Apollo Commercial Real Estate Finance Inc

Previous wording

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Current wording

and Analysis of Financial Condition and Results of Operations

Previous wording

We are externally managed and advised by the Manager, an indirect subsidiary of Apollo, a global, high-growth alternative asset manager with assets under management of approximately $650.8 billion as of December 31, 2023.

Current wording

We are externally managed and advised by the Manager, an indirect subsidiary of Apollo, a global, high-growth alternative asset manager with assets under management of approximately $696.3 billion as of June 30, 2024.

Previous wording

For the three months ended March 31, 2024 and 2023, our net income (loss) available to common stockholders was $(107.6) million, or $(0.76) per diluted share of common stock, and $45.8 million, or $0.32 per diluted share of common stock, respectively.

Current wording

For the three months ended June 30, 2024 and 2023, our net income (loss) available to common stockholders was $32.7 million, or $0.23 per diluted share of common stock, and ($86.5) million, or ($0.62) per diluted share of common stock, respectively.

Previous wording

For the three months ended March 31, 2024, we recorded a net loss related to real estate owned of $0.7 million, compared to net income of $5.3 million for the three months ended December 31, 2023. The net loss was primarily due to an increase in depreciation relating to the Atlanta Hotel as a result of reclassification to held for investment as of March 31, 2024. On the date of reclassification, we recorded $3.6 million in depreciation, representing the amount that would have been recorded had the asset remained as held for investment throughout 2023 and in the first quarter of 2024. The decrease was also due to the seasonality of the D.C. Hotel and Atlanta Hotel's operations which led to $2.3 million lower net income from operations, prior to depreciation, during the three months ended March 31, 2024 as compared to the three months ended December 31, 2023. Refer to "Note 5 - Real Estate Owned" for full discussion of the reclassification and operations related to real estate owned.

Current wording

For the three months ended June 30, 2024, we recorded net income related to real estate owned of $5.3 million, compared to a net loss of $0.7 million for the three months ended March 31, 2024. The increase in net income was primarily due to the seasonality of the D.C. Hotel's operations which led to $3.7 million higher net income from operations, prior to depreciation, during the three months ended June 30, 2024 as compared to the three months ended March 31, 2024. The increase in net income was also due to a decrease in depreciation recorded relating to the Atlanta Hotel during the three months ended June 30, 2024 as compared to the three months ended March 31, 2024 as a result of reclassification from held for sale to held for investment as of March 31, 2024. On the date of reclassification, we recorded $3.6 million in depreciation, representing the amount that would have been recorded had the asset remained as held for investment throughout 2023 and in the first quarter of 2024. Refer to "Note 5 - Real Estate Owned" for full discussion of the reclassification and operations related to real estate owned.

Previous wording

Management fees to related party and general and administrative expenses remained generally the same for the three months ended March 31, 2024 compared to the three months ended December 31, 2023.

Current wording

General and administrative expenses and management fees to related party remained generally the same for the three months ended June 30, 2024 compared to the three months ended March 31, 2024.

Previous wording

Valuation allowance, commercial mortgage loan held for sale

Current wording

Reversal of valuation allowance, commercial mortgage loan held for sale and Net realized loss on investment

Previous wording

During the three months ended March 31, 2024, we reclassified one of our commercial mortgage loans collateralized by a hotel property located in Honolulu, HI to held for sale. Loans held for sale are carried at the lower of amortized cost or fair value less costs to sell. Accordingly, we recorded a valuation allowance of $0.7 million to carry the loan at its fair value which reflected the agreed upon selling price of 99.5%. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for full discussion.

Current wording

During the three months ended March 31, 2024, we reclassified one of our commercial mortgage loans collateralized by a hotel property located in Honolulu, HI to held for sale and recorded a valuation allowance of $0.7 million to carry the loan at its fair value which reflected the agreed upon selling price of 99.5%. Loans held for sale are carried at the lower of amortized cost or fair value less costs to sell. We subsequently sold the loan during the three months ended June 30, 2024, and reversed the full allowance, recording a realized loss within realized loss on investments on our condensed consolidated statement of operations. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for full discussion.

