Apollo Commercial Real Estate Finance, Inc. - Quarter Report: 2012 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2012

¨	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)		(IRS Employer Identification Number)

Apollo Commercial Real Estate Finance, Inc.

c/o Apollo Global Management, LLC

9 West 57th Street, 43rd Floor,

New York, New York 10019

(Address of Registrant’s principal executive offices)

(212) 515–3200

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of May 1, 2012, there were 20,570,616 shares, par value $0.01, of the registrant’s common stock issued and outstanding.

Table of Contents


	Page
Part I — Financial Information
ITEM 1. Financial Statements		3
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		31
ITEM 4. Controls and Procedures		32
Part II — Other Information
ITEM 1. Legal Proceedings		33
ITEM 1A. Risk Factors		33
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
ITEM 3. Defaults Upon Senior Securities		33
ITEM 4. Mine Safety Disclosures		33
ITEM 5. Other Information		33
ITEM 6. Exhibits		33

Part I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands—except share and per share data)


	March 31, 2012		December 31, 2011
Assets:
Cash	$	31,452	$	21,568
Securities available-for-sale, at estimated fair value		151,964		302,543
Securities, at estimated fair value		178,932		251,452
Commercial mortgage loans, held for investment		108,817		109,006
Subordinate loans, held for investment		179,336		149,086
Repurchase agreements, held for investment		47,439		47,439
Interest receivable		5,959		8,075
Deferred financing costs, net		1,308		2,044
Other assets		14		17

Total Assets	$	705,221	$	891,230

Liabilities and Stockholders’ Equity
Liabilities:
Borrowings under repurchase agreements	$	355,257	$	290,700
TALF borrowings		—		251,327
Derivative instruments, net		483		478
Accounts payable and accrued expenses		1,126		1,746
Payable to related party		1,289		1,298
Dividends payable		8,553		8,703
Deferred revenue		136		—

Total Liabilities		366,844		554,252
Stockholders’ Equity:
Common stock, $0.01 par value, 450,000,000 shares authorized, 20,561,032 shares issued and outstanding in 2012 and 2011		206		206
Preferred stock, $0.01 par value, 50,000,000 shares authorized and no shares outstanding		—		—
Additional paid-in-capital		337,789		336,209
Accumulated other comprehensive income		382		563

Total Stockholders’ Equity		338,377		336,978

Total Liabilities and Stockholders’ Equity	$	705,221	$	891,230

See notes to unaudited condensed consolidated financial statements.

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 March 31, 2012			Three months ended March 31, 2011
Net interest income:
Interest income from securities	$	5,323		$	6,656
Interest income from commercial mortgage loans		2,234			2,313
Interest income from subordinate loans		5,313			1,909
Interest income from repurchase agreements		1,559			60
Interest expense		(3,242	)		(3,339	)

Net interest income		11,187			7,599
Operating expenses:
General and administrative expenses (includes $1,083 and $351 of non-cash stock based compensation in 2012 and 2011, respectively)		(2,036	)		(1,380	)
Management fees to related party		(1,289	)		(1,088	)

Total operating expenses		(3,325	)		(2,468	)
Interest income from cash balances		1			5
Realized gain on sale of securities		262			—
Unrealized gain on securities		1,385			26
Gain (loss) on derivative instruments (includes $(5) and $459 of unrealized gains (losses) in 2012 and 2011, respectively)		(417	)		18

Net income	$	9,093		$	5,180

Basic and diluted net income per share of common stock	$	0.43		$	0.29

Basic and diluted weighted average common shares outstanding		20,966,426			17,551,828

Dividend declared per share of common stock	$	0.40		$	0.40

See notes to unaudited condensed consolidated financial statements.

Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

(in thousands)


	Three months ended March 31,
	2012			2011
Net income	$	9,093		$	5,180
Change in net unrealized gain (loss) on securities available-for-sale		(181	)		(1,877	)

Comprehensive income	$	8,912		$	3,303

See notes to unaudited condensed consolidated financial statements.

Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

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

(in thousands—except share data)


	Common Stock				Additional Paid In			Retained			Accumulated Other Comprehensive
	Shares		Par		Capital			Earnings			Income			Total
Balance at January 1, 2012		20,561,032	$	206	$	336,209		$	—		$	563		$	336,978
Vesting of restricted stock pursuant to Equity Incentive Plan		—		—		1,083			—			—			1,083
Offering Costs		—		—		(204	)		—			—			(204	)
Net income		—		—		—			9,093			—			9,093
Change in net unrealized gain on securities available-for-sale		—		—		—			—			(181	)		(181	)
Dividends on common stock		—		—		701			(9,093	)		—			(8,392	)

Balance at March 31, 2012		20,561,032	$	206	$	337,789		$	—		$	382		$	338,377

See notes to unaudited condensed consolidated financial statements.

Apollo Commercial Real Estate Finance, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows (Unaudited)

(in thousands)


	For three months ended March 31, 2012			For three months ended March 31, 2011
Cash flows provided by operating activities:
Net income	$	9,093		$	5,180
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization		1,574			1,998
Amortization of deferred financing costs		735			358
Amortization of deferred revenue		(14	)		—
Restricted stock amortization expense		1,083			351
Unrealized gain on securities		(1,385	)		(26	)
Unrealized gain on derivative instruments		5			(459	)
Realized gain on sale of security		(262	)		—
Changes in operating assets and liabilities:
Increase in accrued principal and interest receivable, less purchased interest		1,267			(2,696	)
Decrease in other assets		3			3
Increase in accounts payable and accrued expenses		(324	)		651
Increase (decrease) in payable to related party		(9	)		405

Net cash provided by operating activities		11,766			5,765

Cash flows used in investing activities:
Proceeds from sale of securities available-for-sale		121,338			—
Proceeds from sale of securities at estimated fair value		16,918			—
Funding of commercial mortgage loans		—			(8,800	)
Funding of subordinate loans		(29,833	)		—
Funding of repurchase agreements		—			(41,418	)
Principal payments received on securities available-for-sale		29,271			11,446
Principal payments received on securities at estimated fair value		56,037			3,505
Principal payments received on commercial mortgage loans		189			182
Principal payments received on subordinate loans		10			12
Change in contractual deposits		—			(144	)

Net cash provided by (used in) investing activities		193,930			(35,217	)

Cash flows from financing activities:
Payment of offering costs		—			(494	)
Repayments of TALF borrowings		(251,327	)		(7,895	)
Proceeds from repurchase agreement borrowings		264,401			58,819
Repayments of repurchase agreement borrowings		(199,844	)		(3,155	)
Deferred financing costs		(500	)		(500	)
Dividends on common stock		(8,542	)		(7,142	)

Net cash provided by financing activities		(195,812	)		39,633

Net increase in cash and cash equivalents		9,884			10,181
Cash and cash equivalents, beginning of period		21,568			37,894

Cash and cash equivalents, end of period	$	31,452		$	48,075


Supplemental disclosure of cash flow information:
Interest paid	$	2,809	$	3,391

Supplemental disclosure of non-cash financing activities:
Dividend declared, not yet paid	$	8,553	$	7,116

Deferred financing costs, not yet paid	$	—	$	500

Offering costs payable	$	204	$	—

See notes to unaudited condensed consolidated financial statements.

