Apollo Commercial Real Estate Finance(ARI) - 2020 Q4 - Annual Report

PART I Item 1. Business. ARI is an externally managed REIT investing in commercial first mortgage loans and other real estate debt in the U.S. and Europe, leveraging Apollo's platform for risk-adjusted returns - ARI is a Maryland corporation taxed as a REIT, primarily investing in performing commercial first mortgage loans and other real estate-related debt investments[11] - The company is externally managed by ACREFI Management, LLC, a subsidiary of Apollo Global Management, Inc., which managed approximately $455.5 billion in assets as of December 31, 2020[12] - As of December 31, 2020, ARI's diversified portfolio included approximately $5.5 billion in commercial mortgage loans and $1.0 billion in subordinate loans and other lending assets[13] - The investment strategy focuses on originating and acquiring performing commercial first mortgage loans and other debt investments at attractive risk-adjusted yields, secured by institutional quality real estate in the U.S. and Europe[15][16] - The financing strategy utilizes borrowings and derivative financial instruments to hedge interest rate risk and enhance equity returns[13][18][19] - ARI has no direct employees, relying entirely on its Manager and affiliates for all operational and investment management services[26][27] Item 1A. Risk Factors The company faces significant risks including intense market competition, adverse impacts from the COVID-19 pandemic, financing limitations, illiquid investments, LIBOR transition, conflicts of interest with its Manager, and complex REIT taxation requirements - The company operates in a highly competitive market for investment opportunities, potentially limiting asset acquisition or affecting pricing[31][38][39] - The ongoing COVID-19 pandemic significantly disrupts global economic activity, financial markets, and the company's financial condition, leading to capital access difficulties, real estate value declines, and increased margin calls[31][56][58][61] - Limited access to financing and increased leverage could lead to greater risk of loss, including insufficient cash flow or forced asset sales[32][85][88] - Illiquid commercial mortgage loans and real estate debt investments may hinder quick asset sales, potentially resulting in values significantly below recorded amounts[33][110] - The discontinuance of LIBOR and transition to alternative reference rates may adversely impact borrowings and assets, potentially causing financial market disruptions or increased borrowing costs[111][114] - Conflicts of interest exist with Apollo and the Manager, including potential competition for assets and the Manager's contractual rather than fiduciary duty, which may not align with stockholder interests[34][137][139][145] - Maintaining REIT qualification is complex, and non-compliance could result in U.S. federal income tax, reduced distributions, or forced liquidation of investments[35][161][163][167] Item 1B. Unresolved Staff Comments. The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[190] Item 2. Properties. The company's principal executive office is located in New York, New York - The principal executive office is located at 9 West 57th Street, New York, New York 10019[190] Item 3. Legal Proceedings The company is involved in ordinary course legal actions, including a 2018 lawsuit alleging tortious interference with $700.0 million in claimed damages, which was dismissed, and the company believes the claims are without merit - The company may be involved in various claims and legal actions arising in the ordinary course of business[191] - A lawsuit filed in 2018 alleges tortious interference and aiding and abetted breaches of fiduciary duty, claiming $700.0 million in damages, including punitive damages[531] - The defendants' motion to dismiss the lawsuit was granted on October 23, 2019, and the company believes the plaintiffs' claims are without merit[531] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[191] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. ARI common stock is listed on the NYSE, with 456 registered holders as of February 9, 2021, and the company, as a REIT, expects to distribute at least 90% of its taxable income annually, while also repurchasing 3,998,037 shares in Q4 2020 - The company's common stock is listed on the New York Stock Exchange under the symbol "ARI," with a closing sales price of $12.17 per share as of February 9, 2021[193] - As of February 9, 2021, there were 456 registered holders of common stock[194] - As a REIT, the company anticipates distributing annually at least 90% of its REIT taxable income[196] Cumulative Total Stockholder Return (December 31, 2015 = $100) | | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | |:---|:---|:---|:---|:---|:---|:---| | Apollo Commercial Real Estate Finance, Inc. | 100.00 | 107.14 | 130.80 | 130.70 | 158.33 | 157.87 | | S&P 500 | 100.00 | 112.00 | 136.31 | 130.09 | 170.71 | 201.53 | | BBREMTG Index | 100.00 | 121.19 | 145.31 | 141.08 | 174.42 | 135.69 | Equity Compensation Plan Information (December 31, 2020) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |:---|:---|:---|:---| | Equity compensation plans approved by stockholders | — | — | 4,484,643 | | Equity compensation plans not approved by stockholders | — | — | — | | Total | — | — | 4,484,643 | Common Stock Repurchases (Three Months Ended December 31, 2020) | Month | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that Yet Be Purchased Under the Plans or Programs | |:---|:---|:---|:---|:---|\ | October 31, 2020 | 3,448,037 | 9.08 | 3,448,037 | 26,977 | | November 30, 2020 | 550,000 | 8.74 | 550,000 | 22,170 | | December 31, 2020 | — | — | — | 22,170 | | Total | 3,998,037 | 9.03 | 3,998,037 | 22,170 | Item 6. Selected Financial Data. This section provides selected financial data from 2016 to 2020, including interest income, net income, EPS, dividends, total assets, liabilities, and stockholders' equity, derived from audited consolidated financial statements Selected Financial Data (2016-2020) ($ thousands) | Operating Data | 2020 | 2019 | 2018 | 2017 | 2016 | |:---|:---|:---|:---|:---|:---|\ | Interest income | $427,569 | $487,408 | $403,889 | $338,521 | $264,376 | | Interest expense | (148,891) | (152,926) | (114,597) | (78,057) | (63,759) | | Net interest income | 278,678 | 334,482 | 289,292 | 260,464 | 200,617 | | Operating expenses | (66,599) | (64,831) | (56,894) | (52,377) | (48,371) | | Provision for loan losses and impairments, net of reversals | (125,600) | (20,000) | (20,000) | (5,000) | (15,000) | | Net income | $18,377 | $230,174 | $219,986 | $193,031 | $157,876 | | Net income available to common stockholders | $4,837 | $211,649 | $192,646 | $156,270 | $127,581 | | Basic EPS | $0.01 | $1.41 | $1.52 | $1.54 | $1.74 | | Diluted EPS | $0.01 | $1.40 | $1.48 | $1.54 | $1.74 | | Dividends declared per share of common stock | $1.45 | $1.84 | $1.84 | $1.84 | $1.84 | | Balance Sheet Data (at period end) | | | | | | | Total assets | $6,940,020 | $6,888,363 | $5,095,819 | $4,088,605 | $3,482,977 | | Total liabilities | 4,669,491 | 4,258,388 | 2,586,072 | 2,000,462 | 1,550,750 | | Total stockholders' equity | 2,270,529 | 2,629,975 | 2,509,747 | 2,088,143 | 1,932,227 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes ARI's financial condition and operations, detailing the COVID-19 impact, 2020 net income decrease, loan portfolio characteristics, liquidity management, and non-GAAP measures like Distributable Earnings and Book Value Per Share - Net income available to common stockholders significantly decreased from $211.6 million ($1.40 per diluted share) in 2019 to $4.8 million ($0.01 per diluted share) in 2020[225] Consolidated Results of Operations (2019 vs 2020) | Metric | Year Ended 2020 ($ thousands) | Year Ended 2019 ($ thousands) | 2020 vs 2019 Change ($ thousands) | |:---|:---|:---|:---|\ | Net interest income | 278,678 | 334,482 | (55,804) | | Total operating expenses | (66,599) | (64,831) | (1,768) | | Realized loss on investments | (47,632) | (12,513) | (35,119) | | Provision for loan losses - Specific CECL Allowance, net | (115,000) | (20,000) | (95,000) | | Provision for loan losses - General CECL Allowance, net | (10,600) | — | (10,600) | | Loss on foreign currency forward contracts | (9,743) | (14,425) | 4,682 | | Foreign currency translation gain | 26,916 | 19,818 | 7,098 | | Loss on interest rate hedging instruments | (39,247) | (14,470) | (24,777) | | Net income | $18,377 | $230,174 | $(211,797) | - Net interest income decreased by $55.8 million in 2020, primarily due to a 1.71% decrease in average one-month LIBOR and an increase in loans on cost recovery or non-accrual status, partially offset by in-the-money LIBOR floors and a decrease in average LIBOR on debt[229] - Provision for loan losses and impairments, net, increased significantly to $125.6 million in 2020 (vs. $20.0 million in 2019), driven by $115.0 million in Specific CECL Allowances and $10.6 million in General CECL Allowances, largely due to the COVID-19 pandemic's impact on macroeconomic conditions and loan portfolio risk[228][234][235] Commercial Real Estate Debt Portfolio (December 31, 2020) | Description | Amortized Cost ($ thousands) | Weighted-Average Coupon | Weighted Average All-in Yield | |:---|:---|:---|:---|\ | Commercial mortgage loans, net | $5,451,084 | 4.8% | 5.2% | | Subordinate loans and other lending assets, net | 1,045,893 | 10.5% | 12.1% | | Total/Weighted-Average | $6,496,977 | 5.7% | 6.3% | - As of December 31, 2020, the loan portfolio had a weighted average risk rating of 3.1, with 93.8% of loans rated 'Moderate/average risk' (Risk Rating 3) and 5.7% rated 'Impaired/loss likely' (Risk Rating 5)[248][249] Debt-to-Equity Ratio | | December 31, 2020 | December 31, 2019 | |:---|:---|:---|\ | Debt to Equity Ratio | 1.8 | 1.4 | - As of December 31, 2020, the