Apollo Commercial Real Estate Finance, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a quarterly filing; the provided filing text does not give a clear standalone fourth-quarter income statement or cash-flow comparison.
Business context
ARI is an externally managed REIT that originates, acquires and manages commercial real estate debt, principally performing first-mortgage loans, subordinate loans and other lending assets. It reported a portfolio of $7.86 billion at year-end, net of allowances, and financed its business with secured borrowings and corporate debt.
Financial and operating metrics
| Metric | 2021 | 2020 / comparison |
|---|---|---|
| Net interest income | $265.6 million | $278.7 million, down $13.1 million |
| Net income | $223.5 million | $18.4 million |
| Net income available to common stockholders | $210.6 million; $1.46 diluted EPS | $4.8 million; $0.01 diluted EPS |
| Distributable Earnings, non-GAAP | $188.7 million; $1.33 per share | $125.6 million; $0.84 per share |
| Net cash provided by operating activities | $199.4 million | $164.1 million |
| Cash and cash equivalents at year-end | $343.1 million | $325.5 million |
| Total assets / stockholders’ equity | $8.42 billion / $2.29 billion | $6.94 billion / $2.27 billion |
| Total borrowings, principal balance | $6.02 billion | $4.52 billion |
| Debt-to-equity ratio, as defined by ARI | 2.4x | 1.8x |
| Common dividends declared per share | $1.40 | $1.45 |
- Year-end loan portfolio carrying value was $7.86 billion: $7.01 billion in commercial mortgages and $844.9 million in subordinate loans and other lending assets. Weighted-average all-in yield was 4.9%; weighted-average secured-debt cost of funds was 2.0%. These portfolio rates are not a company-wide net interest margin.
- ARI committed $3.2 billion to loans in 2021, funded $2.8 billion at closing, received $1.9 billion in repayments, and funded another $522.0 million on loans closed before 2021.
- Unfunded loan commitments were $1.4 billion, with approximately $689 million expected to be funded in the short term. ARI also reported about $1.9 billion of unencumbered assets.
- Net cash used in investing activities was $1.36 billion; net cash provided by financing activities was $1.18 billion. The filing reports no conventional operating-margin measure.
Material changes versus the prior year
- Net income available to common stockholders rose substantially from 2020, which included $115.0 million of net specific credit-loss allowances and impairments. In 2021, ARI reported a $30.0 million net reversal of specific allowances and a $4.8 million reversal of general allowances, reflecting improved macroeconomic assumptions and portfolio seasoning.
- Commercial mortgage loans grew to $7.01 billion from $5.45 billion, while subordinate loans and other lending assets declined to $844.9 million from $1.05 billion. Commercial mortgage interest income increased, but subordinate-loan interest income fell; interest expense rose $13.6 million as secured borrowings increased.
- Borrowings increased and leverage rose to 2.4x from 1.8x. ARI issued $500 million of 4.625% senior secured notes due 2029, added a $300 million 2028 term loan, and amended term-loan covenants in the fourth quarter, including increasing specified leverage and asset-coverage limits.
- Common dividends declined to $1.40 per share from $1.45. Book value per common share increased to $15.19 from $15.08.
Outlook, risks, contingencies and unusual items
- Management said it expects to continue originating and acquiring performing commercial mortgage and other real estate debt investments. No numerical earnings, portfolio-growth or dividend guidance is provided.
- ARI described COVID-19’s ultimate effects as uncertain and said the pandemic had adversely affected asset values, borrowers, operations and cash flows. It modified some borrower loans, including reserve repurposing and temporary interest or principal deferrals. The Federal Reserve’s expected 2022 rate increases and the transition from LIBOR were identified as uncertainties.
- Portfolio concentration warrants attention: the United Kingdom represented 29.1% and New York City 25.4% of loan portfolio carrying value; hotels represented 23.8% and offices 21.6%. The portfolio was 98% floating-rate by amortized cost. Three loans, totaling $404.8 million after specific allowances, were risk-rated 5; 93.5% of portfolio value was risk-rated 3.
- Credit and liquidity risks include borrower defaults, collateral-value declines, margin calls, refinancing costs, short-term secured-facility maturities and the need to fund substantial loan commitments. $345 million of 4.75% convertible notes was due in August 2022. ARI reported compliance with its debt covenants at year-end.
- In May 2021, ARI acquired a Washington, D.C. hotel through a deed-in-lieu of foreclosure, assumed its assets and debt, then repaid the $110 million mortgage. The hotel contributed a $3.7 million net operating loss for 2021; the related investment produced a $20 million realized loss. A separate held-for-sale hotel was sold in 2021.
- A lawsuit related to a Manhattan development was pending; ARI said it believed the claims lacked merit, but could not reasonably estimate any possible loss. The filing reports no COVID-19 contingency accrual at year-end.
- ARI is externally managed by an Apollo affiliate. Management fees were $38.2 million in 2021; the filing identifies potential conflicts of interest and describes a termination fee. The independent directors elected not to seek termination after reviewing the management agreement in February 2022.
- The auditor issued unqualified opinions on the financial statements and internal control. CECL allowance estimation, including macroeconomic assumptions and collateral fair values, was identified as a critical audit matter.
Most important facts for investors to verify
- Whether the $345 million convertible notes due August 2022 were refinanced, repaid or otherwise addressed, and the status of other near-term secured financing maturities.
- Actual funding needs and timing for the $1.4 billion of unfunded loan commitments, available liquidity, and sensitivity to collateral marks or margin calls.
- Performance, repayment and collateral coverage of the risk-rated 5 loans and other loans on cost recovery or with past-due interest; reconcile the reported allowance balance and subsequent loan outcomes.
- Exposure to the UK, New York City, hotels and offices, including the effects of COVID-19, property markets, currency movements and LIBOR transition on borrowers and financing costs.
- How much of the improvement in 2021 earnings and Distributable Earnings reflects recurring loan economics versus allowance reversals, foreign-exchange and derivative gains, realized losses, and non-GAAP adjustments.
- Subsequent events disclosed after year-end included $484.8 million of loan repayments, a $106.2 million UK loan upsize and an Italian office loan origination; verify their effects on portfolio size and liquidity.