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Apollo Commercial Real Estate Finance, Inc. Reports Third Quarter 2016 Financial Results

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NEW YORK--(BUSINESS WIRE)--

Apollo Commercial Real Estate Finance, Inc. (the "Company" or "ARI") (NYSE: ARI) today reported financial results for the three and nine month periods ended September 30, 2016.

Third Quarter 2016 Highlights

  • Reported net income available to common stockholders of $60.6 million, or $0.83 per diluted share of common stock, for the three months ended September 30, 2016, as compared to net income available to common stockholders of $23.5 million, or $0.39 per diluted share of common stock, for the three months ended September 30, 2015;
  • Reported Operating Earnings (a non-GAAP financial measure defined below) of $0.45 per diluted share of common stock for the three months ended September 30, 2016; Excluding $4.9 million of expenses associated with the acquisition of Apollo Residential Mortgage, Inc. (NYSE: AMTG) ("AMTG"), ARI reported Operating Earnings of $0.52 per diluted share of common stock, as compared to Operating Earnings of $0.53 per diluted share of common stock for the three months ended September 30, 2015;
  • Reported book value per share of common stock of $15.94 at September 30, 2016, an increase of 2.8% as compared to book value per share of common stock of $15.51 at June 30, 2016;
  • Generated $53.3 million of net interest income during the quarter from the Company's $2.7 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 September 30, 2016; At quarter end, 88% of the loans in the Company's investment portfolio had floating interest rates;
  • Closed $245.5 million of commercial real estate debt investments and funded an additional $39.1 million for previously closed loans for the three months ended September 30, 2016; For the nine months ended September 30, 2016, ARI closed $669.0 million of commercial real estate debt investments and funded a total of $113.2 million for previously closed loans, for total capital commitment and deployment of approximately $782.2 million;
  • Declared a $0.46 dividend per share of common stock for the three months ended September 30, 2016;
  • Completed the acquisition of AMTG and subsequently sold substantially all of AMTG's assets, realizing net proceeds of approximately $400.0 million; and
  • Entered into a new master repurchase agreement (the "DB Facility") with Deutsche Bank AG, Cayman Islands Branch ("Deutsche Bank") to provide up to $300.0 million of advances in connection with financing first mortgage loans.

"I am extremely proud of everything ARI has accomplished over the past several months, which has culminated in strong financial results and a notable increase in book value per share," said Stuart Rothstein, the Chief Executive Officer and President of the Company. "The acquisition of AMTG and subsequent successful sale of the bulk of AMTG's assets in less than one month generated approximately $400.0 million of investable capital. In anticipation of the closing, ARI effectively managed the Company's investment pipeline such that $245.5 million of investments closed during the quarter and another $236.4 million shortly after quarter end, bringing year to date capital committed and deployed to approximately $1.1 billion. Finally, ARI positioned the Company for future investment activity and diversified the Company's funding sources with a new $300.0 million credit facility to fund first mortgage loans."

Third Quarter 2016 Operating Results

The Company reported net income available to common stockholders for the three months ended September 30, 2016 of $60.6 million, or $0.83 per diluted share of common stock, as compared to net income available to common stockholders of $23.5 million, or $0.39 per diluted share of common stock, for the three months ended September 30, 2015. Operating Earnings for the three months ended September 30, 2016 were $32.7 million, or $0.45 per diluted share of common stock. Excluding expenses associated with the acquisition of AMTG which totaled approximately $4.9 million during the quarter, ARI reported Operating Earnings of $37.7 million, or $0.52 per diluted share of common stock, for the three months ended September 30, 2016, as compared to Operating Earnings of $31.7 million, or $0.53 per diluted share of common stock, for the three months ended September 30, 2015.

The Company reported net income available to common stockholders of $77.9 million, or $1.11 per diluted share of common stock, for the nine months ended September 30, 2016, as compared to net income available to common stockholders of $70.0 million, or $1.24 per diluted share of common stock, for the nine months ended September 30, 2015.

Operating Earnings were $96.0 million, or $1.38 per diluted share of common stock for the nine months ended September 30, 2016. Excluding expenses associated with the acquisition of AMTG which totaled approximately $11.4 million for the nine months ended September 30, 2016, ARI reported Operating Earnings of $107.4 million, or $1.54 per diluted share of common stock, as compared to Operating Earnings of $80.3 million, or $1.42 per diluted share of common stock, for the nine months ended September 30, 2015.

