Apollo Commercial Real Estate Finance, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited; dollar amounts below are in millions unless stated otherwise. The company is a REIT that originates, acquires and manages U.S. commercial real estate debt investments and is externally managed by an Apollo affiliate.
Financial performance and position
- Q2 revenue and earnings: Net interest income was $9.7, up 92% from $5.1 a year earlier. Net income was $6.5 versus $2.9; diluted earnings per share were $0.37 versus $0.27.
- First half: Net interest income was $17.3, up 93% from $9.0. Net income was $11.7 versus $4.7; diluted earnings per share were $0.66 versus $0.43.
- Income drivers and costs: Higher interest income across securities and loan investments—primarily reflecting deployment of offering proceeds—was partly offset by higher interest expense. Q2 operating expenses were $2.5, up 18%, including management fees of $1.1, up 50%. The filing does not provide a conventional operating margin measure.
- Fair-value items: Q2 included a $1.4 unrealized securities gain and $2.0 of derivative losses, resulting in a net $0.7 loss from the reported securities and derivative fair-value/realized items. First-half net loss from those items was $0.6. First-half comprehensive income was $8.2, down from $10.1, reflecting a $3.5 decline in unrealized gains on available-for-sale securities.
- Cash flow: First-half operating cash flow was $16.0, investing cash outflow $56.2 and financing cash inflow $26.8. Cash declined $13.4 to $24.5. Cash dividends paid were $14.2.
- Assets and equity: At June 30, total assets were $895.5 and stockholders’ equity $292.5. The investment portfolio included $605.7 of CMBS fair value, $109.4 of commercial mortgage loans, $99.0 of subordinate loans and $47.4 invested through a repurchase facility.
- Debt and liquidity: Total borrowings were $582.1: $280.2 TALF, $232.9 under the Wells facility and $69.0 under the JPMorgan facility. Weighted-average debt rate was 2.8%, with 1.8 years’ weighted-average remaining maturity, assuming extension options are exercised. Cash was $24.5; the company reported $31.0 of unused JPMorgan capacity, subject to acquiring eligible assets. Debt was about 2.0 times equity.
- Dividends: The company declared $0.40 per share for each of the first two 2011 quarters, or $0.80 for the first half. A further $0.40 dividend was declared in August for payment in October.
Changes versus prior comparable periods
- Net interest income rose sharply year over year as the company deployed capital raised in its September 2010 follow-on offering; interest expense also increased.
- Management fees increased 50% in both the quarter and first half, which the company attributed primarily to the larger equity base following the 2010 offering. General and administrative costs were broadly stable.
- Subordinate loans increased to $99.0 from $59.0 at year-end 2010, following a $40.0 ski-resort loan investment. The company also began a $47.4 repurchase-facility investment. A $8.8 commercial mortgage loan was repaid in April.
- Borrowings rose to $582.1 from $540.1 at year-end 2010, principally reflecting increased repurchase-agreement financing; TALF borrowings declined as collateral paid down.
Outlook, risks and unusual items
- Management cited a potential financing opportunity from commercial real estate loan maturities and constrained traditional lending and CMBS issuance. It expects to pursue investments but provided no specific earnings or portfolio guidance. It intends to make regular quarterly distributions, subject to board discretion and operating results.
- The company expects leverage on loans to be approximately 35% of the value of its total loan portfolio. It uses swaps and caps to manage floating-rate exposure. The filing estimates a 50-basis-point LIBOR increase would raise quarterly interest expense by $74 on its then-net $59.1 of variable-rate debt after hedging.
- Key risks include credit deterioration and collateral-value declines, interest-rate and asset/liability mismatches, prepayment and refinancing risk, market-liquidity and fair-value uncertainty, and financing covenants or margin calls. CMBS fair values relied on dealer quotations and were classified as Level II; management noted quotes may not represent executable sale prices. No loan-loss allowance was considered necessary at June 30.
- The company’s Core Earnings exceeded the hurdle triggering payment of the $10.0 deferred IPO underwriting fee; payment was expected in Q3 2011. Related-party management fees are based on stockholders’ equity, and reimbursable expenses are not subject to a dollar limit.
- Subsequent to quarter-end, the company issued 3.0 million shares for gross proceeds of approximately $50.0 (about $49.0 before offering expenses). It also closed a $25.0 junior mezzanine hotel loan on August 2, with an underwritten expected IRR of approximately 13.5%; actual returns are not assured.
- The filing reported no legal proceedings, defaults on senior securities, or material changes to previously disclosed risk factors. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether loan and CMBS collateral performance supports management’s conclusion that no loan-loss allowance or securities impairment is needed.
- Actual returns and credit performance of the new subordinate and repurchase-facility investments, including the CDO bond’s downgrade from AAA/Aaa to A-/Baa1.
- Availability and terms of financing extensions, covenant compliance, collateral valuation and exposure to margin calls.
- The cash and earnings effect of the $10.0 deferred underwriting fee, subsequent share issuance and continued $0.40 quarterly dividend.
- How much reported earnings depends on fair-value movements, derivative results and management’s valuation assumptions; the filing does not provide numerical earnings guidance.