Company Quick10K Filing
Apollo Commercial Real Estate Finance
Price19.65 EPS1
Shares154 P/E14
MCap3,017 P/FCF16
Net Debt400 EBIT353
TEV3,417 TEV/EBIT10
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-07-30
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-02-13
10-Q 2019-09-30 Filed 2019-10-23
10-Q 2019-06-30 Filed 2019-07-24
10-Q 2019-03-31 Filed 2019-04-24
10-K 2018-12-31 Filed 2019-02-13
10-Q 2018-09-30 Filed 2018-10-24
10-Q 2018-06-30 Filed 2018-07-25
10-Q 2018-03-31 Filed 2018-05-02
10-K 2017-12-31 Filed 2018-02-14
10-Q 2017-09-30 Filed 2017-11-01
10-Q 2017-06-30 Filed 2017-08-01
10-Q 2017-03-31 Filed 2017-05-02
10-K 2016-12-31 Filed 2017-02-28
10-Q 2016-09-30 Filed 2016-11-01
10-Q 2016-06-30 Filed 2016-07-28
10-Q 2016-03-31 Filed 2016-04-27
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-07-29
10-Q 2015-03-31 Filed 2015-04-30
10-K 2014-12-31 Filed 2015-02-26
10-Q 2014-09-30 Filed 2014-10-31
10-Q 2014-06-30 Filed 2014-07-30
10-Q 2014-03-31 Filed 2014-04-30
10-K 2013-12-31 Filed 2014-02-27
10-Q 2013-09-30 Filed 2013-11-06
10-Q 2013-06-30 Filed 2013-08-06
10-Q 2013-03-31 Filed 2013-05-03
10-K 2012-12-31 Filed 2013-03-01
10-Q 2012-09-30 Filed 2012-11-08
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-07
10-K 2011-12-31 Filed 2012-03-02
10-Q 2011-09-30 Filed 2011-11-04
10-Q 2011-06-30 Filed 2011-08-05
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-11
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-13
10-K 2009-12-31 Filed 2010-03-17
8-K 2020-07-30 Earnings, Exhibits
8-K 2020-06-30 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2020-06-02
8-K 2020-05-07
8-K 2020-03-16
8-K 2020-02-13
8-K 2020-02-03
8-K 2019-10-23
8-K 2019-10-22
8-K 2019-07-24
8-K 2019-06-17
8-K 2019-05-15
8-K 2019-05-08
8-K 2019-05-08
8-K 2019-04-25
8-K 2019-04-24
8-K 2019-02-13
8-K 2019-02-12
8-K 2018-10-24
8-K 2018-10-02
8-K 2018-08-02
8-K 2018-07-25
8-K 2018-06-28
8-K 2018-06-07
8-K 2018-05-02
8-K 2018-03-13
8-K 2018-02-14

ARI 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization
Note 2 - Summary of Significant Accounting Policies
Note 3 - Fair Value Disclosure
Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net
Note 5 - Loan Proceeds Held By Servicer
Note 6 - Other Assets
Note 7 - Secured Debt Arrangements, Net
Note 8 - Senior Secured Term Loan, Net
Note 9 - Convertible Senior Notes, Net
Note 10 - Derivatives
Note 11 - Accounts Payable, Accrued Expenses and Other Liabilities
Note 12 - Related Party Transactions
Note 13 - Share - Based Payments
Note 14 - Stockholders' Equity
Note 15 - Commitments and Contingencies
Note 16 - Fair Value of Financial Instruments
Note 17 - Net Income (Loss) per Share
Note 18 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ari-20200630xex311.htm
EX-31.2 ari-20200630xex312.htm
EX-32.1 ari-20200630xex321.htm

Apollo Commercial Real Estate Finance Earnings 2020-06-30

Balance SheetIncome StatementCash Flow

Document
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iso4217:USD xbrli:pure ari:loan xbrli:shares iso4217:GBP iso4217:USD xbrli:shares ari:extension ari:offering iso4217:EUR ari:contract ari:subsidiary
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                    
Commission File Number: 001-34452
__________________________________ 
Apollo Commercial Real Estate Finance, Inc.
(Exact name of registrant as specified in its charter)
__________________________________ 
Maryland
 
27-0467113
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Apollo Commercial Real Estate Finance, Inc.
c/o Apollo Global Management, Inc.
9 West 57th Street, 43rd Floor,
New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 515–3200
(Registrant’s telephone number, including area code)
__________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
ARI
New York Stock Exchange

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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 29, 2020, there were 147,661,102 shares, par value $0.01, of the registrant’s common stock issued and outstanding.
 