Apollo Commercial Real Estate Finance Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands—except share and per share data)

Note 1 – Organization

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

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

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

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included.

The Company currently operates in one business segment.

Recent Accounting Pronouncements

In December 2011, the FASB issued guidance requiring additional disclosure information about offsetting and related arrangements. Entities will be required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transaction subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on a basis of GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (IFRS). The guidance is effective for periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not believe that the adoption of the amended guidance will have a significant effect on its consolidated financial statements but will impact the disclosure.

Note 3 – Fair Value Disclosure

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

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

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

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

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

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

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

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


	Fair Value as of March 31, 2012
	Level I		Level II			Level III		Total
AAA-rated CMBS (Available-for-Sale)	$	—	$	151,964		$	—	$	151,964
AAA-rated CMBS (Fair Value Option)		—		178,932			—		178,932
Interest rate swaps		—		(519	)		—		(519	)
Interest rate caps		—		36			—		36

Total	$	—	$	330,413		$	—	$	330,413

The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of December 31, 2011:


	Fair Value as of December 31, 2011
	Level I		Level II			Level III		Total
AAA-rated CMBS (Available-for-Sale)	$	—	$	302,543		$	—	$	302,543
AAA-rated CMBS (Fair Value Option)		—		251,452			—		251,452
Interest rate swaps		—		(666	)		—		(666	)
Interest rate caps		—		188			—		188

Total	$	—	$	553,517		$	—	$	553,517

Note 4 – Debt Securities

At March 31, 2012, the Company had AAA-rated CMBS with an aggregate face value of $324,798 which were pledged to secure borrowings under the Company’s master repurchase agreement with Wells Fargo Bank, N.A. (the “Wells Facility”). The amortized cost and estimated fair value of the Company’s debt securities at March 31, 2012 are summarized as follows:


Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
AAA-rated CMBS (Available-for-Sale)	$	149,355	$	151,582	$	792	$	(410	)	$	151,964
AAA-rated CMBS (Fair Value Option)		175,443		178,831		346		(245	)		178,932

Total	$	324,798	$	330,413	$	1,138	$	(655	)	$	330,896

The unrealized loss related to the available-for-sale securities results from the fair value of the securities falling below the amortized cost basis. These unrealized losses are primarily the result of market factors other than credit impairment and the Company believes the carrying value of the securities are fully recoverable over their expected holding period. Management does not intend to sell or expect to be forced to sell the securities prior to the Company recovering the amortized cost. Additionally, all unrealized losses on securities available-for-sale at March 31, 2012 have existed for less than twelve months. As such, management does not believe any of the securities are other than temporarily impaired.

During March 2012, the Company sold CMBS with an amortized cost of $137,423 resulting in realized gains of $262, which was comprised of realized gains of $345 and realized losses of $83. The sale generated proceeds of $14,621 after the repayment of $123,064 of borrowings under the Wells Facility.

The amortized cost and estimated fair value of the Company’s debt securities at December 31, 2011 are summarized as follows:


Security Description	Face Amount		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
AAA-rated CMBS (Available-for-Sale)	$	298,598	$	301,980	$	810	$	(247	)	$	302,543
AAA-rated CMBS (Fair Value Option)		248,209		252,736		—		(1,284	)		251,452

Total	$	546,807	$	554,716	$	810	$	(1,531	)	$	553,995

The overall statistics for the Company’s CMBS investments calculated on a weighted average basis assuming no early prepayments or defaults as of March 31, 2012 and December 31, 2011 are as follows:


	March 31, 2012			December 31, 2011
Credit Ratings *		AAA			AAA
Coupon		5.6	%		5.6	%
Yield		4.3	%		4.3	%
Weighted Average Life		1.5 years			1.2 years

*	Ratings per Fitch, Moody’s or S&P.

The percentage vintage, property type, and location of the collateral securing the Company’s CMBS investments calculated on a weighted average basis as of March 31, 2012 and December 31, 2011 are as follows:


Vintage	March 31, 2012			December 31, 2011
2006		4	%		7	%
2007		96			93

Total		100	%		100	%


Property Type	March 31, 2012			December 31, 2011
Office		39.6	%		36.5	%
Retail		23.6			26.6
Multifamily		13.1			13.1
Hotel		10.8			10.8
Other *		12.9			13.0

Total		100	%		100	%

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


Location	March 31, 2012			December 31, 2011
South Atlantic		22.0	%		23.0	%
Middle Atlantic		20.9			21.9
Pacific		23.8			21.0
Other *		33.3			34.1

Total		100	%		100	%

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

Note 5 – Commercial Mortgage Loans

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


Description	Date of Investment		Maturity Date		Original Face Amount		Current Face Amount		Coupon			Amortization Schedule	Property Size		Appraised Loan-to- Value *
Hotel - NY, NY		Jan-10		Feb-15	$	32,000	$	31,739		8.25	%	30 year		151 rooms		40	%
Office Condo (Headquarters) - NY, NY		Feb-10		Feb-15		28,000		27,587		8.00		30 year		73,419 sq. ft.		54	%
Hotel - Silver Spring, MD		Mar-10		Apr-15		26,000		25,491		9.00		25 year		263 rooms		58	%
Hotel – NY, NY		Aug-10		Aug-12		24,000		24,000		8.00		Interest only		155 rooms		40	%

Total					$	110,000	$	108,817		8.31	%

*	Appraised loan-to-value (“LTV”) represents the LTV as of the date of investment for all loans except the $32,000 New York, NY hotel loan. The LTV for the $32,000 New York, NY hotel loan is as of March 2011.

The Company’s commercial mortgage loan portfolio was comprised of the following at December 31, 2011:


Description	Date of Investment		Maturity Date		Original Face Amount		Current Face Amount		Coupon			Amortization Schedule	Property Size		Appraised Loan-to- Value *
Hotel - NY, NY		Jan-10		Feb-15	$	32,000	$	31,798		8.25	%	30 year		151 rooms		40	%
Office Condo (Headquarters) - NY, NY		Feb-10		Feb-15		28,000		27,644		8.00		30 year		73,419 sq. ft.		54	%
Hotel - Silver Spring, MD		Mar-10		Apr-15		26,000		25,564		9.00		25 year		263 rooms		58	%
Hotel – NY, NY		Aug-10		Aug-12		24,000		24,000		8.00		Interest only		155 rooms		40	%

Total					$	110,000	$	109,006		8.31	%

*	Appraised LTV represents the LTV as of the date of investment for all loans except the $32,000 New York, NY hotel loan. The LTV for the $32,000 New York, NY hotel loan is as of March 2011.

The Company evaluates its loans for possible impairment on a quarterly basis. The Company regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations are sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such loan loss analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan. The Company has determined that an allowance for loan losses was not necessary at March 31, 2012 and December 31, 2011.

