Press Release
February 27, 2017

Apollo Commercial Real Estate Finance, Inc. Reports Fourth Quarter and Full Year 2016 Financial Results

Apollo Commercial Real Estate Finance, Inc. Reports Fourth Quarter and Full Year 2016 Financial Results

NEW YORK--(BUSINESS WIRE)--Feb. 27, 2017-- Apollo Commercial Real Estate Finance, Inc. (the “Company” or “ARI”) (NYSE:ARI) today reported financial results for the quarter and full year ended December 31, 2016.

Fourth Quarter 2016 Highlights

  • Reported net income available to common stockholders of $49.7 million, or $0.60 per diluted share of common stock, for the three months ended December 31, 2016, as compared to net income available to common stockholders of $21.4 million, or $0.32 per diluted share of common stock, for the three months ended December 31, 2015;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) of $41.0 million, or $0.49 per diluted share of common stock, for the three months ended December 31, 2016, as compared to Operating Earnings of $32.4 million, or $0.48 per diluted share of common stock, for the three months ended December 31, 2015;
  • Generated $53.6 million of net interest income during the quarter from the Company’s $3.1 billion commercial real estate debt portfolio, which had a levered weighted average underwritten internal rate of return (“IRR”)(1) of approximately 13.8% at December 31, 2016;
  • Completed $547.5 million of commercial real estate debt investments and funded an additional $28.1 million for previously closed loans;
  • Completed an underwritten public offering of 10.5 million shares of common stock, raising net proceeds of $177.8 million; and
  • Declared a $0.46 dividend per share of common stock for the three months ended December 31, 2016.

2016 Highlights

  • Reported net income available to common stockholders of $127.6 million, or $1.74 per diluted share of common stock, for the twelve months ended December 31, 2016, as compared to net income available to common stockholders of $91.4 million, or $1.54 per diluted share of common stock, for the twelve months ended December 31, 2015;
  • Reported Operating Earnings of $137.0 million or $1.87 per diluted share of common stock for the twelve months ended December 31, 2016 as compared to Operating Earnings of $112.7 million or $1.90 per diluted share of common stock for the twelve months ended December 31, 2015;
  • Completed $1.2 billion of commercial real estate debt investments and funded an additional $141.9 million for previously closed loans;
  • Completed the acquisition of Apollo Residential Mortgage, Inc. (“AMTG”) and subsequently sold all of AMTG’s assets, realizing net proceeds of approximately $421 million; and
  • Declared dividends per share of common stock totaling $1.84 during the twelve months ended December 31, 2016.

“We are extremely proud of ARI’s financial performance in 2016, a year in which the Company committed to and funded approximately $1.4 billion of commercial real estate loans and grew its equity market capitalization to over $2.0 billion,” said Stuart Rothstein, Chief Executive Officer and President of ARI. “The Company has had a solid start to the year, with over $194 million of new loans closed to date and a robust investment pipeline. We believe ARI’s balance sheet is strong, the credit quality of the Company’s investment portfolio is stable and ARI is well positioned for continued success in 2017.”

Fourth Quarter and Full Year 2016 Operating Results

The Company reported net income available to common stockholders of $49.7 million, or $0.60 per diluted share of common stock, for the three months ended December 31, 2016 as compared to net income available to common stockholders of $21.4 million, or $0.32 per diluted share of common stock, for the three months ended December 31, 2015. Operating Earnings were $41.0 million, or $0.49 per diluted share of common stock, for the three months ended December 31, 2016 as compared to Operating Earnings of $32.4 million, or $0.48 per diluted share of common stock, for the three months ended December 31, 2015.

The Company reported net income available to common stockholders of $127.6 million, or $1.74 per diluted share of common stock, for the twelve months ended December 31, 2016, as compared to net income available to common stockholders of $91.4 million, or $1.54 per diluted share of common stock, for the twelve months ended December 31, 2015.

The Company reported Operating Earnings of $137.0 million, or $1.87 per diluted share of common stock, for the twelve months ended December 31, 2016. Excluding expenses associated with the acquisition of AMTG in 2016, which totaled approximately $11.4 million, the Company reported Operating Earnings of $148.3 million, or $2.02 per diluted share of common stock, as compared to Operating Earnings of $112.7 million, or $1.90 per diluted share of common stock, for the twelve months ended December 31, 2015.

Fourth Quarter 2016 Investment Activity

New Investments – During the fourth quarter, ARI closed the following commercial real estate debt investments:

  • $330.0 million of first mortgage loans ($295.3 million of which were funded during the quarter), which were underwritten to generate a levered weighted average IRR(1) of approximately 14.7%; and
  • $217.4 million of subordinate loans ($217.4 million of which were funded at closing), which were underwritten to generate a weighted average IRR(1) of approximately 13.1%.

Funding of Previously Closed Loans – During the fourth quarter, ARI funded approximately $28.1 million for previously closed loans.

Loan Repayments – During the fourth quarter, ARI received approximately $130.5 million from loan repayments.

