,000 shares issued and outstanding ($86,250 aggregate liquidation preference)	35			35
Common stock, $0.01 par value, 450,000,000 shares authorized, 58,413,205 and 46,900,442 shares issued and outstanding, respectively	584			469
Additional paid-in-capital	1,062,064			868,035
Retained earnings (accumulated deficit)	(12,794		)	(10,485		)
Accumulated other comprehensive loss	(3,407		)	(2,985		)
Total Stockholders’ Equity	1,046,482			855,069
Total Liabilities and Stockholders’ Equity	$	2,022,371		$	1,845,147

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries

Condensed Consolidated Statement of Operations (Unaudited)

(in thousands—except share and per share data)



	Three months ended March 31,
	2015			2014
Net interest income:
Interest income from securities	$	8,287		$	2,419
Interest income from securities, held to maturity	3,045			—
Interest income from commercial mortgage loans	10,094			4,011
Interest income from subordinate loans	18,610			14,730
Interest expense	(11,482		)	(1,757		)
Net interest income	28,554			19,403
Operating expenses:
General and administrative expenses (includes $1,117 and $426 of equity based compensation in 2015 and 2014, respectively)	(2,355		)	(1,442		)
Management fees to related party	(3,341		)	(2,565		)
Total operating expenses	(5,696		)	(4,007		)
Interest income from cash balances	11			—
Realized loss on sale of securities	(443		)	—
Unrealized gain on securities	3,409			2,184
Foreign currency gain	2,722			—
Loss on derivative instruments	(3,044		)	—
Net income	25,513			17,580
Preferred dividends	(1,860		)	(1,860		)
Net income available to common stockholders	$	23,653		$	15,720
Basic and diluted net income per share of common stock	$	0.47		$	0.42
Basic weighted average shares of common stock outstanding	49,563,822			37,122,842
Diluted weighted average shares of common stock outstanding	50,171,687			37,341,050
Dividend declared per share of common stock	$	0.44		$	0.40

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

(in thousands)



	Three months ended March 31,
	2015			2014
Net income available to common stockholders	$	23,653		$	15,720
Change in net unrealized gain (loss) on securities available-for-sale	678			(17		)
Foreign currency translation adjustment	(1,100		)	—
Comprehensive income	$	23,231		$	15,703

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries

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

(in thousands—except share data)



	Preferred Stock			Common Stock			Additional Paid In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income
	Shares	Par		Shares	Par		Additional Paid In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total
Balance at January 1, 2015	3,450,000	$	35	46,900,442	$	469	$	868,035		$	(10,485	)	$	(2,985	)	$	855,069
Capital increase related to Equity Incentive Plan	—	—		12,763	*		996			—			—			996
Issuance of common stock	—	—		11,500,000	115		193,315			—			—			193,430
Offering costs	—	—		—	—		(282		)	—			—			(282		)
Net income	—	—		—	—		—			25,513			—			25,513
Change in other comprehensive loss	—	—		—	—		—			—			(422		)	(422		)
Dividends on common stock	—	—		—	—		—			(25,962		)	—			(25,962		)
Dividends on preferred stock	—	—		—	—		—			(1,860		)	—			(1,860		)
Balance at March 31, 2015	3,450,000	$	35	58,413,205	$	584	$	1,062,064		$	(12,794	)	$	(3,407	)	$	1,046,482

* Rounds to zero.

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance, Inc. and Consolidated Subsidiaries

Condensed Consolidated Statement of Cash Flows (Unaudited)

(in thousands)



	Three months ended March 31, 2015			Three months ended March 31, 2014
Cash flows provided by operating activities:
Net income	$	25,513		$	17,580
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization and (discount accretion), net	(2,162		)	(256		)
Amortization of deferred financing costs	684			190
Equity-based compensation	996			(421		)
Unrealized (gain) loss on securities	(3,409		)	(2,184		)
Foreign currency (gain) loss	3,801			—
Unrealized loss on derivative instruments	3,044			—
Realized loss on sale of security	443			—
Changes in operating assets and liabilities:
Accrued interest receivable, less purchased interest	(7,687		)	(3,125		)
Other assets	520			50
Accounts payable and accrued expenses	(4,433		)	(363		)
Payable to related party	101			(63		)
Net cash provided by operating activities	17,411			11,408
Cash flows used in investing activities:
Funding of commercial mortgage loans	(103,888		)	(24,178		)
Funding of subordinate loans	(109,659		)	—
Funding of unconsolidated joint venture	(3,929		)	—
Proceeds from sale of securities available-for-sale	17,291			—
Proceeds from sale of securities at estimated fair value	6,338			—
Proceeds from sale of investment in unconsolidated joint venture	20,794			—
Principal payments received on securities available-for-sale	—			7,785
Principal payments received on securities at estimated fair value	32			9,080
Principal payments received on commercial mortgage loans	727			243
Principal payments received on subordinate loans	666			15,407
Principal payments received on other assets	63
Net cash used in investing activities	(171,565		)	8,337
Cash flows from financing activities:
Proceeds from issuance of common stock	193,430			—
Payment of offering costs	(108		)	(117		)
Proceeds from repurchase agreement borrowings	136,730			12,000
Repayments of repurchase agreement borrowings	(183,491		)	(47,039		)
Proceeds from issuance of convertible senior notes	—			143,750
Proceeds from participations sold	30,484			—
Payment of deferred financing costs	(2,330		)	(4,627		)
Dividends on common stock	(19,380		)	(15,475		)
Dividends on preferred stock	(1,860		)	(1,860		)
Net cash provided by financing activities	153,475			86,632
Net increase in cash and cash equivalents	(679		)	106,377
Cash and cash equivalents, beginning of period	40,641			20,096
Cash and cash equivalents, end of period	$	39,962		$	126,473
Supplemental disclosure of cash flow information:
Interest paid	$	14,399		$	1,958
Supplemental disclosure of non-cash financing activities:
Dividend declared, not yet paid	$	27,601		$	16,688
Deferred financing costs, not yet paid	$	—		$	412
Offering costs payable	$	207		$	—

See notes to unaudited condensed consolidated financial statements.