Note 6 – Subordinate Loans

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


Description	Date of Investment		Maturity Date		Original Face Amount		Current Face Amount		Coupon			Amortization Schedule			Appraised Loan-to-Value (1)
Senior Mezz - Retail - Various		Dec-09		Dec-19	$	30,000	$	30,000		12.24	%		Interest only	(2)		69	%
Junior Mezz - Retail - Various		Dec-09		Dec-19		20,000		20,000		14.00			Interest only	(2)		74	%
Office - Michigan		May-10		Jun-20		9,000		8,939		13.00			25 year			70	%
Ski Resort - California		Apr-11		May-17		40,000		40,000		13.25			Interest only	(3)		64	%
Hotel Portfolio - New York (4)		Aug-11		July-13		25,000		25,000		11.49			Interest only	(5)		60	%
Retail Center - Virginia (6)		Oct-11		Oct-14		25,000		25,397		14.00			Interest only	(6)		74	%
Hotel - New York (7)		Jan-12		Feb-14		15,000		15,000		12.00			Interest only	(7)		63	%
Hotel - New York (8)		Mar-12		Mar-14		15,000		15,000		11.50			Interest only	(8)		65	%

Total/Weighted Average					$	179,000	$	179,336		12.76	%

(1)	Appraised LTV represents the LTV as of the date of investment.

(2)	Prepayments are prohibited prior to the fourth year of the loan and any prepayments thereafter are subject to prepayment penalties ranging from 5% to 1%.

(3)	Prepayments are prohibited prior to the third year of the loan and any prepayments thereafter are subject to prepayment penalties ranging from 5% to 1%.

(4)	Includes a LIBOR floor of 1% and three one-year extension options subject to certain conditions and the payment of a 0.25% fee for the fourth and fifth year extensions.

(5)	Prepayments are prohibited prior to February 2013 and any prepayments thereafter are subject to spread maintenance premiums.

(6)	Interest rate of 14.0% includes a 10.0% current payment with a 4.0% accrual. There are two one-year extension options subject to certain conditions.

(7)	Includes a 1.00% origination fee, a one-year extension option subject to certain conditions and a 0.50% extension fee as well as a 1.50% exit fee.

(8)	Includes a LIBOR floor of 0.50%, two one-year extension options subject to certain conditions and the payment of a 0.50% fee for the second extension.

The Company’s subordinate loan portfolio was comprised of the following at December 31, 2011:


Description	Date of Investment		Maturity Date		Original Face Amount		Current Face Amount		Coupon			Amortization Schedule			Appraised Loan-to-Value (1)
Senior Mezz - Retail - Various		Dec-09		Dec-19	$	30,000	$	30,000		12.24	%		Interest only	(2)		69	%
Junior Mezz - Retail - Various		Dec-09		Dec-19		20,000		20,000		14.00			Interest only	(2)		74	%
Office - Michigan		May-10		Jun-20		9,000		8,950		13.00			25 year			70	%
Ski Resort - California		Apr-11		May-17		40,000		40,000		13.25			Interest only	(2)		64	%
Hotel Portfolio - New York (3)		Aug-11		July-13		25,000		25,000		11.49			Interest only	(4)		60	%
Retail Center - Virginia (5)		Oct-11		Oct-14		25,000		25,136		14.00			Interest only	(5)		60	%

Total/Weighted Average					$	149,000	$	149,086		13.00	%

(1)	Appraised LTV represents the LTV as of the date of investment.

(2)	Prepayments are prohibited prior to the third year of the loan and any prepayments thereafter are subject to prepayment penalties ranging from 5% to 0%.

(3)	Includes a LIBOR floor of 1% and three one-year extension options subject to certain conditions.

(4)	Prepayments are prohibited prior to February 2013 and any prepayments thereafter are subject to spread maintenance premiums.

(5)	Interest rate of 14.0% includes a 10.0% current payment with a 4.0% accrual. There are two one-year extension options subject to certain conditions.

The Company evaluates its loans for possible impairment on a quarterly basis. See Note 5 – Commercial Mortgage Loans for a summary of the metrics reviewed. The Company has determined that an allowance for loan loss was not necessary at March 31, 2012 and December 31, 2011.

Note 7 – Repurchase Agreement

During March 2011, the Company closed on a $47,439 investment structured in the form of a repurchase facility secured by a Class A-2 CDO bond. The first draw under the repurchase facility totaled $41,418 and occurred on March 28, 2011. During April 2011, the Company funded an additional $6,021. The additional funding results in the total balance of the Company’s investment in the repurchase facility being $47,439.

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

In aggregate, the $47,439 of borrowings provided under the facility will finance the purchase of a CDO bond with an aggregate face amount of $68,726, representing an advance rate of 69% on the CDO bond’s face amount. The Class A-2 CDO bond, originally rated AAA/Aaa, is currently rated A-/Baa1. The CDO is comprised of 58 senior and subordinate commercial real estate debt positions and commercial real estate securities with the majority of the debt and securities underlying the CDO being first mortgages.

Note 8 – Borrowings

At March 31, 2012 and December 31, 2011, the Company’s borrowings had the following weighted average maturities and interest rates:


	March 31, 2012								December 31, 2011
	Debt Balance		Weighted Average Remaining Maturity			Weighted Average Rate			Debt Balance		Weighted Average Remaining Maturity			Weighted Average Rate
Wells Facility borrowings	$	286,650		1.4 years	*		1.6	%	$	221,980		1.6 years	*		1.8	%	*
JPMorgan Facility borrowings		68,607		0.7 years			3.2	%		68,720		0.9 years			3.3	%	L+300
TALF borrowings		—		—			—	%		251,327		1.3 years			2.8	%	Fixed

Total borrowings	$	355,257		1.2 years			1.9	%	$	542,027		1.3 years			2.5	%

*	Assumes extension options on Wells Facility are exercised. Borrowings outstanding under the Wells Facility bear interest at a LIBOR plus 125bps or 150bps depending on the collateral pledged.

At March 31, 2012, the Company’s borrowings had the following remaining maturities:


	Less than 1 year		1 to 3 years			3 to 5 years		More than 5 years		Total
Wells Facility borrowings	$	136,317	$	150,333	*	$	—	$	—	$	286,650
JPMorgan Facility borrowings		68,607		—			—		—		68,607

Total	$	204,924	$	150,333		$	—	$	—	$	355,257

*	Assumes extension options on Wells Facility are exercised.

At March 31, 2012, the Company’s collateralized financings are comprised of borrowings outstanding under the Company’s $100,000 master repurchase facility entered into with JPMorgan Chase Bank, N.A. (the “JPMorgan Facility”) and the Wells Facility. The table below summarizes the outstanding balances at March 31, 2012 as well as the maximum and average balances for the three months ended March 31, 2012.


			For the three months ended March 31, 2012
	Balance at March 31, 2012		Maximum Month-End Balance		Average Month-End Balance
Wells Facility borrowings	$	286,650	$	469,147	$	350,721
JPMorgan Facility borrowings		68,607		68,720		68,670
TALF borrowings		—	$	251,327		62,932

Total	$	355,257

During December 2011, the Company, through an indirect wholly-owned subsidiary, entered into an amendment letter related to the Wells Facility to increase its maximum permitted borrowing under the facility from $250,000 to $506,000. The Company utilized the additional capacity under the Wells Facility to refinance all of the Company’s outstanding TALF debt during January 2012.

Prior to the refinancing, the Company had TALF borrowings totaling $250,293 with a weighted average cost of funds of 2.8%. The increased borrowings related to this collateral totaled $264,401 and the Company entered into interest rate swap agreements with an initial aggregate notional of $56,273 to economically hedge a portion of this floating-rate debt. During the first quarter of 2012, the Company repaid $76,667 of debt under the Wells Facility upon receiving paydowns from the Company’s securities and $123,064 upon the sale of a portion of the Company’s CMBS portfolio. At March 31, 2012, the Company had $286,650 of aggregate borrowings outstanding under the Wells Facility with a current weighted average cost of funds of 2.1%.

