Apollo Commercial Real Estate Finance, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in thousands except per-share data. The company is a REIT focused on commercial real estate loans, subordinate financings, and commercial mortgage-backed securities (CMBS).
Key financial results and position
- Q2 earnings: Net income was $11.8 million, versus $9.9 million in Q2 2012. Net income available to common stockholders was $9.9 million, or $0.27 per share, compared with $9.9 million, or $0.47 per share. Preferred dividends began reducing income available to common stockholders in 2013, and the weighted-average common share count rose to 37.4 million from 21.0 million.
- Six-month earnings: Net income was $23.7 million, versus $19.0 million in 2012; net income available to common stockholders was $20.0 million, or $0.59 per share, versus $19.0 million, or $0.91 per share.
- Net interest income: Q2 was $17.2 million, up 44.2%; first-half net interest income was $34.3 million, up 48.2%. Growth in commercial mortgage and subordinate-loan income and lower interest expense more than offset reduced securities income.
- Operating expenses and valuation items: Q2 operating expenses were $4.0 million, broadly flat year over year; first-half expenses were $8.1 million, up 9.7%, mainly reflecting higher management fees. Securities fair-value losses were $1.4 million in Q2 and $2.5 million for the first half, versus gains in the comparable 2012 periods.
- Cash flow: First-half operating cash flow was $23.2 million. Investing activities used $59.0 million, mainly reflecting $174.2 million of subordinate-loan fundings, partly offset by principal repayments. Financing activities provided $84.0 million, including common-stock issuance proceeds.
- June 30 balance sheet: Cash was $156.8 million; total assets were $898.1 million; total liabilities were $212.1 million; and stockholders’ equity was $686.0 million. Repurchase-agreement borrowings were $191.3 million, down from $225.2 million at year-end 2012.
- Investment portfolio: Amortized cost was $733.4 million, with a 9.9% weighted-average yield and a 3.0-year remaining weighted-average life. Subordinate loans had a $354.9 million carrying value and 12.23% weighted-average coupon; commercial mortgage loans had a $143.5 million carrying value and 7.84% weighted-average coupon.
- Distributions: Common dividends declared were $0.40 per share quarterly. Series A preferred stock carries an 8.625% annual dividend rate. First-half common and preferred dividends paid were $26.0 million and $3.7 million, respectively.
Changes versus the prior comparable period
- Net interest income increased as the loan portfolio expanded and financing costs fell; subordinate-loan interest income nearly doubled in Q2 and more than doubled for the first half.
- Common shares outstanding increased from 28.0 million at year-end 2012 to 36.9 million at June 30, 2013, following a March offering of 8.805 million shares at $16.90 each. Net offering proceeds were approximately $148.3 million.
- Subordinate loans grew to $354.9 million from $246.2 million at year-end 2012, while securities declined to $237.1 million fair value from $278.9 million.
- The company reported negative securities valuation effects in 2013, contrasting with gains in the first half of 2012. Management attributed available-for-sale unrealized losses primarily to market factors rather than credit impairment and stated it did not intend, or expect to be forced, to sell those securities before recovering amortized cost.
Outlook, risks, and notable items
- Management stated it believed current liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months. It expected borrowings on target assets to be approximately 35% of total loan-portfolio value; this is an expectation, not a firm forecast.
- Management cited more than $1 trillion of commercial real estate debt scheduled to mature from 2013 through 2017 as a potential investment opportunity, while noting that loan extensions delay refinancing demand. It also noted increased credit-market volatility following Federal Reserve commentary and the possibility of slower CMBS issuance.
- Interest-rate, credit, collateral-value, liquidity, prepayment, and refinancing risks could affect income and asset values. All repurchase borrowings were floating rate; the filing estimates a 50-basis-point LIBOR increase would raise quarterly interest expense by $54 on the stated net variable-rate exposure, before considering broader economic effects.
- At June 30, unfunded loan commitments totaled $38.6 million. Repurchase facilities include financial covenants and potential margin calls; the company reported compliance with covenants at June 30.
- In February, the company amended its facilities, reducing stated Wells Facility spreads and extending the maturity for AAA-CMBS financing to March 2014. Wells borrowings were $191.3 million at June 30. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
- Subsequent events included a July declaration of a $0.40 common dividend, new mezzanine loans in July and August, and board authorization of a $50 million share-repurchase program. No shares had been repurchased under the program as of the filing.
- The company reported non-GAAP Operating Earnings of $0.31 per share for Q2 and $0.70 for the first half, versus $0.41 and $0.83, respectively, in 2012. Management cautions that this measure excludes realized and unrealized investment gains and losses and may not be comparable with similarly titled measures at other companies.
Important facts for investors to verify
- Whether portfolio growth and reported underwritten investment returns translate into realized returns; the filing states actual returns may differ from underwritten IRRs.
- The effect of common-share issuance and preferred dividends on per-share earnings and future dividend coverage.
- Facility maturities, extension conditions, collateral requirements, and capacity to refinance or reborrow, including the stated dependence of certain leveraged return estimates on additional borrowing.
- Performance and credit quality of subordinate loans, including the unfunded commitments and upcoming loan maturities or extension options.
- How securities fair values, interest rates, and liquidity conditions evolve; most disclosed securities fair values rely on Level II inputs and broker quotations.
- The terms and status of the $50 million repurchase authorization, the unused ATM equity program, and subsequent investment activity.