Apollo Commercial Real Estate Finance, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company is an externally managed REIT investing primarily in commercial mortgage loans, subordinate financings and commercial mortgage-backed securities (CMBS). Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Net interest income | $28.6 | $19.4; up 47.2% |
| Net income | $25.5 | $17.6 |
| Net income available to common stockholders | $23.7 | $15.7 |
| Basic and diluted EPS | $0.47 | $0.42 |
| Operating Earnings, non-GAAP | $22.2; $0.44 per share | $14.0; $0.37 per share |
| Cash from operating activities | $17.4 | $11.4 |
| Cash and restricted cash | $40.0 cash; $30.1 restricted cash | At December 31, 2014: $40.6 and $30.1 |
| Total assets / stockholders’ equity | $2,022.4 / $1,046.5 | At December 31, 2014: $1,845.1 / $855.1 |
| Repurchase-agreement borrowings | $575.4 | $622.2 at December 31, 2014 |
| Convertible senior notes, net | $246.9 | $246.5 at December 31, 2014 |
- Net interest income growth reflected the expanded investment portfolio, partly offset by substantially higher interest expense. Interest expense was $11.5 million versus $1.8 million, with average repurchase borrowings rising to $661.4 million from $193.7 million.
- Operating expenses rose 42.2% to $5.7 million, including $3.3 million of related-party management fees and $1.1 million of stock-based compensation.
- Investment portfolio carrying value was approximately $1.81 billion: $563.4 million in first mortgages, $672.1 million in subordinate loans, $520.4 million in fair-value-option CMBS and $154.4 million in held-to-maturity securities. The filing reports a 9.3% weighted-average yield for the portfolio.
- Q1 financing cash inflows included $193.4 million from a common-stock offering and $30.5 million from participations sold. Investing activities used $171.6 million, principally for loan funding.
Material changes and transactions
- The company issued 11.5 million common shares in a follow-on offering at $16.82 per share, generating approximately $193.1 million in net proceeds. Shares issued and outstanding increased to 58.4 million from 46.9 million at year-end.
- Commercial mortgage loans increased to $563.4 million from $458.5 million, and subordinate loans increased to $672.1 million from $561.2 million, reflecting originations and additional funding.
- The company entered a Goldman repurchase loan with $52.5 million outstanding and amended and restated its JPMorgan facility, with $89.0 million outstanding at quarter-end. It repaid the Wells Fargo facility during February following a collateral sale.
- The company sold approximately 48% of its Champ LP interest to an Apollo-managed account for about $20.8 million, reducing its remaining unfunded commitment to approximately $3.5 million.
Liquidity, distributions, outlook and risks
- Management stated it believed available liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months. The company reported $211.0 million of available capacity under the JPMorgan facility, subject to collateral and facility terms.
- Unfunded loan commitments were $234.1 million for commercial mortgage loans and $25.1 million for subordinate loans; the Champ LP commitment was approximately $3.5 million. These commitments are potential future funding needs.
- Repurchase borrowings had a 3.1% weighted-average rate and 3.0-year weighted-average remaining maturity. Facilities include financial covenants and may involve margin calls; the company reported covenant compliance at quarter-end.
- Interest-rate sensitivity: management estimated a 50-basis-point increase in LIBOR would increase quarterly net interest income by approximately $0.8 million, based on stated net variable-rate exposure of $723.2 million and assuming no structural changes.
- Management described commercial real estate lending opportunities as supported by expected loan maturities through 2017 and anticipated continued refinancing and acquisition activity in 2015. No specific earnings or investment-volume guidance was provided.
- The common dividend declared for Q1 was $0.44 per share; the filing also reports an April 2015 declaration of $0.44 per share payable in July. The Q1 dividend per share equaled reported non-GAAP Operating Earnings per share. Dividend decisions remain at the board’s discretion.
- Key risks include borrower and collateral credit deterioration, real estate market and property-value declines, interest-rate and funding-cost changes, refinancing and prepayment uncertainty, fair-value estimation risk, and foreign-currency movements. Currency forwards are not designated as GAAP hedges; their fair-value changes flow through earnings. Q1 included a $2.7 million foreign-currency gain and a $3.0 million derivative loss.
- The company reported no material legal proceedings, no material change in risk factors, and effective disclosure controls. A full repayment of a first mortgage loan secured by a Silver Spring, Maryland hotel occurred in April 2015.
Important facts for investors to verify
- Whether planned loan fundings and portfolio growth generate returns consistent with the manager’s underwriting assumptions, particularly given $259.1 million of unfunded loan commitments.
- Collateral values, borrower performance and credit quality of CMBS and loan exposures; no loan-loss allowance was recorded at March 31, 2015.
- Availability and terms of repo financing, covenant headroom, collateral requirements and possible margin calls, including the conditions for using remaining JPMorgan capacity.
- How recurring distributable cash compares with common and preferred distributions; reconcile GAAP earnings, non-GAAP Operating Earnings, cash flows and declared dividends.
- The effects of currency movements and derivative marks on reported earnings, and the continuing costs and governance terms of the Apollo-affiliated management arrangement.