Table of Contents
 


3




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands—except share data)
 
June 30, 2020
 
December 31, 2019
Assets:
 
 
 
Cash and cash equivalents
$
487,165

 
$
452,282

Commercial mortgage loans, net(1)(2)
5,343,437

 
5,326,967

Subordinate loans and other lending assets, net(2)
1,044,400

 
1,048,126

Derivative assets, net
49,294

 

Other assets
45,218

 
52,716

Loan proceeds held by servicer

 
8,272

Total Assets
$
6,969,514

 
$
6,888,363

Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Secured debt arrangements, net (net of deferred financing costs of $15,079 and $17,190 in 2020 and 2019, respectively)
$
3,425,098

 
$
3,078,366

Convertible senior notes, net
563,583

 
561,573

Senior secured term loan, net (net of deferred financing costs of $7,737 and $7,277 in 2020 and 2019, respectively)
485,179

 
487,961

Accounts payable, accrued expenses and other liabilities(3)
120,190

 
100,712

Payable to related party
9,958

 
10,430

Derivative liabilities

 
19,346

Total Liabilities
4,604,008

 
4,258,388

Commitments and Contingencies (see Note 15)


 


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

 
68

Common stock, $0.01 par value, 450,000,000 shares authorized, 148,326,806 and 153,537,296 shares issued and outstanding in 2020 and 2019, respectively
1,483

 
1,535

Additional paid-in-capital
2,781,111

 
2,825,317

Accumulated deficit
(417,156
)
 
(196,945
)
Total Stockholders’ Equity
2,365,506

 
2,629,975

Total Liabilities and Stockholders’ Equity
$
6,969,514

 
$
6,888,363

———————
(1) Includes $5,330,380 and $4,852,087 pledged as collateral under secured debt arrangements in 2020 and 2019, respectively

(2) Net of $242,025 CECL Allowances in 2020, comprised of $197,481 Specific CECL Allowance and $44,544 General CECL Allowance. Net of $56,981 provision for loan loss in 2019.

(3) Includes $4,119 of General CECL Allowance related to unfunded commitments on our loans in 2020.






See notes to unaudited condensed consolidated financial statements.

4




Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Operations (Unaudited)
(in thousands—except share and per share data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2020
 
2019
 
2020
 
2019
Net interest income:
 
 
 
 
 
 
 
Interest income from commercial mortgage loans
$
75,641

 
$
77,458

 
$
157,496

 
$
155,744

Interest income from subordinate loans and other lending assets
32,616

 
41,043

 
66,634

 
81,882

Interest expense
(37,498
)
 
(33,511
)
 
(78,703
)
 
(69,806
)
Net interest income
70,759

 
84,990

 
145,427

 
167,820

Operating expenses:
 
 
 
 
 
 
 
General and administrative expenses (includes equity-based compensation of $4,252 and $8,515 in 2020 and $4,294 and $8,195 in 2019, respectively)
(6,425
)
 
(6,574
)
 
(12,956
)
 
(12,725
)
Management fees to related party
(9,957
)
 
(10,259
)
 
(20,225
)
 
(19,872
)
Total operating expenses
(16,382
)
 
(16,833
)
 
(33,181
)
 
(32,597
)
Other income
591

 
484

 
1,351

 
1,002

Realized loss on investments
(16,405
)
 
(12,513
)
 
(16,405
)
 
(12,513
)
Reversal of (provision for) loan losses(1)
25,169

 
15,000

 
(158,296
)
 
15,000

Foreign currency translation gain (loss)
2,559

 
(7,777
)
 
(35,390
)
 
(883
)
Gain (loss) on foreign currency forward contracts (includes unrealized gains (losses) of $9,004 and $53,432 in 2020 and $10,787 and $(4,198) in 2019, respectively)
(2,995
)
 