Previous wording

During the three months ended March 31, 2024, there was an increase of $142.0 million in our Specific CECL Allowance related to a mezzanine loan secured by an ultra-luxury residential property in Manhattan, NY. The additional Specific CECL Allowance was primarily attributable to reduction in list pricing of remaining units. Comparatively, during the three months ended December 31, 2023, we recorded no change in our Specific CECL Allowance. Refer "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information related in our Specific CECL Allowance and further detail on the mezzanine loan.

Current wording

During the three months ended June 30, 2024, we recorded a $7.5 million Specific CECL Allowance on a subordinate loan secured by our interest in a Class A office building in Troy, MI. This allowance was attributable to low occupancy and limited leasing activity in the property's submarket. Comparatively, during the three months ended March 31, 2024, there was an increase of $142.0 million in our Specific CECL Allowance related to a mezzanine loan secured by an ultra-luxury residential property in Manhattan, NY. The additional Specific CECL Allowance was primarily attributable to a reduction in list pricing of remaining units. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information related in our Specific CECL Allowance and further detail on the mezzanine loan.

Previous wording

Our General CECL Allowance increased by $5.7 million during the three months ended March 31, 2024, primarily driven by an increase in our view of remaining expected term of certain of our loans and an increase in the historical loss rate derived from Trepp's data, compared to a decrease of $0.8 million recorded during the three months ended December 31, 2023. This decrease was primarily driven by the impacts of portfolio seasoning and a more positive economic outlook, which was partially offset by loan originations outpacing repayments.

Current wording

Our General CECL Allowance increased by $2.8 million during the three months ended June 30, 2024, primarily driven by new loan originations as well as a more adverse outlook on our office portfolio. The increase was partially offset by the favorable impacts of portfolio seasoning. Comparatively, our General CECL Allowance increased by $5.7 million during the three months ended March 31, 2024, which was primarily driven by an increase in our view of the remaining expected term of certain of our loans and an increase in the historical loss rate derived from Trepp's data.

Previous wording

We use forward currency contracts to economically hedge net interest and principal repayments under our loans denominated in currencies other than USD. Foreign currency gains and losses on derivative instruments are evaluated on a combined basis and the net impact for the three months ended March 31, 2024, and three months ended December 31, 2023 was a net gain of $3.8 million and a net loss of $0.4 million, respectively.

Current wording

We use forward currency contracts to economically hedge net interest and principal repayments under our loans denominated in currencies other than USD. Foreign currency gains and losses on derivative instruments are evaluated on a combined basis and the net impact for the three months ended June 30, 2024 and March 31, 2024 were net gains of $5.0 million and $3.8 million, respectively. The change in net gain (loss) for the three months ended June 30, 2024 compared to the three months ended March 31, 2024 was predominantly due to lower forward point estimates and gains on forward currency contracts related to our net interest hedges for the three months ended June 30, 2024 compared to the three months ended March 31, 2024.

Previous wording

During the three months ended March 31, 2024, Fx rates fell in relation to USD compared to a rise in relation to USD during the three months ended December 31, 2023. The decrease in Fx rates resulted in a gain on our foreign currency forward contracts and a loss related to foreign currency translation. Gains and losses on our forward currency contracts are derived from changes in market spot rates, forward point estimates, and discount factors. Gains and losses related to foreign currency translation are derived only from changes in market spot rates. Forward currency contract gains and losses derived from market spot rates offset the gains and losses related to foreign currency translation except for the gains and losses from forward currency contracts related to our net interest hedges which have no offset in foreign currency translation. A net gain or loss arises each period due to the change in forward point estimates and discount factors as well as gains and losses from forward currency contracts related to our net interest hedges. The change in net gain (loss) for the three months ended March 31, 2024 compared to the three months ended December 31, 2023 is predominantly due to lower forward point estimates and gains on forward currency contracts related to our net interest hedges for the three months ended March 31, 2024 compared to the three months ended December 31, 2023.