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Apollo Commercial Real Estate Finance Inc. and Consolidated Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands—except share and per share data)

Note 1 – Organization

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

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

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

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, 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. Our results of operations for the quarterly period ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year or any other future period.

The Company currently operates in one business segment.

Recent Accounting Pronouncements

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

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

In August 2014, the FASB issued guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance requires that management evaluate each annual and interim reporting period whether conditions exist that give rise to substantial doubt about the entity’s ability to continue as a going concern within one year from the financial statement issuance date, and if so, provide related disclosures. Disclosures are only required if conditions give rise to substantial doubt, whether or not the substantial doubt is alleviated by management’s plans. No disclosures are required specific to going concern uncertainties if an assessment of the conditions does not give rise to substantial doubt. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. If substantial doubt is alleviated as a result of the consideration of management’s plans, a company should disclose information that enables users of financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes): (1) principal conditions that initially give rise to substantial doubt, (2) management’s evaluation of the significance of those conditions in relation to the

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company’s ability to meet its obligations, and (3) management’s plans that alleviated substantial doubt. If substantial doubt is not alleviated after considering management’s plans, disclosures should enable investors to understand the underlying conditions, and include the following: (1) a statement indicating that there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date, (2) the principal conditions that give rise to substantial doubt, (3) management’s evaluation of the significance of those conditions in relation to the company’s ability to meet its obligations, and (4) management's plans that are intended to mitigate the adverse conditions. The new guidance applies to all companies. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company's consolidated financial statements.

In February 2015, the FASB issued guidance which amends the guidance related to accounting for the consolidation of certain legal entities. The modifications impacts limited partnerships and similar legal entities, the evaluation of (i) fees paid to a decision maker or a service provider as a variable interest, (ii) fee arrangements, and (iii) related parties on the primary beneficiary determination. This guidance is effective for the first interim or annual period beginning after December 15, 2015. The Company does not anticipate that the adoption will have a material impact on its condensed consolidated financial statements.

In April 2015, the FASB issued guidance that simplifies the presentation of debt issuance costs by amending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amendments are consistent with the accounting guidance related to debt discounts. This guidance is effective for the first interim or annual period beginning after December 15, 2015. Early adoption is permitted, and the Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

Note 3 – Fair Value Disclosure

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

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

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. In accordance with GAAP, the Company elects the fair value option for these securities at the date of purchase in order to allow the Company to measure these securities at fair value with the change in estimated fair value included as a component of earnings in order to reflect the performance of investment in a timely manner.

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

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determined by comparing the contracted forward exchange rate to the current market exchange rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries. The Company’s derivative instruments are classified as Level II in the fair value hierarchy.

The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of March 31, 2015 and December 31, 2014:



	Fair Value as of March 31, 2015								Fair Value as of December 31, 2014
	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
CMBS (Available-for-Sale)	$	—	$	—	$	—	$	—	$	—	$	17,105	$	—	$	17,105
CMBS (Fair Value Option)	—		520,449		—		520,449		—		522,730		—		522,730
Derivative instruments	—		1,026		—		1,026		—		4,070		—		4,070
Total	$	—	$	521,475	$	—	$	521,475	$	—	$	543,905	$	—	$	543,905

Note 4 – Debt Securities

At March 31, 2015, all of the Company's CMBS (Fair Value Option) were pledged to secure borrowings under the Company’s master repurchase agreements with UBS AG, London Branch ("UBS") (the "UBS Facility") and Deutsche Bank AG ("DB") (the "DB Facility"). See "Note 8 - Borrowings Under Repurchase Agreements" for a description of these facilities.

During February 2015, the Company sold CMBS with an amortized cost of $24,038 resulting in a net realized loss of $443, which was comprised of realized gains of $43 and realized losses of $486. As a result of the sale, $678 was reclassified out of accumulated other comprehensive income. The sale generated proceeds of $1,341 after the repayment of $22,254 of borrowings under the Company's master repurchase agreement with Wells Fargo Bank, N.A. ("Wells Fargo") (the "Wells Facility").

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

The amortized cost and estimated fair value of the Company’s debt securities at March 31, 2015 are summarized as follows:



Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Carrying Value
CMBS (Fair Value Option)	$	520,883	$	510,740	$	10,348	$	(639	)	$	520,449
CMBS (Held-to-Maturity)	$	155,000	$	154,446	$	—	$	—		$	154,446
Total	$	675,883	$	665,186	$	10,348	$	(639	)	$	674,895

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. Additionally, all unrealized losses on securities available-for-sale at March 31, 2015 have existed for less than twelve

months. As such, management does not believe any of the securities are other than temporarily impaired.

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The amortized cost and estimated fair value of the Company’s debt securities at December 31, 2014 are summarized as follows:



Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
CMBS (Available-for-Sale)	$	17,013	$	17,783	$	—	$	(678	)	$	17,105
CMBS (Fair Value Option)	527,177		516,443		7,322		(1,035		)	522,730
CMBS (Held-to-Maturity)	$	155,000	$	154,283	$	—	$	—		$	154,283
Total	$	699,190	$	688,509	$	7,322	$	(1,713	)	$	694,118

The following table presents information about the Company's debt securities that were in an unrealized loss position at December 31, 2014:



	Unrealized Loss Position for Less than 12 months					Unrealized Loss Position for 12 months or More
Security Description	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
CMBS (Available-for-Sale)	$	—	$	—		$	17,105	$	(678	)
CMBS (Fair Value Option)	130,435		(1,019		)	6,315		(16		)
Total	$	130,435	$	(1,019	)	$	23,420	$	(694	)

The overall statistics for the Company’s CMBS (Available-for-Sale) and CMBS (Fair Value Option) investments calculated on a weighted average basis assuming no early prepayments or defaults as of March 31, 2015 and December 31, 2014 are as follows:



