Apollo Commercial Real Estate Finance, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. ARI is an externally managed commercial real estate lender and a REIT.
Financial performance and position
- Earnings: Net income was $67.8 million, up from $49.4 million a year earlier. Net income available to common stockholders was $60.9 million versus $42.6 million. GAAP diluted EPS was $0.43 versus $0.38; basic EPS was $0.45 versus $0.38.
- Interest income and expenses: Net interest income rose to $82.8 million from $63.2 million. Commercial mortgage loan interest income was $78.3 million; subordinate loan interest income was $40.8 million; interest expense was $36.3 million. Management attributed the increase in net interest income primarily to portfolio growth and higher average one-month LIBOR.
- Other results: Foreign currency gain was $6.9 million and derivative loss was $6.7 million. Operating earnings, a non-GAAP measure, were $68.4 million, or $0.50 per share, versus $47.9 million, or $0.43 per share. The company cautions that this measure excludes items including unrealized gains or losses and is not comparable necessarily to similarly titled measures.
- Portfolio: Net loans totaled $5.19 billion, up from $4.93 billion, across 69 loans. The weighted-average cash coupon was 8.4%, all-in yield 9.3%, and remaining term 2.9 years. Floating-rate loans were 93% of the portfolio. Unfunded loan commitments were $1.04 billion.
- Credit and concentration: The aggregate loan-loss provision was $37.0 million. Three loans, representing 4% of portfolio carrying value, had the highest internal risk rating of 5; the weighted-average rating was 3.1. Hotels were 25.7% of the portfolio, and Manhattan, New York, was 35.2% of collateral exposure.
- Cash flow: Operating activities provided $57.2 million; investing activities used $243.0 million; financing activities provided $185.3 million. Cash and cash equivalents were $109.3 million at quarter end, down $0.5 million from year-end.
- Debt and equity: Secured debt was $2.16 billion gross ($2.14 billion net of financing costs), and convertible notes were $558.7 million net. Debt-to-equity was 1.0x, compared with 0.9x at year-end. Total stockholders’ equity was $2.54 billion; common book value was $16.13 per share, down from $16.20. The 2019 convertible notes matured or were converted/repaid by March 15; remaining convertible notes are due in 2022 and 2023.
- Margins and distributions: The filing does not provide a conventional operating-margin figure. The common dividend declared was $0.46 per share, unchanged from Q1 2018; preferred dividends were also declared. Preferred dividends totaled $6.8 million for the quarter.
Material changes versus the prior comparable period
- Net interest income increased $19.6 million, while net income increased $18.3 million. Loan balances grew, and the company also cited a 0.79 percentage-point increase in average one-month LIBOR.
- Interest expense increased $13.6 million, reflecting higher debt balances and benchmark rates. General and administrative expense increased $1.2 million and management fees increased $1.5 million.
- Common weighted-average shares increased substantially, to 134.6 million basic shares from 110.2 million, following prior note conversions and other share issuance. Diluted EPS includes the effect of potential note conversion.
- Compared with year-end, net loans increased $259.4 million, secured debt increased $262.7 million gross, and unfunded commitments decreased $56.5 million.
Outlook, risks, and unusual items
- Management said upcoming commercial real estate debt maturities and uncertainty in lending and property markets may create attractive risk-adjusted investment opportunities. It expects to continue originating first-mortgage and subordinate loans, but provided no quantitative earnings or distribution guidance.
- Management stated that available liquidity and access to additional liquidity should be sufficient for obligations over at least the next 12 months. The company targets debt-to-common-equity below 2.0x, subject to portfolio composition. Debt facilities include margin-call provisions and near-term maturities; $655.2 million of secured borrowings were classified as due in less than one year assuming the disclosed extension assumptions.
- Interest-rate sensitivity analysis estimated that an immediate 50-basis-point increase would increase 12-month net interest income by $13.2 million ($0.10 per share); a 50-basis-point decrease would reduce it by $10.9 million ($0.08 per share). Actual results may differ, including because some loans have LIBOR floors.
- Foreign-currency movements and derivatives affected reported earnings; the company uses currency forwards as economic hedges but does not designate them as accounting hedges. Q1 included $14.5 million of PIK interest and $3.7 million of prepayment penalties and accelerated fees.
- The company expects adoption of the expected-credit-loss accounting standard to result in higher provisions for potential loan losses. It adopted a stock-compensation accounting update in Q1 without financial-statement impact.
- A New York lawsuit involving a Manhattan development alleges damages of $700 million, including punitive damages. The company disputes the claims, intends to defend them, and said it does not believe the case will materially adversely affect its financial statements; a court decision on its dismissal motion was pending.
- After quarter end, ARI committed $75.6 million to a first-mortgage loan, funded about $41.3 million on loans closed earlier, and received about $13.1 million in repayments. The REIT must generally distribute at least 90% of taxable income to maintain its tax status.
Most important facts for investors to verify
- Portfolio credit quality, loan-level collateral values, the $37.0 million loan-loss reserve, and performance of the three risk-rating-5 loans.
- Funding needs and repayment timing for $1.04 billion of unfunded loan commitments, alongside secured-debt maturities, extension conditions, and margin-call exposure.
- Dividend sustainability relative to GAAP earnings, operating earnings, cash flows, and REIT distribution requirements.
- Concentration in hotels and Manhattan, foreign-currency exposure, and the effects of interest-rate floors and hedging on future net interest income.
- Potential effects of the pending litigation and adoption of the expected-credit-loss standard.