Apollo Commercial Real Estate Finance, Inc. (ARI) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 8. "Financial Statements and Supplementary Data" of this annual report on Form 10-K.

Overview

We are a Maryland corporation and have elected to be taxed as a REIT for U.S. federal income tax purposes. We primarily originate, acquire, invest in and manage 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 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 $481.1 billion as of September 30, 2021.

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. We benefit from Apollo’s global infrastructure and operating platform, through which we are able to source, evaluate and manage potential investments in our target assets.

Current Market Conditions

During the first quarter of 2020, there was a global outbreak of 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 declared national emergencies, which has led to large scale quarantines as well as restrictions to business deemed non-essential. Although more normalized activities have resumed, we are not in a position to estimate the ultimate impact COVID-19 and its variants will have on our business and the economy as a whole. We cannot predict the potential impact related to both known and unknown risks, including future quarantines, closures and other restrictions resulting from the outbreak. The effects of COVID-19 have adversely impacted the value of our assets, business, financial condition, results of operations and cash flows, and our ability to operate successfully. Some of the factors that impacted us to date and may continue to affect us are outlined in Item 1A. "Risk Factors."

Critical Accounting Policies and Use of Estimates

Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. The most critical accounting policies involve decisions and assessments that affect our reported assets and liabilities, as well as reported revenues and expenses. We believe that all of the decisions and assessments upon which these financial statements are based are reasonable based upon information currently available to us. The accounting policies and estimates that we consider to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.

Real Estate Owned (and Related Debt)

From time to time we may obtain legal title to the collateral from our loans due to non-performance. This acquisition of real estate is accounted for using the acquisition method under Accounting Standards Codification ("ASC") Topic 805, "Business Combinations." We recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree, if applicable, based on their relative fair values. Once real estate assets have been recorded at fair value they are evaluated for impairment on a quarterly basis. Please refer to "Note 2 – Summary of Significant Accounting Policies," "Note 3 – Fair Value Disclosure," and "Note 5 – Real Estate Owned” for more information regarding real estate owned and our valuation methodology.

Real estate assets acquired may include land, building, furniture, fixtures and equipment ("FF&E"), and intangible assets. The fair value of land is determined by utilizing the market or sales comparison approach, which compares the property to similar properties in the marketplace. Although we exercise significant judgement to identify similar properties, and may also consult independent third-party valuation experts to assist, our assessment of fair value is subject to uncertainty and sensitive to our selection of comparable properties.

We estimate the fair value of any building and FF&E by the cost approach which measures fair value as the replacement cost of these assets. This approach also requires significant judgement, and our estimate of replacement cost could vary from actual replacements costs.

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Once real estate assets have been recorded at fair value, they are evaluated for impairment on a quarterly basis. We consider the following factors when performing our impairment analysis: (i) Management, having the authority to approve the action, commits to a plan to sell the asset; (ii) significant negative industry and economic outlook or trends; (iii) expected material costs necessary to extend the life or operate the real estate asset; and (iv) our ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows to be generated by the real estate asset over the estimated remaining holding period is less than the carrying value of such real estate asset. An impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value. When determining the fair value of a real estate asset for the purpose of assessing impairment, we make certain assumptions including, but not limited to: consideration of projected operating cash flows, intended holding period of the real estate, comparable selling prices and projected cash flows from the eventual disposition of the real estate based upon our estimate of a capitalization rate and discount rate. While we exercise significant judgement in generating our assumptions, the asset’s fair value is subject to uncertainty, as actual operating cash flows and disposition proceeds could differ from those assumed in our valuations. Additionally, the output is sensitive to the assumptions used in calculating any potential impairment.

Current Expected Credit Losses ("CECL")

We measure and record potential expected credit losses related to our loan portfolio in accordance with the CECL Standard. The CECL Standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The FASB recognizes the weighted average remaining maturity ("WARM") method as an acceptable approach for computing current expected credit losses. We have adopted the WARM method to determine the General CECL Allowance for the majority of loans in our portfolio, applied on a collective basis by assets with similar risk characteristics. If we determine that a borrower or sponsor is experiencing financial difficulty, we will record loan-specific allowances (our Specific CECL Allowance). Please see “Note 2 – Summary of Significant Accounting Policies” and “Note 4 Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net” for further discussion regarding CECL.

General CECL Allowance

There are various significant assumptions required to estimate our General CECL Allowance which include deriving and applying an annual historical loss rate, forecasting and analyzing the impacts of macroeconomic conditions and the timing of expected repayments, satisfactions and future fundings.

