Apollo Commercial Real Estate Finance, Inc. — Q1 2014 Form 10-Q
Amounts are in millions except per-share data. Quarter ended March 31, 2014; comparisons are with Q1 2013 unless noted.
Business context and reporting period
ARI is an externally managed REIT investing primarily in commercial first-mortgage loans, subordinate financings, commercial mortgage-backed securities (CMBS), and related real-estate debt. The unaudited statements cover the three months ended March 31, 2014.
Financial results and position
- Net interest income: $19.4, up 13.7% from $17.1. Interest income was $21.2; interest expense was $1.8.
- Net income: $17.6, compared with $11.9. Net income available to common stockholders was $15.7, or $0.42 per diluted share, versus $10.1, or $0.33.
- Operating Earnings (non-GAAP): $14.0, or $0.37 per share, versus $12.0, or $0.39. This measure excludes unrealized investment gains and certain noncash items; it is not GAAP earnings or a liquidity measure.
- Dividends: Common dividend declared was $0.40 per share; preferred dividends were $1.9 for the quarter. Operating Earnings per share was below the common dividend per share.
- Cash flow: Operating activities provided $11.4, investing activities provided $8.3, and financing activities provided $86.6. Cash increased $106.4 to $126.5. Restricted cash was an additional $30.1.
- Assets and equity: Total assets were $1,015.6, up from $907.5 at year-end 2013; stockholders’ equity was $687.9 versus $683.0.
- Debt and liquidity: Repurchase borrowings were $167.0, down from $202.0 at year-end; net carrying value of the new convertible notes was $139.2. The notes have $143.8 principal, a 5.50% coupon, and mature in 2019. Management said it believed liquidity and access to additional liquidity were sufficient for at least 12 months.
- Investment portfolio: First mortgages and subordinate loans had carrying values of $185.5 and $485.0, respectively; CMBS had estimated fair value of $176.6. The reported weighted-average portfolio yield was 10.4%; the filing does not provide a comparable operating margin.
Material changes versus the prior comparable period
- Net interest income rose $2.3, primarily from higher income on subordinate loans and commercial mortgages. Subordinate-loan interest income increased 28.6%; mortgage-loan interest income increased 11.7%.
- Securities interest income fell 21.6%, reflecting repayments as securities approached maturity. Interest expense increased 64.5%, including the new notes and higher average repo funding costs, partly offset by lower average repo balances.
- Net income included a $2.2 unrealized gain on securities, compared with a $1.1 unrealized loss in Q1 2013. Q1 2013 also included a one-time $2.5 prepayment payment on repaid mezzanine loans.
- Common shares outstanding increased to 37.1 million from 36.9 million at year-end; weighted-average diluted shares were 37.3 million versus 30.5 million in Q1 2013.
Outlook, risks, contingencies, and unusual items
- Management cited more than $1 trillion of commercial real-estate debt scheduled to mature through 2017 and expects refinancing activity and lending opportunities to continue. It reported no specific earnings or return guidance; portfolio IRRs are underwriting estimates, not forecasts or assurances.
- In April, ARI closed a $210.0 first-mortgage loan, retaining $106.0 after syndication; a $54.0 London mezzanine loan; and a CMBS purchase financed partly with $98.7 of repo borrowings. These are post-quarter transactions.
- On April 25, JPMorgan temporarily waived, for up to 30 days, a minimum-liquidity covenant in connection with proposed asset funding. The waiver may be revoked, and facility modification was uncertain. This is a notable post-quarter liquidity and financing risk.
- ARI had committed up to approximately $50.0 for a minority investment in KBC Bank Deutschland, subject to regulatory and antitrust approvals; closing was not assured. It also had $29.1 of unfunded loan commitments at March 31.
- Management reported no loan-loss allowance was required at quarter-end and no material legal proceedings. Key risks include borrower/property credit performance, interest-rate and fair-value changes, repo margin calls and refinancing, and the ability to maintain REIT status. All outstanding derivatives had matured during 2013.
- The external management agreement carries a fee of 1.5% annually of defined stockholders’ equity, plus certain expense reimbursements. After reviewing manager performance and fees in February, independent directors decided not to seek termination.
Important facts for investors to verify
- Whether the JPMorgan liquidity-covenant waiver was extended, revoked, or replaced by amended financing terms, and the company’s liquidity after post-quarter funding.
- Whether projected returns and portfolio cash flows hold up against actual repayments, extensions, defaults, and collateral values; underwritten IRRs assume specified conditions and no defaults.
- How sustainable the $0.40 common dividend is relative to recurring earnings and cash available for distribution, given Q1 Operating Earnings of $0.37 per share.
- The effects of the 2019 convertible notes, repo financing costs, and covenant headroom on leverage and future earnings.
- Whether the KBC investment received required approvals and whether the company funded its outstanding loan commitments.