11,186

 
67,496

 
4,466

Loss on interest rate hedging instruments (includes unrealized gains (losses) of $50,756 and $15,208 in 2020 and $(13,113) in 2019, respectively)
(3,095
)
 
(13,113
)
 
(38,643
)
 
(13,113
)
Net income (loss)
$
60,201

 
$
61,424

 
$
(67,641
)
 
$
129,182

Preferred dividends
(3,385
)
 
(4,919
)
 
(6,770
)
 
(11,754
)
Net income (loss) available to common stockholders
$
56,816

 
$
56,505

 
$
(74,411
)
 
$
117,428

Net income (loss) per share of common stock:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.38

 
$
(0.50
)
 
$
0.83

Diluted
$
0.36

 
$
0.37

 
$
(0.50
)
 
$
0.80

Basic weighted-average shares of common stock outstanding
151,523,513

 
145,567,963

 
152,735,852

 
140,117,813

Diluted weighted-average shares of common stock outstanding
182,083,702

 
174,101,234

 
152,735,852

 
169,418,177

Dividend declared per share of common stock
$
0.35

 
$
0.46

 
$
0.75

 
$
0.92

———————
(1) Comprised of $(9,500) and $140,500 of Specific CECL (Reversals) Allowance and $(15,669) and $17,796 of General CECL (Reversals) Allowance for the three and six months ended June 30, 2020, respectively.









See notes to unaudited condensed consolidated financial statements.

5




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



 
Preferred Stock
 
Common Stock
 
Additional
Paid-In-Capital
 
Accumulated
Deficit
 
Total
 
Shares
 
Par
 
Shares
 
Par
 
Balance at January 1, 2020
6,770,393

 
$
68

 
153,537,296

 
$
1,535

 
$
2,825,317

 
$
(196,945
)
 
$
2,629,975

Adoption of ASU 2016-13, see Note 2










(30,867
)

(30,867
)
Capital increase (decrease) related to Equity Incentive Plan

 

 
503,251

 
5

 
(2,236
)
 

 
(2,231
)
Repurchase of common stock

 

 
(300,000
)
 
(3
)
 
(2,438
)
 

 
(2,441
)
Net loss

 

 

 

 

 
(127,842
)
 
(127,842
)
Dividends declared on preferred stock - $0.50 per share

 

 

 

 

 
(3,385
)
 
(3,385
)
Dividends declared on common stock - $0.40 per share

 

 

 

 

 
(62,298
)
 
(62,298
)
Balance at March 31, 2020
6,770,393
 
$
68

 
153,740,547

 
$
1,537

 
$
2,820,643

 
$
(421,337
)
 
$
2,400,911

Capital increase related to Equity Incentive Plan
 

 
82,235

 
1

 
4,251

 

 
4,252

Repurchase of common stock
 

 
(5,495,976
)
 
(55
)
 
(43,783
)
 

 
(43,838
)
Net income
 

 

 

 

 
60,201

 
60,201

Dividends declared on preferred stock - $0.50 per share
 

 

 

 

 
(52,635
)
 
(52,635
)
Dividends declared on common stock - $0.35 per share
 

 

 

 

 
(3,385
)
 
(3,385
)
Balance at June 30, 2020
6,770,393

$
68


148,326,806

$
1,483


$
2,781,111


$
(417,156
)
 
$
2,365,506


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

 
$
137

 
133,853,565

 
$
1,339

 
$
2,638,441

 
$
(130,170
)
 
$
2,509,747

Capital increase (decrease) related to Equity Incentive Plan

 

 
433,426

 
4

 
(1,099
)
 

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

 

 
1,967,361

 
20

 
33,758

 

 
33,778

Net income

 

 

 

 

 
67,758

 
67,758

Dividends declared on preferred stock - $0.50 per share

 

 

 

 

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

 

 

 

 

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

 
$
137

 
136,254,352

 
$
1,363

 
$
2,671,100

 
$
(132,776
)
 
$
2,539,824

Capital increase related to Equity Incentive Plan

 

 
27,245

 

