Apollo Commercial Real Estate Finance, Inc. — Q2 2019 Form 10-Q
Business and period. ARI is an externally managed REIT that originates, acquires and manages commercial real estate debt. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted.
Financial performance and position
- Income: Q2 net interest income was $85.0 million, up from $70.8 million. Net income was $61.4 million versus $55.3 million; net income available to common stockholders was $56.5 million versus $48.5 million. Diluted GAAP EPS was $0.37, compared with $0.39. For the first six months, net interest income was $167.8 million versus $134.0 million, net income was $129.2 million versus $104.8 million, and diluted EPS was $0.80 versus $0.78.
- Portfolio and returns: Loans, net, totaled $5.44 billion at quarter-end, up from $4.93 billion at December 31, 2018. The portfolio was 93% floating rate; weighted-average cash coupon was 8.2% and weighted-average all-in yield was 9.0%. Q2 and first-half PIK interest were $14.6 million and $29.1 million, respectively.
- Cash flow and liquidity: First-half operating cash flow was $109.9 million; investing cash outflow was $510.1 million and financing cash inflow was $406.9 million. Cash ended at $116.5 million. Unfunded loan commitments were $1.19 billion. Management said it expects sufficient liquidity and access to additional liquidity to meet obligations for at least 12 months.
- Debt and equity: At June 30, carrying values included $1.78 billion of secured debt, $490.2 million of senior secured term debt and $559.6 million of convertible notes. Net debt-to-equity was 1.0x, up from 0.9x at year-end. Stockholders’ equity was $2.67 billion and reported book value was $16.30 per common share.
- Distributions: The common dividend declared was $0.46 per share for Q2, unchanged from Q2 2018. ARI redeemed all Series C preferred shares in June and had 6.77 million Series B preferred shares outstanding at quarter-end.
Material changes and unusual items
- Net interest income increased $14.2 million in Q2 and $33.8 million in the first half, primarily reflecting portfolio growth and higher average LIBOR; higher debt and financing costs partly offset the increase.
- ARI reversed a previously recorded $15.0 million loan-loss provision after collateral on a Williston, North Dakota property was sold. The sale generated a separate $12.5 million realized investment loss.
- Q2 results included a $13.1 million unrealized interest-rate-swap loss. Foreign-currency losses and gains on forward contracts substantially offset; management reported a combined net impact of $3.4 million for Q2.
- In May, ARI issued a $500 million senior secured term loan due 2026 at LIBOR plus 2.75%, and entered a swap that fixed its effective all-in rate at 4.87%. It also completed a common-stock offering of 17.25 million shares, generating approximately $314.8 million net proceeds.
- The loan portfolio’s weighted-average internal risk rating improved to 3.0 from 3.1 at year-end. Two loans, representing 3% of portfolio carrying value, had the highest risk rating; 92% was rated 3.
Outlook, risks and contingencies
- Management cited commercial real estate debt maturities and market uncertainty as potential sources of attractive risk-adjusted lending opportunities. The filing provides no formal earnings or dividend guidance; management intends to continue regular quarterly common distributions, subject to board discretion and results.
- ARI expects adoption of the new expected-credit-loss standard to result in higher loan-loss provisions; the impact was still under evaluation. Management cautioned that reported period results are not necessarily indicative of future results.
- Key exposures include borrower and collateral credit risk, real estate values, interest rates, refinancing and prepayment activity, foreign exchange, and liquidity. Financing facilities can require margin calls. A hypothetical immediate 50-basis-point rate increase was estimated to raise following-12-month net interest income by $15.5 million; a decrease was estimated to reduce it by $12.2 million, before possible management actions.
- Debt facilities and contractual obligations require monitoring: the filing’s maturity schedule shows $607.3 million of secured borrowings due in less than one year, assuming the stated asset-financing and extension assumptions. Loan commitments may require up to $1.19 billion of future funding.
- A pending New York lawsuit alleges damages of $700 million, including punitive damages. ARI considers the claims without merit, intends to defend them, and does not expect a material adverse financial-statement effect; the court’s decision on the motion to dismiss was pending.
Investor verification priorities
- Reconcile GAAP diluted EPS with non-GAAP Operating Earnings: Q2 Operating Earnings were $0.38 per share and $0.47 excluding the realized investment loss; first-half figures were $0.88 and $0.97, respectively.
- Review loan-level credit quality, the two highest-risk loans, the remaining impaired Bethesda loan, and the consequences of the Williston collateral sale.
- Assess funding needs for the $1.19 billion of unfunded commitments against cash, facility availability, maturities, extension conditions and potential margin calls.
- Evaluate the effect of share issuance, convertible-note dilution, preferred-stock redemption and the continuing $0.46 common dividend on per-share returns and distribution coverage.
- Track the lawsuit, adoption of expected-credit-loss accounting and subsequent activity: ARI reported $51.5 million of new subordinate-loan commitments, $54.2 million of previously closed loan fundings and $68.2 million of repayments after quarter-end.