Apollo Commercial Real Estate Finance, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. ARI is an externally managed REIT focused on commercial real estate loans and related debt investments. This unaudited report covers the quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2021 / June 30, 2021 | Comparison |
|---|---|---|
| Net interest income | $74.5 million | $70.8 million in Q2 2020; $71.2 million in Q1 2021 |
| Total net revenue | $75.9 million | $70.8 million in Q2 2020 |
| Net income | $67.7 million | $60.2 million in Q2 2020 |
| Net income available to common stockholders | $64.3 million; diluted EPS $0.42 | $56.8 million; diluted EPS $0.36 in Q2 2020 |
| Distributable Earnings, non-GAAP | $38.8 million; $0.27 per diluted share | $(11.3) million; $(0.07) per share in Q2 2020 |
| Six-month net income (loss) available to common | $119.3 million; diluted EPS $0.79 | $(74.4) million; diluted EPS $(0.50) in H1 2020 |
| Operating cash flow, six months | $120.9 million | $53.5 million in H1 2020 |
| Cash and cash equivalents | $204.6 million | $325.5 million at December 31, 2020 |
| Loan portfolio, net | $7.52 billion across 68 loans | $6.50 billion across 67 loans at December 31, 2020 |
| Total assets / stockholders’ equity | $7.95 billion / $2.29 billion | $6.94 billion / $2.27 billion at December 31, 2020 |
| Debt-to-equity ratio | 2.3x | 1.8x at December 31, 2020 |
| Common book value per share | $15.19 | $15.08 at December 31, 2020 |
- Q2 net interest income rose $3.3 million from Q1, primarily reflecting new originations and add-on fundings, partly offset by repayments and higher interest expense.
- For H1, net interest income was essentially flat year over year. Interest income from subordinate loans declined $3.4 million, while lower interest expense contributed $3.3 million.
- Loan carrying value grew about $1.02 billion from year-end, with $1.3 billion of new mortgage loan funding in H1. The portfolio was 97% floating rate; weighted-average cash coupon was 5.4%, versus 5.7% at year-end, and weighted-average all-in yield was 5.5%.
- H1 investing cash outflow was $1.01 billion, reflecting loan funding exceeding repayments and sales. Financing cash inflow was $771.1 million, including proceeds from new term debt and senior secured notes, partly offset by debt repayments and dividends.
- At June 30, debt included $3.68 billion of secured debt arrangements, $774.6 million of senior secured term loans, $493.7 million of senior secured notes, and $567.8 million of convertible notes, on a net carrying-value basis. ARI reported $1.9 billion of corporate debt at face value and $3.7 billion of asset-specific financing.
- ARI declared common dividends of $0.35 per share for Q2, unchanged from Q2 2020; H1 common dividends were $0.70 per share versus $0.75 in H1 2020.
Material changes, outlook, and risks
- Financing: ARI issued a $300 million senior secured term loan due 2028 and $500 million of 4.625% senior secured notes due 2029 during 2021. Management stated there were no corporate debt maturities until August 2022.
- Credit reserves and unusual items: Total CECL allowances were $185.6 million at June 30, down from $216.5 million at year-end. Q2 included a $20 million realized loss associated with acquiring a Washington, D.C. hotel through a deed-in-lieu of foreclosure, alongside $30 million of specific CECL allowance reversals. The hotel contributed a $1.1 million operating loss in Q2; ARI repaid its $110 million mortgage in June.
- Credit indicators: Loans rated 5, the highest-risk category, represented 5.3% of portfolio carrying value; loans rated 4 represented 1.1%. Loans with interest 90 or more days past due had $751.5 million of amortized cost. A London urban-retail loan was in default and administration; ARI reported no specific CECL allowance for it at quarter-end and continued accruing contractual and default interest.
- Liquidity and commitments: ARI reported $204.6 million cash, $21.9 million of approved undrawn secured borrowing capacity, and $2.0 billion of unencumbered loan assets. Management believed available sources were adequate to meet obligations, while noting that secured facilities may make margin calls if collateral values decline. Unfunded loan commitments were reported as $1.258 billion in the portfolio statistics; the contractual-obligations table shows $1.220 billion.
- COVID-19 and market risk: Management said the pandemic’s ultimate effect on borrowers, collateral values, liquidity, and results remained uncertain and could be significant. A hypothetical immediate 50-basis-point rate increase was estimated to reduce following-12-month net interest income by $5.5 million, or $0.04 per share; an equal decrease was estimated to increase it by $1.8 million, or $0.01 per share.
- Management and legal matters: The external management agreement automatically renews unless terminated under specified conditions; independent directors decided not to seek termination in February 2021. A separate lawsuit concerning a Manhattan development seeks damages, but ARI said the claims are without merit and no reasonable loss estimate can be made.
- Subsequent events: After quarter-end, ARI committed $441 million to a first mortgage loan ($141 million funded at closing) and received about $297.3 million in loan repayments. On July 15, it exchanged all outstanding Series B preferred shares bearing an 8% rate for Series B-1 shares bearing a 7.25% rate.
The filing provides no formal earnings or dividend guidance. Management stated that results for the first half are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile the $1.258 billion portfolio commitment disclosure with the $1.220 billion contractual-obligations figure, and assess expected funding timing and liquidity needs.
- Review borrower performance, collateral valuations, and recovery assumptions for the $751.5 million of loans with interest 90 or more days past due, including the London defaulted loan and risk-rated 4 and 5 exposures.
- Assess leverage and refinancing exposure, including secured-debt mark-to-market and margin-call terms, facility maturities, and the rise in debt-to-equity to 2.3x.
- Distinguish GAAP earnings from Distributable Earnings: the latter is a non-GAAP measure with adjustments that management says may not be comparable across companies.
- Monitor COVID-19 effects, the acquired hotel’s operating performance, subsequent loan activity, and the unresolved litigation; the filing gives no estimable loss for the lawsuit.