The Company entered into the JPMorgan Facility in January 2010 to finance the Company’s first mortgage loans and AAA-rated CMBS. The Company has borrowed under this facility from time to time as needed to fund the acquisition of additional assets.

The Company’s repurchase agreements are subject to certain financial covenants and the Company was in compliance with these covenants at March 31, 2012.

Note 9 – Derivative instruments

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

The Company entered into interest rate swaps and forward-starting caps in an effort to economically hedge floating-rate interest payments due under the Wells Facility as well as potential extensions of the collateral securing the Wells Facility borrowings. The Company’s derivative instruments consist of the following at March 31, 2012 and December 31, 2011:


			March 31, 2012						December 31, 2011
	Balance Sheet Location		Notional Value			Estimated Fair Value			Notional Value			Estimated Fair Value
Interest rate swaps		Derivative instruments	$	248,452		$	(519	)	$	241,850		$	(666	)
Interest rate caps		Derivative instruments		60,102	*		36			26,189	*		188

Total derivative instruments						$	(483	)				$	(478	)

*	Represents the notional values at March 31, 2012 and December 31, 2011 but does not include forward-starting notionals.

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

The following table summarizes the amounts recognized on the consolidated statements of operations related to the Company’s derivatives for the three months ended March 31, 2012 and 2011.


		Amount of loss recognized in income
	Location of Loss Recognized in Income	2012			2011
Interest rate swaps	Loss on derivative instruments – realized *	$	(412	)	$	(441	)
Interest rate swaps	Loss on derivative instruments – unrealized		147			306
Interest rate caps	Loss on derivative instruments – unrealized		(152	)		153

Total		$	(417	)	$	18

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

Note 10 – Related Party Transactions

Management Agreement

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

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

The initial term of the Management Agreement expires on September 29, 2012 (the third anniversary of the closing of the IPO), and it is automatically renewed for one-year terms on each anniversary thereafter. Following the initial term, the Management Agreement may be terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Following a meeting by the

Company’s independent directors on March 29, 2012 with respect to the Management Agreement, including the Manager’s performance and the level of the management fees thereunder, the Company did not provide notice of termination to the Manager pursuant to the Management Agreement.

For the three months ended March 31, 2012 and 2011, respectively, the Company incurred approximately $1,289 and $1,088 in base management fees. In addition to the base management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company or for certain services provided by the Manager to the Company. For the three months ended March 31, 2012 and 2011, respectively, the Company recorded expenses totaling $184 and $186 related to reimbursements for certain expenses paid by the Manager on behalf of the Company. Expenses incurred by the Manager and reimbursed by the Company are reflected in the respective consolidated statement of operations expense category or the consolidated balance sheet based on the nature of the item.

Included in payable to related party on the consolidated balance sheet at March 31, 2012 and December 31, 2011, respectively, is approximately $1,289 and $1,298 for base management fees incurred but not yet paid.

Note 11 – Share-Based Payments

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

The Company recognized stock-based compensation expense of $1,083 and $351 for the three months ended March 31, 2012 and 2011, respectively, related to restricted stock and RSU vesting. The following table summarizes the grants of RSUs during the three months ended March 31, 2012:

Type

Date

RSUs

Estimate Fair Value
on Grant Date

Initial Vesting

Final Vesting

Forfeiture*

February 2012

—

(1,875

)

n/a

Grant

March 2012

—

20,000

310

March 2013

March 2015

Total

—

18,125

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

Below is a summary of expected restricted stock and RSU vesting dates as of March 31, 2012.


Vesting Date	Shares Vesting		RSU Vesting		Total Awards
April 2012		11,083		11,039		22,122
July 2012		11,078		11,043		22,121
October 2012		11,083		11,043		22,126
January 2013		1,707		93,749		95,456
March 2013		—		6,666		6,666
April 2013		1,709		834		2,543
July 2013		1,181		834		2,015
October 2013		1,185		416		1,601
January 2014		768		93,335		94,103
March 2014		—		6,667		6,667
April 2014		768		417		1,185
March 2015		—		6,667		6,667

		40,562		242,710		283,272

Note 12 – Stockholders’ Equity

Dividends. For 2012, the Company declared and paid the following dividends:

Declaration Date

Record Date

Payment Date

Amount

February 28, 2012

March 31, 2012

April 12, 2012

0.40

Note 13 – Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the consolidated balance sheet at March 31, 2012 and December 31, 2011:


	March 31, 2012						December 31, 2011
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Cash and cash equivalents	$	31,452		$	31,452		$	21,568		$	21,568
Securities available-for-sale, at estimated fair value		151,964			151,964			302,543			302,543
Securities, at estimated fair value		178,932			178,932			251,452			251,452
Commercial first mortgage loans		108,817			115,759			109,006			116,516
Subordinate loans		179,336			184,274			149,086			154,778
Repurchase agreements		47,439			47,439			47,439			47,415
Derivative instruments, net		(483	)		(483	)		(478	)		(478	)
TALF borrowings		—			—			(251,327	)		(256,171	)
Borrowings under repurchase agreements		(355,257	)		(355,257	)		(290,700	)		(290,700	)

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

Note 14 – Net Income per Share

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

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

The table below presents basic and diluted net (loss) income per share of common stock using the two-class method for the three months ended March 31, 2012 and 2011:


	For the three months ended March 31, 2012			For the three months ended March 31, 2011
Numerator:
Net income	$	9,093		$	5,180
Dividends declared on common stock		(8,224	)		(7,020	)
Dividends on participating securities		(168	)		(48	)

Net income (loss) attributable to common stockholders	$	701		$	(1,888	)

Denominator:
Weighted average shares of common stock outstanding		20,966,426			17,551,828
Basic and diluted net income (loss) per weighted average share of common stock
Distributable Earnings	$	0.40		$	0.40
Undistributed income (loss)	$	0.03		$	(0.11	)

Basic and diluted net income (loss) per share of common stock	$	0.43		$	0.29

For the three months ended March 31, 2011, unvested RSUs of 118,959 were excluded from the calculation of diluted net loss per share because the effect was anti-dilutive.

Note 15 – Subsequent Events

Investment activity. During April 2012, the Company purchased two senior sub-participation interests (an aggregate face of $23,844) in a first mortgage loan (the “Loan”) with a current balance of $120,000 which is secured by over 20 acres of land in South Boston, Massachusetts. The land is currently used as parking with approximately 3,325 spaces, but the various parcels that comprise the site are entitled for over 5.8 million of buildable square feet. The two senior sub-participation interests have a 27.5% LTV (based on a current appraisal) and a debt yield of 8.2% (based on the Manager’s underwritten net operating income for the parking operations).

The aggregate purchase price of the two senior sub-participation interests was $18,599 (including a 3% brokerage fee which will be expensed during the period ending June 30, 2012). The senior sub-participations each have an interest rate of one-month LIBOR + 1.72% and mature in December 2012. Upon the repayment of $33,000 of the Loan (of which the Company will receive its pro-rata share) and the payment of an extension fee equal to 0.50% of the outstanding balance of the Loan, the Loan, including the senior sub participation interests, can be extended through December 2013. Assuming the extension occurs, the senior sub-participation interests are expected to generate an IRR of approximately 21.9%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Investments” for a discussion of how IRR is calculated.