We derive an annual historical loss rate based on a CMBS database with historical losses from 1998 through the fourth quarter of 2021 provided by a third party, Trepp LLC. We apply various filters to arrive at a CMBS dataset most analogous to our current portfolio from which to determine an appropriate historical loss rate. Selecting these filters requires the use of significant judgement. The historical loss rate, and ultimately General CECL Allowance we calculated, is sensitive to the CMBS dataset that we select.

We adjust our determined annual historical loss rate based on our outlook of the macroeconomic environment, for a reasonable and supportable forecast period—which we have determined to be one year. We determine our expectations for the macroeconomic environment by analyzing various market factors and assess the potential impact on our our portfolio. This assessment requires the use of significant judgement in selecting relevant market factors and our expectations of the future macroeconomic environment. The future macroeconomic environment is subject to uncertainty as the actual future macroeconomic environment could vary from our expectations, which will impact our General CECL Allowance.

Additionally, there are assumptions provided to us by the Manager that represent their best estimate as to expected loan maturity dates, future fundings, and timing of loan repayments. These assumptions, although made with the most available information at the time of the estimate, are subjective and actual activity may not follow the estimated schedule. These assumptions impact the future balances that the loss rate will be applied to and as such impact our General CECL Allowance. As we acquire new loans and the Manager monitors loan and sponsor performance, these estimates may change each period.

Specific CECL Allowance

When we determine that a borrower or sponsor is experiencing financial difficulty, we evaluate the related loan for loan-specific allowances, under the practical expedient per the guidance. Determining that a borrower or sponsor is experiencing financial difficulty requires the use of significant judgement and can be based on several factors subject to uncertainty. These factors can include, but are not limited to, whether cash from the borrower's operations are sufficient to cover current and future debt service requirements, the borrower’s ability to potentially refinance the loan and other circumstances that can affect the borrower’s ability to satisfy their obligations in accordance the terms of the loan. When utilizing the practical expedient for

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collateral dependent loans, the loan loss provision is determined as the difference between the fair value of the underlying collateral, adjusted for estimated costs to sell when applicable, and the carrying value of the loan (prior to the loan loss provision), as repayment or satisfaction of a loan is dependent on a sale of the underlying collateral.

The fair value of the underlying collateral is determined by using method(s) such as discounted cash flow, the market approach, or direct capitalization approach. These methods require the use of key unobservable inputs, which are inherently uncertain and subjective. Our estimate of fair value is sensitive to both the valuation methodology selected and inputs used. Determining a suitable valuation method and selecting the appropriate key unobservable inputs and assumptions requires significant judgment and consideration of factors specific to the underlying collateral being assessed. Additionally, the key unobservable inputs and assumptions used may vary depending on the information available to us and market conditions as of the valuation date. As such, the fair value that we derive and use in calculating our Specific CECL Allowance, is subject to uncertainty and any actual losses, if incurred, could differ materially from our provision.

Refer to "Note 2 - Summary of Significant Accounting Policies" to our consolidated financial statements for the complete listing and description of our significant accounting policies.

Results of Operations

All non-USD denominated assets and liabilities are translated to USD at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the prevailing exchange rate on the dates that they were recorded.

Loan Portfolio Overview

The following table sets forth certain information regarding our loan portfolio as of December 31, 2021 ($ in thousands):

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(1)    Weighted-Average Coupon and Weighted-Average All-in Yield are based on the applicable benchmark rates as of December 31, 2021 on the floating rate loans.

(2)     Weighted-Average All-in Yield includes the amortization of deferred origination fees, loan origination costs and accrual of both extension and exit fees. Weighted-Average All-in Yield excludes the benefit of forward points on currency hedges relating to loans denominated in currencies other than USD.

(3)    Gross of deferred financing costs of $9.1 million.

(4)    Cost of funds includes weighted average spread and applicable benchmark rates as of December 31, 2021 on secured debt arrangements.

(5)    Represents loan portfolio at amortized cost less secured debt outstanding.

The following table provides details of our commercial mortgage loan portfolio and subordinate loan and other lending assets portfolio, on a loan-by-loan basis, as of December 31, 2021 ($ in millions):

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(1)Includes $27.1 million of a subordinate participation sold accounted for as secured borrowing.

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

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

(4)Loans are secured by the same property.

(5)Single Asset, Single Borrower CMBS.

(6)Loan and Single Asset, Single Borrower CMBS are secured by the same properties.

