Apollo Commercial Real Estate Finance, Inc. — Q1 2024 Form 10-Q
Business and period. ARI is an externally managed REIT that originates, acquires and manages commercial real estate debt investments. This unaudited report covers the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Amounts below are in U.S. dollars.
Financial and operating performance
- Revenue and earnings: Net interest income was $56.7 million, down 20% from $71.0 million in Q1 2023. Total net revenue was $80.5 million, versus $87.1 million. ARI reported a net loss of $104.5 million, or $0.76 per common share, compared with net income of $48.9 million, or $0.32 per share, a year earlier. The loss chiefly reflects a $142.0 million increase in the specific CECL allowance.
- Distributable earnings (non-GAAP): $50.5 million, or $0.35 per share, versus $69.2 million, or $0.48 per share, in Q1 2023. This measure excludes specified items, including credit-loss provisions; it is not a substitute for GAAP earnings.
- Portfolio and credit: Net loan carrying value was $8.29 billion, including a $135.5 million hotel loan classified as held for sale. The portfolio was 99% floating-rate by amortized cost, with an 8.4% weighted-average cash coupon and a 9.1% weighted-average all-in yield. The weighted-average risk rating was 3.0; 92.1% of rated portfolio carrying value was risk-rated 3, while 1.5% was risk-rated 5.
- Credit allowances: Total CECL allowance was $371.2 million at quarter-end, up from $223.5 million at year-end. Specific allowance increased to $335.0 million from $193.0 million, principally due to an additional $142.0 million reserve on a Manhattan ultra-luxury residential mezzanine loan, following lower list prices and slower unit sales. General allowance was $36.2 million, including $3.6 million for unfunded commitments.
- Cash flow: Operating activities provided $52.8 million, versus $110.3 million in Q1 2023. Investing activities used $166.7 million, including $308.0 million of add-on mortgage-loan funding and $37.9 million of real estate capital expenditures, partly offset by $168.5 million of loan repayments and sale proceeds. Financing activities provided $48.3 million. Cash declined by $64.9 million to $161.2 million.
- Debt and leverage: Total borrowings were $6.88 billion at principal value, including $5.61 billion of secured debt arrangements, $767.3 million of term loans and $500.0 million of 2029 secured notes. Reported debt-to-equity was 3.3x, compared with 3.0x at year-end. ARI reported compliance with its financing covenants at March 31.
- Liquidity and commitments: ARI reported $161.2 million of cash and approximately $368.8 million of unencumbered assets. It anticipated $701.3 million of secured-debt repayments in the short term and expected approximately $315.7 million of its $555.6 million unfunded loan commitments to be funded in the short term. These amounts make refinancing, asset repayments and funding needs important liquidity considerations.
- Equity and distributions: Common book value was $13.22 per share, down from $14.43 at year-end. The declared common dividend was $0.35 per share, unchanged from Q1 2023; the preferred dividend was $0.45 per share.
Material changes and notable items
- Compared with Q1 2023, interest expense rose to $127.9 million from $104.9 million, while commercial mortgage interest income increased to $183.7 million from $166.1 million. Management attributed lower net interest income in part to placing Manhattan loans on non-accrual status in May 2023.
- Foreign-currency forward contracts generated a $23.4 million gain, while foreign-currency translation generated a $19.6 million loss. These gains and losses are recognized in earnings and can create significant period-to-period volatility.
- ARI reclassified its Atlanta hotel from held for sale to held for investment because a proposed sale was no longer probable and it was no longer actively marketing the property. The reclassification resulted in $3.6 million of depreciation expense. The Atlanta and D.C. hotels generated seasonal operating effects.
- During Q1, ARI entered a Goldman Sachs secured facility with $158.6 million of additional borrowing capacity and upsized its Atlas facility by $113.5 million. The Atlas amendment established a two-year initial term with a one-year extension option and reduced recourse percentages.
- After quarter-end, ARI received approximately $269.3 million of loan proceeds, including $135.5 million from the Honolulu hotel loan sale and $108.3 million from refinancing of the Manhattan Senior Loan. The Manhattan loans were subsequently modified and extended to November 2025; their combined amortized cost basis, including later protective advances, decreased from $456.7 million at quarter-end to $356.9 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or portfolio guidance. Management describes exposure to higher rates, inflation, economic weakness, CRE valuation declines, reduced lending and market liquidity, borrower defaults, refinancing conditions, and geopolitical and currency volatility.
- ARI’s sensitivity analysis estimates that an immediate 50-basis-point rate increase would raise following-12-month net interest income by $7.8 million, or approximately $0.06 per share; a corresponding decrease would reduce it by the same amount. This is a hypothetical estimate and assumes no changes in financial structure or management actions.
- Management’s CECL estimates depend on collateral valuations, expected repayment timing, macroeconomic forecasts and historical loss data. The filing notes that actual results and losses may differ materially from estimates.
- ARI reported $555.6 million of unfunded loan commitments, expected to be funded over the loans’ remaining lives, and stated that amounts and timing depend on underlying asset progress and performance. It also noted that market conditions could make future covenant compliance more difficult, although it was compliant at quarter-end.
- The filing describes a legal action concerning a Manhattan development. The remaining claim against Apollo entities was dismissed on appeal, and the Court of Appeals denied leave to appeal on April 23, 2024. No defaults on senior securities were reported.
Important facts for investors to verify
- Whether the Manhattan property’s remaining unit prices and sales pace support the recorded $335.0 million specific CECL allowance, and whether further reserve changes or realized losses may follow.
- Whether loan repayments and refinancing proceeds materialize as expected, particularly against $701.3 million of anticipated short-term secured-debt repayments and near-term commitment funding needs.
- How Atlanta hotel operating performance and the Brooklyn development’s construction costs, financing and completion progress affect liquidity and asset values.
- Whether the $0.35 common dividend remains supported by taxable income, cash availability and future distributable earnings; Q1 GAAP results were a loss despite positive non-GAAP distributable earnings.
- How foreign-exchange movements, interest rates, CRE valuations and the portfolio’s UK and European exposure affect earnings, collateral values and financing access.