Amendment to JPMorgan Facility. During April 2012, the Company amended its facility JPMorgan Facility to reduce the interest rate spread by 50 basis points to LIBOR + 2.50%.

Repayment of First Mortgage Loan. During April 2012, a $24,000 two-year fixed rate first mortgage loan on a 155-room boutique hotel in midtown Manhattan was repaid. The loan had an interest rate of 8.00%. The Company repaid $15,444 of borrowings under the JPMorgan Facility in conjunction with this repayment.

Dividends. On May 3, 2012, the Company declared a dividend of $0.40 per share of common stock which is payable on July 12, 2012 to common stockholders of record on June 29, 2012.

Stockholders’ Equity. On April 1, 2012, as part of their annual compensation, each of the Company’s independent directors was granted 2,396 shares of restricted stock under the Company’s LTIP. The shares will vest ratably over twelve quarters with the initial vesting date scheduled for July 1, 2012 and the final vesting date scheduled for April 1, 2015.

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

FORWARD-LOOKING INFORMATION

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

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

Overview

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

The Company is externally managed and advised by ACREFI Management, LLC (the “Manager”), an indirect subsidiary of Apollo Global Management, LLC, together with its subsidiaries, “Apollo”, a leading global alternative investment manager with a contrarian and value oriented investment approach in private equity, credit-oriented capital markets and real estate. Apollo had total assets under management of $75 billion as of December 31, 2011.

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

Market Overview

Throughout the first part of 2011, the commercial real estate lending market continued its recovery from the downturn experienced as part of the correction in the global financial markets which began in mid-2007. As evidenced by the re-starting of the CMBS market since early 2010, lenders began to return to the market. Since early 2010, approximately $37 billion of CMBS has been issued in the United States, and while this is significantly less than the $229 billion that was issued in 2007, it was clear evidence that the lending market for commercial real estate was in the midst of a recovery. However, beginning in July and August 2011, concerns over the global economy resulted in spread widening in the CMBS market and a reduction in the pace of new loans being originated for securitization. At present, we believe the commercial real estate lending market remains in flux. There are a number of active life insurance companies, commercial banks and conduit lenders, but recent volatility and uncertainty in the global markets has slowed the pace of transaction activity.

The Company estimates that from 2012 to 2015, there is in excess of $1 trillion of commercial real estate debt that is scheduled to mature and this presents a compelling opportunity for the Company to invest capital in its target assets for attractive risk adjusted returns.

While the volume of impending maturities and the need for refinancing is significant, the demand for new capital to refinance maturing commercial mortgage debt continues to be somewhat tapered by the granting of extensions by lenders across the commercial mortgage loan industry. In 2009, the Internal Revenue Service and the Department of the Treasury issued guidance which provided loan servicers with increased flexibility in relation to their ability to modify commercial mortgage loans held by real estate mortgage investment conduits (“REMICs”), opening the door to previously unavailable loan restructurings, and as a result an increasing number of maturing loans have been extended. Despite this trend, the Company has been able to deploy substantially all capital it has raised in the Company’s target assets.

The Company also believes that while the CMBS market has begun to reopen, the supply of capital provided by this market will not approach the levels seen from 2005-2007. The Company believes that lower levels of CMBS issuances will enhance the Company’s first mortgage origination business. The Company further believes that any increase in CMBS issuances will likely be at lower loan-to-value ratios and will therefore continue to provide the Company with opportunities to originate mezzanine financings with respect to those parts of the financing capital structure which are unsuitable to be sold as part of CMBS.

Critical Accounting Policies

A summary of the Company’s accounting policies is set forth in its annual report on Form 10-K for the year ended December 31, 2011 under Item 7 – Management Discussion and Analysis – Critical Accounting Policies.

Financial Condition and Results of Operations

Investment Activity

Subordinate loans. During January 2012, the Company closed a $15,000 mezzanine loan secured by a pledge of the equity interests in a borrower that purchased a 165-room hotel in midtown Manhattan. The mezzanine loan is part of a $80,000, three-year (two year initial term with one one-year extension option) financing package split into a $65,000 first mortgage loan and a $15,000 mezzanine loan. The mezzanine loan is an interest-only fixed

rate loan that bears interest at 12.00%, with a 1.00% origination fee, a 0.50% extension fee and a 1.50% exit fee. The mezzanine loan has an appraised loan-to-value of approximately 60% and is expected to generate an IRR of approximately 14.0%. See “—Investments” for a discussion of how IRR is calculated.

During March 2012, the Company closed a $15 million mezzanine loan secured by a pledge of the equity interest in a borrower that owns a 226-room hotel in Manhattan. The mezzanine loan is part of a $70 million, four-year (two-year initial term with two one-year extension options) floating-rate whole loan originated on February 15, 2012 to refinance the property. The interest rate on the mezzanine loan is one-month LIBOR+11.00% with a 0.50% LIBOR floor and 0.50% fee for the second extension. The mezzanine loan is expected to generate an IRR of approximately 12.8%. See “—Investments” for a discussion of how IRR is calculated.

Sale of CMBS – During March 2012, the Company sold CMBS with an amortized cost of $137,423 resulting in net realized gains of $262. The sale generated proceeds of $14,621 after the repayment of $123,064 of debt under the Wells Facility.

Investments

The following table sets forth certain information regarding the Company’s investments at March 31, 2012:


Description	Face Amount		Weighted Average Coupon			Amortized Cost		Weighted Average Yield			Remaining Weighted Average Life (years)		Debt		Cost of Funds			Remaining Debt Term (years)*		Equity at cost		Weighted Average IRR **
AAA CMBS	$	324,798		5.6	%	$	330,413		4.3	%		1.5	$	286,650		2.1	%		1.4	$	43,763		16.1	%
First mortgages		108,817		8.3			108,817		8.3			2.4		68,607		3.2			0.7		40,210		17.8
Subordinate loans		179,336		12.8			179,336		12.8			5.5		—		—			—		179,336		13.9
Repurchase agreements		47,439		13.0			47,439		13.0			2.0		—		—			—		47,439		13.7

Total	$	660,390		8.5	%	$	666,005		7.8	%		2.8	$	355,257		2.4	%		1.2	$	310,748		14.7	%

*	Assumes extension options on Wells Facility are exercised. See “—Borrowings under Various Financing Arrangements” for a discussion of the Wells Facility.

The internal rates of return (“IRR”) for the investments shown in the above table reflect the returns underwritten by the Manager, calculated on a weighted average basis assuming no dispositions, early prepayments or defaults but assumes extensions as well as the cost of borrowings and derivative instruments under the Wells Facility. IRR is the annualized effective compounded return rate that accounts for the time-value of money and represents the rate of return on an investment over a holding period expressed as a percentage of the investment. It is the discount rate that makes the net present value of all cash outflows (the costs of investment) equal to the net present value of cash inflows (returns on investment). It is derived from the negative and positive cash flows resulting from or produced by each transaction (or for a transaction involving more than one investment, cash flows resulting from or produced by each of the investments), whether positive, such as investment returns, or negative, such as transaction expenses or other costs of investment, taking into account the dates on which such cash flows occurred or are expected to occur, and compounding interest accordingly. There can be no assurance that the actual IRRs will equal the underwritten IRRs shown in the table. See Risk Factors included in the Company’s annual report on Form 10-K for the year ended December 31, 2011 for a discussion of some of the factors that could adversely impact the returns received by the Company from the investments shown in the table over time.

