Press Release
November 04, 2013

Apollo Commercial Real Estate Finance, Inc. Reports Third Quarter 2013 Financial Results and Declares a $0.40 per Common Share Quarterly Dividend

Apollo Commercial Real Estate Finance, Inc. Reports Third Quarter 2013 Financial Results and Declares a $0.40 per Common Share Quarterly Dividend

NEW YORK, NY -- (Marketwired) -- 11/04/13 -- Apollo Commercial Real Estate Finance, Inc. (the "Company" or "ARI") (NYSE: ARI) today reported financial results for the three and nine months ended September 30, 2013.

Third Quarter 2013 Highlights

  • Generated $18.8 million of net interest income from the Company's $843 million investment portfolio, which had a current weighted average underwritten internal rate of return ("IRR") of approximately 12.9% and a levered weighted average underwritten IRR of approximately 13.9% at September 30, 2013;
  • Closed three loan transactions totaling $98.9 million;
  • Reached an agreement to make a $50 million (EUR 38 million) investment in an entity that has agreed to acquire a minority participation in KBC Bank Deutschland AG, the German subsidiary of Belgian KBC Group NV;
  • Deployed $20.6 million of equity to purchase $91.4 million of legacy commercial mortgage backed securities ("CMBS") originally rated AAA. ARI financed the balance utilizing the Company's new repurchase facility with UBS AG (the "UBS Facility"); and
  • Subsequent to quarter end, closed a $47 million mezzanine loan and deployed additional equity into CMBS, bringing year-to-date investment activity to $431.9 million.

"ARI had another solid quarter of operating and financial results, as the Company made significant progress deploying available capital into a variety of commercial real estate debt investments," said Stuart Rothstein, Chief Executive Officer and President of the Company. "ARI's investment portfolio continues to expand and diversify, as the Company completed its first transaction in the healthcare sector and opportunistically deployed capital into legacy CMBS. Our pipeline for new investments remains healthy and we are confident in our ability to put the remainder of our available capital to work at attractive returns."

Third Quarter 2013 Operating Results
The Company reported Operating Earnings (a non-GAAP financial measure as defined below) of $13.3 million, or $0.35 per share, for the three months ended September 30, 2013, as compared to Operating Earnings of $9.2 million, or $0.44 per share, for the three months ended September 30, 2012. Net income available to common stockholders for the three months ended September 30, 2013 was $11.0 million, or $0.29 per share, as compared to net income available to common stockholders of $11.0 million, or $0.52 per share, for the three months ended September 30, 2012.

For the nine months ended September 30, 2013, the Company reported Operating Earnings of $37.0 million, or $1.05 per share, as compared to Operating Earnings of $26.5 million, or $1.27 per share, for the nine months ended September 30, 2012. Net income available to common stockholders for the nine months ended September 30, 2013 was $31.0 million, or $0.88 per share, as compared to net income available to common stockholders of $30.0 million, or $1.43 per share, for the nine months ended September 30, 2012.

Third Quarter Investment and Portfolio Activity
New Investments - During the third quarter of 2013, ARI closed three transactions totaling $98.9 million. The transactions include the following:

  • $14.0 million fixed rate mezzanine loan (purchased for $13.6 million or approximately 97% of face value) with a remaining nine-year term, secured by a pledge of the equity interest in a borrower that owns the office component of a 432,717 square foot building located in downtown New York City. ARI's loan basis represents an underwritten loan-to-value ("LTV") of 70%. The mezzanine loan has been underwritten to generate an IRR of approximately 13%;
  • $22.5 million mezzanine loan secured by a pledge of the equity interest in a borrower that owns a mixed-use property located in the central business district of Pittsburgh, PA and consists of (i) a 27-story multi-tenant office building, (ii) an adjoining 616-key convention center hotel, and (iii) a 479-space underground parking garage. The mezzanine loan has a three-year initial term and two one-year extension options, at the borrower's option, subject to certain conditions. ARI's loan basis represents an appraised LTV of 69%. The mezzanine loan has been underwritten to generate an IRR of approximately 12%; and
  • $62.4 million whole loan, which is split into a $33.0 million first mortgage and a $29.4 million mezzanine loan secured by a pledge of the equity interests in a borrower that owns an eight-story commercial building in the Greenwich Village section of New York City. The whole loan will fund the conversion of the existing building into a 12-story luxury residential condominium consisting of approximately 37,000 square feet comprising eight residential units and approximately 3,600 square feet of ground-floor retail space. The whole loan has a three year term, including one 12-month extension option, at the borrower's option, subject to certain conditions. On a fully funded basis, the whole loan represents an appraised loan-to-net-sellout of 55%. The whole loan has been underwritten to generate an IRR of approximately 14%.

