Apollo Commercial Real Estate Finance, Inc. Reports Second Quarter 2024 Results

Rhea-AI Summary

Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) reported its Q2 2024 results. Net income per diluted share was $0.23, while Distributable Earnings per share stood at $0.35. The company provided an update on its healthcare loan, which remains current on interest payments despite Steward Health Care's Chapter 11 bankruptcy filing in May 2024. ARI anticipates recording a Specific CECL Allowance of approximately $90 million in a subsequent quarter due to ongoing developments. The company's board considers Distributable Earnings as a key factor in setting dividends. ARI will hold a conference call on August 7, 2024, to review Q2 results.

Positive

• Net income per diluted share of $0.23 for Q2 2024
• Distributable Earnings per share of $0.35 for Q2 2024
• Healthcare loan remains current on all contractual interest payments

Negative

• Anticipated Specific CECL Allowance of approximately $90 million in a subsequent quarter
• Downgrade of healthcare loan's risk rating from three to four
• Uncertainty surrounding the healthcare loan due to Steward Health Care's bankruptcy

Insights

Financial Analyst

Apollo Commercial Real Estate Finance's Q2 2024 results reveal a mixed financial picture. The company reported net income per diluted share of $0.23 and Distributable Earnings of $0.35 per share. While these figures demonstrate profitability, the potential $90 million Specific CECL Allowance related to the healthcare loan is concerning.

The downgrade of the healthcare loan's risk rating from 3 to 4 and Steward Health Care's bankruptcy filing in May 2024 are red flags for investors. Despite the loan remaining current on interest payments, the anticipated substantial allowance suggests significant credit risk. This situation could impact ARI's future earnings and dividend capacity.

Investors should closely monitor the ongoing bid process for the hospitals and the final CECL Allowance determination, as these factors will likely influence ARI's financial stability and stock performance in the near term.

Real Estate Investment Specialist

The healthcare loan situation highlights the inherent risks in commercial real estate lending, particularly in specialized sectors like healthcare. ARI's exposure to this $341.9 million loan, representing a significant portion of its portfolio, underscores the importance of diversification in REIT investments.

The 55% loan-to-cost ratio at origination and the 11% amortization since then provide some cushion, but the potential $90 million allowance suggests a substantial value deterioration. This case demonstrates how quickly market conditions and operator performance can impact commercial real estate valuations and loan performance.

Investors should assess ARI's overall portfolio composition and risk management practices, as well as its ability to absorb potential losses without significantly impacting its dividend policy or growth strategies.

REIT Analyst

ARI's Q2 2024 results and the healthcare loan situation present a challenging outlook for the REIT. The potential $90 million Specific CECL Allowance could significantly impact ARI's book value and earnings capacity. This may put pressure on the company's ability to maintain its current dividend level, a important factor for REIT investors.

The company's Distributable Earnings of $0.35 per share provide some cushion, but the sustainability of this metric is now in question given the loan issues. Investors should pay close attention to ARI's dividend coverage ratios and any potential changes in dividend policy in the coming quarters.

Furthermore, this situation may lead to increased scrutiny of ARI's underwriting standards and risk management practices, potentially affecting investor confidence and the REIT's cost of capital going forward.

NEW YORK, Aug. 06, 2024 (GLOBE NEWSWIRE) -- Apollo Commercial Real Estate Finance, Inc. (the “Company” or “ARI”) (NYSE:ARI) today reported results for the quarter ended June 30, 2024.

Net income attributed to common stockholders per diluted share of common stock was $0.23 for the quarter ended June 30, 2024. Distributable Earnings (a non-GAAP financial measure defined below) and Distributable Earnings prior to net realized loss on investments per share of common stock were $0.35 for the quarter ended June 30, 2024.

Subsequent Events – Healthcare Loan
In March 2022, ARI and other Apollo-managed entities co-originated a 55% loan-to-cost first mortgage loan secured by eight hospitals in Massachusetts. At origination, ARI’s portion of the loan totaled $378.7 million. The loan was made in connection with the capitalization of a joint venture between two parties to own the hospitals. That joint venture – through its subsidiaries, which were the mortgage borrowers under ARI and the Apollo managed entities' loan – then leased the properties to Steward Health Care ("Steward"), who served as the operator. ARI and the Apollo managed entities did not lend to Steward and do not have any involvement in Steward's operation of the hospitals or performance under the lease. The structure and covenants in the loan have provided for cash collateral and amortization since origination that represents approximately 11% of the original loan balance, and ARI’s amortized cost basis was $341.9 million as of June 30, 2024. As of the date of this quarterly report, the loan remains current on all contractual interest payments.

Steward filed for Chapter 11 bankruptcy in May 2024. During the three months ended June 30, 2024, ARI downgraded the loan's risk rating from a three to a four. Subsequent to the date of ARI’s condensed consolidated financial statements but prior to the date of ARI’s quarterly report, bids for the hospitals were received and the bid process and negotiations are continuing to evolve with multiple constituencies. While there still is a high degree of uncertainty, based upon the information available as of the date of this quarterly report, and taking into account Steward's bankruptcy court documents made publicly available on July 30, 2024, ARI anticipates recording a Specific CECL Allowance in a subsequent quarter, which the Company currently estimate to be approximately $90 million. The actual Specific CECL Allowance may differ materially based on continuing developments from the date of this quarterly report.