	March 31, 2015		December 31, 2014
Credit Ratings *	BBB- to CCC-		AAA to CCC-
Coupon	5.9	%	5.9	%
Yield	6.5	%	6.4	%
Weighted Average Life	2.1 years		2.3 years


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

The percentage vintage, property type and location of the collateral securing the Company’s CMBS (Available-for-Sale) and CMBS (Fair Value Option) investments calculated on a weighted average basis as of March 31, 2015 and December 31, 2014 are as follows:



Vintage	March 31, 2015		December 31, 2014
2005	9.8	%	9.0	%
2006	19.7		19.0
2007	61.4		63.0
2008	9.1		9.0
Total	100.0	%	100.0	%



Property Type	March 31, 2015		December 31, 2014
Office	33.2	%	33.4	%
Retail	29.2		29.1
Multifamily	13.0		13.3
Other *	24.6		24.2
Total	100.0	%	100.0	%

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

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Location	March 31, 2015		December 31, 2014
South Atlantic	23.3	%	23.2	%
Middle Atlantic	19.0		21.1
Pacific	17.1		17.0
East North Central	12.3		11.0
Other *	28.3		27.7
Total	100.0	%	100.0	%

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

Note 5 – Commercial Mortgage Loans

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



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon		Property Size
Hotel - Silver Spring, MD	Mar-10	Apr-15	$	26,000	$	24,489	$	24,488	Fixed		263 rooms
Condo Conversion – NY, NY (1)(2)	Aug-13	Sept-15	33,000		34,015		34,209		Floating		40,000 sq. ft.
Condo Construction - Potomac, MD (3)	Feb-14	Sept-16	50,000		50,000		49,469		Floating		50 units
Vacation Home Portfolio - Various (1)	Apr-14	Apr-19	101,000		100,046		99,099		Fixed		229 properties
Hotel - Philadelphia, PA (1)(4)	May-14	May-17	34,000		34,000		33,890		Floating		301 rooms
Condo Construction - Bethesda, MD (5)	Jun-14	Dec-16	21,000		21,000		20,720		Floating		40 units
Multifamily - Brooklyn, NY (1)(6)	Jul-14	Aug-16	34,500		34,500		34,681		Floating		63 units
Mixed Use - Cincinnati, OH (7)	Nov-14	May-18	25,000		25,000		23,275		Floating		65 acres
Condo Conversion - NY, NY (1)(8)	Nov-14	Dec-15	67,300		67,300		65,485		Floating		86,000 sq. ft.
Multifamily - Williston, ND (1)(4)	Nov-14	Nov-17	58,000		57,167		56,795		Floating		366 units/homes
Vacation Home Portfolio - Various U.S. (1)(4)	Nov-14	Nov-19	50,000		50,000		49,529		Fixed		24 properties
Mixed Use - Brooklyn, NY (1)(9)	Feb-15	Mar-17	72,550		72,550		71,750		Floating		330,000 sq. ft.
Total/Weighted Average			$	572,350	$	570,067	$	563,390	7.05	%


(1)	At March 31, 2015, this loan was pledged to secure borrowings under the Company’s master repurchase facilities entered into with JPMorgan Chase Bank, N.A. (the “JPMorgan Facility”) or Goldman Sachs Bank USA (the “Goldman Loan”). See "Note 8 – Borrowings Under Repurchase Agreements" for a description of these facilities.


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


(3)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee. As of March 31, 2015, the Company had $30,000 of unfunded loan commitments related to this loan.


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


(5)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee. As of March 31, 2015, the Company had $44,100 of unfunded loan commitments related to this loan.


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


(7)	This loan includes two one-year extension options subject to certain conditions and the payment of a fee. As of March 31, 2015, the Company had $140,000 of unfunded loan commitments related to this loan.


(8)	This loan includes a six-month extension options subject to certain conditions and the payment of a fee.


(9)	As of March 31, 2015, the Company had $19,950 of unfunded loan commitments related to this loan.

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The Company’s commercial mortgage loan portfolio was comprised of the following at December 31, 2014:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon		Property Size
Hotel - Silver Spring, MD (1)	Mar-10	Apr-15	$	26,000	$	24,590	$	24,557	Fixed		263 rooms
Condo Conversion – NY, NY (1)(2)	Aug-13	Sept-15	33,000		33,846		33,961		Floating		40,000 sq. ft.
Condo Construction - Potomac, MD (3)	Feb-14	Sept-16	28,000		28,000		27,520		Floating		50 units
Vacation Home Portfolio - Various	Apr-14	Apr-19	101,000		100,046		99,086		Fixed		229 properties
Hotel - Philadelphia, PA (1)(4)	May-14	May-17	34,000		34,000		33,842		Floating		301 rooms
Condo Construction - Bethesda, MD (5)	Jun-14	Dec-16	20,000		20,000		19,616		Floating		40 units
Multifamily - Brooklyn, NY (1)(6)	Jul-14	Aug-16	30,000		30,000		30,110		Floating		63 units
Mixed Use - Cincinnati, OH (7)	Nov-14	May-18	20,000		20,000		18,309		Floating		65 acres
Condo Conversion - NY, NY (1)(8)	Nov-14	Dec-15	67,300		67,300		64,714		Floating		86,000 sq. ft.
Multifamily - Williston, ND (1)(4)	Nov-14	Nov-17	58,000		57,792		57,297		Floating		366 units/homes
Vacation Home Portfolio - Various U.S. (4)	Nov-14	Nov-19	50,000		50,000		49,508		Fixed		24 properties
Total/Weighted Average			$	467,300	$	465,574	$	458,520	6.84	%


(1)	At December 31, 2014, this loan was pledged to secure borrowings under the JPMorgan Facility. See "Note 8 – Borrowings Under Repurchase Agreements" for a description of this facility.


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


(3)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee. As of December 31, 2014, the Company had $52,000 of unfunded loan commitments related to this loan.


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


(5)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee. As of December 31, 2014, the Company had $45,100 of unfunded loan commitments related to this loan.


