Apollo Commercial Real Estate Finance Inc (ARI) 2021 Q1 法說會逐字稿

I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.

In addition, we will be discussing certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. These measures are reconciled to GAAP figures in our earnings presentation, which is available in the Stockholders section of our website. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloreit.com, or call us (212) 515-3200.

At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein.

Thank you, operator, and good morning, and thank you to those of us joining us on the Apollo Commercial Real Estate Finance First Quarter 2021 Earnings Call. As usual, joining me this morning are Jai Agarwal and Scott Weiner.

ARI is off to a solid start for 2021, committing to over $500 million of new transactions and reporting distributable earnings well in excess of the company's dividend per share. As I stated on our last earnings call, we entered this year focused on growing ARI's portfolio. That focus was based on confidence in the strength of the company's capital position, the performance of our existing loans and the ability of Apollo's real estate credit team to originate attractive risk-adjusted return opportunities for ARI.

Continuing the trend we saw in the second half of 2020, the overall tone of the commercial real estate market remains positive as asset level performance is generally improving and transaction levels are increasing. The economy clearly is benefiting from the combination of COVID relief, fiscal stimulus and the increasing pace of vaccinations.

Specific to business, we see both the strength of the real estate capital markets and increased investor optimism reflected in recent and anticipated loan repayments, sponsor support of their investments and our growing pipeline of opportunities. During the quarter, ARI closed 2 large European loan transactions on behalf of one of our larger clients. In both transactions, the mandates were won due to a strong borrower relationship and the ability to speak for a sizable portion of the overall capital stack, which we're able to split with other vehicles managed by Apollo.

ARI's affiliation with the broader Apollo Real Estate credit platform continues to be a key competitive advantage as it enables ARI to avail itself of the knowledge and resources within Apollo and to benefit from our collaborative efforts in winning large transaction mandates. Given existing available capital as well as additional expected loan repayments, we are very focused on building a robust pipeline for ARI.

Turning briefly to the existing portfolio. Recent highlights include the full repayment of a sizable office loan and the repayment of a preferred equity investment in a New York City condo project. We have also seen in -- we have also seen meaningful sales activity within the properties underlying our residential for sale loans, consistent with recent news of the strengthening New York City housing market.

Finally, several of our sponsors have made equity commitments to rebalance certain loans and replenish reserves, and we received a significant pay down on one of our Miami hotel loans.

Turning now to the balance sheet. ARI completed a $300 million upsize of our Term Loan B during the first quarter. The loan has a 7-year term and bears interest at LIBOR plus 350 basis points, with a 50 basis point LIBOR floor and was issued at a price of $99. Given the attractive pricing, felt it was prudent to term out some of our financing as well as meaningfully increase our pool of unencumbered assets.

Before I turn the call over to Jai, I just want to highlight the ability of ARI's existing portfolio to generate earnings that covered the $0.35 per share quarterly dividend at 1.1x. This was achieved even while maintaining excess liquidity on the balance sheet throughout the quarter. Our common stock offers investors a dividend and dividend yield in excess of 9% on a stock that is trading slightly below book value, which we believe is extremely attractive in this current low-yield environment.

And with that, I will turn the call over to Jai to review our financial results.

Thank you, Stuart. We had a strong first quarter, with earnings of $56.1 million or $0.39 per share. GAAP net income available to common stockholders was $55 million, or $0.37 per diluted share. Our portfolio continues to perform well, generating earnings in excess of the quarterly dividend of $0.35 per share.

As of March 31, our general CECL reserve remained relatively stable quarter-over-quarter. The asset value per share prior to the general CECL reserve was $15.35 as compared to $15.38 at the end of the fourth quarter. Minor decline was due to vesting of restricted stock, which was partially offset by earnings in excess of the dividend.

At quarter end, our loan portfolio grew to $6.8 billion, with a weighted average unlevered yield of 6.2% and the remaining fully extended term of just around 3 years. Approximately 88% of our floating rate U.S. loans have LIBOR floors that are in the money, with a weighted average floor of 1.46%.

In addition to the 2 new loans this quarter, we made $133 million of add-on fundings. Both the new loans were financed under our existing financing facilities. Our secure lenders continue to express their desire to grow their relationship with us. And in certain instances, we are seeing financing spreads at or below pre-COVID levels.

