Apollo Commercial Real Estate Finance, Inc. (ARI) — Q2 2022 10-Q
Reporting period: Three and six months ended June 30, 2022. ARI is an externally managed REIT focused primarily on commercial real estate loans and related debt investments.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior date |
|---|---|---|
| Total net revenue | $76.0 million | $75.9 million in Q2 2021 |
| Net interest income | $57.4 million | $74.5 million in Q2 2021 |
| Net income available to common stockholders | $67.9 million; diluted EPS $0.44 | $64.3 million; diluted EPS $0.42 in Q2 2021 |
| Distributable Earnings (non-GAAP) | $49.5 million; $0.35 per share | $38.8 million; $0.27 per share in Q2 2021 |
| Common dividend declared | $0.35 per share | $0.35 per share in Q2 2021 |
| Loan portfolio, net | $8.94 billion; 67 loans | $7.86 billion at December 31, 2021 |
| Cash and cash equivalents | $241.6 million | $343.1 million at December 31, 2021 |
| Total liabilities / stockholders’ equity | $7.28 billion / $2.27 billion | $6.12 billion / $2.29 billion at December 31, 2021 |
| Debt-to-equity ratio | 3.0x | 2.4x at December 31, 2021 |
| Book value per common share | $14.97 | $15.19 at December 31, 2021 |
For the first six months, net interest income was $112.5 million versus $145.6 million in 2021; net income available to common stockholders was $80.1 million versus $119.3 million. Operating cash flow was $99.4 million versus $120.9 million. Investing activities used $1.33 billion, primarily reflecting loan originations and add-on fundings; financing activities provided $1.14 billion.
Material changes and portfolio developments
- Q2 net interest income rose $2.2 million sequentially from Q1, as larger average loan balances and higher benchmark rates more than offset increased funding costs and a loan placed on non-accrual.
- Loan principal balance increased to $9.18 billion from $8.07 billion at year-end. ARI committed $3.1 billion to loans in the first half, funded $2.3 billion at closing, and received $1.2 billion in repayments.
- About 98% of the portfolio was floating rate. Weighted-average cash coupon was 4.7%, versus 4.5% at year-end.
- Q2 net income included a $105.2 million gain on foreign currency forwards and an $84.8 million foreign currency translation loss. These volatile items materially affect GAAP earnings; management’s non-GAAP Distributable Earnings measure excludes specified unrealized and other items.
- CECL allowance totaled $199.4 million, including $172.0 million of specific allowances and $27.4 million of general allowances, including unfunded commitments. The Q2 net reversal of loan-loss provisions was $0.9 million, compared with a $29.6 million reversal in Q2 2021.
Liquidity, debt, risks and outlook
- At June 30, ARI reported $7.05 billion of debt principal: $5.19 billion in secured asset financings, $781.3 million in term loans, $500 million of senior secured notes and $575 million of convertible notes. The $345 million 4.75% convertible notes matured in August 2022.
- Management reported $1.7 billion of unencumbered assets and $1.7 billion of unfunded loan commitments; approximately $930.8 million of commitments was expected to fund in the short term. It anticipated about $725 million of secured financing repayments in the short term.
- Secured facilities include mark-to-market provisions that may trigger collateral demands or repayment if collateral values decline. About 58% of secured borrowings were recourse to ARI. The company reported compliance with debt covenants at quarter-end.
- Management provided no numerical earnings guidance. It intends to continue regular quarterly common distributions, subject to board discretion and operating results. The common dividend was $0.35 per share; Q2 Distributable Earnings were also $0.35 per share.
- Key uncertainties include COVID-19 effects on borrowers and property values, inflation and interest-rate changes, credit losses, refinancing and liquidity risk, foreign-currency movements, and the timing of loan repayments and unfunded commitments. A hotel loan in Atlanta was put on cash-basis interest recognition and received a $7 million specific allowance; a Manhattan residential-for-sale subordinate loan had a $30 million allowance and remained risk-rated 5.
- A pending lawsuit involving a Manhattan condominium project seeks alleged investment losses and punitive damages; ARI said it believes the claims are without merit, but stated that a loss estimate cannot be made. Subsequent to quarter-end, ARI funded $58.1 million on previously closed loans and received $62.0 million in repayments.
Important facts for investors to verify
- How the $345 million convertible notes due August 2022 were repaid, refinanced or otherwise addressed after quarter-end.
- Whether liquidity can cover near-term loan commitments, debt maturities and potential collateral calls, especially if asset values or financing terms weaken.
- Performance and recovery assumptions for risk-rated 4 and 5 loans, including the Manhattan, Miami, Cincinnati and Atlanta exposures, and any resulting allowance changes.
- How much reported earnings depend on foreign-exchange and derivative valuation movements versus recurring loan income; review GAAP results alongside non-GAAP Distributable Earnings.
- Whether the $0.35 quarterly common dividend remains supported by future distributable earnings and cash availability.