Repayment of Investment - In September 2013, ARI received principal repayment from two senior sub-participation interests in a first mortgage loan ($23.8 million of aggregate face value) that the Company purchased for $17.9 million. The Company realized a 25% IRR on this investment.

KBC Bank Deutschland AG - In September 2013, the Company, together with other affiliates of Apollo Global Management, LLC, reached an agreement to make an investment in an entity that has agreed to acquire a minority participation in KBC Bank Deutschland AG ("KBCD"), the German subsidiary of Belgian KBC Group NV. ARI committed to invest up to approximately $50 million (EUR 38 million), representing approximately 21% of the ownership. The acquisition is subject to antitrust and regulatory approval, which is expected to take approximately nine months. As such, there is no assurance the acquisition will close.

CMBS Investment and UBS Facility - During the quarter, the Company acquired legacy CMBS originally rated AAA with an aggregate purchase price of $91.4 million and a weighted average life of approximately 3.8 years. ARI financed the CMBS utilizing $91.4 million of borrowings under the UBS Facility and additionally pledged $20.6 million of cash with respect to such borrowings. The UBS Facility provides for a maximum aggregate purchase price of $133.3 million and has a four-year term plus a one-year extension option. The CMBS investment has been underwritten to generate an IRR of approximately 15%.

Quarter End Portfolio Summary
The following table sets forth certain information regarding the Company's investments at September 30, 2013 ($ amounts in thousands):




Description
Amortized
Cost
Weighted Average
Yield
Debt Cost
of
Funds
Equity
at
Cost(1)
Current
Weighted Average
IRR(2)
Levered Weighted Average
IRR(3)
First mortgage loans$160,893 9.4% $3 2.7% $160,890 10.7% 14.5%
Subordinate loans 394,554 12.7 - - 394,554 13.4 13.4
CMBS 218,019 5.3 180,626 1.9 36,760 15.4 15.4
CMBS - Hilton 69,587 12.3 46,538 1.9 23,049 16.6 16.6
Total$843,053 10.2% $227,167 1.9% $615,253 12.9% 13.9%

(1) Includes $15,794 of restricted cash related to the UBS Facility and $16,427 of future borrowings related to unsettled trades at September 30, 2013.

(2) The IRR for the investments shown in the above table reflect the returns underwritten by ACREFI Management, LLC, the Company's external manager (the "Manager"), calculated on a weighted average basis assuming no dispositions, early prepayments or defaults but assuming that extension options are exercised and that the cost of borrowings under the master repurchase agreement with Wells Fargo Bank, N.A. (the "Wells Facility") remains constant over the remaining terms and extension terms under this facility. With respect to certain loans, the IRR calculation assumes certain estimates with respect to the timing and magnitude of future fundings for the remaining commitments and associated loan repayments, and assumes no defaults. IRR is the annualized effective compounded return rate that accounts for the time-value of money and represents the rate of return on an investment over a holding period expressed as a percentage of the investment. It is the discount rate that makes the net present value of all cash outflows (the costs of investment) equal to the net present value of cash inflows (returns on investment). It is derived from the negative and positive cash flows resulting from or produced by each transaction (or for a transaction involving more than one investment, cash flows resulting from or produced by each of the investments), whether positive, such as investment returns, or negative, such as transaction expenses or other costs of investment, taking into account the dates on which such cash flows occurred or are expected to occur, and compounding interest accordingly. There can be no assurance that the actual IRRs will equal the underwritten IRRs shown in the table. See "Item 1A--Risk Factors--The Company may not achieve its underwritten internal rate of return on its investments which may lead to future returns that may be significantly lower than anticipated" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 for a discussion of some of the factors that could adversely impact the returns received by the Company from the investments shown in the table over time.