(6)	This loan includes three one-year extension options subject to certain conditions and the payment of a fee for each extension. As of December 31, 2014, the Company had $4,500 of unfunded loan commitments related to this loan.


(7)	This loan includes two one-year extension options subject to certain conditions and the payment of a fee. As of December 31, 2014, the Company had $145,000 of unfunded loan commitments related to this loan.


(8)	This loan includes a six-month extension option subject to certain conditions and the payment of a fee.

The Company evaluates its loans for possible impairment on a quarterly basis. 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 March 31, 2015 and December 31, 2014.

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Note 6 – Subordinate Loans

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



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon
Office - Michigan	May-10	Jun-20	$	9,000	$	8,795	$	8,795	Fixed
Ski Resort - California	Apr-11	May-17	40,000		40,000		39,828		Fixed
Mixed Use – North Carolina	Jul-12	Aug-22	6,525		6,525		6,525		Fixed
Office Complex - Missouri	Sept-12	Oct-22	10,000		9,674		9,674		Fixed
Hotel Portfolio – Various (1)	Nov-12	Nov-15	50,000		33,511		33,490		Floating
Condo Construction – NY, NY (1)	Jan-13	Jul-17	60,000		78,900		78,613		Fixed
Multifamily Conversion – NY, NY (1)	Jan-13	Dec-15	18,000		14,608		14,682		Floating
Hotel Portfolio – Rochester, MN	Jan-13	Feb-18	25,000		24,407		24,407		Fixed
Warehouse Portfolio - Various	May-13	May-23	32,000		32,000		32,000		Fixed
Multifamily Conversion – NY, NY	May-13	May-15	44,000		44,000		43,991		Floating
Office Condo - NY, NY	Jul-13	Jul-22	14,000		14,000		13,604		Fixed
Condo Conversion – NY, NY (1)(2)	Aug-13	Sept-15	29,400		29,900		30,014		Floating
Mixed Use - Pittsburgh, PA (3)	Aug-13	Aug-16	22,500		22,500		22,495		Floating
Mixed Use - Various (3)	Dec-13	Dec-18	17,000		19,500		19,341		Fixed
Mixed Use - London, England	Apr-14	Sept-15	47,566		50,958		50,958		Fixed
Healthcare Portfolio - Various (4)	Jun-14	Jun-16	50,000		50,000		50,000		Floating
Hotel - NY, NY (4)	Jul-14	Jul-16	20,000		20,000		19,901		Floating
Ski Resort - Big Sky, MT	Aug-14	Sept-20	15,000		15,000		14,871		Fixed
Mixed Use - New York, NY (5)	Dec-14	Dec-17	57,410		59,027		58,095		Floating
Senior Housing - United Kingdom	Jan-15	Dec-17	80,786		80,786		80,786		Floating
Hotel - Burbank, CA	Feb-15	Jan-20	20,000		20,000		20,000		Fixed
Total/Weighted Average			$	668,187	$	674,091	$	672,070	11.10	%


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


(2)	At March 31, 2015, this loan was pledged to secure borrowings under the JPMorgan Facility. See "Note 8 – Borrowings Under Repurchase Agreements" for a description of this facility.


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


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


(5)	Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension. As of March 31, 2015, the Company had $25,090 of unfunded loan commitments related to this loan.

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The Company’s subordinate loan portfolio was comprised of the following at December 31, 2014:



Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon
Office - Michigan	May-10	Jun-20	$	9,000	$	8,813	$	8,813	Fixed
Ski Resort - California	Apr-11	May-17	40,000		40,000		39,771		Fixed
Mixed Use – North Carolina	Jul-12	Aug-22	6,525		6,525		6,525		Fixed
Office Complex - Missouri	Sept-12	Oct-22	10,000		9,711		9,711		Fixed
Hotel Portfolio – Various (1)	Nov-12	Nov-15	50,000		34,042		33,995		Floating
Condo Construction – NY, NY (1)	Jan-13	Jul-17	60,000		76,344		76,005		Fixed
Multifamily Conversion – NY, NY (1)	Jan-13	Dec-15	18,000		14,608		14,703		Floating
Hotel Portfolio – Rochester, MN	Jan-13	Feb-18	25,000		24,486		24,486		Fixed
Warehouse Portfolio - Various	May-13	May-23	32,000		32,000		32,000		Fixed
Multifamily Conversion – NY, NY (2)	May-13	Feb-15	44,000		44,000		43,989		Floating
Office Condo - NY, NY	Jul-13	Jul-22	14,000		14,000		13,596		Fixed
Condo Conversion – NY, NY (1)	Aug-13	Sept-15	29,400		29,751		29,762		Floating
Mixed Use - Pittsburgh, PA (3)	Aug-13	Aug-16	22,500		22,500		22,473		Floating
Mixed Use - Various (3)	Dec-13	Dec-18	17,000		19,464		19,294		Fixed
Mixed Use - London, England	Apr-14	Jan-15	50,009		52,355		52,355		Fixed
Healthcare Portfolio - Various (4)	Jun-14	Jun-16	50,000		50,000		50,000		Floating
Hotel - NY, NY (4)	Jul-14	Jul-16	20,000		20,000		19,870		Floating
Ski Resort - Big Sky, MT	Aug-14	Sept-20	15,000		15,000		14,861		Fixed
Mixed Use - New York, NY (5)	Dec-14	Dec-17	50,000		50,000		48,973		Floating
Total/Weighted Average			$	562,434	$	563,599	$	561,182	11.34	%


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


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


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


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


(5)	Includes two one-year extension options subject to certain conditions and the payment of a fee for each extension. As of December 31, 2014, the Company had $32,500 of unfunded loan commitments related to this loan.

During January 2014, the Company received a $15,000 principal repayment from a subordinate loan secured by a pledge of the equity interests in the owner of a New York City hotel.

The Company 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 March 31, 2015 and December 31, 2014.

