Apollo Commercial Real Estate Finance, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company is an externally managed REIT investing in commercial real estate debt.
Key financial metrics
| Metric | Q2 2012 / June 30, 2012 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $13.9 million for Q2; $28.3 million for six months | Q2 2011: $13.5 million; six months 2011: $24.4 million |
| Net interest income | $12.0 million for Q2; $23.1 million for six months | Q2 2011: $9.7 million; six months 2011: $17.3 million |
| Net income | $9.9 million for Q2; $19.0 million for six months | Q2 2011: $6.5 million; six months 2011: $11.7 million |
| Reported diluted EPS | $0.47 for Q2; $0.91 for six months | Q2 2011: $0.37; six months 2011: $0.66 |
| Cash from operations | $15.4 million for six months | 2011 six months: $16.0 million |
| Cash and total assets | $12.0 million cash; $703.5 million assets | December 31, 2011: $21.6 million cash; $891.2 million assets |
| Debt and equity | $350.7 million repurchase borrowings; $341.3 million stockholders’ equity | December 31, 2011: $542.0 million total borrowings, including $251.3 million TALF debt; $337.0 million equity |
| Common dividend | $0.40 per share declared for Q2 | $0.40 per share in each quarter of the first half of 2011 |
The filing does not provide a clear consolidated profit-margin measure. Portfolio-wide weighted average yield was 7.6%, weighted average cost of funds 2.1%, and weighted average investment IRR 15.0%; IRRs are manager-underwritten estimates and not guaranteed results.
Business, portfolio, and period changes
- At June 30, investments totaled about $680.6 million by face amount: $276.0 million of AAA-rated CMBS, $74.9 million of Hilton CMBS, $108.5 million of first mortgages, $179.6 million of subordinate loans, and $41.7 million of repurchase-agreement investments.
- Net interest income increased 23.4% in Q2 and 33.9% for the first half versus 2011. Higher income from subordinate loans and repurchase-agreement investments and lower interest expense more than offset falling income from securities as securities repaid near maturity.
- First-half net income rose to $19.0 million from $11.7 million. Gains on securities and lower derivative losses also contributed. Q2 operating expenses increased 61.3% to $4.1 million, including higher stock-based compensation and $0.76 million of one-time costs associated with a mortgage-loan sub-participation investment.
- Investing activity generated $184.1 million of cash, reflecting securities sales and repayments, partly offset by new investments. Financing used $209.1 million, including repayment of $251.3 million of TALF borrowings and $16.8 million of common dividends. Cash declined $9.6 million during the half.
- Total assets contracted by $187.7 million from year-end, largely alongside the reduction in securities and repayment of TALF debt. Repurchase borrowings increased from $290.7 million to $350.7 million as the company refinanced TALF debt and added financing for Hilton CMBS.
Outlook, liquidity, and risks
- Management said it believed liquidity and access to additional liquidity were sufficient for at least the next 12 months. At June 30, cash was $12.0 million and unused JPMorgan borrowing capacity was $46.9 million, subject to acquiring eligible collateral.
- The Wells Fargo facility was scheduled to mature in August 2012, with an extension option for certain assets subject to restrictions and a fee. The JPMorgan facility was extended to January 4, 2013; the company said discussions about extending or replacing it were at an early stage. Both facilities are collateralized and include financial covenants and potential margin calls.
- After quarter-end, the company completed an offering of 3.45 million Series A preferred shares with an 8.625% rate and approximately $83.2 million of net proceeds. It also declared a $0.40 common dividend payable in October and closed a $6.5 million mezzanine loan in July.
- Management described a longer-term opportunity from commercial real estate debt maturities, while noting lender extensions were delaying refinancing activity and uncertainty in Europe and the global economy could widen CMBS spreads and slow issuance. No specific earnings or investment guidance was provided.
- Key risks include real estate collateral and borrower credit performance, floating-rate funding costs, asset fair-value volatility, refinancing and facility-renewal risk, liquidity and margin calls, and actual investment returns falling short of underwritten IRRs. A California ski-resort subordinate loan received covenant relief and amended terms; it was current on interest at quarter-end. No loan-loss allowance was recorded.
- A 50-basis-point LIBOR increase was estimated to add approximately $256,000 to quarterly interest expense on stated net variable-rate exposure, before any management actions or broader economic effects.
- The external management agreement carries a 1.5% annual base fee on defined stockholders’ equity plus expense reimbursements. Independent directors reviewed the arrangement in March; the company did not give notice to terminate it. No material legal proceedings or material risk-factor changes were reported.
Most important facts for investors to verify
- Whether the Wells Fargo facility was extended or refinanced after its August 2012 maturity, and the subsequent status and terms of the JPMorgan facility.
- Whether the preferred offering proceeds and later financing supported liquidity without materially increasing leverage or funding costs.
- Performance, covenant compliance, collateral values, and repayment prospects for the ski-resort loan and other subordinate exposures.
- Whether higher net interest income and earnings persist as securities run off, portfolio mix changes, and financing costs or rates move.
- Cash available for distributions and the sustainability of the $0.40 quarterly common dividend, including the impact of the new preferred dividend obligation.