 
4,294

 

 
4,294

Issuance of common stock

 

 
17,250,000

 
172

 
314,985

 

 
315,157

Redemption of preferred stock
(6,900,000
)
 
(69
)
 

 

 
(172,431
)
 

 
(172,500
)
Offering costs

 

 

 

 
(406
)
 

 
(406
)
Net income

 

 

 

 

 
61,424

 
61,424

Dividends declared on preferred stock - $0.50 per share

 

 

 

 

 
(4,919
)
 
(4,919
)
Dividends declared on common stock - $0.46 per share

 

 

 

 

 
(71,475
)
 
(71,475
)
Balance at June 30, 2019
6,770,393

 
$
68

 
153,531,597

 
$
1,535

 
$
2,817,542

 
$
(147,746
)
 
$
2,671,399





See notes to unaudited condensed consolidated financial statements.

6




Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
 
For the six months ended June 30,
 
2020
 
2019
Cash flows provided by operating activities:
 
 
 
     Net income (loss)
$
(67,641
)
 
$
129,182

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
     Amortization of discount/premium and PIK
(36,449
)
 
(40,490
)
     Amortization of deferred financing costs
6,577

 
5,487

     Equity-based compensation
8,515

 
3,195

     Provision for (reversal of) loan losses
158,296

 
(15,000
)
     Realized loss on investments
16,405

 
12,513

     Foreign currency loss
48,404

 
3,068

     Unrealized (gain) loss on derivative instruments
(68,640
)
 
17,311

     Changes in operating assets and liabilities:
 
 
 
          Other assets
(9,615
)
 
(6,460
)
          Accounts payable, accrued expenses and other liabilities
(1,921
)
 
668

          Payable to related party
(472
)
 
455

Net cash provided by operating activities
53,459

 
109,929

Cash flows used in investing activities:
 
 
 
     New funding of commercial mortgage loans
(447,440
)
 
(511,310
)
     Add-on funding of commercial mortgage loans
(197,261
)
 
(175,497
)
     New funding of subordinate loans and other lending assets

 
(276,607
)
     Add-on funding of subordinate loans and other lending assets
(25,766
)
 
(12,825
)
     Proceeds received from the repayment and sale of commercial mortgage loans
397,994

 
341,453

     Proceeds received from the repayment of subordinate loans and other lending assets
1,885

 
130,567

     Origination and exit fees received on commercial mortgage loans, and subordinate loans
and other lending assets, net
6,110

 
12,275

     Increase (decrease) in collateral held related to derivative contracts, net
55,550

 
(18,180
)
Net cash (used in) provided by investing activities
(208,928
)
 
(510,124
)
Cash flows from financing activities:
 
 
 
     Proceeds from issuance of common stock

 
315,157

     Redemption of preferred stock

 
(172,500
)
     Repurchase of common stock
(46,279
)
 

     Payment of offering costs

 
(141
)
     Proceeds from secured debt arrangements
1,373,643

 
981,529

     Repayments of secured debt arrangements
(980,280
)
 
(1,063,071
)
     Repayments of senior secured term loan principal
(2,500
)
 

     Proceeds from issuance of senior secured term loan

 
497,500

     Exchanges of convertible senior notes

 
(704
)
     Payment of deferred financing costs
(7,522
)
 
(9,416
)
Other financing activities
(6,494
)
 

     Dividends on common stock
(133,446
)
 
(126,289
)
     Dividends on preferred stock
(6,770
)
 
(15,204
)
Net cash (used in) provided by financing activities
190,352

 
406,861

Net increase in cash and cash equivalents
34,883

 
6,666

Cash and cash equivalents, beginning of period
452,282

 
109,806

Cash and cash equivalents, end of period
$
487,165

 
$
116,472

Supplemental disclosure of cash flow information:
 
 
 
     Interest paid
$
71,974

 
$
62,915

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

 
$
33,778

     Dividend declared, not yet paid
$
56,256

 
$
74,295

     Offering costs payable
$

 
$
265

     Loan proceeds held by servicer
$

 
$
4,619

     Deferred financing costs, not yet paid
$
2,596

 
$
4,095

Transfer of proceeds borrowed under secured credit facilities to Barclays Private Securitization
$
782,006

 
$




















































See notes to unaudited condensed consolidated financial statements.