Note 7 – Unconsolidated Joint Venture

On September 30, 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ Limited Partnership (“Champ LP”) following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in KBC Bank Deutschland AG ("KBC Bank"), the German subsidiary of Belgian KBC Group NV. KBC Bank specializes in corporate banking and financial services for medium-sized German companies. It also provides professional real estate financing, acquisition finance, institutional asset management and private wealth management services for German high-net-worth individuals. Following the closing of the transaction, KBC Bank was renamed Bremer Kreditbank AG and will operate under the name BKB Bank. The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 ($39,477). The Company committed to invest up to approximately €38,000 ($50,000).

In January 2015, the Company funded an additional investment of €3,331 (or $3,929) related to its investment in Champ LP. In February 2015, the Company sold approximately 48% of its ownership interest in Champ LP at cost to an investment fund managed by Apollo Global Management, LLC (together with its subsidiaries, "Apollo") for €16,314 (or $20,794) (of

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which $2,614 related to foreign exchange losses which were previously included in accumulated other comprehensive loss), reducing its unfunded commitment to Champ LP to €3,229 (or $3,465). Through its interest in Champ LP, the Company now holds an indirect ownership interest of approximately 11% in Bremer Kreditbank AG, which operates under the name BKB Bank.

The Company together with certain other affiliated investors and unaffiliated third party investors, in aggregate, own 100% of BKB Bank. The Company determined that Champ LP met the definition of a variable interest entity ("VIE") and that it was not the primary beneficiary; therefore, we did not consolidate the assets and liabilities of the partnership.

Note 8 – Borrowings Under Repurchase Agreements

At March 31, 2015 and December 31, 2014, the Company’s borrowings outstanding under the JPMorgan Facility, the UBS Facility, the DB Facility and the Goldman Loan had the following debt balances, weighted average maturities and interest rates:



	March 31, 2015						December 31, 2014
	Debt Balance		Weighted Average Remaining Maturity		Weighted Average Rate		Debt Balance		Weighted Average Remaining Maturity		Weighted Average Rate
Wells Facility borrowings	$	—	—		—	%	$	20,166	0.2 years		1.0	%	**
UBS Facility borrowings	133,899		3.5 years	*	2.7	%	133,899		3.7 years	*	2.8	%	Fixed
DB Facility borrowings	300,005		3.0 years		3.7	%	300,005		3.3 years		3.7	%	***
JPMorgan Facility borrowings	89,005		2.8 years		2.4	%	168,124		0.1 years		2.7	%	L+250
Goldman Loan	52,524		4.1 years		3.7	%	—		0		—	%	L+350
Total borrowings	$	575,433	3.0 years		3.1	%	$	622,194	3.2 years		3.2	%

*Assumes extension options are exercised.

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

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

At March 31, 2015, 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
UBS Facility borrowings *	$	—	$	132,816	$	1,083	$	—	$	133,899
DB Facility borrowings	40,476		211,328		48,201		—		300,005
JPMorgan Facility borrowings	1,117		87,888		—		—		89,005
Goldman Loan	1,804		9,859		40,861		—		52,524
Total	$	43,397	$	441,891	$	90,145	$	—	$	575,433

*Assumes extension option is exercised.

At March 31, 2015, the Company’s collateralized financings were comprised of borrowings outstanding under the UBS Facility, the DB Facility, the JPMorgan Facility and the Goldman Loan. The table below summarizes the outstanding balances at March 31, 2015, as well as the maximum and average balances for the three months ended March 31, 2015.



			For the three months ended March 31, 2015
	Balance at March 31, 2015		Maximum Month-End Balance		Average Month-End Balance
Wells Facility borrowings	$	—	$	22,254	$	10,605
UBS Facility borrowings	133,899		133,899		$	133,899
DB Facility borrowings	300,005		300,005		300,005
JPMorgan Facility borrowings	89,005		249,918		177,503
Goldman Loan	52,524		52,524		39,393
Total	$	575,433

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Goldman Loan. On January 26, 2015, the Company, through an indirect wholly-owned subsidiary, entered into the Goldman Loan. The Goldman Loan provides for a purchase price of $52,524 and a repurchase date of the earliest of: (1) April 30, 2019, (2) an early repurchase date as a result of repayment or sale of the purchased loan, or (3) an accelerated repurchase date as a result of certain events of default. Subject to the terms and conditions thereof, the Goldman Loan provides for the purchase and sale of certain participation interests in a mortgage loan secured by single-family and condominium properties. Prior to an event of default, amounts borrowed under the Goldman Loan bear interest at a spread of 3.5% plus one-month LIBOR. In addition, the Goldman Loan provides that margin calls may occur during the continuance of certain credit events if the market value of the mortgaged properties drop below an agreed upon percentage. The Goldman Loan contains affirmative and negative covenants and provisions regarding events of default that are normal and customary for similar repurchase agreements. The Company has agreed to the following restrictive covenants, among others: (1) continuing to operate in a manner that allows the Company to qualify as a REIT and (2) financial covenants, including (A) a minimum consolidated tangible net worth covenant ($750,000), (B) maximum total indebtedness to consolidated tangible net worth (3:1), (C) minimum liquidity ($15,000), (D) minimum sum of (i) cash liquidity and (ii) “near cash liquidity” (5.0% of the Company’s total recourse indebtedness), (E) minimum net income (one U.S. dollar during any four consecutive fiscal quarters) and (F) a minimum ratio of EBITDA to interest expense (1.5 to 1.0). The Company has also agreed to provide a guarantee of the obligations under the Goldman Loan.