Net Interest Income

The following table sets forth certain information regarding the Company’s net investment income for the three months ended March 31, 2012 and 2011:


	Three months ended March 31,
	2012			2011			Change (amount)			Change (%)
Interest income from:
Securities	$	5,323		$	6,656		$	(1,333	)		(20.0	)%
Commercial mortgage loans		2,234			2,313			(79	)		(3.4	)%
Subordinate loans		5,313			1,909			3,404			178.3	%
Repurchase agreements		1,559			60			1,499			2,498.3	%
Interest expense		(3,242	)		(3,339	)		97			(2.9	)%

Net interest income	$	11,187		$	7,599		$	3,588			47.2	%

Net interest income for the three months ended March 31, 2012, increased $3,588, or 47.2% from the same periods in 2011. The increase is primarily the result of additional interest income from subordinate loans and repurchase agreements offset by a decline in interest income from securities. The decline in interest from securities of $1,333, or 20.0%, is attributable to the repayment of these securities as they near maturity. The increase in interest income related to subordinate loans and repurchase agreements of $3,404, or 178.3%, and $1,499, or 2,498.3%, respectively, is primarily attributable to the full deployment of capital raised from the Company’s follow-on offering in July 2011 as well as the deployment of additional investable capital generated with the refinancing of the Company’s TALF debt.

Operating Expenses

The following table sets forth the Company’s operating expenses for the three months ended March 31, 2012 and 2011.


	Three months ended March 31,
	2012		2011		Change (amount)			Change (%)
General and administrative expense	$	953	$	1,029	$	(76	)		(7.4	)%
Stock-based compensation expense		1,083		351		732			208.5	%
Management fee expense		1,289		1,088		201			18.5	%

Total operating expense	$	2,538	$	2,121	$	857			34.7	%

Management fee expense for the three months ended March 31, 2012 increased $201, or 18.5% from the same periods in 2011. The increase is primarily attributable to increases in the Company’s stockholders’ equity (as defined in the Management Agreement) as a result of the Company’s follow-on equity offering that was completed in July 2011. Management fees and the relationship between the Company and its Manager are discussed further in the accompanying consolidated financial statements - Note 10 - Related Party Transactions.

Stock-based compensation expense for the three months ended March 31, 2012 increased $732, or 208.5% from the same periods in 2011. The increase is primarily attributable to the grant of 308,750 restricted stock units (“RSUs”) during August 2011 as well as the increase in the price of the Company’s stock since the end of 2011. Share-based payments are discussed further in the accompanying consolidated financial statements - Note 11 – Share-Based Payments.

Realized and unrealized gain/loss

In order to mitigate interest rate risk resulting from the Company’s floating-rate borrowings under the Wells Facility, the Company has entered into interest rate swaps and caps which are intended to economically hedge the floating-rate borrowings through the expected maturity of the underlying collateral as well as the potential extension of the underlying collateral.

The Company has elected not to pursue hedge accounting for these derivative instruments and records the change in estimated fair value related to these interest rate agreements in earnings. The Company also elected to record the change in estimated fair value related to certain AAA-rated CMBS securing the Wells Facility in earnings by electing the fair value option. These elections allow the Company to align the change in the estimated fair value of the Wells Facility collateral and related interest rate derivatives without having to apply complex hedge accounting provisions.

During March 2012, the Company sold CMBS with an amortized cost of $137,423 resulting in net realized gains of $262. The sale generated proceeds of $14,621 after the repayment of $123,064 of debt under the Wells Facility.

The following amounts related to realized and unrealized gains (losses) on the Company’s CMBS and derivative instruments are included in the Company’s consolidated statement of operations for three months ended March 31, 2012 and 2011:


		Amount of gain (loss) recognized in income for the three months ended March 31,
	Location of Gain (Loss) Recognized in Income	2012			2011
Securities	Realized gain on sale of securities	$	262		$	—
Interest rate swaps	Loss on derivative instruments - realized		(412	)		(441	)
Interest rate swaps	Loss on derivative instruments – unrealized		147			306
Interest rate caps	Loss on derivative instruments - unrealized		(152	)		153

Total		$	(155	)	$	18

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

Dividends

For 2012, the Company has declared and paid the following dividends:

Declaration Date

Record Date

Payment Date

Amount

February 28, 2012

March 31, 2012

April 12, 2012

0.40

Subsequent Events

Investment activity. During April 2012, the Company purchased two senior sub-participation interests (an aggregate face of $23,844) in the Loan with a current balance of $120,000 which is secured by over 20 acres of land in South Boston, Massachusetts. The land is currently used as parking with approximately 3,325 spaces, but the various parcels that comprise the site are entitled for over 5.8 million of buildable square feet. The two senior sub-participation interests have a 27.5% LTV (based on a current appraisal) and a debt yield of 8.2% (based on the Manager’s underwritten net operating income for the parking operations).

The aggregate purchase price of the two senior sub-participation interests was $18,599 (including a 3% brokerage fee which will be expensed during the period ending June 30, 2012). The senior sub-participations each have an interest rate of one-month LIBOR + 1.72% and mature in December 2012. Upon the repayment of $33,000 of the Loan (of which the Company will receive its pro-rata share) and the payment of an extension fee equal to 0.50% of the outstanding balance of the Loan, the Loan, including the senior sub participation interests, can be extended through December 2013. Assuming the extension occurs, the senior sub-participation interests are expected to generate an IRR of approximately 21.9%. See “—Investments” for a discussion of how IRR is calculated.

Amendment to JPMorgan Facility. During April 2012, the Company amended the JPMorgan Facility to reduce the interest rate spread by 50 basis points to LIBOR + 2.50%. Based upon the Company’s current usage projections, the reduced interest rate spread should result in an annual interest expense reduction of approximately $250.

Dividends. On May 3, 2012, the Company declared a dividend of $0.40 per share of common stock which is payable on July 12, 2012 to common stockholders of record on June 29, 2012.

Liquidity and capital resources

Liquidity is a measure of the Company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain its assets and operations, make distributions to its stockholders and other general business needs. The Company’s cash is used to purchase or originate target assets, repay principal and interest on borrowings, make distributions to stockholders and fund operations. The Company’s liquidity position is closely monitored and the Company believes it has sufficient current liquidity and access to additional liquidity to meet financial obligations for at least the next twelve months. The Company’s primary sources of short-term and long-term liquidity are as follows:

Cash Generated from Operations

Cash from operations is generally comprised of interest income from the Company’s investments, net of any associated financing expense, principal repayments from the Company’s investments, net of associated financing repayments, proceeds from the sale of investments, and changes in working capital balances. See Financial Condition and Results of Operations – Investments for a summary of interest rates and weighted average lives related to the Company’s investment portfolio at March 31, 2012. While there are no contractual paydowns related to the Company’s CMBS, periodic paydowns do occur. Repayments on the debt secured by the Company’s CMBS occur in conjunction with the paydowns on the collateral pledged.