Third Quarter 2016 Investment Activity

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

  • $245.5 million of floating-rate first mortgage loans ($213.6 million of which were funded at closing), which were underwritten to generate a levered weighted average IRR(1) of approximately 14%.

Funding of Previously Closed Loans – During the third quarter, ARI funded approximately $31.9 million for previously closed loans.

Loan Repayments – During the third quarter, ARI received approximately $138.2 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 September 30, 2016 ($ amounts in thousands):

                 

 

Description

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

Weighted Average

Underwritten IRR (1)

  Fully-Levered Weighted Average Underwritten IRR(1)(3)
First mortgage loans $1,426,990 8.2% $ 690,882 2.9% $ 736,108 13.0% 15.6%
Subordinate loans(4)(5) 918,480 12.4 - - 918,480 12.4 12.4
CMBS 395,160   5.9   330,155   3.3%   127,329   6.2   6.2
Total/Weighted Average $2,740,630   9.3%   $1,021,037   3.0%   $1,781,917   12.2%   13.3%
 

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

Loan-to-Value

At September 30, 2016, the Company's commercial real estate loan portfolio, which includes CMBS, held-to-maturity, 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 64% and the subordinate loans (including CMBS, held-to-maturity) had a weighted average LTV of 65%.

Book Value

The Company's book value per share of common stock was $15.94 at September 30, 2016, an increase of 2.8% as compared to book value per share of common stock of $15.51 at June 30, 2016. The increase in book value per share primarily was driven by the acquisition of AMTG.

Subsequent Events

The following events occurred subsequent to quarter end:

New Investments

ARI closed an $80.0 million first mortgage loan (all of which is expected to be funded by year end) secured by a to-be-developed data center in Manassas, Virginia which has been substantially pre-leased on a long-term basis to a credit tenant. The loan is part of a $365.0 million financing which consists of ARI's $80.0 million loan and additional pari passu notes totaling $285.0 million. The fixed-rate loan has a three-year term and an underwritten, as-stabilized LTV of approximately 55%. The loan has been underwritten to generate a levered IRR(1) of approximately 14%.

ARI closed a $130.0 million junior mezzanine loan secured by the equity interests in a portfolio of 155 healthcare properties representing 18,662 licensed beds across 20 states. The loan is being used to refinance existing debt on the portfolio, which includes a $39.0 million mezzanine loan provided by ARI in 2014, which was repaid. The floating rate junior mezzanine loan has a two-year initial term with three two-year extension options and an appraised LTV of approximately 62%. The junior mezzanine loan has been underwritten to generate an IRR(1) of approximately 12%.

ARI entered into a twelve month extension and upsized the Company's outstanding loan amount through the acquisition of an additional £45.0 million (approximately $57.4 million) of pari passu interests in an existing pre-development mezzanine loan for the development of a luxury condominium project in Mayfair, London, bringing ARI's total outstanding loan balance to £100.0 million. The loan is part of a £220 million financing which consists of a £120.0 million first mortgage loan and ARI's £100.0 million mezzanine loan. The first mortgage loan also was extended for an additional twelve months in connection with the extension of ARI's mezzanine loan. The floating rate mezzanine loan has an appraised LTV of approximately 63% and has been underwritten to generate an IRR(1) of approximately 16%.

Funding of Previously Closed Loans –ARI funded approximately $6.2 million for previously closed loans.

Loan Repayments – ARI received approximately $34.5 million from loan repayments.

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.

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 has 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 tables below reconcile 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, 2016 and September 30, 2015 ($ amounts in thousands, except per share data):

           

 

Three Months Ended

September 30, 2016

  Earnings Per Share (Diluted)   Three Months Ended

September 30, 2015

  Earnings Per Share (Diluted)
Operating Earnings:
Net income available to common stockholders $ 60,583 $ 0.83 $ 23,543 $ 0.39
Adjustments:
Equity-based compensation expense 1,828 0.03 756 0.01
Unrealized loss on securities 9,798 0.13 6,926 0.12
Unrealized (gain) on derivative instruments (4,815 ) (0.07 ) (2,096 ) (0.04 )
Foreign currency loss, net 4,861 0.07 2,165 0.04
Bargain purchase gain (40,021 ) (0.55 ) - -
Amortization of convertible senior notes related to equity reclassification 590 0.01 556 0.01
Income from unconsolidated joint venture
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