Loan repayments for the quarter were $232 million from a combination of full and partial repayments. Lastly, with respect to our borrowings, we are in compliance with all covenants and continue to maintain strong liquidity. As of today, we have $290 million of liquidity and $1.5 billion in unfinanced loan assets. In addition, we have $200 million of potential liquidity available from previously encumbered mortgages.

And with that, we'd like to open the line for questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from Doug Harter with Credit Suisse.

Can you just give us an update on other loans where you have specific reserves? Any kind of progress or updates there and kind of thoughts around time lines for resolution?

Yes. Doug, it's Stuart. Obviously, the first thing I'd say is nothing's changed in terms of the reserve levels. And obviously, you should interpret that as meaning nothing really material has gone on with respect to those transactions.

I think anecdotally, to just highlight a few things, I think I've commented previously that with respect to the loan on the aggregation in Brooklyn, we're going ahead with a partner in building multifamily on that site. It's going to be a several-year process to actually do the development. So that gives you some sense of time line and sort of when you might expect anything material to change with respect to that asset. But I'm very confident in our partnership, feel good about the market overall and like the path we're headed on with respect to that particular asset.

With respect to Miami, again, I think you've heard me comment previously, we've sort of taken the reverse approach on that asset relative to Brooklyn, which is despite the site's ability to support greater density in terms of entitlements, we're actually going to leave the assets effectively as they are for now and focus on more of a shorter-term retail lease-up strategy.

And while I'm not at liberty to disclose anything at this point, I would say the reception from the market, overall, has been fairly positive, both in terms of national as well as local tenants and would expect that you'll see some news with respect to lease-up on that sooner rather than later. And I think the quality of tenants will highlight the long-term value of that location.

And then with respect to Liberty Center in Ohio and then our hotel asset in D.C., really just blocking and tackling at this point. I think we're encouraged by the pickup in the overall level of economic activity. Still waiting for D.C. to open more fully with respect to the hotel asset. But I would say probably what is most encouraging across the hotel portfolio is really just the amount of capital and the strength of bids that we're seeing in the market for well-located hotel assets. So nothing specific to announce at this point, but probably more to come on that in the future.

Our next question comes from Steve Delaney with JMP Securities.

Congratulations on being the first commercial mortgage REIT to report this quarter. Good to see everybody. I think you get a props for that, right? At least Jai does.

Absolutely. Absolutely.

Yes. Stuart, kind of big picture, you commented on New York. It was just great to hear the -- I detected optimism, certainly, in your voice and your reply there to Doug.

Switching -- looking a little farther away, you've got $2.3 billion, almost 1/3 of the portfolio in U.K. or the continent. Can you just kind of share with us what your team in London is -- what the environment is like there relative to COVID, reopening? Are they on pace with what you're seeing here in the states or lagging a bit? Just a sense of what that market is like.

Yes, sure. I mean I think there's -- let me answer it a couple of different ways because I think there's both differences and similarities. I think at a high level, if we think about Europe as a place, and the more time I spend in Europe, I realize it's actually just a bunch of disparate countries that happen to be on the same continent as opposed to actually being a place. I would say, clearly behind the U.S. in terms of economic recovery, vaccine rollout, quantum of fiscal stimulus, right? It lags -- the best macroeconomic analysis I've seen, some of which is done by talent inside Apollo, would indicate that Europe as a whole, collectively, is sort of 6 weeks behind the U.S. in terms of recovery and, call it, a pacing towards back to normal. And I would say, the U.K. is ahead of that. And then other countries that we would consider as target markets are a little behind that.

So I think that's sort of the story on the COVID side. I think in terms of what's going on in the real estate market, I think there continues to be a fair measure of similarity between the U.S. and Europe in the sense that there's a lot of capital available for real estate investments. A lot of it is actually managed by the same sponsors you'd see in the U.S., you'd see in Europe. People are viewing real estate as, in light of COVID, as a place where they might be able to find yield, they might be able to find opportunity. So there's plenty of liquidity in the market. There's plenty of planned action flow. And I think what that means to us as a lender is that there's lots of deal flow to look at. And ultimately, as we think about our business, what we do in Europe is very similar to what we do in the U.S. and vice versa, similar types of transactions, similar quality of borrower or sponsorship. Generally speaking, similar deal structures with some minor tweaks to deal with, different tax regimes, et cetera, in Europe. But overall, we sort of take an agnostic view between the U.S. and Europe as we're looking at new deal flow because there really is a lot of similarity between what we do in both regions.

