Press Release
July 24, 2019

Apollo Commercial Real Estate Finance, Inc. Reports Second Quarter 2019 Financial Results

Apollo Commercial Real Estate Finance, Inc. Reports Second Quarter 2019 Financial Results

NEW YORK, July 24, 2019 (GLOBE NEWSWIRE) -- Apollo Commercial Real Estate Finance, Inc. (the “Company” or “ARI”) (NYSE:ARI) today reported financial results for the quarter ended June 30, 2019.

Second Quarter 2019 Highlights

  • Reported net income available to common stockholders of $56.5 million, or $0.37 per diluted share of common stock, for the three months ended June 30, 2019; Reported net income available to common stockholders of $117.4 million, or $0.80 per diluted share of common stock, for the six months ended June 30, 2019;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) of $56.6 million, or $0.38 per diluted share of common stock; Operating Earnings excluding realized loss on investments (described below), were $69.1 million, or $0.47 per diluted share of common stock, for the three months ended June 30, 2019; Reported Operating Earnings of $125.0 million, or $0.88 per diluted share of common stock; Operating Earnings excluding realized loss on investments (described below) were $137.5 million, or $0.97 per diluted share of common stock, for the six months ended June 30, 2019;
  • Generated $85.0 million of net interest income during the quarter from the Company’s $5.4 billion commercial real estate loan portfolio;
  • Committed $554.3 million to new commercial real estate loans ($346.1 million of which was funded at closing) and funded an additional $78.0 million for loans closed prior to the quarter;
  • Subsequent to quarter end, committed $51.5 million (all of which was funded at closing) to a subordinate lending investment, bringing year-to-date loan commitments to $1.1 billion;
  • Closed a $500.0 million seven-year senior secured term loan ("Term Loan B" or "TLB") priced at LIBOR plus 2.75% (99.5% original issue discount), and entered into an interest rate swap to fix LIBOR at 2.12%, effectively fixing ARI's all-in coupon at 4.87%;
  • Issued 17,250,000 shares of common stock in an underwritten public offering, which generated net proceeds of $314.8 million; ARI used a portion of the net proceeds for the redemption of all of the outstanding 8.00% Series C Cumulative Redeemable Perpetual Preferred Stock ("Series C Preferred Stock"), which had a liquidation preference of $172.5 million; and
  • Declared a $0.46 dividend per share of common stock for the three months ended June 30, 2019.

"ARI opportunistically capitalized on favorable conditions in the capital markets to further strengthen the Company’s balance sheet through a debut issuance in the Term Loan B market and through another accretive issuance of common stock,” said Stuart Rothstein, Chief Executive Officer and President of ARI. “With respect to our investment activity, the market remains highly competitive.  However, the strength of Apollo’s global commercial real estate debt platform has enabled the Company to continue to find attractive investments, including our first transaction in Germany, as our international presence grows."

Second Quarter 2019 Investment Activity
New Investments - During the second quarter of 2019, ARI committed capital to the following commercial real estate loans:

  • $514.3 million of first mortgage loans ($314.3 million of which were funded during the quarter)
  • $40.0 million subordinate loan ($31.8 million of which was funded during the quarter)

Funding of Previously Closed Loans - During the second quarter of 2019, ARI funded $78.0 million for loans closed prior to the quarter.

Loan Repayments - During the second quarter of 2019, ARI received $167.7 million from loan repayments, comprised of $167.2 million from first mortgage loans and $0.5 million from subordinate loans. ARI did not receive any pre-payment penalties in connection with these repayments.

Second Quarter 2019 Capital Markets Activity
Term Loan B - ARI closed a $500 million senior secured TLB priced at LIBOR plus 2.75% (99.5% original issue discount) with a seven-year term. Following the closing of the TLB, ARI entered into an interest rate swap which effectively fixed the interest rate on the loan to 4.87% for the full seven-year term.

Common Stock Issuance and Preferred Stock Redemption - ARI completed an underwritten public offering of 17,250,000 shares of common stock, including the full exercise of the underwriters’ option to purchase additional shares, resulting in net proceeds of $314.8 million. ARI used a portion of the net proceeds to redeem all of the outstanding Series C Preferred Stock, which had a liquidation preference of $172.5 million.

