Press Release
October 24, 2018

Apollo Commercial Real Estate Finance, Inc. Reports Third Quarter 2018 Financial Results

Apollo Commercial Real Estate Finance, Inc. Reports Third Quarter 2018 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 ended September 30, 2018.

Third Quarter 2018 Highlights

  • Reported net income available to common stockholders of $55.4 million, or $0.40 per diluted share of common stock, for the three months ended September 30, 2018;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) of $58.3 million, or $0.45 per diluted share of common stock, for the three months ended September 30, 2018; excluding the realized loss on early extinguishment of debt (described below), Operating Earnings were $60.9 million, or $0.47 per diluted share of common stock for the three months ended September 30, 2018;
  • Generated $77.5 million of net interest income during the quarter from the Company’s $4.8 billion commercial real estate loan portfolio;
  • Committed $285.0 million to new commercial real estate loans ($87.0 million of which was funded at closing) and funded an additional $96.9 million for loans closed prior to the quarter;
  • Subsequent to quarter end, committed $387.0 million to new commercial real estate loans ($273.2 million of which was funded at closing), bringing year-to-date loan commitments to $2.6 billion;
  • Entered into privately negotiated agreements with a limited number of holders of the Company's 5.50% Convertible Senior Notes due 2019 (the "5.50% 2019 Notes") and exchanged approximately $206.2 million in aggregate principal of the 5.50% 2019 Notes for an aggregate of (i) 10,020,328 newly issued shares of ARI common stock plus (ii) approximately $39.3 million in cash;
  • Subsequent to quarter end, completed an underwritten public offering of $230.0 million of the Company's 5.375% Convertible Senior Notes due 2023 (the "5.375% 2023 Notes"); and
  • Declared a $0.46 dividend per share of common stock for the three months ended September 30, 2018.

"ARI remains on track for a record year of loan originations in 2018, having committed to over $2.6 billion of new transactions year-to-date,” said Stuart Rothstein, Chief Executive Officer and President of the Company. “In addition, we continue to focus on optimizing ARI’s balance sheet, lowering our cost of capital and extending the maturity on our liabilities. During the quarter, ARI completed an exchange transaction for a significant portion of the 5.50% 2019 Notes, and subsequent to quarter end, the Company completed a new issuance of $230.0 million of the 5.375% 2023 Notes, which provides ARI with dry powder to fund the Company’s robust pipeline of new loan transactions."

Third Quarter 2018 Investment Activity

New Investments - During the third quarter of 2018, ARI committed capital to the following commercial real estate loans:

  • $285.0 million of first mortgage loans ($87.0 million of which were funded during the quarter)

Funding of Previously Closed Loans - During the third quarter of 2018, ARI funded $96.9 million for loans closed prior to the quarter.

Loan Repayments - During the third quarter of 2018, ARI received $225.3 million from loan repayments, comprised of $128.9 million from first mortgage loans and $96.4 million from subordinate loans.

Third Quarter 2018 Capital Markets Activity

Exchange and Conversion of 5.50% 2019 Notes - On August 2, 2018, ARI entered into separate, privately negotiated agreements with a limited number of holders of the Company's 5.50% 2019 Notes. Pursuant to the exchange agreements, the Company exchanged approximately $206.2 million in aggregate principal amount of the 5.50% 2019 Notes, for an aggregate of (i) 10,020,328 newly issued shares of ARI common stock plus (ii) approximately $39.3 million in cash. Also during the quarter, certain holders converted $12.6 million of the 5.50% 2019 Notes for an aggregate of (i) 724,250 newly issued shares of ARI common stock plus (ii) approximately $0.2 million in cash.

In connection with the exchanges and conversions, ARI recorded a loss on early extinguishment of debt of $2.6 million, which includes fees and accelerated amortization of capitalized costs.