Got it. Very helpful. A quick follow-up. Caravan holiday home property type, just quick description generally there. I assume it's somewhat seasonal, vacationing and such. But are these kind of like moderate-priced resort-type properties? How would you describe it?

I mean I would -- and I don't want to disparage them. I'd probably just -- they're somewhere between moderate-priced hotels and moderate-priced sort of campgrounds, for lack of a better phrase. I think they are viewed as a business that is very well suited in the environment where there is a clear desire to vacation, but it is quite likely that a greater percentage of that travel will be more intra-regional as opposed to interregional. And it is both a real estate business as well as an operating business at the end of the day, no difference in hospitality. And a business that I would say, underwriting the transaction, big benefit to the real estate team at Apollo for being able to speak with other parts of Apollo that have looked at this type of real estate from a business perspective, historically. But that's the way I think about it.

Our next question comes from Stephen Laws with Raymond James.

A couple of questions as things continue to normalize a little bit. Around PIK income, year-over-year, obviously impacted. But how do we think about that moving forward? And what do you view as a really a normalized level there as the loan portfolio puts COVID things behind?

Yes. I mean let me answer it this way, Stephen. And I think it's hard to say, this is what's going to be a normalized level on a go-forward basis because I think it's somewhat dependent on portfolio mix in terms of high level. Obviously, you're more likely to see PIK in a construction loan than in a nonconstruction loan. You're more likely to see PIK in a mezzanine position versus a senior position.

I think as you look at our portfolio and sort of think about where the portfolio was and where the portfolio is headed, if you just look at our continued shift from mezzanine loans to first mortgages, and then also some of the prior comments that I've made on recent calls with respect to probably limiting the appetite, overall, for construction and also highlighting that while we're still open for business, there's probably not as many discrete mezzanine opportunities to look at. So maybe we'll create some of our own along the way from home loan positions, but there's certainly not as much to look at on the discrete side of things, and then some of the lumpier mezzanine transactions that are already in the loan portfolio that people are aware of.

I think we are probably running right now at what I would consider to be the high end of the range with respect to PIK income. And if you look out over coming quarters and years, unless we make a shift in where we see opportunity at some point in the future, I think you're likely to see the PIK income continue to tick down over time as things pay off, things get to stability, et cetera.

Great. That's helpful color, Stuart. Jai, touching base on G&A. Kind of as we look forward, it's down from -- trending down a little bit. Looking back at 2019, it was $24 million, kind of we look at a pre-COVID year. What are your thoughts on what -- given what's in place now, what annualized G&A expense look like?

Sure, yes. I would think of annualized G&A ex RSUs of around $9.25 million on a run rate basis.

Our next question comes from Jade Rahmani with KBW.

Stuart, I just wanted to see if you could comment as to where you're seeing levered returns, if you're seeing compression in the magnitude of returns and also where you're finding the most interesting opportunities right now?

Yes. I mean I think -- look, I think from a return perspective, things feel very similar to where they were pre-pandemic. So I would say the components of it have shifted a little bit, I would say, from the loan perspective. Spreads are definitely compressing. Generally speaking, I would say we're sort of in a broad range, call it, high 3s to high 4s these days for the types of stuff we look at on the senior side and definitely lower LIBOR floors, right? LIBOR floors are probably 25 to 50 bps these days versus where they were previously when LIBOR was higher. And if you look across our portfolio, LIBOR floors are probably 1.5% on average.

Today, that being said, we're able to pick up some benefit in the terms of how we lever our first mortgages with our various bank relationships. I would say we picked up some spread in our favor there. And I would say we're continuing to get comfortable leverage levels on what we show to banks. And I'll again remind everybody that rarely, if ever, do we take full leverage on anything that we're levering.