company had $325 million of cash on hand and $18.4 million of approved and undrawn capacity from secured debt arrangements, along with $1.1 billion of unencumbered assets[274][297] Distributable Earnings (Non-GAAP) (2019 vs 2020) | Metric | Year Ended 2020 ($ thousands) | Year Ended 2019 ($ thousands) | |:---|:---|:---|\ | Net income available to common stockholders | $4,837 | $211,649 | | Total adjustments | 222,238 | 69,285 | | Distributable Earnings | $125,592 | $268,421 | | Diluted Distributable Earnings per share of common stock | $0.84 | $1.80 | Book Value Per Share (December 31, 2020 vs 2019) | Metric | December 31, 2020 | December 31, 2019 | |:---|:---|:---|\ | Common Stockholders' Equity | $2,101,269 | $2,460,715 | | Common Stock (shares) | 139,295,867 | 153,537,296 | | Book value per share | $15.08 | $16.03 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to various market risks and its strategies for managing them, including credit risk, interest rate risk, prepayment risk, market risk (heightened by COVID-19), and currency risk - The company manages credit risk by acquiring high-quality assets at appropriate prices and employing a value-driven underwriting approach focused on current cash flows and potential risks[329] - Interest rate risk is managed by structuring financing agreements with varied maturities and interest rate adjustment periods, and by using hedging instruments like interest rate swaps[330] Hypothetical Impact on Net Interest Income from 50 Basis Point Interest Rate Change (December 31, 2020) | Currency | Net floating rate assets subject to interest rate sensitivity ($ thousands) | Increase net interest income (Decrease) to (per share) ($ thousands) | Increase net interest income (Decrease) to (per share) (per share) | |:---|:---|:---|:---|\ | USD | $1,583,898 | $(7,703) | $(0.06) | | GBP | 448,069 | (306) | — | | EUR | 325,501 | — | — | | Total: | $2,357,468 | $(8,009) | $(0.06) | - Prepayment risk is managed by including prepayment penalties in loan agreements[333] - Market risk, particularly heightened by the COVID-19 pandemic, affects commercial mortgage assets due to national, regional, and local economic conditions, real estate values, and industry slowdowns[334][335] - Currency risk from non-U.S. assets and liabilities is mitigated through foreign currency forward contracts that match net principal and interest payments[337] Item 8. Financial Statements and Supplementary Data. This section presents audited consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with the independent auditor's report and detailed notes on accounting policies and critical audit matters - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[341][342] - The company changed its method of accounting for credit losses in 2020 due to the adoption of FASB ASU 2016-13, the CECL Standard[343] - Critical audit matters include the subjectivity in estimating macroeconomic factors for the CECL allowance and fair value estimation for collateral of financially difficult loans[349][350][352][353] Consolidated Balance Sheets (December 31, 2020 vs 2019) | Asset/Liability | December 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | |:---|:---|:---|\ | Cash and cash equivalents | $325,498 | $452,282 | | Commercial mortgage loans, net | 5,451,084 | 5,326,967 | | Subordinate loans and other lending assets, net | 1,045,893 | 1,048,126 | | Total Assets | $6,940,020 | $6,888,363 | | Secured debt arrangements, net | $3,436,672 | $3,078,366 | | Convertible senior notes, net | 565,654 | 561,573 | | Senior secured term loan, net | 483,465 | 487,961 | | Total Liabilities | 4,669,491 | 4,258,388 | | Total Stockholders' Equity | 2,270,529 | 2,629,975 | Consolidated Statement of Operations (2018-2020) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | 2018 ($ thousands) | |:---|:---|:---|:---|\ | Net interest income | $278,678 | $334,482 | $289,292 | | Total operating expenses | (66,599) | (64,831) | (56,894) | | Realized loss on investments | (47,632) | (12,513) | — | | Provision for loan losses and impairments, net | (125,600) | (20,000) | (20,000) | | Net income | $18,377 | $230,174 | $219,986 | | Net income available to common stockholders | $4,837 | $211,649 | $192,646 | | Basic EPS | $0.01 | $1.41 | $1.52 | | Diluted EPS | $0.01 | $1.40 | $1.48 | Consolidated Statement of Cash Flows (2018-2020) | Cash Flow Category | 2020 ($ thousands) | 2019 ($ thousands) | 2018 ($ thousands) | |:---|:---|:---|:---|\ | Net cash provided by operating activities | $164,052 | $273,435 | $265,964 | | Net cash used in investing activities | (215,720) | (1,435,112) | (998,922) | | Net cash (used in) provided by financing activities | (75,116) | 1,504,153 | 765,093 | | Net increase in cash and cash equivalents | (126,784) | 342,476 | 32,135 | | Cash and cash equivalents, end of period | $325,498 | $452,282 | $109,806 | - The company adopted the CECL Standard on January 1, 2020, through a cumulative-effect