Apollo Commercial Real Estate Finance, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. ARI is a REIT that originates, acquires and manages commercial real estate debt, including first mortgages and subordinate loans. Amounts below are in U.S. dollars unless stated otherwise.
Key financial and operating metrics
- Income: Net interest income was $71.2 million, down $3.5 million from Q1 2020. Net income was $58.3 million, versus a net loss of $127.8 million; net income available to common stockholders was $55.0 million, or $0.37 per diluted share, versus a loss of $131.2 million, or $0.86 per diluted share.
- Distributable earnings (non-GAAP): $56.1 million, or $0.39 per share, compared with $62.7 million, or $0.40 per share, in Q1 2020. The filing cautions this measure is not a substitute for GAAP results and may not be comparable across companies.
- Portfolio and revenue drivers: Net carrying value of loans was $6.82 billion, up from $6.50 billion at year-end 2020. The 67-loan portfolio was 95% floating rate, with a 5.6% weighted-average cash coupon and 6.2% weighted-average all-in yield. Q1 commitments totaled $527.7 million; $417.2 million was funded at closing, and $232.0 million of repayments and sales were received.
- Cash flow: Operating activities provided $43.9 million; investing activities used $298.7 million; financing activities provided $223.4 million. Cash declined $31.4 million during the quarter to $294.1 million.
- Margins and credit costs: Q1 loan-loss allowance reversals were $1.2 million, including a $1.7 million reduction in the funded general CECL allowance, partly offset by an increase for unfunded commitments. Specific CECL allowance remained $175.0 million; total CECL allowances were $215.2 million. Q1 2020 included $183.5 million of loan-loss provisions.
- Debt and leverage: Secured debt arrangements were $3.43 billion gross ($3.42 billion net of deferred financing costs); senior secured term loans were $791.3 million principal; convertible notes were $575.0 million principal. Debt-to-equity was 1.9, compared with 1.8 at December 31, 2020. The company reported compliance with debt covenants.
- Liquidity: In addition to $294.1 million cash, ARI reported $62.4 million of approved, undrawn secured-debt capacity and $1.5 billion of unencumbered loan assets. It also had $1.4 billion of unfunded loan commitments.
- Capital and distributions: Common dividend declared was $0.35 per share, down from $0.40 in Q1 2020; Series B preferred dividend was $0.50 per share. Book value per common share was $15.06 versus $15.08 at year-end 2020.
Material changes versus comparable periods
- Compared with Q1 2020, the return to GAAP profitability largely reflects the prior-year period’s $183.5 million loan-loss provision and substantial foreign-exchange and interest-rate-hedging losses. Q1 2021 included a $9.8 million gain on foreign-currency forwards and a $7.4 million foreign-currency translation loss; the combined net impact was a $2.4 million gain.
- Net interest income fell $3.5 million year over year, which management attributed mainly to loans placed on non-accrual in Q1 2020 and a 1.29 percentage-point decrease in average one-month LIBOR, partly offset by lower secured borrowings.
- Compared with Q4 2020, net interest income rose $6.5 million, principally due to new originations and add-on fundings. Net income increased from $36.7 million to $58.3 million; Q4 included $30.2 million of realized investment losses and a $42.7 million loss on foreign-currency forwards.
- The company issued a $300 million 2028 senior secured term loan in March 2021 and reduced Deutsche Bank facility capacity from $1.0 billion to $700 million. The Barclays private securitization balance increased during the quarter.
Outlook, management commentary and risks
- No quantified earnings or investment guidance is provided. Management said it believes available cash, expected receipts, financing capacity and unencumbered assets are adequate to meet obligations, while emphasizing close monitoring of liquidity and COVID-19 developments.
- COVID-19 continues to create uncertainty for borrowers, tenants, property values, market liquidity and financing conditions. ARI reported working with some borrowers on modifications, including reserve repurposing and temporary interest or principal deferrals; some deferred interest is recorded as payment-in-kind (PIK). PIK interest was $16.8 million in Q1, so reported interest income includes amounts not necessarily received in cash during the period.
- Credit exposures warrant attention: four loans totaling approximately $404.1 million were risk-rated 5 and had a $175.0 million specific CECL allowance. Accrued interest was 90 or more days past due on loans with $774.8 million amortized cost. A London urban-retail borrower entered administration in November 2020; ARI continued accruing contractual and default interest and reported no specific allowance for that loan as of March 31, 2021.
- Portfolio concentrations include New York City (35.0%) and the United Kingdom (22.3%) by loan carrying value; office (26.3%) and hotel (22.5%) by property type. Financing arrangements include mark-to-market provisions that may require additional collateral or repayment if collateral values fall. A hypothetical immediate 50-basis-point rate increase was estimated to reduce 12-month net interest income by $8.5 million in aggregate.
- A $0.6 million impairment was recorded on a foreclosed hotel held for sale due to increased expected selling costs. A separate lawsuit relating to a Manhattan condominium development remains at an early stage; ARI said it believes the claims are without merit, but possible loss cannot be reasonably estimated.
- The external management agreement renews annually; after review in February 2021, independent directors determined not to seek termination. The agreement provides for a 1.5% annual base fee on defined stockholders’ equity and a potential termination fee.
Important facts for investors to verify
- Whether the $774.8 million of loans with interest 90 or more days past due, including the London retail exposure, continue to accrue interest and perform as assumed.
- Actual cash collections and borrower funding needs relative to $16.8 million of Q1 PIK interest and $1.4 billion of unfunded commitments.
- Liquidity under stress, including secured-financing margin calls, facility renewals and maturities, and covenant headroom.
- Credit quality and collateral valuations supporting the $175.0 million specific CECL allowance and the absence of a specific allowance on the London defaulted loan.
- Sustainability of the common dividend relative to non-GAAP distributable earnings, GAAP results, cash flows and REIT distribution requirements.
- Developments in the litigation and the expected sale value and timing for the foreclosed hotel.