Apollo Commercial Real Estate Finance, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. ARI is an externally managed commercial real estate debt REIT. Results reflect the emerging COVID-19 disruption and the adoption of the expected-credit-loss (CECL) standard on January 1, 2020.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior date |
|---|---|---|
| Net interest income | $74.7 million | $82.8 million in Q1 2019 |
| GAAP net income (loss) | $(127.8) million; $(0.86) per common share | $67.8 million; $0.45 basic per share in Q1 2019 |
| Operating Earnings (non-GAAP) | $62.7 million; $0.40 per share | $68.4 million; $0.50 per share in Q1 2019 |
| Cash and cash equivalents | $582.1 million | $452.3 million at December 31, 2019 |
| Operating cash flow | $54.1 million | $57.2 million in Q1 2019 |
| Loan portfolio, net | $6.43 billion | $6.38 billion at December 31, 2019 |
| Total assets / stockholders’ equity | $7.17 billion / $2.40 billion | $6.89 billion / $2.63 billion at December 31, 2019 |
| Debt-to-equity ratio | 1.6x | 1.4x at December 31, 2019 |
| Common dividend declared | $0.40 per share | $0.46 per share in Q1 2019 |
Material changes and portfolio
- Net interest income fell $8.2 million year over year, reflecting lower average LIBOR and higher interest expense as debt increased; larger loan balances and LIBOR floors partly offset the decline.
- ARI recorded $183.5 million of Q1 loan-loss provision: $150.0 million specific and $33.5 million general. The filing attributes the increased expected-loss estimates largely to COVID-19-related macroeconomic assumptions. Total CECL allowances were $271.3 million at quarter-end.
- Foreign-currency losses were $37.9 million, partly offset by $70.5 million of gains on currency forwards; the interest-rate swap generated a $35.5 million unrealized loss. Together, these items contributed substantial volatility to GAAP results.
- The portfolio comprised 75 loans, with 95% floating-rate exposure, $1.82 billion of unfunded commitments, and a weighted-average cash coupon of 6.0%. Risk-rating-5 loans represented 8.3% of portfolio carrying value; the weighted-average risk rating increased to 3.1 from 3.0.
- Exposure was concentrated in office (27.8%) and hotel (23.7%) property types; New York City represented 35.8% and the United Kingdom 20.8% of portfolio carrying value.
- Secured debt arrangements were $3.54 billion net of financing costs; convertible notes and the senior secured term loan were $562.6 million and $487.1 million, respectively. About 54% of secured borrowings were recourse. ARI reported covenant compliance at March 31.
Liquidity, outlook, risks, and notable items
- Management reported $582 million of cash, $8 million of approved and undrawn secured borrowing capacity, and approximately $1.2 billion of unencumbered loan assets. It believed liquidity and access to additional liquidity would cover obligations for at least 12 months; this assessment is subject to COVID-19 uncertainty.
- Secured facilities include mark-to-market provisions and may require additional collateral or repayment if collateral values fall. ARI warned that lower asset values, margin calls, refinancing constraints, borrower payment problems, and further credit losses could pressure liquidity and results. Approximately $1.8 billion of unfunded loan commitments remained at quarter-end.
- The filing gives no quantitative earnings or dividend guidance. Management said the pandemic’s ultimate impact could not yet be estimated. The company intends to continue regular quarterly common distributions, but distributions remain subject to board discretion and operating results.
- After quarter-end, ARI sold interests in three construction loans to Manager-affiliated entities, recognizing an approximately $0.5 million loss and reducing future unfunded commitments by $172.6 million. It also terminated its $500 million interest-rate swap, resulting in a $54.3 million realized loss, $50.0 million of which had already been recognized at quarter-end.
- ARI repurchased 300,000 shares for $2.4 million under a newly authorized $150 million repurchase program. A disclosed lawsuit seeking up to $700 million in damages had been dismissed, but the plaintiffs appealed; ARI stated it did not expect a material adverse effect.
- The non-GAAP Operating Earnings measure excludes, among other items, loan-loss provisions and unrealized items; ARI cautions that it is not a substitute for GAAP net income and may not be comparable with peers.
Investor verification priorities
- Review the specific impaired loans, collateral valuations, and assumptions supporting the $271.3 million total CECL allowance, especially the effects of COVID-19.
- Track borrower performance, property values, the $1.82 billion of unfunded commitments, and subsequent funding or loan-sale activity.
- Assess liquidity and refinancing exposure, including mark-to-market collateral calls, near-term facility maturities, recourse debt, and covenant headroom.
- Reconcile GAAP losses with non-GAAP Operating Earnings and confirm the realized accounting and cash effects of the post-quarter swap termination.
- Evaluate the sustainability of common distributions and the share repurchase program in light of credit deterioration and capital needs.