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 December 31, 2016 ($ amounts in thousands):

                           

 

Description

   

Amortized
Cost

   

Weighted
Average
Yield

    Debt    

Cost
of
Funds

   

Equity at
Cost(2)

   

Current
Weighted
Average
Underwritten
IRR (1)

   

Fully-
Levered
Weighted
Average
Underwritten
IRR(1)(3)

First mortgage loans $ 1,641,856 8.1 % $ 835,464 3.0 % $ 806,392 12.8 % 15.4 %
Subordinate loans(4) 1,112,609 13.2 - n/a 1,112,609 13.2 13.2
CMBS   368,247     6.0         311,102     3.3         119,602     8.4       8.4  
Total/Weighted Average $ 3,122,712     9.7 %     $ 1,146,566     3.0 %     $ 2,038,603     12.8 %     13.8 %
 

Please see chart footnotes at the end of the press release.

Loan-to-Value

At December 31, 2016, the Company’s commercial real estate loan portfolio, which includes CMBS, held-to-maturity, had a weighted average loan-to-value (“LTV”) of 63%. Within the commercial real estate loan portfolio, the first mortgage loans had a weighted average LTV of 62% and the subordinate loans (including CMBS, held-to-maturity) had a weighted average LTV of 64%.

Book Value

The Company’s book value per share of common stock was $16.12 at December 31, 2016, an increase of 1.1% as compared to book value per share of common stock of $15.94 at September 30, 2016.

Subsequent Events

The following events occurred subsequent to quarter end:

New Investments

ARI closed a $60.0 million first mortgage loan secured by a recently renovated 250-key hotel located on South Beach in Miami, FL. The floating rate loan has a three-year initial term with two one-year extension options and an appraised LTV of approximately 41%.

ARI closed a $57.0 million first mortgage loan secured by a recently renovated 917-key hotel located in downtown St. Louis, MO. The floating rate loan has a two-year initial term with three one-year extension options and an appraised LTV of approximately 61%.

ARI closed a $42.5 million mezzanine loan for a mixed-use property comprising a 1.3 million square foot office tower, a 400-key hotel and a parking garage in downtown Cleveland, OH. The mezzanine loan is part of a $262.5 million financing which consists of a $220.0 million first mortgage loan and ARI’s $42.5 million mezzanine loan. The fixed rate loan has a ten-year term, with two years of interest only payments followed by eight years of amortization, and an appraised LTV of approximately 72%.

ARI closed a $34.0 million ($30.8 million of which was funded at closing) first mortgage loan secured by a 15,895 square foot retail condominium located on South Beach in Miami, FL. The floating rate loan has an eighteen-month initial term with two twelve-month extension options and an appraised LTV of approximately 59%.

Funding of Previously Closed Loans –ARI funded approximately $67.7 million for previously closed loans.

Loan Repayments – ARI received approximately $41.5 million from loan repayments.

Operating Earnings

Operating Earnings is a non-GAAP financial measure that 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 unconsolidated joint ventures; (iv) foreign currency gains/(losses) other than realized gains/(losses) related to interest income; (v) the non-cash amortization expense related to the reclassification of a portion of the convertible senior notes to stockholders’ equity in accordance with GAAP; and (vi) provision for loan losses. Operating Earnings may also be adjusted to exclude certain other non-cash items, as determined by the Company's Manager and approved by a majority of the Company's independent directors.

In order to evaluate the effective yield of the portfolio, the Company uses Operating Earnings to reflect the net investment income of the Company’s portfolio as adjusted to include the net interest expense related to the Company’s derivative instruments. Operating Earnings allows the Company to isolate the net interest expense associated with the Company’s swaps in order to monitor and project the Company’s full cost of borrowings. The Company also believes that investors use Operating Earnings or a comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers and, as such, the Company believes that the disclosure of Operating Earnings is useful to its investors.

A significant limitation associated with Operating Earnings as a measure of the Company’s financial performance over any period is that it excludes net realized and unrealized gains (losses) from investments. In addition, the Company’s presentation of Operating Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, Operating Earnings should not be considered as a substitute for the Company’s GAAP net income as a measure of its financial performance or any measure of its liquidity under GAAP.

Beginning with the quarter ended September 30, 2016, the Company slightly modified its definition of Operating Earnings to include realized gains/(losses) on currency swaps related to interest income on investments denominated in a currency other than U.S. dollars. The Company believes that including the effects of realized gains/(losses) on currency swaps related to interest income more accurately reflects the Company's investment income for a particular period and will allow investors to more easily compare its operating results over various periods. The effects of such unrealized gains/(losses) in prior periods were not material to the Company's financial results. The Company intends to apply this modified definition for Operating Earnings for all future periods.

Reconciliation of Operating Earnings to Net Income Available to Common Stockholders

The tables below reconcile Operating Earnings and Operating Earnings per share of common stock with net income available to common stockholders and net income available to common stockholders per share of common stock for the three and twelve months ended December 31, 2016 and December 31, 2015 ($ amounts in thousands, except per share data):

               

 

Three Months
Ended
December 31,
2016

   

Earnings Per
Share
(Diluted)

   

Three Months
Ended
December 31,
2015

   

Earnings
Per Share
(Diluted)

Operating Earnings:
Net income available to common stockholders $ 49,716 $ 0.60 $ 21,379 $ 0.32
Adjustments:
Equity-based compensation expense 1,655