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 June 30, 2019 ($ 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 $4,206,754  6.7%  7.5%  $1,801,303  3.9%  $2,405,451 
Subordinate loans, net 1,236,990  13.2%  14.1%      1,236,990 
Total/Weighted-Average $5,443,744  8.2%  9.0%  $1,801,303  3.9%  $3,642,441 

(1)     Weighted-Average Coupon and Weighted-Average All-in Yield are based on the applicable benchmark rates as of June 30, 2019 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 $18.2 million.
(4)     Represents loan portfolio at amortized cost less secured debt arrangements outstanding.

Book Value
The Company’s book value per share of common stock was $16.30 at June 30, 2019 as compared to book value per share of common stock of $16.20 at December 31, 2018. The increase is primarily driven by the common equity issuance, partially offset by the loss on term loan interest rate swap.

Subsequent Events
The following events occurred subsequent to quarter end:
New Investments - ARI committed $51.5 million (all of which was funded at closing) to a subordinate lending investment.

Funding of Previously Closed Loans - ARI funded $54.2 million for previously closed loans.

Loan Repayments - ARI received $68.2 million from loan repayments, including $67.9 million from first mortgage loans and $0.3 million from subordinate loans.

Operating Earnings

Operating Earnings is a non-GAAP financial measure that the Company defines 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 (a) realized gains/(losses) related to interest income, and (b) forward point gains/(losses) realized on the Company's foreign currency hedges, (v) the non-cash amortization expense related to the reclassification of a portion of the Company's 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, ARI 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. In addition, beginning with the quarter ended December 31, 2018, ARI further modified its definition of Operating Earnings to include the impact from forward points on its foreign currency hedges, which reflect the interest rate differentials between the applicable base rate for the Company's foreign currency investments and USD LIBOR. These forward contracts effectively convert the rate exposure to USD LIBOR, resulting in additional interest income earned in U.S. dollar terms. These amounts are not included in GAAP net income. In order to conform to the 2018 year end presentation, which incorporates this modification, prior year Operating Earnings results presented below have been modified accordingly. Operating Earnings may also be adjusted to exclude certain other non-cash items, as determined by 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 its portfolio as adjusted to include the net interest expense related to its derivative instruments. Operating Earnings allows the Company to isolate the net interest expense associated with its swaps in order to monitor and project its 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. Forward points effectively convert the Company's foreign rate exposure to USD LIBOR, which the Company believes is a better reflection of its operating results and ARI believes the inclusion of the resulting gain or loss in Operating Earnings is useful to its investors. The Company believes it is useful to its investors to present Operating Earnings excluding realized loss on investments to reflect its operating results. The Company's operating results are primarily comprised of earning interest income on its investments net of borrowing and administrative costs.

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 ARI's GAAP net income as a measure of the Company's financial performance or any measure of the Company's 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 six months ended June 30, 2019 and June 30, 2018, respectively ($ amounts in thousands, except per share data):

        
 Three months ended Earnings Per Share(1) Three months ended Earnings Per Share(1)
 June 30, 2019  June 30, 2018 
Operating Earnings:       
Net income available to common stockholders$56,505  $0.38  $48,512  $0.39 
Adjustments:       
Equity-based compensation expense4,294  0.03  4,014  0.03 
Unrealized loss on interest rate swap13,113  0.09     
Gain on currency forwards(11,186) (0.07) (33,538) (0.27)
Foreign currency loss, net(2)7,777  0.05  29,649  0.24 
Net realized gains relating to interest income on foreign currency hedges, net325    148   
Net realized gains relating to forward points on foreign currency hedges, net44    1   
Amortization of the convertible senior notes related to equity reclassification721    1,156  0.01 
(Reversal of) Provision for loan losses and impairments(4)(15,000) (0.10) 5,000  0.04 
Total adjustments:88    6,430  0.05 
Operating Earnings(3)$56,593  $0.38  $54,942  $0.44 
        
Realized loss on investments(4)12,513  $0.09     
Operating Earnings excluding realized loss on investments$69,106  $0.47  $54,942  $0.44 
Basic weighted-average shares of common stock outstanding145,567,963    123,019,993   
Weighted-average diluted shares - Operating Earnings       
Weighted-average diluted shares - GAAP174,101,234    124,629,317   
Weighted-average unvested RSUs1,846,173       
Reversal of hypothetical conversion of the convertible senior notes(5)(28,533,271)