So again, I think levered ROEs are still in that plus or minus 11.5% to 12% range these days. And it feels very much like it did pre-pandemic, which, again, I think goes back to comments I've made in the past on just how quickly the Capital Markets for real estate, in general, recovered. I think there are probably somewhat better ROEs available today if you wanted to get a little bit more aggressive with respect to construction, a little bit more aggressive with respect to certain types of hospitality assets, not all types of hospitality assets. And then I won't even really comment on sort of retail these days because we don't have much appetite for it.

And then I think in terms of opportunities, obviously, the question Steve asked gave me a chance to highlight that we continue to be active both in the U.S. and Europe. And I think, if anything, as I think about Europe on the margin, maybe slightly less competitive, maybe a little bit easier for us to disintermediate banks or securitization financing than it is here in the U.S. And then I think for things in the U.S., again, the types of assets we're looking at, I would say that the biggest difference I'd probably draw between what we're doing today versus what we've done historically on the margin, slightly less in the New York area. But we're still willing to look in New York, but slightly less in the New York area. And then again, not as much focus on construction, not as much focus on for sale residential these days as we think about opportunities. And in a positive way, we're still finding other places to put capital.

And have you seen any pullback from the GSEs? And does that present a potential opportunity to maybe lend on the more stabilized multifamily and potentially put more financing on those kinds of assets than ARI's typical loan?

Yes. I would say at a high level, Jade, from our perspective, we haven't really seen a noticeable shift. What we're able to do on the multifamily side continues to be more lease-up, call it, bridge financing in between construction during the lease-up phase, with an expectation that there's a GSE takeout on the back end. We spend a lot of time looking, but I would say at this point in time, no real material change in that overall environment that has led to any material opportunities for us.

Just lastly, touching on credit. Could you talk about what drove the increase in amortized cost of the loans that already have specific CECL reserves? And just generally speaking, was there any negative changes in credit?

Yes. I guess I'd answer your questions in reverse. I would say credit, generally stable. The biggest increase in reserves, first, advances or costs for stuff that we've already got reserves on, about 2/3 of that was due to the acquisition of some air rights relative to the development we're going to do on the Fulton Street development in Brooklyn, and then there were just some other small sort of immaterial protective advances made on some of the other loans. But the bulk of what you're seeing in the increase in amortized cost was the acquisition of air rights for the development in Brooklyn, which was always part of our business plan once we decide to go forward with the development there.

Our next question comes from Charlie Arestia with JPMorgan.

I was looking at the interest income line for the subordinated loan portfolio. I noticed it dipped lower in the fourth quarter and rebounded pretty sharply this quarter despite the overall loan balances being pretty flat there. So I'm just wondering, how should we think about the run rate of that portfolio given, I'm assuming, the new origination volumes are probably going to be more focused on the senior loan side?

Yes. I think what you're seeing, Charlie, is really 2 things. I think with respect to sort of the dip in the fourth quarter last year, I think in some respects, as we were working through extending duration on certain of those loans, working with borrowers to give them a little bit more runway, maybe adjusting economics a little bit, probably more of that than we expected hit in the fourth quarter, and it was really reflective of sort of the economics of the loan change over time. You need to be at the right point and sort of a moment in time with respect to how you're recognizing certain fees that you might get paid for extension or on payoff, things like that. And we saw more than we would have expected in that true-up hit in the fourth quarter.

I think Q1 was more reflective of sort of where economics are on those loans today sort of on a run rate basis. But to my earlier comments, I do think -- and it was sort of prefaced in your question, I do think there's not a lot of fresh mezz coming into the book right now. So as we get paid off on some of the higher-yielding mezz that's in our book today, I think you're going to see that line item just trickle down, over time, more just due to portfolio construction.

Okay. That's really helpful. And then if we could get any update on 111 West 57th. I think we're getting kind of close to the maturity date on that one, so just curious how things are progressing on that?

I know, look, from a construction perspective, it is progressing. To the extent you're in the area, the building looks more and more finished from the outside. And there's a significant amount of work going on, on the inside. I think it's fair to say, I would expect things to be extended beyond the stated maturity date just given sort of delays that occurred last year and you sort of need to make up that time on the back end. I would say foot traffic is very positive in terms of sales activity, and we would expect there to be more sales activity coming in the near to midterm. So it's moving in the right direction, but it definitely lost some time last year due to both the pandemic as well as some construction challenges due to weather, et cetera. So we'd expect that we'll be in that loan beyond the stated maturity date, but it is moving in the right direction.