JPMorgan Facility. On January 29, 2015, the Company, through indirect wholly-owned subsidiaries, entered into a Fourth Amended and Restated Master Repurchase Agreement (the “JPMorgan Facility”) with JPMorgan Chase Bank, National Association. The JPMorgan Facility provides for a maximum aggregate purchase price of $300,000 and has a two-year term plus a one-year extension option, exercisable at the option of the Sellers, subject to satisfaction of certain conditions. Subject to the terms and conditions thereof, the JPMorgan Facility provides for the purchase, sale and repurchase of eligible senior commercial or multifamily mortgage loans, junior commercial or multifamily mortgage loans, mezzanine loans and participation interests therein that are secured by properties located in the United States, England or Wales. Amounts borrowed under the JPMorgan Facility bear interest at spreads ranging from 2.25% to 4.75% over one-month LIBOR. Maximum advance rates under the JPMorgan Facility range from 25% to 80% on the estimated fair value of the pledged collateral depending on its loan-to-value ratio. Margin calls may occur any time the aggregate repurchase price exceeds the agreed upon advance rate multiplied by the market value of the assets by more than $250. The JPMorgan Facility contains affirmative and negative covenants and provisions regarding events of default that are normal and customary for similar repurchase facilities. The Company has agreed to the following restrictive covenants, among others: (1) continuing to operate in a manner that allows the Company to qualify as a REIT and (2) financial covenants, including (A) a minimum consolidated tangible net worth covenant ($750,000 plus 75% of the net cash proceeds of any equity issuance by the Company), (B) maximum total indebtedness to consolidated tangible net worth (3:1), or (C) minimum liquidity (the greater of 5% of the Company’s total recourse indebtedness or $15,000). The Company has agreed to provide a limited guarantee of the obligations under the JPMorgan Facility.

Wells Facility. During February 2015, the Company repaid the outstanding balance under the Wells Facility upon the sale of the pledged collateral.

The Company was in compliance with the financial covenants under its repurchase agreements at March 31, 2015 and December 31, 2014.

Note 9 – Convertible Senior Notes

On March 17, 2014, the Company issued $143,750 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "March 2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $139,037. At March 31, 2015, the March 2019 Notes had a carrying value of $139,978 and an unamortized discount of $3,772.

On August 18, 2014, the Company issued an additional $111,000 aggregate principal amount of 5.50% Convertible Senior Notes due 2019 (the "August 2019 Notes", and together with the March 2019 Notes, the "2019 Notes"), for which the Company received net proceeds, after deducting the underwriting discount and estimated offering expense payable by the Company of approximately $109,615. At March 31, 2015, the August 2019 Notes had a carrying value of $106,903 and an unamortized discount of $4,097.

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The following table summarizes the terms of the 2019 Notes.



	Principal Amount		Coupon Rate		Effective Rate (1)		Conversion Rate (2)	Maturity Date	Remaining Period of Amortization
March 2019 Notes	$	143,750	5.50	%	6.25	%	55.3649	3/15/2019	3.96 years
August 2019 Notes	$	111,000	5.50	%	6.50	%	55.3649	3/15/2019	3.96 years


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

(2)

The Company has the option to settle any conversions in cash, shares of common stock or a combination thereof. The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of 2019 Notes converted. The if-converted value of the 2019 Notes does not exceed their principal amount at March 31, 2015 since the closing market price of the Company’s common stock does not exceed the implicit conversion prices of $18.06 for the 2019 Notes.

GAAP requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. GAAP requires that the initial proceeds from the sale of the 2019 Notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Company at such time. The Company measured the fair value of the debt components of the 2019 Notes as of their issuance date based on effective interest rates. As a result, the Company attributed approximately $11,445 of the proceeds to the equity component of the 2019 Notes, which represents the excess proceeds received over the fair value of the liability component of the 2019 Notes at the date of issuance. The equity component of the 2019 Notes has been reflected within additional paid-in capital in the condensed consolidated balance sheet as of March 31, 2015. The resulting debt discount is being amortized over the period during which the 2019 Notes are expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each of the 2019 Notes will increase in subsequent reporting periods through the maturity date as the 2019 Notes accrete to their par value over the same period. The aggregate contractual interest expense was approximately $3,503 for the three months ended March 31, 2015. With respect to the amortization of the discount on the liability component of the 2019 Notes as well as the amortization of deferred financing costs, the Company reported additional non-cash interest expense of approximately $844 for the three months ended March 31, 2015.

As of March 31, 2015 potential shares of common stock contingently issuable upon the conversion of the 2019 Notes were excluded from the calculation of diluted income per share because it is management's intent and ability to settle the obligation in cash.

Note 10 – Participations Sold

Participations sold represent the interests in loans the Company originated and subsequently partially sold. The Company presents the participations sold as both assets and non-recourse liabilities because the participation does not qualify as a sale according to GAAP. The income earned on the participation sold is recorded as interest income and an identical amount is recorded as interest expense on the Company's consolidated statements of operations.

During January 2015, the Company closed a £34,519 ($51,996) floating-rate mezzanine loan secured by a portfolio of 44 senior housing facilities located throughout the United Kingdom. During February 2015, closed an additional £20,000 ($30,672) and participated that balance to an investment fund affiliated with Apollo. At March 31, 2015, the participation had a face amount of £20,000 ($29,636), a carrying amount of £20,000 ($29,636) and a cash coupon of LIBOR plus 825 basis points.

During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation in the loan. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation and classified it as CMBS (Held-to-Maturity) on its consolidated financial statements. At March 31, 2015, the participation had a face amount of $90,000, a carrying amount of $89,678 and a cash coupon of LIBOR plus 440 basis points.

Note 11 – Derivative Instruments

The Company uses forward currency contracts to economically hedge interest and principal payments due under its loans denominated in currencies other than U.S. dollars.

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The Company has not designated any of its derivative instruments as hedges under GAAP and therefore, changes in the fair value of the Company's derivative instruments are recorded directly in earnings. The following table summarizes the amounts recognized on the consolidated statements of operations related to the Company’s derivatives for the three months ended March 31, 2015 and 2014.



		Three months ended March 31,
	Location of Loss Recognized in Income	2015			2014
Forward currency contract	Loss on derivative instruments - unrealized	(3,044		)	—
Total		$	(3,044	)	$	—

The following table summarizes the gross asset amounts related to the Company's derivative instruments at March 31, 2015 and December 31, 2014.