Quarter End Commercial Real Estate Loan Portfolio Summary

The following table sets forth certain information regarding the Company’s commercial real estate loan portfolio at September 30, 2018 ($ amounts in thousands):

           
Description

Amortized
Cost

 

Weighted
Average
Coupon (1)

 

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

  Secured Debt (3)   Cost of Funds  

Equity at
cost(4)

Commercial mortgage loans, net $ 3,723,550 7.0 % 7.8 % $ 2,013,617 4.2 % $ 1,709,933
Subordinate loans, net 1,104,496     12.2 %   13.6 %           1,104,496
Total/Weighted Average $ 4,828,046     8.2 %   9.2 %   $ 2,013,617     4.2 %   $ 2,814,429
 
(1)   Weighted-Average Coupon and Weighted Average All-in-Yield are based on the applicable benchmark rates as of September 30, 2018 on the floating rate loans.
(2) Weighted-Average All-in-Yield includes the amortization of deferred origination fees, loan origination costs and accrual of both extension and exit fees.
(3) Gross of deferred financing costs of $16.7 million.
(4) Represents loan portfolio at amortized cost less secured debt outstanding.
 

Book Value

The Company’s book value per share of common stock was $16.27 at September 30, 2018 as compared to book value per share of common stock of $16.26 at June 30, 2018.

Subsequent Events

The following events occurred subsequent to quarter end:

New Investments - Subsequent to quarter end, ARI committed capital to the following commercial real estate loans:

  • $387.0 million of first mortgage loans ($273.2 of which was funded during the quarter)

Funding of Previously Closed Loans - Subsequent to quarter end, ARI funded $23.9 million for previously closed loans.

Loan Repayments - Subsequent to quarter end, ARI received $180.9 million from loan repayments, including $36.1 million from first mortgage loans and $144.8 million from subordinate loans.

Convertible Notes- ARI issued $230.0 million aggregate principal amount of the 5.375% 2023 Notes, which includes $30.0 million aggregate principal amount of the 5.375% 2023 Notes issued pursuant to the underwriters’ exercise of their option to purchase additional 5.375% 2023 Notes. The public offering generated net proceeds of approximately $223.7 million, after deducting the underwriting discount and estimated offering expenses. The conversion rate for the 5.375% 2023 Notes was initially equal to 48.7187 shares of common stock per $1,000 principal amount of notes. The 5.375% 2023 Notes will mature on October 15, 2023.

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. 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. Operating Earnings may also be adjusted to exclude certain other non-cash items, as determined by ACREFI Management, LLC, the Company’s external manager (the “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 its 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. In addition, the Company has previously disclosed that it has disposed of all of its CMBS as of December 31, 2017 and the Company recorded a loss on early extinguishment of debt associated with exchanges and conversions of the 5.50% 2019 Notes. Accordingly, the Company has disclosed Operating Earnings excluding realized loss and costs from sale of CMBS and loss on early extinguishment of debt because the Company believes it is useful to investors to present the results of the Company's ongoing operations while excluding the effects associated with the disposal of its CMBS and the loss on early extinguishment of debt, which are non-recurring events and not reflective of our ongoing operations.

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.

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, 2018 and September 30, 2017 ($ amounts in thousands, except per share data):

       
Three months ended

Earnings
Per Share(1)

Three months ended

Earnings
Per Share(1)

September 30, 2018     September 30, 2017  
Operating Earnings:
Net income available to common stockholders $ 55,381 $ 0.42 $ 57,208 $ 0.54
Adjustments:
Equity-based compensation expense 4,048 0.03 2,635 0.02
Unrealized gain on securities (13,488 ) (0.13 )
(Gain) loss on derivative instruments (6,291 ) (0.05 ) 7,481 0.07
Foreign currency (gain) loss, net 4,471 0.04 (7,850 ) (0.07 )
Amortization of the convertible senior notes related to equity reclassification 728 0.01 769 0.01
Series A preferred stock redemption charge         3,016     0.03  
Total adjustments: 2,956     0.03     (7,437 )   (0.07 )
Operating Earnings 58,337     0.45     49,771     0.47  
Realized loss and costs from sale of CMBS 4,076 0.04
Loss on early extinguishment of debt 2,573     0.02          
Operating Earnings excluding realized loss and costs from sale of CMBS and loss on early extinguishment of debt $ 60,910     $ 0.47     $ 53,847     $ 0.51  
Basic weighted average shares of common stock outstanding 129,188,343 105,446,704
Weighted average diluted shares - Operating Earnings
Weighted average diluted shares - GAAP 153,918,435 106,812,721