Our next question comes from Tim Hayes with BTIG.

Stuart, just one more from me. And I know that you've had pretty constructive comments on credit broadly, but can you just touch on your New York City office exposure and maybe if you'd be able to pass along some just some broad trends? How has rent collection been in that portfolio? And how have occupancy and rent trends been there within those assets? And any types of promotion that sponsors are kind of running to get some tenants in the building without locking themselves in at a much lower rent for the next 10 years?

Yes. I mean I'll give you a mix of sort of anecdotes that are both -- with respect to our portfolio as well as, obviously, just being in the market, sort of what we're hearing, what we're seeing people do and then also working for a company that is a leaser of space in New York as well.

First and foremost, most -- not all, but most of our portfolio office in New York are, obviously, we were the lender on something that was transitional, right, something was being done to the real estate. It was being renovated, redeveloped with a plan towards sort of lease-up. And most of our portfolio was sort of still in the lease-up phase. So there's not much to be gleaned with respect to the actions of in-place tenants.

I would say, anecdotally, the foot traffic amongst those that are potential users of space is definitely increasing. And I would say, it is increasing in the context of rent levels probably being down, plus or minus, 15% relative to where they were pre-pandemic. So I think you're starting to see more activity. It feels like the market has adjusted a little bit. And obviously, there continues to be a fair bit of sublease overhang in the city as well. I think the other thing that's going on right now is I think most companies are still trying to figure out what their strategy will be, going forward, from a New York footprint perspective. I think there just seems to be a general consensus that people want to maintain a footprint in New York. I think people are trying to figure out the balance between the need, maybe, to shrink that footprint slightly to give people more optionality in terms of where they work versus the need to probably use space a little differently than you have historically, which may lead towards more space per person than we saw heading into the pandemic.

I still think this is going to play out over a long time in New York as sort of, for the most part, you've got long-term leases in place, and people are still sort of thinking through their decisions. I would say, the last comment I'll make on our portfolio specifically, a, very confident in the quality of sponsorship we've got on each of our office deals. I would say, the strength of the capital markets in general leaves us feeling pretty confident that there are definitely paths to liquidity for our borrowers to take us out if and when they start proving some measure of business plans. They don't need to achieve full business plan. And then lastly, I would say, we continue to see our equity sponsors committing additional capital to their deals as they need to either to rebalance their existing loans as necessary or in working in partnership with us as borrower as they adjust their business plan slightly.

So all in all, it seems to be moving in the right direction. But I would say, at this point, what we need our borrowers to do is really to create the product they envisioned. It's more about doing that and having something that is a refurbished office asset for the market. It's less about worrying about in place tenancy right now.

That's all really good color. And I guess just on one of those last comments there about -- I know modifications are normal course of business for you even before the pandemic. But how would you describe the cadence of modifications this quarter versus the past view? Is it lower than it had been? Or is it still just -- are you seeing kind of more borrowers come back to the wall on that front?

It's definitely less of a frenzy than it was, call it, than prior quarters in the middle of the pandemic. There are still various assets that require dialogue. But in many respects, sort of the way you prefaced the question, it feels like it was maybe before the pandemic, right? Certain borrowers achieve business plans. Certain borrowers don't achieve business plan. And then the nature of lending against transitional assets, there are things that require discussion. But I would say the discussions are much more of what we would describe as sort of ordinary course of business as opposed to if we were having this conversation 9 to 12 months ago, when we were sort of in the depths of this thing, and there was a lot less clarity in terms of where things were headed.

Makes sense. And I guess just last one for me. And just a quick, maybe, housekeeping question. Is there any notable change in interest collections from you this quarter? I imagine the answer is no given your comments around credit, but just curious if there's any amenable change quarter-over-quarter there?

Yes. Nothing worth noting.

I'm showing no further questions in queue at this time. I'd like to turn the call back over to Stuart Rothstein for closing remarks.

Thank you, all, for participating this morning, and we'll talk to you again next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.