	March 31, 2015						December 31, 2014
	Gross Amount of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet		Gross Amount of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets Presented in the Consolidated Balance Sheet
Forward currency contract	$	1,026	$	—	1,026		$	4,070	$	—	4,070
Total derivative instruments	$	1,026	$	—	$	1,026	$	4,070	$	—	$	4,070

Note 12 – 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, 2015 and is automatically renewed for successive one-year terms on each anniversary thereafter. The Management Agreement may be terminated upon expiration of the one-year extension term only upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by the Company’s independent directors in February 2015, 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 months ended March 31, 2015, the Company incurred approximately $3,341 in base management fees. For the three months ended March 31, 2014, the Company incurred approximately $2,565 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 months ended March 31, 2015, the Company recorded expenses totaling $636 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. For the three months ended March 31, 2014, the Company recorded expenses totaling $107 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. Expenses incurred by the

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Manager and reimbursed by the Company are reflected in the respective condensed 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 March 31, 2015 and December 31, 2014, respectively, is approximately $3,341 and $3,240 for base management fees incurred but not yet paid.

Unconsolidated Joint Venture

On September 30, 2014, the Company, through a wholly owned subsidiary, acquired a 59% ownership interest in Champ LP following which a wholly-owned subsidiary of Champ LP then acquired a 35% ownership interest in KBC Bank, the German subsidiary of Belgian KBC Group NV. The Company acquired its ownership interest in Champ LP for an initial purchase price paid at closing of approximately €30,724 ($39,477). The Company committed to invest up to approximately €38,000 ($50,000).

In January 2015, the Company funded an additional investment of €3,331 (or $3,929) related to its investment in Champ LP. In February 2015, the Company sold approximately 48% of its ownership interest in Champ LP at cost to an account managed by Apollo for approximately €16,314 (or $20,794), reducing its unfunded commitment to Champ LP to €3,229 (or $3,465). Through its interest in Champ LP, the Company now holds an indirect ownership interest of approximately 11% in Bremer Kreditbank AG, which operates under the name BKB Bank. The Company together with certain other affiliated investors and unaffiliated third party investors, in aggregate, own 100% of BKB Bank.

Note 13 – Share-Based Payments

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

The Company recognized stock-based compensation expense of $1,117 for the three months ended March 31, 2015 related to restricted stock and RSU vesting. The Company recognized stock-based compensation expense of $426 for the three months ended March 31, 2014 related to restricted stock and RSU vesting. The following table summarizes the activity related to restricted common stock and RSUs during the three months ended March 31, 2015:

Type

Date

Restricted Stock

RSUs

Estimate Fair Value
on Grant Date

Initial Vesting

Final Vesting

Outstanding at December 31, 2014

274,114

610,254

Grant

January 2015

—

8,000

$132

December 2015

December 2017

Forfeiture

January 2015

—

(5,000

)

n/a

Cancelled upon delivery

March 2015

—

(20,000

)

n/a

Outstanding at March 31, 2015

274,114

593,254

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Below is a summary of expected restricted common stock and RSU vesting dates as of March 31, 2015.



Vesting Date	Shares Vesting	RSU Vesting	Total Awards
April 2015	3,699	—	3,699
July 2015	3,300	—	3,300
July 2015	250	—	250
October 2015	3,300	—	3,300
December 2015	15,588	197,751	213,339
January 2016	3,299	—	3,299
April 2016	3,300	—	3,300
July 2016	2,828	—	2,828
October 2016	2,827	—	2,827
December 2016	12,255	134,417	146,672
January 2017	2,411	—	2,411
April 2017	2,414	—	2,414
July 2017	1,250	—	1,250
October 2017	1,250	—	1,250
December 2017	12,258	131,009	143,267
	70,229	463,177	533,406

At March 31, 2015, the Company had unrecognized compensation expense of approximately $1,142 and $7,323, respectively, related to the vesting of restricted stock awards and RSUs noted in the table above.

RSU Deliveries

During the three months ended March 31, 2015, the Company delivered 12,763 shares of common stock for 20,000 vested RSUs. The Company allows holders of RSUs 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 holder, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid-in-capital on the consolidated statement of changes in stockholders' equity. The adjustment was $122 for the three months ended March 31, 2015, and is included as a component of the capital decrease related to the Company's equity incentive plan in the consolidated statement of changes in stockholders’ equity.

During the three months ended March 31, 2014, the Company delivered 237,008 shares of common stock for 288,750 vested RSUs. The Company allows RSU participants to settle their tax liabilities with a reduction of their share delivery from the originally granted and vested RSUs. The amount, when agreed to by the participant, results in a cash payment to the Manager related to this tax liability and a corresponding adjustment to additional paid in capital on the consolidated statement of changes in stockholders' equity. The adjustment was $847 for three months ended March 31, 2014.

Note 14 – Stockholders’ Equity

Common Stock Offering. During the first quarter of 2015, the Company completed a follow-on public offering of 11,500,000 shares of its common stock, including the full exercise of the underwriters’ option to purchase additional shares, at a price of $16.82 per share. The aggregate net proceeds from the offering, including proceeds from the sale of the additional shares, were approximately $193,148 after deducting estimated offering expenses payable by the Company.

Dividends. For 2015, the Company declared the following dividends on its common stock:



Declaration Date	Record Date	Payment Date	Amount
February 25, 2015	March 31, 2015	April 15, 2015	$	0.44

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For 2015, the Company declared the following dividends on its 8.625% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”):



Declaration Date	Record Date	Payment Date	Amount
March 16, 2015	March 31, 2015	April 15, 2015	$	0.5391

Note 15 – Commitments and Contingencies

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

In February 2015, the Company sold approximately 48% of its ownership interest in Champ LP at cost to an account managed by Apollo for approximately €16,314 (or $20,794), reducing its unfunded commitment to Champ LP to €3,229 (or $3,465). Through its interest in Champ LP, the Company now holds an indirect ownership interest of approximately 11% in Bremer Kreditbank AG, which operates under the name BKB Bank.

