Apollo Commercial Real Estate Finance, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. ARI is an externally managed commercial real estate lender and a REIT. Amounts below are in U.S. dollars; balance-sheet comparisons are to December 31, 2022 unless noted.
Financial performance and key metrics
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Net interest income | $71.0 million | $55.1 million in Q1 2022 |
| Total net revenue | $87.1 million | $64.2 million in Q1 2022 |
| Net income | $48.9 million | $15.2 million in Q1 2022 |
| Net income available to common stockholders; diluted EPS | $45.8 million; $0.32 | $12.2 million; $0.08 in Q1 2022 |
| Operating cash flow | $110.3 million | $49.7 million in Q1 2022 |
| Cash and cash equivalents | $331.5 million | $222.0 million at year-end 2022 |
| Stockholders’ equity; book value per common share | $2.35 billion; $15.42 | $2.35 billion; $15.54 at year-end 2022 |
Net interest income rose year over year as higher benchmark rates lifted loan income, despite higher interest expense. The loan portfolio’s weighted-average cash coupon was 7.9%, weighted-average all-in yield 8.6%, and secured-debt cost of funds 6.3%. Approximately 99% of loans were floating rate.
At March 31, the loan portfolio had a net carrying value of $8.47 billion, down from $8.68 billion at year-end. Total borrowings outstanding were $6.83 billion at principal value; the reported debt-to-equity ratio was 2.8. Q1 investing cash flow was positive $87.1 million, reflecting repayments and sales that exceeded loan funding and other investment outlays. Financing cash flow was negative $92.9 million, including common and preferred dividends.
Material changes and portfolio developments
- ARI originated or committed $181.9 million of new loan capital during the quarter, funded $113.8 million on previously closed loans, and received approximately $0.5 billion in repayments, including $139.8 million from loan sales.
- The number of loans fell to 55 from 61 at year-end. Unfunded loan commitments were $872.7 million, with approximately $499 million expected to be funded in the short term.
- ARI took title to an Atlanta hotel through a deed-in-lieu foreclosure, recording the property at $75 million and a $4.8 million realized loss. Real estate owned, held for investment, rose to $539.3 million. The D.C. hotel was reclassified from held for sale to held for investment; ARI recorded $4.0 million of catch-up depreciation.
- Total CECL allowances were $168.5 million, including $133.5 million of specific allowance and $35.0 million of general allowance, the latter including $4.7 million for unfunded commitments. The general allowance increased $4.4 million in Q1, primarily due to a higher estimate of remaining loan terms.
- Two loans were risk-rated 5, with $133.5 million of specific CECL allowance. Loans on non-accrual had an amortized cost basis of $398.2 million, down from $468.0 million at year-end.
Liquidity, debt, outlook and risks
Liquidity included $331.5 million of cash and approximately $881 million of unencumbered assets. A new $170 million Bank of America revolving facility was undrawn at quarter-end. Management reported compliance with debt covenants. Approximately $222.9 million principal amount of convertible notes was due in October 2023; management also cited $231.9 million of secured debt maturities in the short term. The filing provides no formal earnings or portfolio guidance.
Management attributed the improvement in reported earnings versus Q1 2022 partly to higher net interest income and currency-related movements. Q1 results also included a $4.6 million net realized investment loss, a $4.4 million CECL provision, an $18.6 million foreign-currency translation gain, and a $14.1 million loss on foreign-currency forward contracts. These items make reported earnings sensitive to valuation and exchange-rate movements. Management’s non-GAAP Distributable Earnings were $69.2 million, or $0.48 per share, versus $49.5 million, or $0.35, in Q1 2022; this measure is not a substitute for GAAP results.
ARI declared a common dividend of $0.35 per share and a preferred dividend of $0.45 per share, unchanged from Q1 2022. The filing highlights exposure to commercial real estate credit and valuation risk, rising rates and inflation, liquidity and refinancing conditions, foreign currencies, and uncertain property-level cash flows. A pending lawsuit involving a subsidiary and other Apollo-related parties remains; the company says it cannot reasonably estimate any possible loss. Subsequent to quarter-end, ARI reported $30.5 million of loan funding, $29.0 million of loan repayments, and repayment of a $60.0 million hotel loan.
Most important facts for investors to verify
- Progress on refinancing or repaying the $222.9 million convertible notes due October 2023, and the timing of other near-term debt maturities.
- Actual funding needs and performance of the $872.7 million in unfunded loan commitments, particularly the amount expected in the near term.
- Credit quality and collateral values for risk-rated 4 and 5 loans, non-accrual exposures, and the Manhattan residential loans carrying a $66.5 million specific allowance.
- Operating performance, valuation assumptions, and funding requirements for owned real estate, including the Atlanta and D.C. hotels and Brooklyn development.
- Whether floating-rate asset income continues to outpace higher borrowing costs, and how currency and derivative movements affect reported earnings and book value.
- Coverage and sustainability of the $0.35 common dividend; assess GAAP earnings alongside management’s non-GAAP Distributable Earnings and its stated limitations.