Apollo Commercial Real Estate Finance, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. ARI is an externally managed commercial real estate lender and a REIT. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q3 2021 | Comparable period | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $60.7 | $68.6 in Q3 2020 | $206.4 | $214.0 |
| Total net revenue | $66.6 | $68.6 in Q3 2020 | $213.7 | $214.0 |
| Net income (loss) | $60.4 | $49.3 in Q3 2020 | $186.4 | $(18.3) |
| Net income (loss) available to common stockholders | $57.3 | $46.0 in Q3 2020 | $176.5 | $(28.5) |
| Diluted GAAP EPS | $0.38 | $0.31 in Q3 2020 | $1.18 | $(0.20) |
| Common dividend declared per share | $0.35 | $0.35 in Q3 2020 | $1.05 | $1.10 |
Other operating measure: Non-GAAP Distributable Earnings were $49.2 million, or $0.35 per share, for Q3 and $143.6 million, or $1.01 per share, for the first nine months. The filing cautions that this measure is not a substitute for GAAP results and may not be comparable with similarly named measures at other companies.
Interest income from commercial mortgage loans was $84.3 million in Q3, while interest income from subordinate loans and other lending assets was $18.8 million. Interest expense was $42.4 million. The filing does not provide a conventional operating-margin measure.
Balance sheet, cash flow and liquidity
- Total assets were $7.72 billion at September 30, 2021, up from $6.94 billion at December 31, 2020. Net loan carrying value was $7.26 billion, compared with $6.50 billion at year-end 2020.
- Cash and cash equivalents were $243.4 million, down from $325.5 million at year-end. For the nine months, operating cash flow was $164.9 million, investing cash outflow was $763.8 million, and financing cash inflow was $516.8 million; cash declined by $82.1 million.
- Management reported $349.8 million of approved, undrawn secured borrowing capacity and $1.7 billion of unencumbered loan assets. It stated that it believed it could generate or obtain adequate cash to meet obligations.
- Management reported $1.9 billion of corporate debt at face value and $3.5 billion of asset-specific financing. The reported debt-to-equity ratio, defined as debt less cash and loan proceeds held by a servicer divided by stockholders’ equity, was 2.2, versus 1.8 at year-end 2020.
- Secured debt arrangements were $3.45 billion outstanding; term loans had $787.3 million principal outstanding; senior secured notes had $500 million principal; and convertible notes had $575 million principal. The 2029 notes carry a 4.625% coupon. The 2022 and 2023 convertible notes carry coupons of 4.75% and 5.375%, respectively.
- ARI reported no corporate debt maturities until August 2022. Secured facilities include earlier maturities, extensions subject to conditions, and collateral mark-to-market provisions that can trigger margin calls. The company reported covenant compliance at quarter-end.
Portfolio and material changes
- The loan portfolio comprised 66 loans, with $7.46 billion principal balance and $1.18 billion of unfunded commitments. 97% of loans were floating rate, based on amortized cost. Weighted-average cash coupon was 4.8%, down from 5.7% at year-end 2020; weighted-average expected term was 1.9 years.
- For the first nine months, ARI committed $1.5 billion to loans, funded $377.4 million on loans closed before 2021, and received $1.0 billion of repayments. It reported $469.1 million of full and partial repayments in Q3.
- Q3 net interest income fell $13.7 million from Q2 2021. Management attributed the decline principally to stopping interest accrual on a junior mezzanine loan, loan repayments and higher average debt; new originations and add-on fundings partly offset the decrease. For the nine-month year-over-year comparison, lower LIBOR, increased average debt and the cessation of accrual on that loan contributed to lower net interest income.
- The company recorded a net $36.6 million reversal of loan-loss allowances in the first nine months, compared with a $152.0 million provision in the prior-year period. Specific CECL allowances were $145.0 million and general CECL allowances, including unfunded commitments, were $34.9 million at quarter-end. Three loans representing 5.5% of portfolio carrying value were risk-rated 5; one loan representing 1.1% was risk-rated 4. The weighted-average risk rating was 3.1.
- ARI acquired a Washington, D.C. luxury hotel through a deed-in-lieu of foreclosure in May and repaid the property’s $110 million mortgage in June. The property was unlevered at quarter-end. Q3 hotel operations produced $5.9 million revenue and a $2.1 million net loss, including operating costs and depreciation. A separate hotel held for sale was sold in Q2; a $0.6 million impairment was recorded earlier in the year.
- Foreign currency translation and forward-contract valuation were significant and volatile: Q3 included a $24.4 million translation loss and a $32.9 million gain on forward contracts. These items materially affected reported GAAP earnings.
Outlook, risks and contingencies
- The filing gives no numerical earnings or investment guidance. Management described continuing uncertainty from COVID-19 and said the effects on borrowers, property cash flows, asset values and markets remained difficult to estimate.
- Key exposures include borrower credit quality, commercial property values and liquidity, loan repayments and extensions, interest-rate movements, foreign exchange, and refinancing or renewal of facilities. Secured lenders may demand additional collateral or repayment if collateral values decline. A 50-basis-point increase in benchmark rates was estimated to reduce next-12-month net interest income by $4.9 million, or $0.04 per share; a 50-basis-point decrease was estimated to increase it by $1.3 million, or $0.01 per share.
- ARI had $1.2 billion of unfunded loan commitments, expected to be funded over the loans’ remaining weighted-average tenor of 3.5 years; timing and amounts are uncertain. Its liquidity also depends on loan collections, financing availability and market conditions.
- A separate lawsuit involving the 111 West 57th Street development was at an early stage. The company said it believed the claims were without merit; it could not reasonably estimate potential loss.
- The management agreement with an Apollo affiliate renewed for another year. Q3 management fees were $9.6 million. Related-party activity also included Apollo-affiliated arrangers and initial purchasers receiving fees in connection with the 2028 term loan and 2029 notes.
- Subsequent to quarter-end, ARI committed $340.8 million for three loans, including $293.2 million funded at closing, funded another $31.8 million on existing loans, and received approximately $177.1 million in repayments.
Investor verification priorities
- Check the composition and performance of the risk-rated 4 and 5 loans, specific CECL assumptions, and the status and recovery prospects of loans on cost recovery or with past-due interest.
- Assess the $1.18 billion unfunded commitments against cash, undrawn capacity, near-term facility maturities and potential collateral margin calls.
- Reconcile GAAP earnings with Distributable Earnings, especially the effects of allowance reversals, hotel operations, foreign-currency translation and derivative gains or losses.
- Review refinancing and extension terms for secured facilities and the August 2022 maturity of the 2022 convertible notes.
- Evaluate dividend coverage using taxable income and distributable cash flow, noting the $0.35 quarterly common dividend and REIT distribution requirements.
- Confirm the outcome and potential exposure of the 111 West 57th Street litigation and monitor the hotel’s operating performance.