Apollo Commercial Real Estate Finance, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions of dollars unless otherwise stated. The company is an externally managed REIT investing primarily in commercial mortgages, subordinate loans and commercial mortgage-backed securities (CMBS).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $38.7 | $26.6 | $100.1 | $69.8 |
| Net income | $25.8 | $19.2 | $76.0 | $60.7 |
| Net income available to common stockholders | $23.5 | $17.3 | $70.0 | $55.1 |
| GAAP diluted EPS | $0.39 | $0.37 | $1.24 | $1.30 |
| Operating Earnings, non-GAAP | $31.7 ($0.53/share) | $20.8 ($0.44/share) | $80.3 ($1.42/share) | $52.8 ($1.24/share) |
Q3 net interest income rose 45.6% year over year; nine-month net interest income rose 43.4%. Management attributed growth mainly to increased investable capital and larger loan and securities portfolios. Interest expense rose 50.1% in Q3 and 129.6% for the nine-month period, reflecting higher average repurchase borrowings and the convertible notes. Operating expenses increased 33.9% in Q3 and 36.4% for the nine months, including higher management fees and equity compensation. The filing does not provide a clear consolidated margin measure.
Q3 earnings included a $6.9 million unrealized loss on securities and a $2.2 million foreign-currency loss, partly offset by a $2.1 million derivative gain. For the nine months, securities and derivative marks were losses of $5.8 million and $4.1 million, respectively, while foreign-currency results were a $3.4 million gain. Operating Earnings excludes specified unrealized and other items; the company cautions that it is not a substitute for GAAP results and may not be comparable with similarly titled measures.
Financial position, cash flow and capital
- Total assets were $2.53 billion at September 30, versus $1.85 billion at December 31, 2014. Commercial mortgage loans were $905.7 million and subordinate loans $861.8 million, compared with $458.5 million and $561.2 million, respectively, at year-end 2014. CMBS at estimated fair value totaled $512.5 million.
- Stockholders’ equity was $1.38 billion, including $200 million liquidation preference of newly issued Series B preferred stock. Cash was $20.2 million, with a further $30.1 million classified as restricted cash.
- Repurchase-agreement borrowings were $735.4 million, up from $622.2 million at year-end; convertible senior notes, net, were $247.7 million, and participations sold were $119.4 million. Repurchase borrowings had a 3.0% weighted-average rate and 2.5-year weighted-average remaining maturity. Contractual obligations, including estimated interest, totaled $779.7 million.
- For the first nine months, operating cash flow was $62.1 million; investing used $684.3 million; financing provided $601.8 million. Cash decreased $20.5 million from year-end. Investing outflows primarily reflected loan funding.
- Equity raises provided approximately $193.1 million net from a first-quarter common-stock offering and approximately $346.9 million net from the September private placement of common and Series B preferred shares. The company declared common dividends of $0.44 per share each quarter, or $1.32 for the nine-month period.
Material changes and outlook
The investment portfolio expanded significantly during the period, supported by equity issuance and new originations. The company reported first-mortgage and subordinate-loan carrying values of $905.7 million and $861.8 million, respectively, at quarter-end. It had $124.7 million of unfunded commercial-mortgage commitments and $226.3 million of unfunded subordinate-loan commitments.
Management said it believed current liquidity and access to additional liquidity were sufficient for financial obligations for at least the next 12 months. It reported $146.5 million of available borrowing capacity under the JPMorgan facility. Management described commercial real estate lending as an opportunity for risk-adjusted returns amid significant property-debt maturities, while noting uncertainty over the timing of potential Federal Reserve rate increases. It expects regular quarterly common distributions, subject to board discretion and actual results; no specific earnings or dividend guidance was provided.
After quarter-end, the company closed a $55 million mezzanine loan and funded $50.5 million on previously closed loans. A September commitment to purchase approximately $375.4 million of loans from Mubadala GE Capital remained subject to regulatory approvals and closing conditions. An Apollo affiliate received an option to purchase that portfolio; if exercised, the company would receive a $0.75 million fee.
Risks, contingencies and unusual items
- Credit risk is tied to borrower performance, collateral values and real estate markets. The company reported no loan-loss allowance at quarter-end, based on its impairment assessment.
- Interest-rate, fair-value, refinancing and liquidity risks remain. Repo facilities permit margin calls in specified circumstances and impose financial covenants; the company reported compliance with its repurchase covenants at September 30.
- A 50-basis-point increase in LIBOR was estimated to increase quarterly net interest income by approximately $1.3 million on the reported net variable-rate exposure, assuming no change in financial structure. Actual effects could differ.
- The company’s $30.1 million restricted cash supports the UBS facility. Borrowings are secured by pledged assets, and covenant breaches or collateral-value declines could constrain liquidity.
- The externally managed structure involves related-party fees: the base fee is 1.5% annually of defined stockholders’ equity. Q3 management fees were $4.1 million. A $0.5 million placement-agent fee on the September private placement was paid to an Apollo affiliate. Independent directors considered the manager’s performance and fees in February 2015 and did not seek termination.
- The filing reported no material legal proceedings and no material changes to the risk factors in the 2014 Form 10-K. Management stated disclosure controls were effective.
Most important facts for investors to verify
- Whether portfolio growth and higher net interest income translate into sustainable per-share earnings after funding costs, expenses and the larger share and preferred-stock base.
- Loan performance, collateral valuations and the assumptions behind the absence of a loan-loss allowance, particularly for development and subordinate exposures.
- Repo-facility capacity, collateral requirements, margin-call triggers, covenant headroom and the company’s ability to fund remaining loan commitments.
- Closing status and final economics of the Mubadala GE Capital portfolio transaction and any exercise of the affiliate option.
- Dividend coverage using GAAP results, Operating Earnings and taxable income, recognizing that the non-GAAP measure excludes certain gains and losses.