Our average asset and debt balances for the year ended December 31, 2021 were ($ in thousands):

Portfolio Management

Due to the impact of COVID-19, some of our borrowers have experienced consequences which have prevented the execution of their business plans and in some cases, resulted in temporary closures. As a result, we have worked with borrowers to execute loan modifications which are typically coupled with additional equity contributions from borrowers. Loan modifications to date have included repurposing of reserves, temporary deferrals of interest or principal, and partial deferral of coupon interest as payment-in-kind interest.

Investment Activity

During the year ended December 31, 2021, we committed $3.2 billion of capital to loans ($2.8 billion was funded at closing). In addition, during the year ended December 31, 2021, we received $1.9 billion in repayments and funded $522.0 million for loans closed prior to 2021.

For the years ended December 31, 2021 and 2020, our net income available to common stockholders was $210.6 million, or $1.46 per diluted share of common stock, and $4.8 million, or $0.01 per diluted share of common stock, respectively.

Operating Results

The following table sets forth information regarding our consolidated results of operations and certain key operating metrics compared to both the same period in the previous year and the most recently reported period ($ in thousands):

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For a comparison and discussion of our results of operations and other operating and financial data for the fiscal years ended December 31, 2020 and December 31, 2019, see Part II, Item 7. "Management's Discussion and Analysis of Financial

Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed

with the SEC on February 10, 2021.

Net Interest Income

Net interest income decreased by $13.1 million during the year ended December 31, 2021 compared to the same period in 2020. Interest income remained nearly flat as the shift from subordinate loan interest to commercial mortgage loan interest coincided with our increased focus on origination of secure first commercial mortgage loans. Commercial mortgage interest increased due to our average commercial mortgage loan balance increasing by approximately $843 million from 2020 to 2021. The decrease in our subordinate loan interest was primarily caused by a decreased of approximately $102 million in our average subordinate loan balance as well as the cessation of interest accrual on the Junior Mezzanine Loan (refer to “Note 4 – Commercial mortgages, Loans, Subordinate Loans and Other Lending Assets, Net” for more information). In connection with our commercial mortgage loan originations, our outstanding borrowings under our secured debt arrangements increased by approximately $714 million from December 31, 2020 to December 31, 2021, which increased our debt interest expense year over year by $13.6 million.

We recognized payment-in-kind ("PIK") interest of $47.7 million, and $46.7 million for the years ended December 31, 2021 and 2020, respectively.

We recognized $1.5 million and $0.2 million pre-payment penalties and accelerated fees for the years ended December 31, 2021 and 2020, respectively.

Operations Related to Real Estate Owned

In 2017, we originated a $20.0 million junior mezzanine loan which was subordinate to: (i) a $110.0 million mortgage loan, and (ii) a $24.5 million senior mezzanine loan, secured by a full-service luxury hotel in Washington, D.C. On May 24,

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2021, we acquired legal title to the hotel through a deed-in-lieu of foreclosure and the criteria for held-for-sale classification in ASC Topic 360, "Property, Plant, and Equipment" were not met. The assets and liabilities related to the hotel were assumed at their estimated fair value at acquisition and presented net of accumulated depreciation and impairment charges. Results of operations from the hotel are comprised of operating revenue, expenses and real estate asset depreciation. As the real estate owned was acquired on May 24, 2021, $3.7 million of net loss from real estate owned is included in the consolidated statement of operations for year ended December 31, 2021.

Refer to "Note 5 - Real Estate Owned" for more information related to our impairment and realized losses on real estate owned.

Operating Expenses

General and administrative expenses

General and administrative expenses increased by $2.0 million for the year ended December 31, 2021 compared to the same period in 2020. The increase was primarily driven by a $1.2 million increase in general operating expenses, attributable to a one-time arrangement fee incurred in connection with an amendment to one of our senior secured term loans (refer to "Note 8 - Senior Secured Term Loans, Net" for further discussion) and an $0.8 million increase in non-cash restricted stock and RSU amortization related to shares of stock awarded under the LTIPs.

Management fees to related party

Management fee expense decreased by $1.6 million during the year ended December 31, 2021 compared to the same period in 2020. The decrease is primarily attributable to a decrease in our stockholders’ equity (as defined in the Management Agreement) as a result of our common stock repurchase of 14,832,632 shares during the year ended December 31, 2020.

