Apollo Commercial Real Estate Finance, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. ARI is an externally managed REIT focused primarily on commercial real estate loans and related debt investments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Total net revenue | $76.3 | $66.6 in Q3 2021 |
| Net interest income | $61.9 | $60.7 in Q3 2021; $174.4 for nine months, versus $206.4 in 2021 |
| Net income | $183.0; diluted EPS $1.13 | $60.4 and $0.38 diluted EPS in Q3 2021 |
| Nine-month net income | $269.2; diluted EPS $1.66 | $186.4 and $1.18 diluted EPS in 2021 |
| Distributable Earnings (non-GAAP) | $95.9, or $0.67 per share | $49.2, or $0.35 per share, in Q3 2021 |
| Nine-month Distributable Earnings (non-GAAP) | $194.8, or $1.36 per share | $143.6, or $1.01 per share, in 2021 |
| Cash and cash equivalents | $319.3 | $343.1 at December 31, 2021 |
| Total assets / stockholders’ equity | $9,824.0 / $2,407.7 | $8,416.7 / $2,294.6 at December 31, 2021 |
| Loan portfolio, net | $8,731.3 | $7,857.3 at December 31, 2021 |
| Total debt outstanding, principal | $6,873.4 | $6,019.6 at December 31, 2021 |
| Common book value per share | $15.92 | $15.19 at December 31, 2021 |
| Common dividend declared | $0.35 per share | $0.35 per share in Q3 2021 |
Cash provided by operating activities was $225.1 million for the first nine months, compared with $164.9 million in 2021. Investing activities used $1,523.7 million, primarily reflecting loan fundings, while financing activities provided $1,283.6 million. Net cash and cash equivalents decreased $20.8 million over the period.
The filing does not provide a clear standalone operating-margin measure. Net interest income increased year over year in Q3, but fell for the nine-month period as interest expense rose. Management attributed the sequential Q3 increase in net interest income to higher benchmark rates, partly offset by higher funding costs.
Material changes and unusual items
- Q3 GAAP net income included a $43.6 million realized gain when ARI took title to a Brooklyn multifamily development property, recognizing the property above the loan’s carrying value.
- Q3 earnings also benefited from a $55.6 million net reversal of CECL allowances, including a $53.0 million reversal tied to a Miami loan whose collateral was under contract for sale. The loan remained non-accrual and risk-rated 5.
- Foreign currency results were significant and volatile: Q3 included a $92.8 million translation loss and $129.3 million gain on currency forward contracts. For nine months, those items were a $210.1 million translation loss and $257.2 million forward-contract gain. The forwards are economic hedges but are not designated as accounting hedges.
- For nine months, net interest income declined to $174.4 million from $206.4 million, even as total net revenue increased slightly to $216.5 million from $213.7 million. Distributable Earnings before realized gains and impairments fell to $151.3 million from $164.1 million.
- ARI repaid $345.0 million of its 2022 convertible notes in cash during Q3. The remaining convertible notes had $230.0 million principal and mature in October 2023.
- The loan portfolio grew to $8.73 billion, with 65 loans versus 67 at year-end. Approximately 98% of loans were floating rate. The weighted-average cash coupon rose to 5.8% from 4.5% at year-end; expected term was 1.7 years.
- At quarter-end, $429.6 million of loans were risk-rated 5, and $661.5 million of loan amortized cost was on non-accrual. The total CECL allowance, including unfunded commitments, was $143.8 million.
Liquidity, debt and outlook
- Quarter-end liquidity included $319.3 million cash and approximately $1.1 billion of unencumbered assets. Management expected approximately $565.2 million of the $1.1 billion in unfunded loan commitments to be funded in the short term and anticipated $765.0 million of secured-debt repayments in the short term.
- Debt comprised $5.36 billion in secured debt arrangements, $779.3 million in senior secured term loans, $500.0 million in senior secured notes, and $230.0 million in convertible notes. Debt-to-equity was 2.8x, up from 2.4x at year-end.
- ARI reported compliance with its secured financing, term-loan, and senior-note covenants at September 30, 2022. Secured borrowings had a weighted-average advance rate of 69.5%; approximately 55% were recourse to the company.
- Management reported no specific earnings or dividend guidance. It intends to continue regular quarterly common dividends, subject to board authorization and operating results. The company’s REIT status generally requires distribution of at least 90% of taxable income, excluding net capital gains.
- Management cited inflation, rising interest rates, COVID-19 effects, supply-chain disruption, labor shortages, real estate market conditions, and currency fluctuations as risks. It noted that actual results may differ materially from estimates, including credit-loss and collateral valuations.
- Subsequent to quarter-end, ARI funded $34.6 million of previously closed loans and received $112.6 million in repayments. Its Atlanta hotel loan, already risk-rated 5, subsequently entered maturity default; ARI was discussing consensual foreclosure and expected an agreement by Q1 2023. ARI also amended its Deutsche Bank facility to add a one-year extension option to March 31, 2024.
Important facts for investors to verify
- Whether the contracted Miami collateral sale closes as expected and whether the $53.0 million allowance reversal is supported by realized proceeds.
- Progress and recovery prospects for risk-rated 5 and non-accrual loans, especially the Atlanta hotel, Cincinnati retail, Manhattan residential mezzanine, and Miami predevelopment exposures.
- Near-term debt maturities and repayments, the funding schedule for unfunded commitments, and liquidity after derivative collateral requirements.
- How higher benchmark rates affect both floating-rate loan income and borrowing costs, and whether currency hedges continue to offset foreign-exchange exposure.
- The sustainability of Distributable Earnings and the $0.35 common dividend; non-GAAP Distributable Earnings differ from GAAP net income and exclude specified items.
- Potential exposure from the pending April 2021 legal action. The filing states that the case is early-stage and a possible loss cannot be reasonably estimated.