Apollo Commercial Real Estate Finance, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. ARI is an externally managed REIT focused primarily on commercial real estate loans and related debt investments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $60.2 | $61.9 | $194.2 | $174.4 |
| Total net revenue | $81.2 | $76.3 | $260.4 | $216.5 |
| Net income | $46.1 | $183.0 | $11.6 | $269.2 |
| Net income available to common stockholders | $43.0 | $180.0 | $2.4 | $260.0 |
| Diluted EPS | $0.30 | $1.13 | $0.00, rounded | $1.66 |
| Distributable earnings per share (non-GAAP) | $0.37 | $0.67 | $0.73 | $1.36 |
Q3 net interest income was nearly flat year over year: higher commercial mortgage interest income was largely offset by higher interest expense and lower income from subordinate lending assets. Q3 net income also reflected substantial foreign-exchange gains and losses; the filing reports a $44.2 million foreign-currency translation loss and a $39.5 million gain on currency forwards. For the first nine months, investment losses, credit-loss provisions and less favorable currency-related results contributed to the sharp decline in GAAP earnings versus 2022.
Common dividends declared were $0.35 per share in Q3 and $1.05 for the first nine months, unchanged from the comparable 2022 periods. Distributable earnings were $0.37 per share for Q3 and $0.73 year to date. This non-GAAP measure is not a substitute for GAAP earnings or cash flow.
Balance sheet, portfolio, liquidity and debt
- At September 30, 2023, total assets were $9.16 billion, total liabilities $6.95 billion and stockholders’ equity $2.21 billion. Loan carrying value, net of allowances, was $7.97 billion, down from $8.68 billion at year-end 2022; cash was $307.8 million, up from $222.0 million.
- The loan portfolio included 49 loans with $8.23 billion principal balance and $693.1 million in unfunded commitments. 99% of the portfolio was floating rate; the weighted-average cash coupon was 8.3%, and weighted-average risk rating was 3.1 versus 3.0 at year-end 2022.
- Credit exposure increased: loans on non-accrual had $680.7 million amortized cost, compared with $468.0 million at year-end. The total CECL allowance was $224.3 million, including $193.0 million of specific allowance and $31.3 million of general allowance, the latter including unfunded commitments.
- Total borrowings were $6.59 billion principal, including $5.15 billion of secured debt arrangements, $771.3 million of term loans, $500 million of senior secured notes and $176.1 million of convertible notes at quarter-end. Debt-to-equity was 2.8, unchanged from year-end. The company reported compliance with its debt covenants.
- Reported liquidity included $307.8 million cash and $133.0 million of loan proceeds held by servicers, totaling $440.8 million. ARI also reported approximately $804.6 million of unencumbered assets. It expected approximately $441.5 million of its unfunded commitments to be funded in the short term.
- For the first nine months, operating cash flow was $243.0 million, investing cash flow provided $225.3 million, and financing activities used $386.1 million. Cash increased by $85.6 million to $307.8 million.
Material changes and unusual items
- Year-to-date net realized investment loss was $86.6 million, including an $82.0 million write-off on a junior mezzanine loan backed by a Manhattan ultra-luxury residential property and a $4.8 million loss on taking title to an Atlanta hotel. ARI also recorded a $141.5 million increase in specific CECL allowance during Q2 for loans tied to the Manhattan property; the junior loan was written off, leaving a $126.0 million specific allowance on a related mezzanine loan.
- ARI acquired the Atlanta hotel through deed-in-lieu of foreclosure in March 2023 and classified it as held for sale; a third-party offer had been received, and management expected a sale in Q4 2023. The company also held the D.C. hotel and Brooklyn development as real estate owned. The Brooklyn property had a $349.3 million cost basis at quarter-end and $161.2 million net construction financing.
- Loan repayments and sales totaled approximately $1.0 billion in the first nine months, while new loan funding was limited compared with 2022. Portfolio carrying value declined, and the loan count fell from 61 at year-end 2022 to 49.
- After quarter-end, ARI repaid the remaining $176.1 million principal of its 2023 convertible notes at par. It also funded approximately $42.8 million for previously closed loans and received approximately $33.2 million in loan repayments.
- ARI entered new secured financing arrangements and added $170 million of revolving credit capacity, which had no outstanding borrowings at quarter-end. Subsequent to quarter-end, the minimum interest-coverage covenant for that facility was modified from 1.5:1 to 1.4:1.
Outlook, risks and contingencies
The filing gives no specific earnings or investment guidance. Management said it generally intends to continue regular quarterly common dividends, subject to board approval, operating results and available cash. REIT status generally requires distribution of at least 90% of REIT taxable income, excluding net capital gains.
Management highlighted inflation, elevated interest rates, slower growth, banking-sector stress, currency fluctuations, geopolitical events and commercial real estate market conditions as risks. These factors may affect property values, borrower repayment and refinancing, credit losses, financing availability, liquidity and covenant compliance. ARI’s use of floating-rate assets and borrowings creates interest-rate exposure; its sensitivity analysis estimated that an immediate 50-basis-point rate move would change annual net interest income by approximately $5.3 million, before considering changes in economic activity or management actions. Currency forwards are used to economically hedge foreign-currency loan cash flows, but are not designated as accounting hedges, so fair-value changes affect reported earnings.
Unfunded loan commitments were $693.1 million and their timing depends on borrower needs and asset performance. A disclosed related legal claim against Apollo entities was dismissed on appeal on October 5, 2023. The filing states that ARI was in compliance with financing covenants at quarter-end.
Important facts for investors to verify
- Whether the Atlanta hotel sale closed as expected and at what proceeds relative to its $75.3 million reported net asset value.
- Performance, valuation and recovery assumptions for the Manhattan property loans, including the remaining $126.0 million specific CECL allowance and the non-accrual exposures.
- Post-quarter liquidity and debt balances following repayment of the convertible notes, funding of commitments and any subsequent loan repayments or financing changes.
- Whether distributable earnings can sustain the $0.35 quarterly common dividend, particularly given year-to-date distributable earnings of $0.73 per share versus $1.05 of declared dividends.
- Changes in loan portfolio risk ratings, unfunded commitments, covenant headroom, interest-rate exposure and foreign-currency hedge results.