Current wording

During the three months ended June 30, 2024, Fx rates fell at a greater rate in relation to USD compared to the three months ended March 31, 2024. The decrease in Fx rates resulted in a gain on our foreign currency forward contracts and a loss related to foreign currency translation. Gains and losses on our forward currency contracts are derived from changes in market spot rates, forward point estimates, and discount factors. Gains and losses related to foreign currency translation are derived only from changes in market spot rates. Forward currency contract gains and losses derived from market spot rates offset the gains and losses related to foreign currency translation except for the gains and losses from forward currency contracts related to our net interest hedges which have no offset in foreign currency translation. A net gain or loss arises each period due to the change in forward point estimates and discount factors as well as gains and losses from forward currency contracts related to our net interest hedges.

Previous wording

The following table sets forth information regarding our condensed consolidated results of operations and certain key operating metrics for the three months ended March 31, 2024 and 2023 ($ in thousands):

Current wording

The following table sets forth information regarding our condensed consolidated results of operations and certain key operating metrics for the six months ended June 30, 2024 and 2023 ($ in thousands):

Previous wording

Net interest income decreased by $14.3 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Interest income decreased as a result of placing a first mortgage loan and subordinate loan collateralized by the same ultra-luxury residential-for-sale property in Manhattan on non-accrual status as of May 1, 2023.

Current wording

Net interest income decreased by $25.5 million during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in net interest income was primarily driven by a decrease in interest income from placing a first mortgage loan and subordinate loan collateralized by the same ultra-luxury residential-for-sale property in Manhattan on non-accrual status as of May 1, 2023. Additionally, we modified two of our loans to convert from floating rate loans to fixed rate loans, which resulted in a decrease in net interest income earned during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Previous wording

Net loss related to real estate owned decreased by $1.2 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This decrease was primarily driven by net income from hotel operations, prior to depreciation, of $1.8 million attributable to the Atlanta Hotel. We did not acquire legal title of the Atlanta Hotel until March 31, 2023 and as such, recorded no related income for the three months ended March 31, 2023.

Current wording

Net income related to real estate owned decreased by $0.6 million during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This decrease was primarily driven by an increase in depreciation and amortization recorded at the Atlanta Hotel. We acquired legal title of the Atlanta Hotel on March 31, 2023 and as such, recorded no related income or depreciation for the three months ended March 31, 2023.

Previous wording

Management fees to related party and general and administrative expenses remained generally the same for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

General and administrative expenses and management fees to related party remained generally the same for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Previous wording

During the three months ended March 31, 2024, we recorded no net realized gains or losses on investments. Comparatively, during the three months ended March 31, 2023, we recorded a net realized loss on investments of $4.6 million, comprised of a $4.8 million realized loss and a $0.2 million realized gain. We recorded a $4.8 million realized loss in connection with the acquisition of legal title of the Atlanta Hotel through a deed-in-lieu of foreclosure and a $0.2 million realized gain related to loan sales. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" and "Note 5 - Real Estate Owned" for additional detail.

Current wording

Comparatively, during the six months ended June 30, 2023, we recorded a net realized loss on investments of $86.6 million, consisting of i) a $4.8 million realized loss related to the acquisition of the Atlanta Hotel through a deed-in-lieu of foreclosure and ii) a $82.0 million realized loss on investments representing a write-off of previously recorded Specific CECL Allowance on one of our subordinate loans secured by an ultra-luxury residential property in Manhattan, NY. These losses were partially offset by a $0.2 million gain on investments recorded in connection with the sale of our entire interest in three commercial loans secured by properties in Europe and a partial interest in one commercial loan secured by property located in London, UK. Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" and "Note 5 - Real Estate Owned" for additional detail.

Previous wording

During the three months ended March 31, 2023, we repurchased $7.1 million aggregate principal amount of the 2023 Notes at a price of 97%. As a result of this transaction, we recognized a $0.2 million gain on extinguishment of debt. We repaid the remaining principal of the 2023 Notes in full during the fourth quarter of 2023.