Borrowings Under Various Financing Arrangements

In January 2010, the Company entered into the JPMorgan Facility, pursuant to which the Company may borrow up to $100,000 in order to finance the origination and acquisition of commercial first mortgage loans and AAA-rated CMBS. Amounts borrowed under the JPMorgan Facility bear interest at a spread of 3.00% over one-month LIBOR with no floor. Advance rates under the JPMorgan Facility typically range from 65%-90% on the estimated fair value of the pledged collateral depending on its loan-to-value. Margin calls will occur any time the outstanding loan balance exceeds the lender’s required advance in accordance with agreed upon advance rates by more than $250. The JPMorgan Facility has a term of one-year, with two one-year extensions available at the Company’s option and upon the payment of the $500 extension fee for each one-year extension. During January 2012, the Company exercised the second of the two extension options. The extended maturity date is January 4, 2013. The JPMorgan Facility contains, among others, the following restrictive covenants: (1) negative covenants relating to restrictions on the Company’s operations which would cease to allow the Company to qualify as a REIT and (2) financial covenants to be met by the Company when the repurchase facility is being utilized, including a

minimum consolidated tangible net worth covenant ($125,000), maximum total debt to consolidated tangible net worth covenant (3:1), a minimum liquidity covenant (the greater of 10% of total consolidated recourse indebtedness and $12,500) and a minimum net income covenant ($1 during any four consecutive fiscal quarters). Additionally, beginning on the 91st day following the closing date and depending on the utilization rate of the facility, a portion of the undrawn amount may be subject to non-use fees. Subsequent to September 30, 2010, the non-use fee has been waived by the lender. At March 31, 2012, the Company had $68,607 of borrowings outstanding under the JPMorgan Facility.

During August 2010, the Company, through an indirect wholly-owned subsidiary, entered into the Wells Facility pursuant to which the Company may borrow up to $250,000 in order to finance the acquisition of AAA-rated CMBS. The Wells Facility has a term of one year, with two one-year extensions available at the Company’s option, subject to certain restrictions, and upon the payment of an extension fee equal to 25 basis points on the then outstanding balance of the facility for each one-year extension. Advances under the Wells Facility accrue interest at a per annum pricing rate equal to the sum of (i) 30 day LIBOR and (ii) a pricing margin of 1.25%. The purchase price of the CMBS is determined on a per asset basis by applying an advance rate schedule agreed upon by the Company and Wells Fargo. Advance rates under the Wells Facility typically range from 85%-90% on the face amount of the underlying collateral depending weighted average life of the collateral pledged. Margin calls will occur any time the outstanding loan balance exceeds the lender’s required advance in accordance with agreed upon advance rates by more than $250. The Wells Facility contains, among others, the following restrictive covenants: (1) negative covenants intended to restrict the Company from failing to qualify as a REIT and (2) financial covenants to be met by the Company, including a minimum net asset value covenant (which shall not be less than an amount equal to (i) $100,000, (ii) 75% of the greatest net asset value during the prior calendar quarter, and (iii) 65% of the greatest net asset value during the prior calendar year), a maximum total debt to consolidated tangible net worth covenant (8:1), a minimum liquidity covenant ($2,500), and a minimum EBITDA to interest expense covenant (1.5:1). The Company has agreed to provide a limited guarantee of up to 15%, or a maximum of $37,500, of the obligations of its indirect wholly-owned subsidiary under the Wells Facility.

During December 2011, the Company, through an indirect wholly-owned subsidiary entered into an amendment letter (the “Amendment Letter”) related to the Wells Facility to increase its maximum permitted borrowing under the facility from $250,000 to $506,000 in order to pay down its TALF borrowings and to finance the CMBS that had been financed under the TALF program. The Amendment Letter additionally adjusts the pricing margin for all assets financed under the Wells Facility occurring after December 22, 2011 from 1.25% to 1.50%, and adds a minimum liquidity covenant, requiring the Company to maintain at all times an amount in Repo Liquidity (as generally defined under the Wells Facility to include all amounts held in the collection account established under the Facility for the benefit of Wells Fargo Bank, N.A., cash, cash equivalents, super-senior CMBS rated AAA by at least two rating agencies, and total amounts immediately and unconditionally available on an unrestricted basis under all outstanding capital commitments, subscription facilities and secured revolving credit or repurchase facilities) no less than the greater of 10% of total consolidated recourse indebtedness of the Company and $12,500. Advances under the Wells Facility accrue interest at a per annum pricing rate equal to the sum of (i) 30 day LIBOR and (ii) the applicable pricing margin. The Wells Facility matures in August 2012, with a one-year extension available at the Company’s option on all assets financed on or prior to December 22, 2011, subject to certain restrictions, and upon the payment of an extension fee equal to 0.25% on the then aggregate outstanding repurchase price for all such assets.

The Company refinanced its TALF borrowings with borrowings under the Wells Facility during January 2012 and subsequently sold a portion of the CMBS securing the Wells Facility borrowings and repaid the related borrowings during March 2012. At March 31, 2012, the Company had $286,650 of borrowings outstanding under the Wells Facility secured by AAA-rated CMBS held by the Company.

Cash Generated from Offerings

To date, the Company has raised aggregate equity of approximately $375,097 through its IPO and concurrent private placement as well as follow-on offerings. Net proceeds (after deducting underwriting fees and expenses) from these offerings were approximately $355,389.

Other Potential Sources of Financing

The Company’s primary sources of cash currently consist of the $31,452 of cash available at March 31, 2012, principal and interest the Company receives on its portfolio of assets as well as available borrowings under the JPMorgan Facility and Wells Facility. The Company expects its primary sources of cash to consist of cash generated from operations, and the possible prepayments of principal received on the Company’s portfolio of assets. Such prepayments are difficult to estimate in advance. At March 31, 2012, there was $31,393 of borrowing capacity under the JPMorgan Facility; however, the Company would need to acquire additional commercial first mortgage loans or AAA-rated CMBS in order to utilize that capacity. Depending on market conditions the Company may utilize additional borrowings as a source of cash, which borrowings may also include additional repurchase agreements as well as other borrowings such as credit facilities.

The Company maintains policies, described below, relating to its borrowings and use of leverage. See “Leverage Policies” below. In the future, the Company may seek to raise further equity capital, issue debt securities or engage in other forms of borrowings in order to fund future investments or to refinance expiring credit facilities.

The Company generally intends to hold its target assets as long-term investments, although it may sell certain of its investments in order to manage its interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.

To maintain its status as a REIT under the Code, the Company must distribute annually at least 90% of its taxable income. These distribution requirements limit the Company’s ability to retain earnings and thereby replenish or increase capital for operations.

Leverage policies

The Company uses leverage for the sole purpose of financing its portfolio and not for the purpose of speculating on changes in interest rates. In addition to the Wells Facility and JPMorgan Facility, in the future the Company may access additional sources of borrowings. The Company’s charter and bylaws do not limit the amount of indebtedness the Company can incur; however, the Company is limited by certain financial covenants under its repurchase agreements. Consistent with the Company’s strategy of keeping leverage within a conservative range, the Company expects that its total borrowings on its target assets will be in an amount that is approximately 35% of the value of its total loan portfolio.

