Press Release
August 01, 2017

Apollo Commercial Real Estate Finance, Inc. Reports Second Quarter 2017 Financial Results

Apollo Commercial Real Estate Finance, Inc. Reports Second Quarter 2017 Financial Results

NEW YORK--(BUSINESS WIRE)-- Apollo Commercial Real Estate Finance, Inc. (the “Company” or “ARI”) (NYSE:ARI) today reported financial results for the quarter and six months ended June 30, 2017.

Second Quarter 2017 Highlights

  • Reported net income available to common stockholders of $26.9 million, or $0.28 per diluted share of common stock, for the three months ended June 30, 2017, as compared to net income available to common stockholders of $4.5 million, or $0.06 per diluted share of common stock, for the three months ended June 30, 2016;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) of $44.6 million, or $0.46 per diluted share of common stock, for the three months ended June 30, 2017, as compared to Operating Earnings of $33.4 million, or $0.49 per diluted share of common stock, for the three months ended June 30, 2016;
  • Generated $62.2 million of net interest income during the quarter from the Company’s $3.6 billion commercial real estate debt portfolio, which had a fully-levered weighted average underwritten internal rate of return (“IRR”)(1) of approximately 13.3% at June 30, 2017;
  • Committed $107.9 million to new commercial real estate debt investments and funded an additional $29.4 million for loans closed prior to the quarter for the three months ended June 30, 2017; for the six months ended June 30, 2017, committed $558 million to new commercial real estate debt investments and funded a total of $145 million for loans closed prior to the period, for total capital commitment and deployment of approximately $703 million;
  • Subsequent to quarter end, committed $162.5 million and £60.0 million to new commercial real estate debt investments and funded an additional $2.9 million for loans closed prior to the quarter;
  • Completed an underwritten public offering of 13.8 million shares of common stock, including the full exercise of the underwriters’ option to purchase additional shares, raising net proceeds of approximately $249.0 million; and
  • Declared a $0.46 dividend per share of common stock for the three months ended June 30, 2017.

“ARI has committed to over $800 million of commercial real estate debt investments year to date,” said Stuart Rothstein, Chief Executive Officer and President of ARI. “In recognition of the Company’s strong investment pipeline, coupled with favorable market conditions, ARI completed an accretive offering of shares of common stock during the quarter, raising net proceeds of approximately $249 million. We remain very confident in our ability to identify and deploy capital into commercial real estate debt investments with attractive, risk-adjusted returns.”

Second Quarter 2017 Operating Results

The Company reported net income available to common stockholders for the three months ended June 30, 2017 of $26.9 million, or $0.28 per diluted share of common stock, as compared to net income available to common stockholders of $4.5 million, or $0.06 per diluted share of common stock, for the three months ended June 30, 2016. Operating Earnings for the three months ended June 30, 2017 were $44.6 million, or $0.46 per diluted share of common stock, as compared to Operating Earnings of $33.4 million, or $0.49 per diluted share of common stock, for the three months ended June 30, 2016.

For the six months ended June 30, 2017, the Company reported net income available to common stockholders of $64.7 million, or $0.68 per diluted share of common stock, as compared to net income available to common stockholders of $17.3 million, or $0.24 per diluted share of common stock, for the six months ended June 30, 2016.
Operating Earnings for the six months ended June 30, 2017 were $83.2 million, or $0.88 per diluted share of common stock, as compared to Operating Earnings of $63.3 million, or $0.93 per diluted share of common stock, for the six months ended June 30, 2016.

Second Quarter 2017 Investment Activity

New Investments – During the second quarter, ARI committed capital to the following commercial real estate debt investments:

  • $74.9 million of first mortgage loans ($74.9 million of which were funded during the quarter); and
  • $33.0 million of subordinate loans ($28.0 million of which were funded during the quarter).

Funding of Previously Closed Loans – During the second quarter, ARI funded approximately $29.4 million for loans closed prior to the quarter.

