Apollo Commercial Real Estate Finance, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in thousands of dollars unless stated otherwise. ARI is an externally managed REIT investing primarily in commercial mortgage loans, CMBS, subordinate financings, and related real estate debt.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $13,236 | $10,236 | $36,375 | $27,518 |
| Net income | $12,211 | $5,512 | $31,214 | $17,212 |
| Net income available to common stockholders | $10,992 | $5,512 | $29,995 | $17,212 |
| Basic and diluted net income per common share | $0.52 | $0.28 | $1.43 | $0.93 |
| Common dividend declared per share | $0.40 | $0.40 | $1.20 | $1.20 |
- For the nine months, operating cash flow was $32,660, investing cash flow was $255,748, and financing cash outflow was $241,982. Cash rose by $46,426 to $67,994.
- At September 30, total assets were $684,241, total liabilities $256,820, and stockholders’ equity $427,421. Cash was $67,994; investments included $299,590 of CMBS at estimated fair value, $104,101 of commercial mortgage loans, $196,177 of subordinate loans, and $10,975 of repurchase-agreement investments.
- Debt consisted primarily of $242,967 under the Wells Fargo repurchase facility; total borrowings were $242,970. The weighted-average borrowing rate was 1.9%. The company reported no TALF borrowings at period-end.
- Portfolio weighted-average yield was 8.7%, weighted-average life 3.3 years, and current weighted-average investment IRR 13.1%; these are management estimates and assume specified portfolio and financing conditions.
Changes versus comparable periods and year-end
- Q3 net interest income rose 29.3% year over year; nine-month net interest income increased 32.2%. Growth in subordinate-loan and repurchase-agreement income more than offset lower securities income. Interest expense declined following the TALF refinancing and debt repayments.
- Nine-month net income rose to $31,214 from $17,212. The 2012 result included $6,473 of unrealized securities gains, compared with a $118 unrealized loss in 2011; these valuation changes contributed to reported earnings.
- Operating expenses increased 55.6% in Q3 and 50.7% for the nine months. Higher stock-based compensation and management fees, as well as loan-closing expenses, contributed to the increase.
- Compared with December 31, 2011, total assets fell to $684,241 from $891,230, and total liabilities fell to $256,820 from $554,252. The company sold or received principal payments on securities and repaid all TALF debt; its investment mix also shifted toward subordinate loans and the newly acquired Hilton CMBS.
Capital, liquidity, outlook, and risks
- In August, ARI issued 3.45 million shares of 8.625% Series A cumulative redeemable perpetual preferred stock, with a $25 liquidation preference per share. Net proceeds were approximately $83 million. Preferred dividends of $1,219 were recorded for the nine months.
- After quarter-end, ARI completed a common-stock offering of 7 million shares and a partial underwriters’ option exercise for 404,640 additional shares at $16.81 per share; estimated aggregate net proceeds were approximately $124,182. The company also declared a $0.40 common dividend payable in January 2013.
- Management stated it believed current liquidity and access to additional liquidity were sufficient for obligations for at least the next 12 months. It intended to continue regular quarterly common distributions, subject to board discretion and results. No earnings or dividend guidance was provided.
- The Wells facility’s general maturity was extended to August 2013; its separate Hilton CMBS financing capacity matures in November 2014, with an extension option. The JPMorgan facility matures January 4, 2013. Management was in early discussions to extend or replace it and cautioned that renewal on acceptable terms was not assured. The filing says ARI may need to reborrow about $53 million under JPMorgan or a replacement facility to achieve certain underwritten leveraged returns.
- All repurchase-agreement borrowings were floating rate. Management estimated a 50-basis-point LIBOR increase would increase quarterly interest expense by $161 on the stated net variable-rate exposure, before considering potential management actions or broader economic effects. Derivatives were used to hedge part of the exposure.
- Risks include collateral valuation and credit deterioration, real estate-market weakness, refinancing and facility-renewal risk, margin calls, interest-rate and prepayment exposure, and the possibility that underwritten investment returns will not be achieved. Management reported no loan-loss allowance at September 30. It also disclosed potential CFTC/NFA commodity-pool-operator regulation related to swaps and caps; inability to obtain relief could require registration or changes to hedging practices.
- Management described a recovering but still moderate commercial real estate lending and CMBS market, with significant expected commercial mortgage maturities through 2015. These are market observations, not company-specific earnings guidance. No material legal proceedings were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Facility extensions, refinancing or replacement options, collateral requirements, covenant compliance, and potential margin calls—especially the JPMorgan January 2013 and Wells August 2013 maturities.
- How much of reported earnings reflects recurring net interest income versus securities fair-value movements, realized gains, and derivative results.
- Asset-level performance and collateral values, particularly the modified California ski-resort loan and higher-LTV subordinate exposures; confirm subsequent payment and covenant status.
- Preferred-stock costs, post-quarter common-stock issuance and dilution, and the sustainability of common dividends relative to distributable earnings and cash flows.
- Whether management’s underwritten yields and IRRs are realized, including the assumptions about extensions, prepayments, defaults, and future leverage.