Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This 10-K reports full-year results; it does not provide a standalone fourth-quarter summary.
Business context
ARI is an externally managed mortgage REIT that originates, acquires and manages commercial real estate debt, primarily first mortgages and subordinate loans. Its portfolio is concentrated in the United States and Europe. The company reported approximately $8.4 billion of loans at year-end and also owned real estate acquired through foreclosure or deed-in-lieu transactions.
Key financial results
| Metric | 2023 | 2022 |
|---|---|---|
| Net revenue | $344.6 million | $303.6 million |
| Net interest income | $252.2 million | $241.6 million |
| Net income | $58.1 million | $265.2 million |
| Net income available to common stockholders | $45.9 million; $0.29 diluted EPS | $253.0 million; $1.68 diluted EPS |
| Distributable Earnings, non-GAAP | $157.5 million; $1.09 per share | $239.3 million; $1.67 per share |
| Net cash provided by operating activities | $273.9 million | $267.7 million |
| Common dividends declared per share | $1.40 | $1.40 |
Higher benchmark rates lifted mortgage interest income, but interest expense also rose substantially, to $466.1 million from $270.5 million. The sharp decline in GAAP earnings reflected, among other items, an $86.6 million net realized investment loss, a $59.4 million net CECL allowance increase, and a net loss on foreign currency forwards; currency translation gains partly offset the derivative losses. Distributable Earnings also declined, and were below the $1.40 per-share common dividend declared for the year. Distributable Earnings is a non-GAAP measure and excludes certain items, including unrealized gains and losses.
Portfolio, balance sheet and liquidity
- Net loan carrying value was $8.36 billion, down from $8.68 billion a year earlier. The portfolio had 50 loans, 99% floating-rate by amortized cost, and a weighted-average cash coupon of 8.3%, versus 7.2% in 2022.
- Portfolio risk rating averaged 3.0, unchanged year over year; 90.0% of portfolio carrying value was rated 3, while 3.2% was rated 5. Weighted-average origination LTV was 57%, excluding risk-rated 5 loans.
- Loans on non-accrual had an amortized cost basis of $693.7 million at year-end, versus $468.0 million in 2022. Specific CECL allowance was $193.0 million; total CECL allowance, including unfunded commitments, was $223.5 million.
- Assets were $9.30 billion, liabilities $7.09 billion and stockholders’ equity $2.21 billion. Common book value was $14.43 per share, down from $15.54. Debt-to-equity was 3.0x, compared with 2.8x.
- Cash was $225.4 million; ARI also reported approximately $521.5 million of unencumbered assets. Unfunded loan commitments totaled $868.6 million, with approximately $609.4 million expected to be funded in the short term.
- Total borrowings were approximately $6.82 billion, including $5.55 billion of secured debt arrangements, $769.3 million of term loans and $500.0 million of 4.625% senior secured notes due 2029. The $176.1 million remaining principal of the 2023 convertible notes was repaid in cash during the fourth quarter.
- Operating cash flow was $273.9 million. Investing activities provided $68.4 million in 2023, versus using $1.34 billion in 2022; financing activities used $343.4 million. Cash-flow comparisons reflect substantial changes in loan funding, repayments and financing activity.
Material changes and unusual items
- Net interest income increased $10.6 million, mainly due to higher average index rates, partly offset by placing a Manhattan ultra-luxury residential loan exposure on non-accrual.
- ARI increased specific reserves on two Manhattan mezzanine loans; it wrote off $82.0 million on the most junior loan as unrecoverable. The remaining senior and junior mezzanine exposure had $402.9 million of amortized cost, net of a $126.0 million specific allowance.
- ARI acquired an Atlanta hotel through deed-in-lieu of foreclosure, recording a $4.8 million realized loss, and continued to classify the property as held for sale at year-end. The D.C. hotel was reclassified from held for sale to held for investment in March 2023; Brooklyn development assets also remained held for investment.
- Foreign currency forward contracts and translation produced a combined net gain of $3.8 million in 2023, compared with $30.6 million in 2022. These movements are reflected in earnings because the derivatives were not designated for GAAP hedge accounting.
- ARI committed $734.1 million to loans during 2023, funded $456.2 million at closing, and received $1.2 billion in repayments and sales. It entered new financing facilities and expanded existing capacity.
Outlook, risks and contingencies
Management expects to continue originating and acquiring performing commercial real estate loans at attractive risk-adjusted yields. The filing provides no specific earnings, dividend or portfolio guidance. Management highlights persistent uncertainty around inflation, interest rates, property values, refinancing, borrower performance and financing availability. Higher rates may increase borrower stress and property risk even as floating-rate assets can generate higher income.
Material risks include loan defaults and collateral losses, non-accruals and further CECL provisions, concentrated property or geographic exposures, illiquid assets, refinancing and covenant pressure, and foreign-currency and interest-rate movements. At year-end, 52.0% of assets by carrying value were loans denominated in non-U.S. currencies or secured by non-U.S. assets. REIT qualification, continued exclusion from Investment Company Act registration, reliance on Apollo and the external manager, and related-party conflicts are also significant risks.
ARI reported compliance with financing covenants at December 31, 2023. It disclosed a pending motion for leave to appeal in a related legal matter after an appellate court dismissed the remaining claim against Apollo entities, including an ARI subsidiary. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and internal controls.
Subsequent to year-end, ARI funded approximately $64.5 million on previously closed loans, capitalized $11.7 million of development costs, closed a UK secured facility with approximately $209 million of capacity in connection with a $213 million loan commitment, and received about $15.9 million in repayments.
Important facts for investors to verify
- Current status, collateral value and potential recovery of the Manhattan loans on non-accrual, including the remaining $402.9 million mezzanine exposure and specific allowance.
- Whether the $1.40 common dividend is supported by future distributable earnings, cash generation and taxable income; 2023 Distributable Earnings were $1.09 per share.
- Near-term funding needs: approximately $609.4 million of expected short-term commitment fundings, against reported cash of $225.4 million and unencumbered assets of about $521.5 million.
- Borrowing maturities, refinancing terms, covenant headroom and any collateral or deleveraging requirements, especially for secured facilities.
- Progress and valuation of the Atlanta hotel sale process and the Brooklyn development, including additional construction funding and the related financing covenants.
- Assumptions underlying CECL allowances and real estate valuations; Deloitte identified macroeconomic estimates and collateral fair values for financially stressed loans as critical audit matters.