Current wording

During the six months ended June 30, 2023, we repurchased $43.9 million aggregate principal amount of the 2023 Notes. As a result of this transaction, we recognized a $0.5 million gain on extinguishment of debt. We repaid the remaining principal of the 2023 Notes in full during the fourth quarter of 2023.

Previous wording

During the three months ended March 31, 2023, the net increase in our General CECL Allowance of $4.4 million was driven by an increase in our view of the remaining expected term of our loan portfolio based on the macroeconomic outlook, partially offset by the effects of portfolio seasoning and loan repayments and sales.

Current wording

During the six months ended June 30, 2023, we recorded a net increase in our General CECL Allowance of $6.5 million primarily driven by an increase in our view of the remaining expected term of certain of our loans and a more adverse macroeconomic outlook, which was partially offset by the effects of portfolio seasoning.

Previous wording

Net interest income decreased by $1.3 million during the three months ended March 31, 2024 compared to the three months ended December 31, 2023, primarily driven by an increase in interest expense. The increase in interest expense was mainly attributable to increased utilization of the Revolving Credit Facility, which included interest expense related to borrowings associated with one of our real estate owned assets. Refer to "Note 4 – Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" and "Note 7 - Secured Debt Arrangements, Net" for full discussion of our loans and Revolving Credit Facility, respectively.

Current wording

Refer to "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional detail.

Previous wording

Foreign currency gains and losses on derivative instruments are evaluated on a combined basis and the net impact for the three months ended March 31, 2024 and three months ended March 31, 2023 was a net gain of $3.8 million and $4.5 million, respectively.

Current wording

Foreign currency gains and losses on derivative instruments are evaluated on a combined basis and the net impact for both the six months ended June 30, 2024 and six months ended June 30, 2023 was a net gain of $8.9 million.

Previous wording

During the three months ended March 31, 2024, the GBP rate and the EUR rate fell in relation to USD while both rates rose during the three months ended March 31, 2023. The decrease in Fx rates during the three months ended March 31, 2024 resulted in a gain on our foreign currency forward contracts and a loss related to foreign currency translation. The change in net gain for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 is predominantly due to lower forward point estimates and gains on forward currency contracts related to our net interest hedges for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

During the six months ended June 30, 2024, the GBP rate and the EUR rate fell in relation to USD while both rates rose during the six months ended June 30, 2023. The decrease in Fx rates during the six months ended June 30, 2024 resulted in a gain on our foreign currency forward contracts and a loss related to foreign currency translation. The increase in Fx rates during the six months ended June 30, 2023 resulted in a loss on our foreign currency forward contracts and a gain related to foreign currency translation. The net gain both for the six months ended June 30, 2024 and the six months ended June 30, 2023 was due to lower forward point estimates.

Previous wording

During the three months ended March 31, 2024, we recorded a net gain of $0.4 million on our interest rate cap, which is primarily driven by a $0.6 million realized gain. The realized gain is attributable to SOFR exceeding the cap's strike rate. We purchased this cap in September 2023, in connection with our construction financing.

Current wording

During the six months ended June 30, 2024, we recorded a net gain of $0.5 million on our interest rate hedges or caps. The net gain was primarily driven by a $1.1 million realized gain recorded in relation to our construction financing interest rate cap, which we purchased in September 2023. The realized gain is attributable to SOFR exceeding the interest rate cap's strike rate. Additionally, we recorded a partially offsetting unrealized loss of $0.6 million, driven by a decrease in the interest rate cap's fair value, as it approaches its maturity.

Previous wording

During the three months ended March 31, 2023, we recorded a net loss of $0.1 million on our interest rate cap related to our 2026 Term Loan. Though we recorded a realized gain of $4.7 million driven by an increase in LIBOR over the cap strike rate, this gain was offset by unrealized losses of $4.8 million, resulting from a decrease in the cap's fair value as it continued to approach its June 2023 maturity.