Loan Repayments – During the second quarter, ARI received approximately $86.3 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 June 30, 2017 ($ amounts in thousands):

 

Description

Amortized Cost Weighted Average Yield(2) Debt Cost of Funds Equity at Cost Current

Weighted Average

Underwritten IRR (1)(2)

Fully-Levered Weighted Average Underwritten IRR(1)(2)(3)
First mortgage loans $ 2,037,971 7.3 % $ 1,096,084 3.6 % $ 941,887 11.3 % 14.1 %
Subordinate loans 1,240,363 13.5 - - 1,240,363 13.5 13.5
CMBS(4)   293,312 4.3     244,170 3.3     106,806 4.3   4.3  
Total/Weighted Average $ 3,571,646 9.2 % $ 1,340,254 3.5 % $ 2,289,056 12.2 % 13.3 %

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

Loan-to-Value

At June 30, 2017, the Company’s commercial real estate loan portfolio had a weighted average loan-to-value (“LTV”) of 64%. Within the commercial real estate loan portfolio, the first mortgage loans had a weighted average LTV of 63% and the subordinate loans had a weighted average LTV of 65%.

Book Value

The Company’s book value per share of common stock was $16.16 at June 30, 2017, as compared to book value per share of common stock of $16.05 at March 31, 2017.

Subsequent Events

The following events occurred subsequent to quarter end:

New Investments

Subsequent to the end of the second quarter, ARI committed capital to the following commercial real estate debt investments:

  • $125.0 million and £60.0 million of first mortgage loans, $125.0 million and £32.2 million of which were funded; and
  • $37.5 million subordinate loan, all of which was funded.

Funding of Previously Closed Loans – ARI funded approximately $2.9 million for previously closed loans.

Loan Repayments – ARI received approximately $50.4 million from loan repayments.

Sale of CMBSARI received approximately $60 million in proceeds from sales and principal pay downs from two CMBS.

Redemption of Preferred Stock – ARI announced that it will redeem all 3,450,000 issued and outstanding shares of its 8.625% Series A Cumulative Redeemable Perpetual Preferred Stock (the "Series A Preferred Stock") on August 2, 2017 (the "Redemption Date"). The shares of Series A Preferred Stock will be redeemed at the redemption price of $25.00 per share, plus a dividend in an amount of $0.1079 per share, representing all accumulated and unpaid dividends to, but not including, the Redemption Date. On the Redemption Date, dividends on the Series A Preferred Stock will cease to accrue.

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 and impairments. Operating Earnings may also be adjusted to exclude certain other non-cash items, as determined by ACREFI Management, LLC, the Company's external 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 table below reconciles 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 six months ended June 30, 2017 and June 30, 2016:

($ amounts in thousands, except per share data)

 

 

Three Months Ended

June 30, 2017

  Earnings Per Share (Diluted) Three Months Ended

June 30, 2016

Earnings Per Share (Diluted)
Operating Earnings:
Net income available to common stockholders $ 26,925 $ 0.28 $ 4,478 $ 0.06
Adjustments:
Equity-based compensation expense 3,461 0.04 1,938 0.03
Unrealized loss on securities 4,510 0.05 11,728 0.17
Provision for loan losses and impairments 5,000 0.05 15,000 0.22
Unrealized (gain)/loss on derivative instruments 7,389 0.08 (13,313 ) (0.19 )
Foreign currency(gain)/ loss, net (6,958 ) (0.08 ) 13,082 0.19
Amortization of convertible senior notes related to equity reclassification 618 0.01 582 0.01
(Income)/loss from unconsolidated joint venture 3,305 0.03 (59 ) -
Realized gain from unconsolidated joint venture   346     -     -     -  
Total adjustments:   17,671     0.18     28,958     0.43  
Operating Earnings $ 44,596     0.46   $ 33,435   $ 0.49  
 

Basic weighted average shares of

common stock outstanding:

95,428,134

67,402,311

Diluted weighted average shares of

common stock outstanding:

96,796,289

68,374,557

 

Six Months Ended

June 30, 2017

  Earnings Per Share (Diluted) Six Months Ended

June 30, 2016

Earnings Per Share (Diluted)
Operating Earnings:
Net income available to common stockholders $ 64,739 $ 0.68 $ 17,281 $ 0.24
Adjustments:
Equity-based compensation expense 7,252 0.08 3,606 0.06
Unrealized loss on securities 1,658 0.02 26,802