7




Apollo Commercial Real Estate Finance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1Organization
Apollo Commercial Real Estate Finance, Inc. (together with its consolidated subsidiaries, is referred to throughout this report as the "Company," "ARI," "we," "us" and "our") is a corporation that has elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes and primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. These asset classes are referred to as our target assets.
We were formed in Maryland on June 29, 2009, commenced operations on September 29, 2009 and are externally managed and advised by ACREFI Management, LLC (the "Manager"), an indirect subsidiary of Apollo Global Management, Inc. (together with its subsidiaries, "Apollo").
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2009. To maintain our tax qualification as a REIT, we are required to distribute at least 90% of our taxable income, excluding net capital gains, to stockholders and meet certain other asset, income, and ownership tests.
Note 2Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries. All intercompany amounts have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates include loan loss allowances. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 ("Annual Report"), as filed with the Securities and Exchange Commission (the "SEC"). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows have been included. Our results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year or any other future period.
We currently operate in one reporting segment.
Risks and Uncertainties
During the first quarter of 2020, there was a global outbreak of a novel coronavirus ("COVID-19"), which was declared by the World Health Organization as a pandemic. In response to COVID-19, the United States and numerous other countries have declared national emergencies, which has led to large scale quarantines as well as restrictions to business deemed non-essential. These responses to COVID-19 have disrupted economic activities and could have a continued significant adverse effect on economic and market conditions. As we are still in the midst of the COVID-19 pandemic we are not in a position to estimate the ultimate impact this will have on our business and the economy as a whole. We believe the estimates used in preparing our financial statements and related footnotes are reasonable and supportable based on the best information available to us as of June 30, 2020. The uncertainty surrounding COVID-19 may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and, as a result, actual results may vary significantly from estimates.
Current Expected Credit Losses ("CECL")
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which we refer to as the "CECL Standard." This update has changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value. The CECL Standard replaced the "incurred loss" approach under existing guidance with an "expected loss" model for instruments measured at amortized cost. The CECL Standard requires entities to record allowances for held-to-maturity debt securities that are deducted from the carrying amount of the assets to present the net carrying value at the amounts expected to be collected on the assets. We continue to record loan specific allowances as a practical expedient under the CECL Standard ("Specific CECL Allowance"), which we apply to assets that are collateral dependent and where the borrower or sponsor is experiencing

8




financial difficulty. In addition, we now record a general allowance in accordance with the CECL Standard on the remainder of the loan portfolio ("General CECL Allowance", and together with the Specific CECL Allowance, "CECL Allowances") on a collective basis by assets with similar risk characteristics.
The CECL Standard requires us to record an allowance for credit losses that are deducted from the carrying amount of our loan portfolio to present the net carrying value at the amounts expected to be collected on the assets. We adopted the CECL Standard through a cumulative-effect adjustment to retained earnings on January 1, 2020. Subsequent changes to the General CECL Allowance are recognized through net income (loss) on our condensed consolidated statement of operations.
The CECL Standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The FASB recognizes what is known as the weighted average remaining maturity ("WARM") method as an acceptable approach for computing current expected credit losses. We have adopted the WARM method to comply with the CECL Standard in determining a General CECL Allowance for a majority of our portfolio. In the future, we may use other acceptable methods, such as a probability-of-default/loss-given-default method. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we have elected to apply a practical expedient in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a Specific CECL Allowance.
In accordance with the WARM method, an annual historical loss rate is applied to the amortized cost of an asset or pool of assets over the remaining expected life. The WARM method requires consideration of the timing of expected future fundings of existing commitments and repayments over each asset’s remaining life. An annual loss factor, adjusted for macroeconomic estimates, is applied over each subsequent period and aggregated to arrive at the General CECL Allowance.
In determining the General CECL Allowance, we considered various factors including (i) historical loss experience in the commercial real estate lending market, (ii) timing of expected repayments and satisfactions, (iii) expected future funding, (iv) capital subordinate to us when we are the senior lender, (v) capital senior to us when we are the subordinate lender, and (vi) our current and future view of the macroeconomic environment. The standard requires the use of significant judgment to arrive at an estimated credit loss. There is significant uncertainty related to future macroeconomic conditions as the result of COVID-19.
We derived an annual historical loss rate based on a commercial mortgage backed securities ("CMBS") database with historical losses from 1998 to the first quarter of 2020 provided by a third party, Trepp LLC. We applied various filters to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. The annual historical loss rate was further adjusted to reflect our expectations of the macroeconomic environment for a reasonable and supportable forecast period which we have determined to be one year.
The General CECL Allowance on subordinate loans is calculated by incorporating both the loan balance of the position(s) of the structurally senior third-party lender(s) and the balance of our subordinate loan. The subordinate loan, by virtue of being the first loss position, is required to absorb losses prior to the senior position(s) being impacted, resulting in a higher percentage allowance attributable to the subordinate loan. The General CECL Allowance on unfunded loan commitments is time-weighted based on our expected commitment to fund such obligations. The General CECL Allowance on unfunded commitments is recorded as a liability on the condensed consolidated balance sheet within accounts payable, accrued expenses and other liabilities. At adoption, the General CECL Allowance was $30.9 million and was recorded in the condensed consolidated statement of changes in stockholders’ equity.
Refer to Note 4 - Commercial Mortgage, Subordinate Loans and Other Lending Assets for further information regarding CECL.