Loan Commitments. As described in "Note 5 - Commercial Mortgage Loans" and "Note 6 - Subordinate Loans", respectively, at March 31, 2015, the Company had $234,050 of unfunded commitments related to its commercial mortgage loan portfolio and $25,090 of unfunded commitments related to its subordinate loan portfolio.

Note 16 – 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 March 31, 2015 and December 31, 2014:



	March 31, 2015						December 31, 2014
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Cash and cash equivalents	$	39,962		$	39,962		$	40,641		$	40,641
Restricted cash	30,127			30,127			30,127			30,127
Securities, held-to-maturity	154,446			154,984			154,283			154,980
Commercial first mortgage loans	563,390			570,002			458,520			465,510
Subordinate loans	672,070			675,154			561,182			566,385
Borrowings under repurchase agreements	(575,433		)	(575,453		)	(622,194		)	(621,269		)
Convertible senior notes, net	(246,881		)	(255,705		)	(246,464		)	(254,605		)
Participations sold	(119,314		)	(119,626		)	(89,584		)	(89,995		)

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 securities, held-to-maturity, commercial first mortgage loans, subordinate loans, borrowings under repurchase agreements, convertible senior notes and participations sold are carried at amortized cost on the condensed consolidated financial statements and are classified as Level III in the fair value hierarchy.

Note 17 – 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

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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 basic and diluted net (loss) income per share of common stock using the two-class method for the three months ended March 31, 2015 and 2014:



	For the three months ended March 31,
	2015			2014
Numerator:
Net income	$	25,513		$	17,580
Preferred dividends	(1,860		)	(1,860		)
Net income available to common stockholders	23,653			15,720
Dividends declared on common stock	(25,702		)	(14,850		)
Dividends on participating securities	(261		)	(86		)
Net income (loss) attributable to common stockholders	$	(2,310	)	$	784
Denominator:
Basic weighted average shares of common stock outstanding	49,563,822			37,122,842
Diluted weighted average shares of common stock outstanding	50,171,687			37,341,050
Basic and diluted net income per weighted average share of common stock
Distributable Earnings	$	0.52		$	0.40
Undistributed income (loss)	$	(0.05	)	$	0.02
Basic and diluted net income per share of common stock	$	0.47		$	0.42

For 2015, 607,865 unvested RSUs were excluded from the calculation of diluted net income per share because the effect was anti-dilutive.

Note 18 – Subsequent Events

Dividends. On April 28, 2015, the Company declared a dividend of $0.44 per share of common stock, which is payable on July 15, 2015 to common stockholders of record on June 30, 2015.

Repayments. During April 2015, the Company received the full repayment of a first mortgage loan secured by a hotel in Silver Springs, Maryland.

Investment Activity. During April 2015, the Company funded $8,000 related to previously closed loans.

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

FORWARD-LOOKING INFORMATION

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

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. See “Item 1A - Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

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

The Company is externally managed and advised by the Manager, an indirect subsidiary of Apollo, a leading global alternative investment manager with a contrarian and value oriented investment approach in private equity, credit and real estate with assets under management of approximately $160 billion as of December 31, 2014.

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

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Market Overview

The commercial real estate lending market has recovered from the downturn experienced as part of the correction in the global financial markets which began in mid-2007. Property values in many markets and across multiple property types have recovered and the lending market is functioning with both established and new entrants. Based on the current market dynamics, including 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. The Company will continue to focus on underlying real estate value, and transactions that benefit from the Company’s ability to execute complex and sophisticated transactions.

During and immediately following the financial crisis, due to the prevalence of lenders granting extensions across the commercial mortgage loan industry, the demand for new capital to refinance maturing commercial mortgage debt was somewhat tempered. This trend has abated to a certain extent in more recent periods as many borrowers have 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.

Recent Federal Reserve announcements have indicated a belief that labor markets continue to strengthen, while inflation remains muted. As a result, it is expected that the Federal Reserve will maintain the accommodative monetary policy in the near term - while revisiting the policy at upcoming Federal Open Market Committee meetings. As a result, the low interest rate environment coupled with the potential for near term interest rate increases is expected to persist, remain attractive to borrowers and is projected to continue to drive significant refinancing and acquisition activity across all property types during 2015.

New-issue CMBS volume continued to grow in 2014 with total issuance in the U.S. of approximately $94 billion, a 9% increase from the $86 billion issued during the prior year. Issuance in 2013 increased approximately 78% over 2012 and 163% over 2011. While not directly related to many of the transactions we often pursue, the active CMBS market can be viewed as an indication of the strength and recovery of the commercial real estate lending market.

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

Critical Accounting Policies

A summary of the Company’s accounting policies is set forth in its Annual Report on Form 10-K for the year ended December 31, 2014 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

(currency amounts in thousands—except per share data)

Investments

The following table sets forth certain information regarding the Company’s investments at March 31, 2015:



Description	Face Amount		Amortized Cost		Weighted Average Yield		Remaining Weighted Average Life (years)	Debt		Cost of Funds		Remaining Debt Term (years) (1)	Equity at cost (2)		Current Weighted Average Underwritten IRR (3) (4)		Levered Weighted Average Underwritten IRR (3) (4)
First mortgages	$	570,067	$	563,390	8.6	%	3.2	$	141,528	2.9	%	3.3	$	421,862	11.0	%	16.4	%
Subordinate loans (5)	674,091		672,070		11.7		3.5	1		3.7		3.3	642,433		13.1		13.2
CMBS, held-to-maturity (6)	65,000		64,768		11.8		4.1	—		—		—	64,768		11.8		11.8
CMBS	520,883		510,740		6.5		2.1	433,904		3.4		3.2	106,963		16.2		16.2
Total/Weighted Average	$	1,830,041	$	1,810,968	9.3	%	3.0	$	575,433	3.1	%	3.0	$	1,236,026	12.6	%	14.2	%

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


(2)	CMBS includes $30,127 of restricted cash related to the UBS Facility.

(3)

Internal rate of return ("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. The underwritten 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 remains constant over the remaining term. With respect to certain loans, the underwritten 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