Apollo Commercial Real Estate Finance, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results. Unless otherwise noted, financial amounts below are in millions of dollars; the filing’s financial statements are stated in thousands.
Business context
ARI is an externally managed REIT that originates, acquires and manages commercial real estate debt, including first mortgage loans, subordinate loans and commercial mortgage-backed securities (CMBS). Its manager is an Apollo affiliate. At year-end, the portfolio included $142.9 million of commercial mortgage loans, $246.2 million of subordinate loans, $205.3 million of AAA-rated CMBS and $73.6 million of Hilton CMBS, among other investments.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Interest income | $57.1 million | $52.9 million |
| Net interest income | $48.7 million | $38.5 million |
| Operating expenses | $14.7 million | $10.4 million |
| Net income | $40.2 million | $25.9 million |
| Net income available to common shareholders | $37.1 million | $25.9 million |
| GAAP diluted EPS | $1.64 | $1.35 |
| Operating Earnings, a non-GAAP measure | $33.9 million; $1.50 per share | $28.1 million; $1.47 per share |
| Operating cash flow | $40.1 million | $35.5 million |
Fourth-quarter 2012 net interest income was $12.3 million and net income was $9.0 million; net income available to common shareholders was $7.1 million, or $0.26 per share. The company declared common dividends of $0.40 per share each quarter in 2012 ($1.60 for the year). The 2012 common dividend exceeded Operating Earnings per share of $1.50, though it was below GAAP EPS of $1.64.
At December 31, 2012, total assets were $788.4 million, total liabilities $241.5 million and stockholders’ equity $546.9 million. Cash was $108.6 million. Repurchase-agreement borrowings were $225.2 million; TALF borrowings had been fully repaid during 2012. The company reported no loan-loss reserve at year-end and stated it believed available liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months. It also had $34.7 million of unfunded loan commitments.
Material changes versus 2011
- Net interest income rose 26.6%, primarily due to growth in subordinate-loan and repurchase-agreement income and lower interest expense. Interest income from securities fell 39.4% as securities were repaid or sold.
- Net income increased to $40.2 million from $25.9 million. The 2012 result included a $6.5 million unrealized securities gain; derivative instruments generated a $0.6 million loss.
- Operating expenses increased 41.4%, including higher management fees and stock-based compensation.
- Total assets declined to $788.4 million from $891.2 million, while equity increased to $546.9 million from $337.0 million, reflecting 2012 common and preferred stock offerings. Common shares outstanding rose to 28.0 million from 20.6 million.
- Cash increased to $108.6 million from $21.6 million. Net investing cash flow was positive $192.9 million, reflecting repayments and securities proceeds alongside new investment funding; financing cash flow was negative $146.0 million.
Outlook, commentary and risks
- Management cited more than $1 trillion of commercial real estate debt scheduled to mature from 2012 through 2015 as a potential investment opportunity, while noting that lender extensions were delaying some refinancing demand. This is market commentary, not earnings guidance.
- Management expects to continue originating and acquiring commercial real estate debt. It targets conservative leverage, and stated that borrowings on loan assets are generally expected to be about 35% of the value of the loan portfolio. No specific earnings or dividend guidance was provided.
- Key risks include borrower defaults and collateral-value declines; illiquid investments; interest-rate and refinancing exposure; repurchase-facility margin calls, covenants and short-term funding availability; fair-value estimation; and possible limits on REIT or Investment Company Act status.
- The company is externally managed under a related-party agreement. Disclosed risks include potential conflicts with other Apollo-managed vehicles, a management fee based on defined stockholders’ equity rather than investment performance, and termination provisions that can make ending the agreement costly.
- In February 2013, the Wells Facility was repriced to lower spreads and the maturity for AAA CMBS financing was extended to March 2014. The JPMorgan facility was extended to January 2014, with a further extension option. The board declared a $0.40 common dividend in February 2013.
- The filing’s Iran-related disclosure concerns activities by LyondellBasell and certain non-U.S. subsidiaries, not ARI, its management or its Manager. ARI reported no legal proceedings as of December 31, 2012. The auditor reported fairly presented financial statements and effective internal control over financial reporting.
Important facts for investors to verify
- Whether recurring portfolio income and cash generation support the common dividend, particularly given 2012 Operating Earnings per share below the $1.60 annual dividend.
- Borrower credit performance, collateral values and the status of subordinate exposures, including the modified California ski-resort loan and the unfunded condominium-conversion commitment.
- Facility availability, maturity and covenant compliance, potential collateral calls, and the effect of short-term funding costs on asset spreads.
- The composition and valuation of CMBS, including the concentration of AAA-rated CMBS collateral in 2007-vintage securities and the reliance on dealer pricing inputs.
- The assumptions behind underwritten investment returns: the filing cautions that projected IRRs assume, among other things, no defaults or early repayments and may not be realized.