Other income

Other income increased by $2.2 million during the year ended December 31, 2021 as compared to the same period in 2020 due to a $3.7 million shared appreciation fee related to a first mortgage loan secured by a portfolio of residential-for-rent assets located in the United States. This was partially offset by a decrease in interest income earned on our cash balance.

Realized loss on investments and Reversal of (provision for) loan losses - Specific CECL Allowance, net

On May 24, 2021, we purchased a $24.5 million senior mezzanine loan at par and acquired legal title to the underlying hotel through a deed-in-lieu of foreclosure. We assumed the hotel’s assets and liabilities (including the $110.0 million mortgage loan) and recorded an additional $10.0 million charge reflecting the difference between the fair value of the hotel’s net assets and the carrying amount of the loan. This $10.0 million loss on title assumption plus the previously recorded Specific CECL Allowance of $10.0 million represents a $20.0 million realized loss on investments.

Additionally, during the fourth quarter of 2021, we sold our interest in a subordinate loan secured by a mixed-use property with an outstanding principal of $41.9 million. We recorded a realized loss of approximately $0.8 million in connection with this sale. This $0.8 million in connection with the $20.0 million referenced above comprises the loss on investment in our consolidated statement of operations.

In addition to the $10.0 million Specific CECL Allowance realized on property discussed above, we reversed $20.0 million of previously recorded Specific CECL Allowance on a multifamily development loan located in Brooklyn, NY due to a more favorable market outlook as compared to when the allowance was taken. We recorded no additional Special CECL Allowances during the year ended December 31, 2021.

During the year ended December 31, 2020, we recorded $115.0 million of Specific CECL Allowances and impairments net of $13.0 million in reversals of previously recorded Specific CECL Allowances and impairments. Additional Specific CECL Allowances and impairments of $128.0 million were recorded on four loans, one of which had $47.0 million of previously recorded provisions for loan losses, related to adverse effects from COVID-19. Reversals represent $10.0 million in Specific CECL Allowances and $3.0 million in impairments to an equity position held in other assets in our consolidated balance sheet from the payoff of a loan.

The realized loss for the year ended December 31, 2020 is attributable to a $15.0 million realized loss in connection with a troubled debt restructuring ("TDR"), $11.0 million realized loss related to a loan recapitalization, $19.2 million realized loss as a result of loan sales or payoffs and $2.4 million realized loss from a foreclosure.

Realized losses and impairment on real estate owned

During the first quarter of 2021, our real estate owned, held for sale asset was reviewed for possible impairment due to a

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change in expected time to sell the asset. A $0.6 million impairment loss was recorded during the three months ended March 31, 2021, which was fully realized when the property was sold during the second quarter of 2021. Refer to "Note 5 - Real Estate Owned" for more information related to our impairment and realized losses on real estate owned.

Reversal of (provision for) loan losses - General CECL Allowance, net

Our General CECL Allowance decreased by $4.8 million during the year ended December 31, 2021 compared to an increase of $10.6 million during the same period in 2020. The decrease in General CECL Allowance recorded during 2021 was largely due to the improvement of projected macroeconomic conditions, as compared to those at the beginning of the COVID-19 pandemic, as well as the seasoning of our loan portfolio. Comparatively, the $10.6 million increase in General CECL Allowance which was recorded from initial adoption on January 1, 2020 to December 31, 2020, was driven by an increase in our view of the remaining expected term of our loan portfolio, as well as the macroeconomic outlook resulting from the COVID-19 pandemic.

Refer to "Note 2 - Summary of Significant Accounting Policies" and "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net" for additional information related to our General CECL Allowance.

Foreign currency gain (loss) and gain (loss) on derivative instruments

We use forward currency contracts to economically hedge interest and principal payments due under our loans denominated in currencies other than USD. When foreign currency gain and (loss) on derivative instruments are evaluated on a combined basis, the net impact for the years ended December 31, 2021 and 2020 was $10.0 million and $17.2 million, respectively, of gain.

During the year ended December 31, 2020 there was a significant fall in USD foreign exchange rates, caused by COVID-19, which increased our unrealized gain from hedges on our future expected interest cash flows. As hedges on our future expected interest cash flows have no offset in foreign currency gain (loss) it caused the large balance noted above. Similarly the USD foreign exchange rates decreased during 2021 and so the interest cash flow hedges increased in value with no offset in foreign currency gain (loss).

