Press Release
November 01, 2017

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

Apollo Commercial Real Estate Finance, Inc. Reports Third 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 nine months ended September 30, 2017.

Third Quarter 2017 Highlights

  • Reported net income available to common stockholders of $57.2 million, or $0.54 per diluted share of common stock, for the three months ended September 30, 2017, as compared to $60.6 million, or $0.83 per diluted share of common stock, for the three months ended September 30, 2016;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) of $49.8 million, or $0.47 per diluted share of common stock, for the three months ended September 30, 2017, as compared to $32.7 million, or $0.45 per diluted share of common stock, for the three months ended September 30, 2016;
  • Generated $71.2 million of net interest income during the quarter from the Company’s $3.8 billion commercial real estate debt portfolio;
  • Committed $423.1 million to new commercial real estate debt investments and funded an additional $45.6 million for loans closed prior to the quarter ended September 30, 2017; for the nine months ended September 30, 2017, committed $910.6 million to new commercial real estate debt investments and funded a total of $190.8 million for loans closed prior to the period, for total capital commitment and deployment of approximately $1.1 billion;
  • Subsequent to quarter end, committed $294.1 million to new commercial real estate debt investments and funded an additional $2.5 million for loans closed prior to the quarter;
  • Completed an underwritten public offering of $230.0 million of the Company’s 4.75% Convertible Senior Notes due 2022 (the “Notes”);
  • Redeemed all the outstanding $86.3 million of the Company’s 8.625% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”); and
  • Declared a $0.46 dividend per share of common stock for the three months ended September 30, 2017.

“Year-to-date, ARI has originated over $1.3 billion of commercial real estate loans and the Company continues to build a pipeline of attractive investment opportunities,” said Stuart Rothstein, Chief Executive Officer and President of ARI. “As we diligently grow ARI’s portfolio, we remain focused on optimizing the Company’s balance sheet. During the quarter, ARI successfully completed a $230 million offering of 4.75% Convertible Senior Notes and redeemed all the outstanding shares of the 8.625% Series A Preferred Stock. In addition, subsequent to quarter end, ARI expanded the Company’s primary credit facility for financing first mortgage loans, providing additional capacity to fund our investment pipeline.”

Third Quarter 2017 Operating Results

The Company reported net income available to common stockholders for the three months ended September 30, 2017 of $57.2 million, or $0.54 per diluted share of common stock, as compared to $60.6 million, or $0.83 per diluted share of common stock, for the three months ended September 30, 2016. Operating Earnings for the three months ended September 30, 2017 were $49.8 million, or $0.47 per diluted share of common stock, as compared to $32.7 million, or $0.45 per diluted share of common stock, for the three months ended September 30, 2016.

For the nine months ended September 30, 2017, the Company reported net income available to common stockholders of $121.9 million, or $1.23 per diluted share of common stock, as compared to $77.9 million, or $1.11 per diluted share of common stock, for the nine months ended September 30, 2016.

Operating Earnings for the nine months ended September 30, 2017 were $133.0 million, or $1.34 per diluted share of common stock, as compared to $96.0 million, or $1.38 per diluted share of common stock, for the nine months ended September 30, 2016.

Third Quarter 2017 Investment Activity

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

  • $203.1 million of first mortgage loans ($166.9 million of which were funded during the quarter); and
  • $220.0 million of subordinate loans (all of which were funded during the quarter).

Funding of Previously Closed Loans – During the third quarter, ARI funded approximately $45.6 million for loans closed prior to the quarter.

Loan Repayments – During the third quarter, ARI received approximately $169.3 million from loan repayments, including $6.6 million from first mortgage loans and $162.7 million from subordinate loans. The Company recorded $3.6 million in interest income from a prepayment penalty on one of the subordinate loans that repaid.

Sale of CMBSARI received approximately $71.1 million in proceeds from sales and principal pay downs from three CMBS.

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, 2017 ($ amounts in thousands):

           

 

Description

  Amortized Cost  

Weighted
Average
Coupon(1)

 

Weighted
Average
All-in
Yield(1)(2)

  Debt  

Cost of
Funds

  Equity at Cost
First mortgage loans $ 2,218,222 6.5 % 7.3 % $ 1,140,198 3.6 % $ 1,078,024
Subordinate loans   1,340,378   11.8 %   13.1 %   NA   NA     1,340,378
Total/Weighted Average $ 3,558,600   8.5 %   9.5 %   $ 1,140,198   3.6 %   $ 2,418,402
 
(1)   Weighted-Average Coupon and Weighted Average All-in-Yield reflects LIBOR at September 30, 2017 which was 1.23%.
(2) Weighted-Average All-in-Yield includes the amortization of deferred origination fees, loan origination costs and accrual of both extension and exit fees.
 

Loan-to-Value

At September 30, 2017, the Company’s commercial real estate loan portfolio had a weighted average loan-to-value (“LTV”) of 62%. Within the commercial real estate loan portfolio, the first mortgage loans had a weighted average LTV of 61% and the subordinate loans had a weighted average last dollar LTV of 64%.

Book Value

The Company’s book value per share of common stock was $16.36 at September 30, 2017, as compared to book value per share of common stock of $16.16 at June 30, 2017.

Subsequent Events

The following events occurred subsequent to quarter end:

New Investments – ARI committed capital to $294.1 million of first mortgage loans, all of which were funded.

Funding of Previously Closed Loans – ARI funded approximately $2.5 million for previously closed loans.

Loan Repayments – ARI received approximately $166.2 million from loan repayments, including $35.5 million from first mortgage loans and $130.7 million from subordinate loans.

Sale of CMBS– ARI received approximately $48.4 million in proceeds from sales and principal pay downs from four CMBS at $2.5 million in excess of book value at September 30, 2017 and recognized a $7.4 million realized loss on the sale.

Credit Facility

ARI amended and restated the Company’s JPMorgan Facility, which ARI primarily uses to finance first mortgage loans. The amendment increased the borrowing capacity to $1.4 billion from $1.1 billion (both figures include a pre-existing $143.0 million asset specific financing).

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 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.

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 nine months ended September 30, 2017 and September 30, 2016:

 

($ amounts in thousands, except per share data)

         

 

Three Months
Ended
September 30,
2017

 

Earnings
Per Share
(Diluted)

 

Three Months
Ended
September 30,
2016

 

Earnings
Per Share
(Diluted)

Operating Earnings:
Net income available to common stockholders $ 57,208 $ 0.54 $ 60,583 $ 0.83
Adjustments:
Equity-based compensation expense 2,635 0.02 1,828 0.03
Unrealized (gain)/loss on securities (13,488 ) (0.13 ) 9,798 0.13
Unrealized (gain)/loss on derivative instruments 7,481 0.07 (4,815 ) (0.07 )
Foreign currency(gain)/ loss, net (7,850 ) (0.07 ) 4,861 0.07
Bargain purchase gain - - (40,021 ) (0.55 )
Amortization of convertible senior notes related to equity reclassification 769 0.01 590 0.01
Series A preferred stock redemption charge 3,016 0.03 - -
(Income)/loss from unconsolidated joint venture   -       -       (80 )     -  
Total adjustments:   (7,437 )     (0.07 )     (27,839 )     (0.38 )
Operating Earnings $ 49,771     $ 0.47     $ 32,744     $ 0.45  
 

Basic weighted average shares of common stock outstanding: 105,446,704

71,919,549

Diluted weighted average shares of common stock outstanding: 106,812,721

72,861,611