Secured Debt Arrangements
Secured debt arrangements are accounted for as financing transactions, unless they meet the criteria for sale accounting. Loans financed through a secured debt arrangement remain on our balance sheet as an asset and cash received from the purchaser is recorded on our condensed consolidated balance sheet as a liability. Interest incurred in accordance with secured debt arrangements is recorded as interest expense.
During the second quarter 2020, we entered into a private securitization with Barclays Bank, plc (the "Barclays Private Securitization"). We have determined that the issuer of this securitization, ACRE Debt 2 PLC, is a Variable Interest Entity ("VIE") of which we were deemed to be the primary beneficiary and therefore, we consolidated the operations of this entity for GAAP. The collateral assets of the securitization are included in commercial mortgage loans, net on our condensed consolidated balance sheet. The liabilities of the securitization to the senior noteholders, excluding the notes held by us, are included in secured debt arrangements, net on our condensed consolidated balance sheet.

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Note 3Fair Value Disclosure
GAAP establishes a hierarchy of valuation techniques based on the observability of the inputs utilized in measuring financial instruments at fair values. Market-based or observable inputs are the preferred source of values, followed by valuation models using management's assumptions in the absence of market-based or observable inputs. The three levels of the hierarchy as noted in ASC 820 "Fair Value Measurements and Disclosures" are described below:
Level I — Quoted prices in active markets for identical assets or liabilities.
Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.
While we anticipate that our valuation methods will be appropriate and consistent with valuation methods used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
The estimated fair values of our derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each instrument. Our derivative instruments are classified as Level II in the fair value hierarchy.
The fair values of foreign exchange forwards are determined by comparing the contracted forward exchange rate to the current market exchange rate. The current market exchange rates are determined by using market spot rates, forward rates and interest rate curves for the underlying countries.
The fair value of interest rate swaps is determined by comparing the present value of remaining fixed payments to the present value of expected floating rate payments based on the forward one-month London Inter-bank Offered Rate ("LIBOR") curve. As of June 30, 2020, we had no interest rate swaps on our condensed consolidated balance sheet.
The fair value of our interest rate cap is determined by using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the interest rate cap. The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on a third party expert's expectation of future interest rates derived from observable market interest rate curves and volatilities.
The following table summarizes the levels in the fair value hierarchy into which our derivative assets were categorized as of June 30, 2020 and December 31, 2019 ($ in thousands): 
 
Fair Value as of June 30, 2020
 
Fair Value as of December 31, 2019
 
Level I
 
Level II
 
Level III
 
Total
 
Level I
 
Level II
 
Level III
 
Total
Foreign currency forward, net
$

 
$
48,556

 
$

 
$
48,556

 
$

 
$

 
$

 
$

Interest rate cap

 
738

 

 
738