Apollo Commercial Real Estate Finance, Inc. — Q1 2018 Form 10-Q
Business and period. REIT primarily originating, acquiring and managing commercial mortgage loans and subordinate real estate debt. This unaudited report covers the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017.
Financial and operating performance
- Income: Net interest income was $63.2 million, up $5.4 million from $57.8 million. GAAP net income was $49.4 million versus $47.1 million; income available to common stockholders was $42.6 million versus $37.8 million. GAAP EPS declined to $0.38 from $0.41, as weighted-average basic shares increased to 110.2 million from 91.6 million.
- Supplemental earnings: Non-GAAP Operating Earnings were $47.8 million, or $0.43 per share, compared with $38.6 million, or $0.41 per share. The measure excludes, among other items, unrealized derivative and foreign-exchange effects and equity compensation; it is not a substitute for GAAP results.
- Portfolio and returns: Net loans increased to $4.07 billion from $3.68 billion. The 63-loan portfolio was 89% floating-rate, with an 8.6% weighted-average cash coupon and 9.2% weighted-average all-in yield. Commercial mortgage loans had a 7.7% all-in yield; subordinate loans, 13.7%. Weighted-average funding cost on secured debt was 4.1%.
- Cash flow and liquidity: Operating cash flow was $88.3 million, compared with $25.6 million; investing cash outflow was $155.1 million, compared with $374.9 million. Cash increased to $98.3 million from $77.7 million. Management stated it believed liquidity and access to additional liquidity were sufficient for at least 12 months. Cash flow included $55.0 million of proceeds received from PIK interest.
- Debt and capital: Secured debt was $1.21 billion, down from $1.33 billion; convertible notes had a net carrying value of $586.0 million. Debt-to-equity was 0.8x versus 0.9x at year-end, using the company’s stated measure. The company raised approximately $275.9 million net from issuing 15.525 million common shares during the quarter. Common dividends declared were $0.46 per share, unchanged year over year. Series B and C preferred dividends were each $0.50 per share.
Changes, outlook and risks
- Higher mortgage-loan interest income and portfolio growth lifted net interest income; higher interest expense partly offset the increase. Q1 2017 included $6.1 million of securities interest income, a $2.9 million unrealized securities gain, and a $1.0 million realized loss on asset sales; the company held no securities at March 31, 2018.
- Net income included a $10.1 million foreign-currency gain and an $11.0 million derivative loss, versus gains of $3.2 million and derivative losses of $3.0 million, respectively, in Q1 2017. The combined impact of foreign-currency gains and derivative losses was a $0.9 million loss, versus a $0.1 million gain.
- Management cited commercial real estate debt maturities and market uncertainty as potential sources of attractive risk-adjusted lending opportunities. It provided no quantified earnings or dividend guidance and cautioned that quarterly results are not necessarily indicative of future periods.
- Unfunded loan commitments were $852.5 million. Two loans, carrying $72.5 million in total, were risk-rated 5; the aggregate loan-loss provision was $17.0 million. The company also disclosed a $3.0 million impairment on an investment recorded in other assets. Rising rates, collateral values, borrower credit, prepayments, financing access, margin calls and foreign exchange are material risks. A modeled 50-basis-point rate increase was estimated to raise 12-month net interest income by $12.2 million, or $0.10 per share, subject to stated assumptions.
- Subsequent to quarter-end, the company committed $238.8 million of first-mortgage loans, funded approximately $20.4 million on previously closed loans, and received approximately $71.9 million in repayments. On April 27, it amended the Deutsche Bank repurchase facility to provide up to $800 million of advances, with a March 2020 maturity and a one-year extension option.
- The company was in compliance with secured-debt financial covenants at quarter-end. It continued cooperating with a Department of Justice information request concerning its former residential real estate portfolio; the filing does not quantify any potential outcome or liability. Management reported no material change in risk factors from its 2017 Form 10-K.
Important facts for investors to verify
- How much of reported income and cash generation is recurring cash interest versus PIK interest, foreign-exchange movements and derivative valuation effects.
- Loan-level credit quality, collateral performance and potential losses, particularly for risk-rated 4 and 5 loans and the impaired investment.
- Funding availability, borrowing costs, margin-call exposure, upcoming facility and note maturities, and the ability to meet $852.5 million of unfunded commitments.
- Whether earnings support the $0.46 common dividend, given GAAP EPS of $0.38 and REIT distribution requirements.
- Progress and potential implications of the DOJ inquiry, and terms and utilization of the amended Deutsche Bank facility.