Gain (loss) on interest rate hedges

In May 2019, we entered into a $500.0 million senior secured term loan (the "2026 Term Loan"). During the second quarter of 2020, we entered into a three-year interest rate cap to cap LIBOR at 0.75%. This effectively limits the maximum all-in coupon on our 2026 Term Loan to 3.50%. During the years ended December 31, 2021 and 2020, the interest rate cap had an unrealized gain (loss) of $1.3 million and $0.1 million, respectively.

We previously used an interest rate swap to manage exposure to variable cash flows on portions of our borrowings under our 2026 Term Loan. The interest rate swap agreement allowed us to receive a variable rate cash flow based on LIBOR and

pay a fixed rate cash flow. During the year ended December 31, 2020 we recognized a net loss of $39.4 million on an interest rate swap, consisting of a realized loss of $53.9 million, and unrealized gain of $14.5 million. During the second quarter of 2020, we terminated this interest rate swap.

Subsequent Events

Refer to "Note 20 - Subsequent Events" to the accompanying consolidated financial statements for disclosure regarding significant transactions that occurred subsequent to December 31, 2021.

Contractual Obligations, Liquidity, and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to fund and maintain our assets and operations, repay borrowings, make distributions to our stockholders and other general business needs. We utilize various sources of cash in order to meet our liquidity needs in the next twelve months, which is considered the short-term, and the longer term.

Our current debt obligations consist of $1.9 billion, at face value, of corporate debt and $4.2 billion of asset specific financings. Our corporate debt includes $785.3 million of term loan borrowings, $500.0 million of senior secured notes, and $575.0 million of convertible notes, of which $345.0 million mature in August 2022. Our asset specific financings are generally tied to the underlying loans and we anticipate repayments of $987.8 million of secured debt arrangements in the short term. Specifics about our secured debt arrangements and corporate debt maturities and obligations are discussed below.

In addition to our debt obligations, as of December 31, 2021, we had $1.4 billion of unfunded loan commitments. We

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expect that approximately $689 million will be funded to existing borrowers in the short term.

We have various sources of liquidity that we are able to use in order to satisfy our short and long term obligations. As of December 31, 2021 we had $343.1 million of cash on hand. As of December 31, 2021 we also held approximately $1.9 billion of unencumbered assets, consisting of $1.1 billion of senior mortgages and $856.0 million of mezzanine loans. Depending on market conditions, we may utilize additional borrowings as a source of cash, which may also include additional secured debt arrangements as well as other borrowings or conduct additional public and private debt and equity offerings.

We maintain policies relating to our use of leverage. See "Leverage Policies" below. In the future, we may seek to raise further equity or debt capital or engage in other forms of borrowings in order to fund future investments or to refinance expiring indebtedness.

We generally intend to hold our assets for investment, although we may sell certain of our investments in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.

To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. These distribution requirements limit our ability to retain earnings and replenish or increase capital for operations.

We additionally have interests in two unconsolidated joint ventures, each of which owns underlying properties that secure one of our first mortgage loans, respectively and are accounted for as off-balance-sheet arrangements. The unconsolidated joint ventures were deemed to be Variable Interest Entities ("VIEs"), of which we are not the primary beneficiary. Accordingly, the VIEs are not consolidated in our consolidated financial statements as of December 31, 2021. Our maximum exposure to loss from these commercial mortgage loans is limited to their carrying value, which as of December 31, 2021 was $227.3 million. Although there is risk of loss we have no contractual obligation to fund any additional capital into the joint ventures.

Borrowings Under Various Financing Arrangements

The table below summarizes the outstanding balances and maturities for our various financing arrangements:

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(1)Borrowings Outstanding represent principal balances as of the respective reporting periods.

(2)Maturity dates represent weighted average maturities based on borrowings outstanding and assumes extensions at our option are exercised with consent of financing providers, where applicable.

Secured Credit Facilities

As of December 31, 2021, we had entered into six secured credit facilities through wholly-owned subsidiaries entered into through various secured debt arrangements. Terms under various master repurchase agreements vary by secured credit facility.

Refer to Note 7 - Secured Debt Arrangements, Net of our Consolidated Financial Statements for additional disclosure regarding our secured credit facilities.

Barclays Private Securitization

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In June 2020, through a newly formed entity, we entered into a private securitization with Barclays Bank plc, of which Barclays Bank plc retained $782.0 million of senior notes (the "Barclays Private Securitization"). The Barclays Private Securitization finances the loans that were previously financed under the Barclays Facility - GBP/EUR. During the fourth quarter of 2021, we pledged two additional commercial mortgage loans with outstanding principal balances of $227.4 million (£165.0 million assuming conversion into USD) and $187.4 million (kr1.6 billion assuming conversion into USD) as of . During the quarter ended June 30, 2021, we pledged an additional commercial mortgage loan with an outstanding principal balance of $281.7 million (€237.6 million assuming conversion into USD), and pledged additional collateral of a financed loan of $114.7 million (kr1.0 billion assuming conversion into USD).

