Apollo Commercial Real Estate Finance, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in millions of dollars unless noted. The company is an externally managed REIT investing primarily in commercial mortgage loans, subordinate financings and commercial mortgage-backed securities (CMBS).
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $18.8 | $13.2 | $53.1 | $36.4 |
| Net income | $12.9 | $12.2 | $36.6 | $31.2 |
| Net income available to common shareholders | $11.0 | $11.0 | $31.0 | $30.0 |
| GAAP diluted EPS | $0.29 | $0.52 | $0.88 | $1.43 |
| Operating Earnings, non-GAAP | $13.3 | $9.2 | $37.0 | $26.5 |
| Operating Earnings per share, non-GAAP | $0.35 | $0.44 | $1.05 | $1.27 |
Operating Earnings excludes equity compensation, unrealized investment gains or losses and other non-cash items; the company presents it as an approximation of cash available for distribution, not as a substitute for GAAP results. Net interest margin is not separately reported.
- Balance sheet at September 30: Total assets $952.8, up from $788.4 at year-end 2012; cash $86.8 and restricted cash $15.8; total liabilities $269.9; repurchase-agreement borrowings $227.2; stockholders’ equity $682.9.
- Investment portfolio: $843.1 amortized cost, comprising $160.9 first-mortgage loans, $394.6 subordinate loans and approximately $288.2 CMBS at fair value. Weighted-average portfolio yield was 10.2%; reported current weighted-average IRR was 12.9% (underwritten estimate, not a realized or assured return).
- Cash flow, nine months: Operating activities provided $33.9; investing activities used $143.1; financing activities provided $87.4. Cash declined $21.8 to $86.8.
- Distributions: Common dividends declared were $0.40 per share each quarter, or $1.20 for the first nine months. Series A preferred shares carry an 8.625% annual dividend rate.
Changes versus comparable periods
- Net interest income increased 41.9% in Q3 and 45.9% for the first nine months, principally as new commercial mortgage and subordinate loans expanded interest income. Subordinate-loan interest also included $3.7 of prepayment penalties during the nine-month period.
- Interest expense declined as average borrowings fell and financing costs were reduced. Interest income from securities and repurchase-agreement investments declined, including because of repayments and the January 2013 repayment of a prior repurchase investment.
- GAAP net income rose, but per-share GAAP income fell as the share count increased substantially following the March 2013 offering of 8.805 million common shares. Common shares outstanding were 36.9 million at September 30, versus 28.0 million at year-end 2012.
- Fair-value losses on securities were $1.5 in Q3 and $4.0 for the first nine months of 2013, compared with gains of $3.0 and $6.5, respectively, in 2012. These changes affected GAAP earnings; Operating Earnings excludes them.
- Operating expenses rose 11.9% in Q3 and 10.4% year to date, mainly because management fees increased 72.9% and 80.1%, respectively, alongside growth in stockholders’ equity. The management fee is 1.5% annually of contractually defined stockholders’ equity.
Outlook, risks and unusual items
- Management said available liquidity and access to additional liquidity should be sufficient for obligations for at least 12 months. It expected borrowings to be approximately 35% of the value of its total loan portfolio; this is an expectation, not a formal earnings forecast.
- Management described commercial real estate lending and refinancing activity as recovering, citing a substantial volume of commercial real estate debt maturing through 2017. It noted uncertainty around interest rates, property values, lending markets and borrower refinancing.
- At quarter-end, borrowings were primarily floating rate; the filing estimated that a 50-basis-point LIBOR increase would reduce net interest income by $43, based on the stated net variable-rate exposure and assuming no change in financial structure. All derivatives had matured during Q3, leaving no derivative balance at September 30.
- Repurchase financing exposes the company to collateral valuation, margin-call, covenant and refinancing risks. Wells Facility borrowings of $157.0 had a reported weighted-average remaining maturity of 0.9 years; UBS borrowings of $70.2 had a five-year weighted-average remaining maturity, assuming extensions where applicable. The company reported compliance with financing covenants at quarter-end.
- No allowance for loan losses was considered necessary at September 30. Management’s estimates of fair value and credit performance may differ from actual outcomes; the filing notes that broker quotes may not represent executable prices.
- The company committed up to approximately $50 million to an Apollo-affiliated partnership investment tied to KBC Bank Deutschland AG, subject to regulatory and antitrust approval; closing was not assured. The filing also disclosed that Apollo informed the company of certain Iran-related transactions by CEVA, an entity potentially affiliated through Apollo. The disclosure stated the transactions did not involve the company or its manager, and the company had not independently verified the information.
- Subsequent to quarter-end, the company purchased $47 million of mezzanine participations in a healthcare-property portfolio, funded a $34.7 million remaining loan commitment, acquired additional CMBS and received repayment of a $25 million mezzanine loan. It declared a $0.40 common dividend payable in January 2014.
- No material legal proceedings or material changes to the risk factors from the 2012 Form 10-K were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether portfolio growth and higher net interest income translate into sustainable per-share earnings after the substantial equity issuance and preferred dividends.
- Actual loan and CMBS credit performance, collateral values, refinancing outcomes and any future loan-loss provisions; the reported portfolio IRRs are underwriting estimates and assume no defaults.
- Liquidity under the repurchase facilities, exposure to margin calls and covenant requirements, and the ability to refinance or extend near-term financing.
- The effect of higher interest rates and the lack of derivative hedges after all existing derivatives matured in Q3.
- Cash generation available to support common and preferred dividends, given REIT distribution requirements and the distinction between GAAP income and non-GAAP Operating Earnings.
- Whether the KBC-related commitment closes and its terms, including the related-party connection and potential Apollo affiliate structuring fee.