adjustment to accumulated deficit, changing how credit losses are measured[375] - As of December 31, 2020, the company had $1.4 billion of unfunded loan commitments, primarily for commercial mortgage loans, with a weighted-average expected term of 2.1 years[304][418] - The company's secured debt arrangements totaled $3.45 billion outstanding as of December 31, 2020, with weighted-average borrowing costs of LIBOR + 2.16% (USD), LIBOR + 1.83% (GBP), and LIBOR + 1.46% (EUR)[457][458] - The company's senior secured term loan had an outstanding principal balance of $492.5 million as of December 31, 2020, bearing interest at LIBOR plus 2.75% and maturing in May 2026[294][486] - The company's convertible senior notes (2022 and 2023 Notes) had an aggregate principal amount of $575.0 million outstanding as of December 31, 2020, with carrying values of $340.4 million and $225.3 million, respectively[491][492] - The company uses forward currency contracts to economically hedge interest and principal payments on non-USD denominated loans and an interest rate cap to manage exposure to variable cash flows on its senior secured term loan[497][501] - Subsequent to December 31, 2020, the company committed £165.0 million ($226.2 million) to a new commercial mortgage loan and increased its share repurchase plan by $150.0 million, bringing total authorization to $300.0 million[543] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. The company reported no changes in or disagreements with accountants on accounting and financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[555] Item 9A. Controls and Procedures. Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a conclusion attested to by Deloitte & Touche LLP - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[557] - Management assessed and believes that, as of December 31, 2020, the company's internal control over financial reporting was effective based on COSO criteria[559] - Deloitte & Touche LLP issued an attestation report on the effectiveness of the company's internal control over financial reporting[560] Item 9B. Other Information The company reported no other information required by this item - No other information is required[561] PART III Item 10. Directors, Executive Officers and Corporate Governance. Information on directors, executive officers, Section 16(a) compliance, Code of Business Conduct and Ethics, and corporate governance is incorporated by reference from the 2021 proxy statement - Information on directors, executive officers, Section 16(a) compliance, Code of Business Conduct and Ethics, and corporate governance is incorporated by reference from the 2021 proxy statement[561][562] Item 11. Executive Compensation. Information concerning executive compensation and other related matters is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders - Information on executive compensation is incorporated by reference from the 2021 proxy statement[563] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information regarding equity compensation plan details and beneficial ownership of securities is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders - Information on equity compensation plan details and beneficial ownership of securities is incorporated by reference from the 2021 proxy statement[563] Item 13. Certain Relationships and Related Transactions, and Director Independence. Information concerning transactions with related persons, promoters, certain control persons, and director independence is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders - Information on related party transactions and director independence is incorporated by reference from the 2021 proxy statement[564] Item 14. Principal Accountant Fees and Services. Information regarding principal accounting fees and services, along with the Audit Committee's pre-approval policies, is incorporated by reference from the definitive proxy statement for the 2021 annual meeting of stockholders - Information on principal accounting fees and services and Audit Committee pre-approval policies is incorporated by reference from the 2021 proxy statement[565] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report on Form 10-K, including consolidated financial statements, Schedule IV—Mortgage Loans on Real Estate, and various organizational and contractual documents - The consolidated financial statements and related schedule are incorporated by reference from Item 8 of this annual report[565] - Schedule IV—Mortgage Loans on Real Estate as of December 31, 2020, is filed as part of this report[566] - A list of exhibits, including organizational documents, indentures, management and license agreements, equity incentive plans, and certifications, is provided, with many incorporated by reference from previous SEC filings[566][567][569][570][571] Item 16. Form 10-K Summary. This item is not applicable to the company - Form 10-K Summary is not applicable[573]