Apollo Commercial Real Estate Finance, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. ARI is an externally managed commercial real estate debt investor and a REIT. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Net interest income | $55.1 million | $71.2 million in Q1 2021; $59.2 million in Q4 2021 |
| Total net revenue | $64.2 million | $71.2 million in Q1 2021 |
| Net income | $15.2 million | $58.3 million in Q1 2021 |
| Net income available to common stockholders | $12.2 million; $0.08 per diluted share | $55.0 million; $0.37 per diluted share in Q1 2021 |
| Distributable Earnings, a non-GAAP measure | $49.5 million; $0.35 per share | $55.6 million; $0.39 per share in Q1 2021 |
| Common dividend declared | $0.35 per share | Unchanged from Q1 2021 |
| Cash and cash equivalents | $215.7 million | $343.1 million at December 31, 2021 |
| Net loan portfolio | $8.35 billion | $7.86 billion at December 31, 2021 |
| Total borrowings, principal balance | $6.44 billion | $6.02 billion at December 31, 2021 |
| Stockholders’ equity | $2.25 billion | $2.29 billion at December 31, 2021 |
| Book value per common share | $14.81 | $15.19 at December 31, 2021 |
Operating cash flow was $49.7 million, compared with $43.9 million in Q1 2021. Investing activities used $577.9 million, principally reflecting loan originations and fundings; financing activities provided $404.7 million. The portfolio was 98% floating-rate loans, with a 4.5% weighted-average cash coupon and 5.0% weighted-average all-in yield. The filing does not provide a single consolidated net interest margin figure.
At quarter-end, secured debt arrangements were $4.58 billion, term loans $783.3 million, senior secured notes $500 million, and convertible notes $575 million. The reported debt-to-equity ratio was 2.7, up from 2.4 at year-end 2021. ARI reported covenant compliance across its financing arrangements.
Material changes and notable items
- Net income available to common stockholders fell to $12.2 million from $55.0 million a year earlier. Net interest income declined, while the quarter included a $30.0 million specific CECL provision, a $32.5 million foreign currency translation loss, and gains of $22.8 million on currency forwards and $6.3 million on the interest-rate cap.
- Distributable Earnings declined to $0.35 per share from $0.39. This non-GAAP measure adjusts for, among other items, foreign exchange movements, unrealized derivative gains and losses, equity compensation, and loan-loss provisions; it should not be treated as GAAP earnings or cash flow.
- ARI recorded a $30.0 million specific allowance against a Manhattan residential-for-sale junior mezzanine loan after sales velocity lagged expectations; the loan was placed on non-accrual in 2021. The borrower’s extension ran to May 1, 2022. Total CECL allowance was $200.3 million, including $175.0 million specific allowance.
- General CECL allowance declined by $11.4 million, which management attributed primarily to updated expected repayment dates, portfolio seasoning, and an improved macroeconomic outlook, partly offset by new originations.
- The portfolio had 67 loans and $1.80 billion of unfunded commitments, compared with $1.36 billion at year-end. The weighted-average risk rating was unchanged at 3.1; four loans, representing 5.5% of portfolio carrying value, were rated 5.
- A Washington, D.C. hotel acquired through foreclosure was classified as held for sale in March. Its assets were $157.1 million and liabilities $5.7 million at quarter-end; Q1 operations produced a $1.3 million net loss.
- ARI adopted ASU 2020-06 for convertible debt accounting on January 1, 2022, reducing reported stockholders’ equity by $3.4 million on adoption. The $345 million 4.75% convertible notes mature in August 2022.
Liquidity, outlook, and risks
Management identified $215.7 million of cash and approximately $1.8 billion of unencumbered assets as liquidity sources at March 31. It expected about $790.6 million of the $1.8 billion in unfunded loan commitments to be funded in the short term. Management also anticipated $414.3 million of secured debt repayments in the short term. These funding and repayment estimates are subject to borrower activity, lender consent, and market conditions.
ARI stated it intends to continue regular quarterly common dividends, but future distributions are at the board’s discretion and depend on results and available cash. The filing gives no earnings or dividend guidance. Subsequent to quarter-end, ARI originated a £407.0 million (approximately $530.3 million) floating-rate U.K. loan, with approximately $491.2 million funded at closing; it also funded about $45 million of prior commitments and received about $28 million in repayments.
- Refinancing and leverage: The $345 million convertible notes mature in August 2022. Secured facilities include near-term maturities, including HSBC in July 2022 and Barclays in June 2022. Extensions may require lender consent; secured financing may also involve margin calls, lower advance rates, or higher costs.
- Commitments and liquidity: Track actual timing and amount of the $1.8 billion unfunded commitments, expected near-term fundings, loan repayments, and available unencumbered assets.
- Credit and collateral: Monitor the risk-rated 4 and 5 loans, especially the Manhattan mezzanine exposure and its May 2022 extension, along with property values, borrower performance, and CECL assumptions.
- Rates and currencies: The filing’s modeled 50-basis-point rate increase reduced projected next-12-month net interest income by $0.4 million overall, with different effects by currency. Foreign exchange translation and derivatives can create earnings volatility despite economic hedging.
- Other risks: Management cited continuing uncertainty from COVID-19 and variants, real estate and market conditions, and potential litigation. A separate New York action involving the company and related parties remained pending; management said it could not reasonably estimate any possible loss.
Key facts for investors to verify
- How the August 2022 convertible notes were repaid or refinanced, and the terms and status of other near-term financing maturities.
- Whether the Manhattan mezzanine borrower met the May 1, 2022 extension and how subsequent collateral sales and credit allowances evolved.
- Actual funding of loan commitments and the resulting cash, unencumbered assets, leverage, and margin-call capacity.
- Whether recurring earnings and cash generation support the $0.35 common dividend, using GAAP results alongside the company’s non-GAAP Distributable Earnings.
- Updates to currency exposure, CECL estimates, the held-for-sale hotel disposition, and the pending litigation.