Current wording

During the six months ended June 30, 2023, we recorded a net loss of $0.1 million on our interest rate cap related to our 2026 Term Loan. Though we recorded a realized gain of $9.1 million driven by an increase in LIBOR over the cap strike rate, this gain was offset by unrealized losses of $9.2 million, resulting from a decrease in the interest rate cap's fair value as it reached its June 2023 maturity.

Previous wording

During the three months ended March 31, 2024, we recorded an income tax provision of $0.1 million. Comparatively, we did not record an income tax provision for the three months ended March 31, 2023. The income tax provision recorded during the three months ended March 31, 2024 reflects our expectations of aggregate projected taxable income of one of our TRS entities for the taxable year ending December 31, 2024.

Current wording

During the six months ended June 30, 2024, we recorded an income tax provision of $0.2 million. Comparatively, we did not record an income tax provision for the six months ended June 30, 2023. The income tax provision recorded during the six months ended June 30, 2024 reflects our expectations of aggregate projected taxable income of one of our TRS entities for the taxable year ending December 31, 2024.

Previous wording

For thethree months ended March 31, 2024, our Distributable Earnings were $50.5 million, or $0.35 per share, as compared to $69.2 million, or $0.48 per share, for the same period in the prior year.

Current wording

For the three and six months ended June 30, 2024, our Distributable Earnings were $49.4 million, or $0.35 per share, and $99.8 million, or $0.69 per share, respectively, as compared to ($15.9) million, or ($0.11) per share, and $53.3 million, or $0.37 per share, respectively, for the same period in the prior year.

Previous wording

(1)Unvested RSUs are net of incremental shares assumed repurchased under the treasury stock method, if dilutive. There were no incremental shares included in 2024. For 2023, the weighted-average diluted shares for GAAP were determined using the if-converted method.

Current wording

Unvested RSUs are net of incremental shares assumed repurchased under the treasury stock method, if dilutive. There were 172,857 and no incremental shares included in the three and six months ended 2024, respectively. For 2023, the weighted-average diluted shares for GAAP were determined using the if-converted method.

Previous wording

(1)Includes net unrealized loss on forward currency contracts and interest hedges, and realized gain on forward currency contracts related to principal outside impact of forward points.

Current wording

Includes net unrealized loss on forward currency contracts and interest hedges, and realized gain on forward currency contracts related to principal outside impact of forward points.

Previous wording

During the three months ended March 31, 2024, we funded $321.8 million of loans closed prior to 2024, including $212.9 million to fund a commitment closed in December 2023, to a first mortgage loan secured by a portfolio of pubs across the United Kingdom. We received $175.7 million in repayments during the three months ended March 31, 2024.

Current wording

During the six months ended June 30, 2024, we committed $504.6 million of capital to new loans ($495.3 million was funded at closing), and provided $437.8 million of add-on fundings, including $212.9 million to a first mortgage loan secured by a portfolio of pubs across the United Kingdom, that was originated in December 2023. During the six months ended June 30, 2024, we received $758.9 million in loan repayments and sales.

Previous wording

(3) Gross of deferred financing costs of $13.5 million.

Current wording

Gross of deferred financing costs of $10.8 million.

Previous wording

(1)Amortized cost for these loans is net of the recorded Specific CECL Allowance.

Current wording

Amortized cost for these loans is net of the recorded Specific CECL Allowance.

Previous wording

(2)Loans are secured by the same property.

Current wording

Loans are secured by the same property.

Previous wording

(3)Includes portfolio of office, industrial, and retail property types.

Current wording

Includes portfolio of office, industrial, and retail property types.

Previous wording

(4)Total may not foot due to rounding.

Current wording

Total may not foot due to rounding.