As of December 31, 2021, we had $1.9 billion (£960.2 million, €328.9 million, and kr2.1 billion assuming conversion into USD) of borrowings outstanding under the Barclays Private Securitization secured by certain of our commercial mortgage loans.

Refer to "Note 7 - Secured Debt Arrangements, Net" of our Consolidated Financial Statements for additional disclosure regarding our Barclays Private Securitization.

Senior Secured Term Loans

In May 2019, we entered into the $500.0 million senior secured term loan (the "2026 Term Loan"). During the year ended December 31, 2021, we repaid $5.0 million of principal related to the 2026 Term Loan. The 2026 Term Loan bears interest at LIBOR plus 2.75%, was issued at a price of 99.5%, and matures in May 2026.

In March 2021, we entered into the $300.0 million senior secured term loan (the "2028 Term Loan" and, together with the 2026 Term Loan, the "Term Loans"). During the year ended December 31, 2021, we repaid $2.3 million of principal related to the 2028 Term Loan. The 2028 Term Loan bears interest at LIBOR (with a floor of 0.50%) plus 3.50%, was issued at a price of 99.0%, and matures in March 2028.

The outstanding Term Loans principal balance as of December 31, 2021 and 2020 was $785.3 million and $492.5 million, respectively. The Term Loans contain restrictions relating to liens, asset sales, indebtedness, and investments in non-wholly owned entities. During the fourth quarter of 2021, we modified the financial covenants of the Term Loans which included the following: (i) increased our maximum ratio of total recourse debt to tangible net worth from 3:1 to 4:1, (ii) increased our maximum ratio of total unencumbered assets to total pari-passu indebtedness from 1.25:1 to 2.50:1, and (iii) the unencumbered asset definition was also amended to include residual repo equity. In conjunction with the modification, we incurred $5.2 million in fees, $3.9 million of which were consent fees paid to borrowers recorded as deferred financing costs and $1.3 million of arrangement fees paid to the Term Loan arranger recorded as general and administrative expenses. We were in compliance with the applicable covenants as of December 31, 2021 and December 31, 2020.

Senior Secured Notes

In June 2021, we issued $500.0 million of 4.625% Senior Secured Notes due 2029 (the "2029 Notes"), for which we received net proceeds of $495.0 million, after offering expenses. The 2029 Notes will mature on June 15, 2029, unless earlier repurchased or redeemed. The 2029 Notes are secured by a first-priority lien, and rank pari passu in right of payment with all of our existing and future first lien obligations, including indebtedness under the Term Loans. The 2029 Notes were issued at par and contain covenants relating to liens, indebtedness, and investments in non-wholly owned entities.

As of December 31, 2021, the 2029 Notes had a carrying value of $494.1 million net of deferred financing costs of $5.9 million. The 2029 Notes require that we maintain a ratio of total unencumbered assets to total pari-passu indebtedness of at least 1.20:1. We were in compliance with this covenant as of December 31, 2021.

Convertible Senior Notes

In two separate offerings during 2017, we issued an aggregate principal amount of $345.0 million of 4.75% Convertible Senior Notes due 2022, for which we received $337.5 million, after deducting the underwriting discount and offering expenses. At December 31, 2021, the 2022 Notes had a carrying value of $343.1 million and an unamortized discount of $1.9 million.

During the fourth quarter of 2018, we issued $230.0 million of 5.375% Convertible Senior Notes due 2023, for which we received $223.7 million after deducting the underwriting discount and offering expenses. At December 31, 2021, the 2023 Notes had a carrying value of $226.9 million and an unamortized discount of $3.1 million.

Debt Covenants

The guarantees related to our secured debt arrangements contain the following financial covenants: (i) tangible net worth must be greater than $1.25 billion plus 75% of the net cash proceeds of any equity issuance after March 31, 2017 (ii) our ratio

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of total indebtedness to tangible net worth cannot be greater than 3.75:1; and (iii) our liquidity cannot be less than an amount equal to the greater of 5% of total recourse indebtedness or $30.0 million. Under these covenants, our General CECL Allowance is added back to our tangible net worth calculation.

We were in compliance with the covenants under each of our secured debt arrangements at December 31, 2021 and December 31, 2020.

Debt-to-Equity Ratio

The following table presents our debt-to-equity ratio:

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(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.

Leverage Policies

We use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. In addition to our secured debt arrangements and senior secured term loan, we access additional sources of borrowings. Our charter and bylaws do not limit the amount of indebtedness we can incur; however, we are subject to and carefully monitor the limits placed on us by our credit providers and those that assign ratings on our company.

At December 31, 2021, our debt-to-equity ratio was 2.4 and our portfolio was comprised of $7.0 billion of commercial mortgage loans and $0.8 billion of subordinate loans and other lending assets. 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.

Investment Guidelines

Our current investment guidelines, approved by our board of directors, are comprised of the following:

•no investment will be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes;

•no investment will be made that would cause us to register as an investment company under the 1940 Act;

•investments will be predominantly in our target assets;

•no more than 20% of our cash equity (on a consolidated basis) will be invested in any single investment at the time of the investment; and

•until appropriate investments can be identified, the Manager may invest the proceeds of any offering in interest bearing, short-term investments, including money market accounts and/or funds, that are consistent with our intention to qualify as a REIT.

The board of directors must approve any change in or waiver to these investment guidelines.

Dividends

We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. We generally intend over time to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Any distributions we make are at the discretion of our board of directors and depend upon, among other things, our actual results of operations. These results and our ability to pay distributions are affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

The following table details our dividend activity:

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(1)As our aggregate 2021 distributions did not exceeded our 2021 earnings and profits, $0.1055 of the January 2022 distribution declared in the fourth quarter of 2021, and payable to common stockholders of record as of December 31, 2021, will be treated as a 2021 distribution for U.S. federal income tax purposes.

On July 15, 2021, we exchanged all 6,770,393 shares outstanding of our 8.00% Fixed-to-Floating Series B Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share ("Series B Preferred Stock"), with a liquidation preference of $25.00 per share, for 6,770,393 shares of 7.25% Series B-1 Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share ("Series B-1 Preferred Stock"), with a liquidation preference of $25.00 per share, pursuant to an exchange agreement with the two existing shareholders.

The Series B Preferred Stock entitled holders to receive dividends at a rate per annum equal to the greater of (a) 8.00% and (b) a floating rate equal to the 3-month LIBOR rate as calculated on each applicable date of determination plus 6.46% of the $25.00 liquidation preference, and paid cumulative cash dividends, which were payable quarterly in equal amounts in arrears on the 15th day of each January, April, July and October.

As of December 31, 2021, we had 6,770,393 shares of Series B-1 Preferred Stock outstanding. The Series B-1 Preferred Stock pay cumulative cash dividends, which are payable quarterly in equal amounts in arrears on the 15th day of each January, April, July and October: at a rate of 7.25% per annum of the $25.00 per share liquidation preference. Except under certain limited circumstances, the Series B-1 Preferred Stock is generally not convertible into or exchangeable for any other property or any other of our securities at the election of the holders. On and after July 15, 2026, we may, at our option, redeem the shares at a redemption price of $25.00, plus any accrued unpaid dividends to, but not including, the date of the redemption.

Non-GAAP Financial Measures

Distributable Earnings

Beginning in the fourth quarter of 2020 to more appropriately reflect the principal purpose of the measure, "Operating Earnings" was relabeled "Distributable Earnings", a non-GAAP financial measure. The definition continues to be net income available to common stockholders, computed in accordance with GAAP, adjusted for (i) equity-based compensation expense (a portion of which may become cash-based upon final vesting and settlement of awards should the holder elect net share settlement to satisfy income tax withholding), (ii) any unrealized gains or losses or other non-cash items (including depreciation and amortization related to real estate owned) included in net income available to common stockholders, (iii) unrealized income from unconsolidated joint ventures, (iv) foreign currency gains (losses), other than (a) realized gains/(losses) related to interest income, and (b) forward point gains/(losses) realized on our foreign currency hedges, (v) the non-cash amortization expense related to the reclassification of a portion of the Convertible Notes to stockholders’ equity in accordance with GAAP, and (vi) provision for loan losses. Distributable Earnings may also be adjusted to exclude certain other non-cash items, as determined by the Manager and approved by a majority of our independent directors. For year ended December 31, 2021, our Distributable Earnings were $188.7 million, or $1.33 per share, as compared to $125.6 million, or $0.84 per share, for the prior year.

