Press Release
October 23, 2019

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

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

NEW YORK, Oct. 23, 2019 (GLOBE NEWSWIRE) -- Apollo Commercial Real Estate Finance, Inc. (the “Company” or “ARI”) (NYSE:ARI) today reported financial results for the quarter ended September 30, 2019.

Third Quarter 2019 Highlights

  • Reported net income available to common stockholders for the three months ended September 30, 2019 of $25.7 million, or $0.16 per diluted share of common stock; these amounts reflect (i) a provision for loan losses totaling $32.0 million, or $0.21 per share of common stock, recorded in connection with a first mortgage loan secured by a retail center in Cincinnati, OH; and (ii) a provision for loan losses totaling $3.0 million, or $0.02 per share of common stock, recorded in connection with a first mortgage loan secured by a residential for sale property in Bethesda, MD. Reported net income available to common stockholders for the nine months ended September 30, 2019 of $143.1 million, or $0.97 per diluted share of common stock;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) for the three months ended September 30, 2019 of $72.6 million, or $0.47 per diluted share of common stock; Reported Operating Earnings for the nine months ended September 30, 2019 of $197.6 million, or $1.35 per diluted share of common stock; Operating Earnings excluding realized loss on investments and loss on early extinguishment of debt (described below) for the nine months ended September 30, 2019 were $210.1 million, or $1.43 per diluted share of common stock;
  • Generated $85.2 million of net interest income during the quarter from the Company’s $6.1 billion commercial real estate loan portfolio;
  • Committed $958.3 million to new commercial real estate loans (all of which was funded at closing) and funded an additional $126.1 million for loans closed prior to the quarter;
  • Subsequent to quarter end, committed $548.3 million ($464.3 million of which was funded at closing) to first mortgage loans, bringing year-to-date loan commitments to $2.5 billion;
  • Amended the Company's master repurchase agreement with JPMorgan Chase Bank to increase the total borrowing capacity to $1.3 billion;
  • Amended the Company's master repurchase agreement with Deutsche Bank to increase the borrowing capacity to $1.25 billion; and
  • Declared a $0.46 dividend per share of common stock for the three months ended September 30, 2019.

"ARI’s third quarter reflected our continued strong originations, highlighted by increased activity throughout Europe, and resulted in a loan portfolio that surpassed the $6 billion mark," said Stuart Rothstein, Chief Executive Officer and President of ARI.

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

  • $754.1 million of first mortgage loans (all of which was funded during the quarter)
  • $204.2 million of subordinate loans and other lending assets (all of which was funded during the quarter)

Funding of Previously Closed Loans - During the third quarter of 2019, ARI funded $126.1 million for loans closed prior to the quarter.

Loan Repayments - During the third quarter of 2019, ARI received $353.4 million from loan repayments, comprised of $218.4 million from first mortgage loans and $135.0 million from subordinate loans. ARI received $0.3 million of pre-payment penalties and accelerated fees in connection with these repayments.

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, 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 $4,779,501  6.2% 6.8% $2,559,318  3.9% $2,220,183 
Subordinate loans and other lending assets, net 1,335,073  12.0% 13.2%     1,335,073 
Total/Weighted-Average $6,114,574  7.5% 8.2% $2,559,318  3.9% $3,555,256 

(1)   Weighted-Average Coupon and Weighted-Average All-in Yield are based on the applicable benchmark rates as of September 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 $18.0 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 $16.02 at September 30, 2019 as compared to book value per share of common stock of $16.20 at December 31, 2018. The decrease is primarily driven by provisions for loan losses and the unrealized loss on our interest rate swap in connection with our senior secured term loan, partially offset by our common equity issuance during the first quarter.

Subsequent Events
The following events occurred subsequent to quarter end:
New Investments - ARI committed $548.3 million ($464.3 million of which was funded at closing) to first mortgage loans.

Funding of Previously Closed Loans - ARI funded $26.7 million for previously closed loans.

Loan Repayments - ARI received $60.2 million from loan repayments, including $11.8 million from first mortgage loans and $48.4 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. In addition, during 2018, the Company recorded a loss on early extinguishment of debt associated with exchanges and conversions of the 2019 Notes. The Company believes it is non-recurring and not reflective of its ongoing operations. For further discussion on the exchanges and conversions of the 2019 Notes, refer to "Note 9 - Convertible Senior Notes, Net" of the Company's 10-Q. 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 and loss on early extinguishment of debt 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, Operating Earnings per share of common stock, Operating Earnings excluding realized loss on investments and loss on investments 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 ended September 30, 2019 and September 30, 2018, respectively ($ amounts in thousands, except per share data):

  Three months
ended
 Earnings
 Three months
ended
 Earnings
  September 30, 2019 Per Share(1) September 30, 2018 Per Share(1)
Operating Earnings:                
Net income available to common stockholders $25,704  $0.17  $55,381  $0.42 
Adjustments:                
Equity-based compensation expense 3,889  0.03  4,048  0.03 
Unrealized loss on interest rate swap 10,307  0.07     
Gain on currency forwards (24,153) (0.16) (6,291) (0.05)
Foreign currency loss, net(2) 19,129  0.12  4,050  0.03 
Net realized gains relating to interest income on foreign currency hedges, net 870    421  0.01 
Net realized gains relating to forward points on foreign currency hedges, net 1,076  0.01  257   
Amortization of the convertible senior notes related to equity reclassification 732    728  0.01 
Provision for loan losses and impairments 35,000  0.23     
Total adjustments: 46,850