(3) Substantially all of the Company's borrowings under the Company's master repurchase agreement with JPMorgan Chase Bank, N.A. (the "JPMorgan Facility") were repaid. The Company's ability to achieve its underwritten levered weighted average IRR with regard to its portfolio of first mortgage loans is additionally dependent upon the Company re-borrowing approximately $53,000 under the JPMorgan Facility or any replacement facility. Without such re-borrowing, the levered weighted average IRRs will be as indicated in the Current Weighted Average IRR column above.

Book Value
The Company's GAAP book value per share at September 30, 2013 was $16.18 as compared to $16.26 at June 30, 2013. For purposes of GAAP accounting, the Company carries loans at amortized cost and its CMBS are marked to market. Management has estimated that the fair value of the Company's financial assets at September 30, 2013 was approximately $10.0 million greater than the carrying value of the Company's investment portfolio as of the same date. This represents a premium of $0.26 per share over the Company's GAAP book value as of September 30, 2013, and results in an estimated market value per share of approximately $16.44.

Subsequent Events
Mezzanine Participations - Subsequent to the end of the quarter, ARI purchased $47 million of mezzanine participations secured by a pledge of the equity interests in a borrower that owns a healthcare portfolio consisting of 193 skilled nursing facilities, long-term acute care hospitals and senior housing facilities. The mezzanine participations, which ARI purchased at par, have a remaining nine-month term and are part of a $92 million floating-rate senior mezzanine loan. ARI's loan basis, inclusive of cash held for collateral, represents an underwritten LTV of 58%. The mezzanine participations were underwritten to generate an IRR of approximately 12%.

CMBS Investments - Subsequent to the end of the quarter, ARI acquired additional legacy CMBS originally rated AAA, with an aggregate purchase price of $18.0 million and a weighted average life of approximately 3.6 years. To finance the purchase of the CMBS, ARI used $18.0 million of borrowings under the UBS Facility and pledged $4.0 million of cash with respect to such borrowings.

Loan Repayment - Subsequent to the end of the quarter, ARI received principal repayment from a $25 million mezzanine loan secured by a portfolio of hotels in New York City. Following the repayment, ARI realized a 12% IRR on its investment.

Dividend - The Board of Directors declared a dividend of $0.40 per share of common stock, which is payable on January 13, 2014 to common stockholders of record on December 31, 2013.

Election of Director - On November 4, 2013, the Board of Directors elected Scott Prince to the Board of Directors of ARI as an independent director. Mr. Prince served as Co-Managing Partner of Skybridge Capital from 2007 until January 2012. Prior to Skybridge, Mr. Prince was a Partner at Eton Park Capital Management from its launch in 2004 until 2007. Mr. Prince also was appointed as a member of the Audit Committee of the Board of Directors of ARI.

Definition of Operating Earnings
Operating Earnings is a non-GAAP financial measure that is used by the Company to approximate cash available for distribution and is defined by the Company as net income available to common stockholders, computed in accordance with GAAP, adjusted for (i) equity-based compensation expense (a portion of which may become cash-based upon final vesting and settlement of awards should the holder elect net share settlement to satisfy income tax withholding) and (ii) any unrealized gains or losses or other non-cash items included in net income available to common stockholders.

Reconciliation of Operating Earnings to Net Income Available to Common Stockholders
The tables below reconcile Operating Earnings and Operating Earnings per share with net income available to common stockholders and net income available to common stockholders per share for the three and nine months ended September 30, 2013 and the three and nine months ended September 30, 2012 ($ amounts in thousands):

Three Months
Ended
September 30,
2013
Earnings
Per
Share
(Diluted)
Three Months
Ended
September 30,
2012
Earnings
Per
Share
(Diluted)
Operating Earnings: