Apollo Commercial Real Estate Finance, Inc. Reports Third Quarter 2014 Financial Results and Declares a Common Stock Quarterly Dividend of $0.40 Per Share

-- 26% Increase in Operating Earnings Per Share --

NEW YORK--(BUSINESS WIRE)--Oct. 28, 2014-- Apollo Commercial Real Estate Finance, Inc. (the “Company” or “ARI”) (NYSE:ARI) today reported financial results for the quarter and nine month period ended September 30, 2014.

Third Quarter 2014 and Recent Highlights

• Reported Operating Earnings (a non-GAAP financial measure defined below) per share of common stock of $0.44 for the quarter ended September 30, 2014, an increase of 26% as compared to Operating Earnings per share of common stock of $0.35 for the quarter ended September 30, 2013;
• Generated $26.6 million of net interest income from the Company’s $1.5 billion commercial real estate debt portfolio, which had a weighted average underwritten internal rate of return (“IRR”) of approximately 13.1% and a levered weighted average underwritten IRR of approximately 13.7% at September 30, 2014;
• Closed $69.5 million of commercial real estate loans and invested $35.6 million of equity into commercial mortgage-backed securities (“CMBS”) with an aggregate purchase price of $178.2 million;
• Completed an offering of $111.0 million aggregate principal amount of 5.50% Convertible Senior Notes due 2019;
• Closed the acquisition of a minority participation in KBC Bank Deutschland AG (“KBCD”) together with other investors, including other affiliates of Apollo Global Management, LLC (“Apollo”); and
• Subsequent to quarter end, invested $4.7 million of equity into CMBS with an aggregate purchase price of $23.3 million, bringing year-to-date investments to $1.0 billion.

“ARI delivered a strong quarter of operating and financial performance, driven by the Company’s diversified investment portfolio and expanded capital base,” said Stuart Rothstein, Chief Executive Officer and President of the Company. “ARI continued to deploy capital into a variety of well-structured commercial real estate debt investments, which totaled $1.0 billion year-to-date. While the commercial real estate finance market remains competitive, we believe ARI continues to benefit from Apollo’s broad origination capabilities and global integrated platform. The Company has a substantial investment pipeline with a broad mix of asset classes and geographies. Importantly, we believe ARI is well positioned for a rising interest rate environment, as 50% of the loans in the Company’s portfolio have floating interest rates and the pipeline for future investments contains predominately floating rate loans as well.”

Third Quarter 2014 Operating Results

The Company reported Operating Earnings of $20.8 million, or $0.44 per share, for the three months ended September 30, 2014, representing a per share increase of 26% as compared to Operating Earnings of $13.3 million, or $0.35 per share, for the three months ended September 30, 2013. Net income available to common stockholders for the three months ended September 30, 2014 was $17.3 million, or $0.37 per share, as compared to net income available to common stockholders of $11.0 million, or $0.29 per share, for the three months ended September 30, 2013.

For the nine months ended September 30, 2014, the Company reported Operating Earnings of $52.8 million, or $1.24 per share, representing an 18% per share increase as compared to Operating Earnings of $37.0 million, or $1.05 per share, for the nine months ended September 30, 2013. Net income available to common stockholders for the nine months ended September 30, 2014 was $55.1 million, or $1.30 per share, as compared to net income available to common stockholders of $31.0 million, or $0.88 per share, for the nine months ended September 30, 2013.

Third Quarter 2014 Investment and Portfolio Activity

New Investments – During the third quarter, ARI closed $287.2 million of commercial real estate and real estate-related debt transactions, including the KBCD transaction. ARI’s third quarter investments included the following transactions:

• $20.0 million floating-rate mezzanine loan secured by the equity interest in a 280-key hotel in the NoMad neighborhood of New York City. The mezzanine loan has a two-year initial term and three one-year extension options and an appraised loan-to-value (“LTV”) of approximately 61%. The mezzanine loan was underwritten to generate an IRR of approximately 12%;
• $34.5 million ($30.0 million of which was funded at closing) floating-rate, first mortgage loan secured by a newly constructed, Class-A, 63-unit multifamily property located in Brooklyn, New York, which also includes approximately 7,300 square feet of retail space and 31 parking spaces. The first mortgage loan has a two-year initial term with three one-year extension options and an appraised LTV of approximately 63% based upon the initial funding. The future funding is contingent upon the property achieving certain occupancy and cash flow hurdles. On a levered basis, the loan was underwritten to generate an IRR of approximately 12%;
• $15 million fixed-rate subordinate loan secured by a top-tier ski resort located in Montana. ARI’s loan has a six-year term and an appraised LTV of approximately 59%. The subordinate loan has been underwritten to generate an IRR of approximately 15%;
• €30.7 million ($39.5 million) investment in an entity that acquired a minority participation in KBCD. As of December 31, 2013, KBCD had total assets of €2,187 million. Following the closing of the transaction, KBCD was renamed Bremer Kreditbank AG and will operate under the name BKB Bank; and
• $35.6 million of equity for the acquisition of CMBS with an aggregate purchase price of $178.2 million. ARI financed the CMBS utilizing $142.5 million of borrowings under the Company’s master repurchase agreement with Deutsche Bank AG (the “Deutsche Bank Facility”), which was amended during the quarter and then again subsequent to quarter end to expand the total borrowing capacity to $300 million from $200 million. The CMBS have a weighted average life of 2.8 years and have been underwritten to generate an IRR of approximately 17%.

Loan Repayment – During the third quarter, ARI received a $50 million principal repayment from a mezzanine loan secured by a pledge of the equity interests in a portfolio of office properties located throughout Florida. ARI realized a 13% IRR on this mezzanine investment.

Third Quarter 2014 Capital Markets Activity

Convertible Notes Offering – In August, the Company completed a public offering of $111.0 million aggregate principal amount of its 5.50% Convertible Senior Notes due 2019 (the “Notes”). The Notes were priced at 102% of face value plus accrued interest from, and including, March 17, 2014. The Notes are an additional issuance of, are fully fungible with and form a single series with the $143,750,000 aggregate principal amount of the Company's 5.50% Convertible Senior Notes due 2019 issued in March 2014. The conversion rate will initially equal 55.3649 shares of common stock per $1,000 principal amount of Notes, which is equivalent to a conversion price of approximately $18.06 per share of common stock.

Quarter End Commercial Real Estate Debt Portfolio Summary

The following table sets forth certain information regarding the Company’s commercial real estate debt portfolio at September 30, 2014 ($ amounts in thousands):

(1) CMBS includes $30,127 of restricted cash related to the Company’s repurchase facility with UBS AG and $26,540 related to investments purchased but not yet settled.

(2) The underwritten IRR for the investments shown in the above table and elsewhere in this press release reflect the returns underwritten by ACREFI Management, LLC, the Company’s external 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 remains constant over the remaining term. With respect to certain loans, the underwritten 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, 2013 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) 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 utilizing its master repurchase agreement with JPMorgan Chase Bank, N.A. or any replacement facility with similar terms and re-borrowing approximately $52,278 in total. Without such re-borrowing, the levered weighted average underwritten IRRs will be as indicated in the current weighted average underwritten IRR column above.

(4) CMBS, held-to-maturity, represents a loan the Company closed during May 2014 that was subsequently contributed to a securitization during August 2014. During May 2014, the Company closed a $155,000 floating-rate whole loan secured by the first mortgage and equity interests in an entity that owns a resort hotel in Aruba. During June 2014, the Company syndicated a $90,000 senior participation in the loan and retained a $65,000 junior participation. During August 2014, both the $90,000 senior participation and the Company's $65,000 junior participation were contributed to a CMBS securitization. In exchange for contributing its $65,000 junior participation, the Company received a CMBS secured solely by the $65,000 junior participation.

(5) CMBS, held-to-maturity, are net of the participation sold during June 2014 described above. ARI presents the participation sold as both assets and non-recourse liabilities because the participation does not qualify as a sale according to GAAP. At September 30, 2014, ARI had one such participation sold with a carrying amount of $89,418.

Loan-to-Value

At September 30, 2014, the Company’s commercial real estate loan portfolio, which includes CMBS, held-to-maturity, had a weighted average LTV of 58%. Within the commercial real estate loan portfolio, the first mortgage loans had a weighted average LTV of 49% and the subordinate loans and CMBS, held-to-maturity, had a weighted average LTV of 63%.

Book Value

The Company’s book value per share at September 30, 2014 was $16.42, an increase of 1% as compared to book value per share of $16.30 at June 30, 2014. 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 loan portfolio at September 30, 2014 was approximately $7.0 million greater than the carrying value as of the same date.

Subsequent Events

New Investments – Subsequent to quarter end, ARI invested $4.7 million of equity into CMBS with an aggregate purchase price of $23.3 million.

Dividend – ARI’s Board of Directors declared a dividend of $0.40 per share of common stock, which is payable on January 15, 2015 to common stockholders of record on December 31, 2014.

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); (ii) any unrealized gains or losses or other non-cash items included in net income available to common stockholders; (iii) unrealized income from equity investments; and (iv) the non-cash amortization expense related to the reclassification of a portion of the senior convertible notes to stockholders’ equity in accordance with GAAP.

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 month periods ended September 30, 2014 and September 30, 2013 ($ amounts in thousands, except share and per share data):