Previous wording

Our average asset and debt balances for the three months ended March 31, 2024 were ($ in thousands):

Current wording

Our average asset and debt balances for the six months ended June 30, 2024 were ($ in thousands):

Previous wording

Our portfolio benefits from our core investment strategy whereby we target assets that are secured by institutional quality real estate throughout the United States and Europe. As discussed in Item 1. "Business—Investment Strategy" in our most recent Annual Report on Form 10-K, the Manager has implemented underwriting standards which place a particular emphasis on due diligence of prospective investments' sponsors and borrowers, as well as assessment of the risk/return profile and appropriate structure of each investment opportunity. As of March 31, 2024, our portfolio's weighted-average origination LTV ratio was 57%, excluding risk-rated 5 loans. This reflects significant equity value which we believe our loan sponsors would be committed to protect during periods of volatility and market disruption.

Current wording

Our portfolio benefits from our core investment strategy whereby we target assets that are secured by institutional quality real estate throughout the United States and Europe. As discussed in Item 1. "Business—Investment Strategy" in our most recent Annual Report on Form 10-K, the Manager has implemented underwriting standards which place a particular emphasis on due diligence of prospective investments' sponsors and borrowers, as well as assessment of the risk/return profile and appropriate structure of each investment opportunity. As of June 30, 2024, our portfolio's weighted-average origination LTV ratio was 58%, excluding risk-rated five loans. This reflects significant equity value which we believe our loan sponsors would be committed to protect during periods of volatility and market disruption.

Previous wording

(1)$3.6 million of the General CECL Allowance for 2024 is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets.

Current wording

$3.6 million of the General CECL Allowance for 2024 is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets.

Previous wording

At March 31, 2024, our debt-to-equity ratio was 3.3 and our portfolio was comprised of $8.0 billion of commercial mortgage loans and $0.3 billion of subordinate loans. In order to achieve our return on equity, we generally finance our mortgage loans with 2.0 to 3.0 turns of leverage and generally do not finance our subordinate loan portfolio given built-in inherent structural leverage. Consequently, depending on our portfolio mix, our debt-to-equity ratio may exceed our previously disclosed thresholds.

Current wording

At June 30, 2024, our debt-to-equity ratio was 3.4 and our portfolio was comprised of $7.9 billion of commercial mortgage loans and $0.4 billion of subordinate loans. In order to achieve our return on equity, we generally finance our mortgage loans with 2.0 to 3.0 turns of leverage and generally do not finance our subordinate loan portfolio given built-in inherent structural leverage. Consequently, depending on our portfolio mix, our debt-to-equity ratio may exceed our previously disclosed thresholds.

Previous wording

(1)Represents total debt less cash and loan proceeds held by servicer (recorded with Other Assets, see "Note 6 -Other Assets" for more information) to total stockholders' equity.

Current wording

Represents total debt less cash and loan proceeds held by servicer (recorded with Other Assets, see "Note 6 - Other Assets" for more information) to total stockholders' equity.

Previous wording

Our current debt obligations consist of $1.3 billion, at face value, of corporate debt and $5.6 billion of asset specific financings. Our corporate debt includes $767.3 million of term loan borrowings and $500.0 million of senior secured notes. Our asset specific financings are generally tied to the underlying loans, and we anticipate repayments of $701.3 million of secured debt arrangements in the short term. Specifics about our secured debt arrangements and corporate debt maturities and obligations are discussed below.

Current wording

Our current debt obligations consist of $1.3 billion, at face value, of corporate debt, $5.6 billion of asset specific financings, and $235.4 million of debt related to real estate owned. Our corporate debt includes $765.3 million of term loan borrowings and $500.0 million of senior secured notes. Our asset specific financings are generally tied to the underlying loans, and we anticipate repayments of $1.2 billion of secured debt arrangements in the short term. Specifics about our secured debt arrangements and corporate debt maturities and obligations are discussed below.

Previous wording

In addition to our debt obligations, as of March 31, 2024, we had $555.6 million of unfunded loan commitments. We expect that approximately $315.7 million will be funded to existing borrowers in the short term.

Current wording

In addition to our debt obligations, as of June 30, 2024, we had $436.6 million of unfunded loan commitments. We expect that approximately $423.1 million will be funded to existing borrowers in the short term.