Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) navigates a segment of the real estate finance industry that’s experiencing increased competition, yet that’s not preventing the company from continuing to find new opportunities at home and abroad.
The New York-based mREIT primarily originates, acquires, invests in, and manages commercial real estate-related debt investments. Those include mortgage loans and subordinate financings. The company’s specialty is in investing in first mortgages and mezzanine loans.
Right now, first mortgages comprise about 75 percent of the company’s business, with mezzanine loans making up the rest. However, it wasn’t always that way.
In 2010, 2013, and 2014, Apollo Commercial “opportunistically” purchased commercial mortgage-backed securities (CMBS) before company officials determined “there’s currently not compelling value for ARI to invest in CMBS,” says president and CEO Stuart Rothstein. Apollo sold off the last of those holdings in 2017. Since then, Rothstein says, the company has stayed “100 percent focused on first mortgages and mezzanine” products—and their profit potential.
Market Competition
Founded in 2009, the mREIT is externally managed by an indirect subsidiary of Apollo Global Management, LLC, a global alternative investment manager. With a market cap of about $2.31 billion as of mid-July, Apollo Commercial sits right in the middle of the pack of the major public REIT debt players, says Ross Smotrich, an analyst who follows the company for Barclays. Apollo’s average loan size is $75 million to $80 million.
More private pools of capital have also begun offering debt financing, Smotrich says, now that the housing industry is nine years into a steady recovery and the nation’s economy is performing well overall. “The markets that [Apollo Commercial] are in are competitive and you’re seeing other providers of debt capital increase that competition,” he says.
Ultimately, Rothstein says, all that competition, especially from public peers, is “a positive. The more public companies there are, the more of an incentive investors have to look at the space.”
During the upcoming year, as interest rates are anticipated to rise and make financing more expensive, the company must stay the course, Smotrich says. “The challenge is to continue to do good, well-underwritten transactions that maintain the kind of spread that they are looking for,” he adds. “In this kind of a market—and we are late in the real estate cycle—the challenge is always to maintain your discipline and not to go out too far on the risk curve in order to get those returns.”
Geographic Expansion
Expansion into new geographic regions has been a recent priority as the company seeks to distinguish itself.
Last year, Apollo Commercial spring-boarded into San Francisco and Seattle’s technology industry-driven commercial real estate markets. “We tend to let the opportunity set dictate where we ultimately end up, but our bias remains the larger gateway cities and institutional-quality product which, over an extended period of time, have proven to be the most liquid markets,” Rothstein says.
Apollo Commercial will also continue to increase its presence in London, which today represents about 15 percent of the mREIT’s total portfolio, Rothstein notes.
“We have historically had a presence in Europe and we’ve been a very active real estate equity investor in Europe through other pools of capital that are managed by Apollo. I think we’re optimistic about continuing to find transactions in London,” Rothstein says.