Contractual obligations and commitments

The Company’s contractual obligations including expected interest payments as of March 31, 2012 are summarized as follows:


	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Wells Facility borrowings*	$	140,372	$	151,604	$	—	$	—	$	291,976
JPMorgan Facility borrowings**		70,132		—		—	$	—		70,132

Total	$	210,504	$	151,604	$	—	$	—	$	362,108

*	Assumes extension options are exercised and the cost of borrowings as well as derivative instruments for interest payments due under the Wells Facility. See above for further discussion.

**	Assumes extension options are exercised and current LIBOR of 0.24% for interest payments due under the JPMorgan Facility. See above for further discussion.

The table above does not include amounts due under the Management Agreement as those obligations, discussed below, do not have fixed and determinable payments.

On September 23, 2009, the Company entered into the Management Agreement with the Manager pursuant to which the Manager is entitled to receive a management fee and the reimbursement of certain expenses.

Management Agreement. Pursuant to the Management Agreement, the Manager is entitled to a base management fee calculated and payable quarterly in arrears in an amount equal to 1.5% of the Company’s stockholders’ equity (as defined in the Management Agreement), per annum. The Manager will use the proceeds from its management fee in part to pay compensation to its officers and personnel. The Company does not reimburse its Manager or its affiliates for the salaries and other compensation of their personnel, except for the allocable share of the compensation of (1) the Company’s Chief Financial Officer based on the percentage of his time spent on the Company’s affairs and (2) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment professional personnel of the Manager or its affiliates who spend all or a portion of their time managing the Company’s affairs based on the percentage of time devoted by such personnel to the Company’s affairs. The Company is also required to reimburse its Manager for operating expenses related to the Company incurred by its Manager, including expenses relating to legal, accounting, due diligence and other services. Expense reimbursements to the Manager are made in cash on a monthly basis following the end of each month. The Company’s reimbursement obligation is not subject to any dollar limitation.

The initial term of the Management Agreement expires on September 29, 2012 (the third anniversary of the closing of the IPO), and is automatically renewed for one-year terms on each anniversary thereafter. Following the initial term, the Management Agreement may be terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of the Company’s independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual base management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Amounts payable under the Company’s Management Agreement are not fixed and determinable. Following a meeting by the Company’s independent directors on March 29, 2012 with respect to the Management Agreement, including the Manager’s performance and the level of the management fees thereunder, the Company did not provide notice of termination to the Manager pursuant to the Management Agreement.

Off-balance sheet arrangements

The Company does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, the Company has not guaranteed any obligations of unconsolidated entities or entered into any commitment to provide additional funding to any such entities.

Dividends

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

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company seeks to manage its risks related to the credit quality of its assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of its capital stock. While risks are inherent in any business enterprise, the Company seeks to quantify and justify risks in light of available returns and to maintain capital levels consistent with the risks the Company undertakes.

Credit risk

One of the Company’s strategic focuses is acquiring assets that it believes to be of high credit quality. The Company believes this strategy will generally keep its credit losses and financing costs low. However, the Company is subject to varying degrees of credit risk in connection with its other target assets. The Company seeks to mitigate this risk by seeking to acquire high quality assets, at appropriate prices given anticipated and unanticipated losses, and by deploying a value-driven approach to underwriting and diligence, consistent with the Manager’s historical investment strategy, with a focus on current cash flows and potential risks to cash flow. The Company enhances its due diligence and underwriting efforts by accessing the Manager’s knowledge base and industry contacts. Nevertheless, unanticipated credit losses could occur which could adversely impact the Company’s operating results.

Interest rate risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond the Company’s control. The Company is subject to interest rate risk in connection with its target assets and its related financing obligations.

To the extent consistent with maintaining the Company’s REIT qualification, the Company seeks to manage risk exposure to protect its portfolio of financial assets against the effects of major interest rate changes. The Company generally seeks to manage this risk by:

•

attempting to structure its financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

•

using hedging instruments, interest rate swaps and interest rate caps; and

•

to the extent available, using securitization financing to better match the maturity of the Company’s financing with the duration of its assets.

At March 31, 2012, all of the Company’s borrowings under repurchase agreements are floating-rate borrowings. The Company also has interest rate swaps with an outstanding notional of $248,452, resulting in net variable rate debt of $106,805. A 50 basis point increase in LIBOR would increase the quarterly interest expense related to the $106,805 in variable rate debt by $134. Any such hypothetical impact on interest rates on the Company’s variable rate borrowings does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of a change in interest rates of that magnitude, the Company may take actions to further mitigate the Company’s exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company’s financial structure.

Prepayment risk

Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on an asset to be less than expected. The Company does not anticipate facing prepayment risk on most of its portfolio of assets since the Company anticipates that most of the commercial loans held directly by the Company or securing the Company’s CMBS assets will contain provisions preventing prepayment or imposing prepayment penalties in the event of loan prepayments.

Market risk

Market value risk. The Company’s available-for-sale securities and securities at estimated fair value are reflected at their estimated fair value. The change in estimated fair value of securities available-for-sale is reflected in accumulated other comprehensive income while the change in estimated fair value of securities at estimated fair value is reflected as a component of net income. The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of the Company’s assets may be adversely impacted.

Real estate risk. Commercial mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans or loans, as the case may be, which could also cause the Company to suffer losses.

Inflation

Virtually all of the Company’s assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors influence the Company’s performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company’s financial statements are prepared in accordance with GAAP and distributions will be determined by the Company’s board of directors consistent with the Company’s obligation to distribute to its stockholders at least 90% of its REIT taxable income on an annual basis in order to maintain the Company’s REIT qualification. In each case, the Company’s activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

ITEM 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Exchange Act, and the rules and regulations promulgated thereunder.

During the period ended March 31, 2012, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, 2012, the Company is not involved in any legal proceedings.

ITEM 1A. Risk Factors

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to the Company’s risk factors during the three months ended March 31, 2012.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

(a) Exhibits


Exhibit No.		Description

3.1*		Articles of Amendment and Restatement of Apollo Commercial Real Estate Finance, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-160533).

3.2*		By-laws of Apollo Commercial Real Estate Finance, Inc., incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-160533).

4.1*		Specimen Stock Certificate of Apollo Commercial Real Estate Finance, Inc., incorporated by reference to Exhibit 4.1 of the Registrant’s Form S-11, as amended (Registration No. 333-160533).

31.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.

101.INS **		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase



101.DEF**		XBRL Taxonomy Extension Definition Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

*	Incorporated by reference.

These interactive data files are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, and are not deemed filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


APOLLO COMMERCIAL REAL ESTATE FINANCE, INC.

May 7, 2012



By:		/s/ STUART A. ROTHSTEIN
		Stuart A. Rothstein President, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description

3.1*		Articles of Amendment and Restatement of Apollo Commercial Real Estate Finance, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-160533).

3.2*		By-laws of Apollo Commercial Real Estate Finance, Inc., incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-160533).

4.1*		Specimen Stock Certificate of Apollo Commercial Real Estate Finance, Inc., incorporated by reference to Exhibit 4.1 of the Registrant’s Form S-11, as amended (Registration No. 333-160533).

31.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

101.DEF**		XBRL Taxonomy Extension Definition Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

*	Incorporated by reference