ARI issued a detailed presentation of the Company’s quarter ended June 30, 2024 results, which can be viewed at www.apollocref.com.

Conference Call and Webcast
The Company will hold a conference call to review second quarter results on August 7, 2024 at 10am ET. To register for the call, please use the following link:

https://register.vevent.com/register/BIce901e6ee4f2497f8a7cbe9c722da126

After you register, you will receive a dial-in number and unique pin. The Company will also post a link in the Stockholders’ section on ARI’s website for a live webcast. For those unable to listen to the live call or webcast, there will be a webcast replay link posted in the Stockholders’ section on ARI’s website approximately two hours after the call.

Distributable Earnings
“Distributable Earnings,” a non-GAAP financial measure, is defined 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 (including depreciation and amortization related to real estate owned) 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, and (v) provision for loan losses.

As a REIT, U.S. federal income tax law generally requires the Company to distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that the Company pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Given these requirements and the Company’s belief that dividends are generally one of the principal reasons shareholders invest in a REIT, the Company generally intends over time to pay dividends to its stockholders in an amount equal to its net taxable income, if and to the extent authorized by the Company’s board of directors. Distributable Earnings is a key factor considered by the Company’s board of directors in setting the dividend and as such the Company believes Distributable Earnings is useful to investors.

During the six months ended June 30, 2024, the Company recorded in the consolidated statement of operations a realized loss on the sale of a commercial mortgage loan secured by a hotel in Honolulu, Hawaii.

The Company believes it is useful to its investors to also present Distributable Earnings prior to net realized loss on investments and realized gain on extinguishment of debt, in applicable periods, to reflect its operating results because (i) the Company’s operating results are primarily comprised of earning interest income on its investments net of borrowing and administrative costs, which comprise the Company’s ongoing operations and (ii) it has been a useful factor related to the Company’s dividend per share because it is one of the considerations when a dividend is determined. The Company believes that its investors use Distributable Earnings and Distributable Earnings prior to net realized loss on investments and realized gain on extinguishment of debt, or a comparable supplemental performance measure, to evaluate and compare the performance of the Company and its peers.

A significant limitation associated with Distributable 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 Distributable Earnings may not be comparable to similarly titled measures of other companies, that use different calculations. As a result, Distributable 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. Distributable Earnings are reduced for realized losses on loans which include losses that management believes are near certain to be realized.

A reconciliation of Distributable Earnings to GAAP net income (loss) available to common stockholders is included in the detailed presentation of the Company’s quarter ended June 30, 2024 results, which can be viewed at www.apollocref.com.

About Apollo Commercial Real Estate Finance, Inc.
Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) is a real estate investment trust that primarily originates, acquires, invests in and manages performing commercial first mortgage loans, subordinate financings and other commercial real estate-related debt investments. The Company is externally managed and advised by ACREFI Management, LLC, a Delaware limited liability company and an indirect subsidiary of Apollo Global Management, Inc., a high-growth, global alternative asset manager with approximately $696 billion of assets under management at June 30, 2024.

Additional information can be found on the Company’s website at www.apollocref.com.

Forward-Looking Statements
Certain statements contained in this press release constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When used in this release, the words believe, expect, anticipate, estimate, plan, continue, intend, should, may or similar expressions, are intended to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: higher interest rates and inflation; market trends in the Company’s industry, real estate values, the debt securities markets or the general economy; the timing and amounts of expected future fundings of unfunded commitments; the return on equity; the yield on investments; the ability to borrow to finance assets; the Company’s ability to deploy the proceeds of its capital raises or acquire its target assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. For a further list and description of such risks and uncertainties, see the reports filed by the Company with the Securities and Exchange Commission. The forward-looking statements, and other risks, uncertainties and factors are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to the Company. Forward-looking statements are not predictions of future events. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

CONTACT:	Hilary Ginsberg
	Investor Relations
	(212) 822-0767

FAQ

What was ARI's net income per diluted share for Q2 2024?

ARI reported a net income per diluted share of $0.23 for the quarter ended June 30, 2024.

How much is the anticipated Specific CECL Allowance for ARI's healthcare loan?

ARI anticipates recording a Specific CECL Allowance of approximately $90 million in a subsequent quarter, based on current information.

When did Steward Health Care file for bankruptcy, affecting ARI's healthcare loan?

Steward Health Care filed for Chapter 11 bankruptcy in May 2024, impacting ARI's healthcare loan secured by eight hospitals in Massachusetts.

What is the current status of ARI's healthcare loan interest payments?

As of the date of the quarterly report, the healthcare loan remains current on all contractual interest payments despite Steward's bankruptcy filing.