The weighted-average diluted shares outstanding used for Distributable Earnings per weighted-average diluted share has been adjusted from weighted-average diluted shares under GAAP to exclude shares issued from a potential conversion of the Convertible Notes. Consistent with the treatment of other unrealized adjustments to Distributable Earnings, these potentially issuable shares are excluded until a conversion occurs, which we believe is a useful presentation for investors. We believe that excluding shares issued in connection with a potential conversion of the Convertible Notes from our computation of Distributable Earnings per weighted average diluted share is useful to investors for various reasons, including the following: (i) conversion of Convertible Notes to shares requires both the holder of a note to elect to convert the Convertible Note and for us to elect to settle the conversion in the form of shares (ii) future conversion decisions by note holders will be based on our stock price in the future, which is presently not determinable; (iii) the exclusion of shares issued in connection with a potential conversion of the Convertible Notes from the computation of Distributable Earnings per weighted-average diluted share is consistent with how we treat other unrealized items in our computation of Distributable Earnings per weighted-average diluted share; and (iv) we believe that when evaluating our operating performance, investors and potential investors consider our Distributable Earnings relative to our actual distributions, which are based on shares outstanding and not shares that might be issued in the future.

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For year ended December 31, 2021, 28,533,271 weighted-average potentially issuable shares with respect to the Convertible Notes were included in the dilutive earnings per share denominator. For year ended December 31, 2020, all of the potentially issuable shares with respect to the Convertible Notes were excluded from the calculation of diluted net loss per share because the effect was anti-dilutive. Refer to "Note 19 - Net Income (Loss) per Share" for further discussion.

The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average diluted shares used for Distributable Earnings ($ in thousands, except Price):

As a REIT, U.S. federal income tax law generally requires us to distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that we pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons stockholders invest in a REIT, we generally intend over time to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Distributable Earnings is a key factor considered by the board of directors in setting the dividend and as such we believe Distributable Earnings is useful to investors.

As discussed in "Note 11 - Derivatives" we terminated our interest rate swap, which we used to manage exposure to variable cash flows on our borrowings under our senior secured term loan, in the second quarter of 2020 and recorded a realized loss in our consolidated statement of operations. We have not had an interest rate swap on our consolidated balance sheet since this termination. In addition, as discussed in "Note 4 - Commercial Mortgage Loans, Subordinate Loans and Other Lending Assets, Net," we recorded a net realized loss on the sale of one of our subordinate loans during the year ended December 31, 2021 and a net realized loss on the sale of seven of our commercial real estate loans, two restructurings, one payoff of a previously impaired loan, and one foreclosure during 2020.

We also believe it is useful to our investors to present Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap to reflect our operating results because (i) our operating results are primarily comprised of earning interest income on our investments net of borrowing and administrative costs, which comprise our ongoing operations and (ii) it has been a useful factor related to our dividend per share because it is one of the considerations when a dividend is determined. We believe that our investors use Distributable Earnings and Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap, or a comparable supplemental performance measure, to evaluate and compare the performance of our company and our peers.

A significant limitation associated with Distributable Earnings as a measure of our financial performance over any period is that it excludes unrealized gains (losses) from investments. In addition, our presentation of Distributable Earnings may not be comparable to similarly-titled measures of other companies, that use different calculations. As a result, Distributable Earnings should not be considered as a substitute for our GAAP net income as a measure of our financial performance or any measure of our liquidity under GAAP. Distributable Earnings are reduced for realized losses on loans which include losses that management believes are near certain to be realized.

The table below summarizes the reconciliation from net income available to common stockholders to Distributable Earnings and Distributable Earnings prior to realized losses and impairments on real estate owned, investments and interest rate swap ($ in thousands):

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Book Value Per Share

The table below calculates our book value per share ($ in thousands, except per share data):

The table below shows the changes in our book value per share:

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We believe that presenting book value per share with sub-totals prior to the CECL Allowances and depreciation and amortization is useful for investors for various reasons, including, among other things, analyzing our compliance with financial covenants related to tangible net worth and debt-to-equity under our secured debt arrangements and senior secured term loan, which permit us to add the General CECL Allowance to our GAAP stockholders' equity. Given that our lenders consider book value per share prior to the General CECL Allowance as an important metric related to our debt covenants, we believe disclosing book value per share prior to the General CECL Allowance is important to investors such that they have the same visibility. We further believe that presenting book value before depreciation and amortization is useful to investors since it is a non-cash expense included in net income and is not representative of our core business and ongoing operations.

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