Apollo Commercial Real Estate Finance Inc (ARI) 2011 Q1 法說會逐字稿

Good morning. I would like to remind everyone that today's call and webcast are being recorded. Please note that this is 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 for 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 that -- 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 those statements and projections.

We do not undertake any obligation to update the forward-looking statements or projections unless required by law. To obtain copies of the latest SEC filings, please visit our website at www.ApolloREIT.com, or call us at 212-515-3200. At this time I'd like to turn the call over to our Chief Executive Officer, Joseph Azrack.

Thank you, operator. Good morning, everybody, and thank you for taking the time to participate in the Apollo Commercial Real Estate Finance earnings call. As usual, joining me this morning in New York are Stuart Rothstein, CFO, and Scott Wiener, our Chief Investment Officer.

Before I turn the call over to Stuart to provide color on our financial performance and our recent SEC filing, I would like to comment on our recent investment activity. Within the last few weeks we have announced the deployment of approximately $87 million of capital in two transactions, each of which generates in excess of a 13% unleveraged return. As a result of these transactions we are now effectively fully deployed.

We are pleased with the weighted average returns and the risk profile of our portfolio. More specifically, the portfolio today consists of $109 million (Sic -- see press release) of first mortgage loans with a weighted average coupon of 8.3% and a levered returned of approximately 14.8%; $99 million subordinated debt with a weighted average coupon of 13.1%; $47.4 million (Sic -- see press release) in a structured repurchase facility collateralized by A-/Baa1 CDO bonds which pays us a 13% interest rate; and $607 million of leveraged CMBS earning approximately 12.6%.

In addition to the existing portfolio we continue to pursue new transactions that will add duration to the portfolio as well as accretively grow the portfolio. Given the rebound in commercial real estate values and operating metrics more transactions are taking place and as a result our pipeline of potential transactions is active.

I'll now turn the call over to Stuart Rothstein for a few comments on our recent financial performance. Stuart?

Thanks, Joe. Turning briefly to our financial statement, you will note that in our earnings release we disclosed $0.29 per share of GAAP net income and we have also modified our definition of operating earnings to bring this non-GAAP financial measure more in line with how we believe it is tracked by both investors and analysts as well as reported by our peers. As such for the quarter just ended our operating earnings per share under this new definition was also $0.29 per share.

More importantly, given that we have now fully deployed our capital, we believe that our portfolio will generate operating earnings per the updated definition that supports our quarterly dividend run rate of $0.40 per share. As is always the case, the dividend will be subject to a valuation and ultimate declaration of the Board of Directors on a quarterly basis.

Lastly, last evening we filed an S3 shelf registration statement. At this time we have no immediate plans to issue any additional securities. The purpose of the filing was to enable the Company to act more quickly in the future if and when the opportunity to deploy additional capital and attractive investment arises. We continue to remain active in pursuing and underwriting potential transactions and, as the commercial real estate market continues to rebound, we are tracking an active pipeline of deals.

That being said, let me reiterate that at this time we have no immediate plans to sell any additional shares of stock and would anticipate that the near-term impetus to sell any additional shares would be compelling identified investment opportunities which we believe at the time of underwriting are beneficial to our overall portfolio and consistent with our goals of growing earnings and supporting our dividend paying ability. I'll now turn it back to the operator for any questions.

(Operator Instructions). Gabe Poggi.

Good morning, guys, it's Gabe Poggi from FBR. Hey, Stuart, can you talk about the forward pipeline? What kind of -- if there are certain asset classes or first versus mezz where you guys have more targeted opportunities or is it really a blend across the spectrum? I'm trying to get an idea for is there anything that you guys have targeted as an area that you're focusing on at this juncture?

Yes, I'll actually let Scott answer that question.

Hi, Gabe. I would say we're seeing much more opportunities on the B note mezz side -- on the securities side. Clearly we did the repo transaction. We thought that was a compelling risk adjusted return given where we were in the capital structure there and we've previously talked about our view of this current CMBS market.

So much more focused on B notes and mezz or preferred equity that's structured as debt in all property types. We're currently evaluating office retail deals. Probably less on the hotel side right now and much more on the traditional commercial side I would say.

When you talk about, Scott, about B note mezz are you talking about just a straight investment into a B note, or kind of and origination acquisition of a whole loan/first mortgage than doing a little carve-out sell off A note to a securitization and keep the B? Or a combination of both?

Yes, a combination of both. I mean, I would say while it's clear that the CMBS market is functioning and robust, I think where we're seeing more opportunities are either properties or borrowers who don't want to go into the CMBS market, and so maybe they're working with a commercial bank who would do a senior loan and then we could do a subordinate loan behind that. Or to your question, where we would do the whole capital structure and either lever that with our JPMorgan facility or sell off a senior whether into a CMBS or other structure?

Then one last question, just in terms of flow is there any area that big banks, all banks, regional banks -- is there any specific kind of sector -- I know you mentioned office retail, but any -- is flow just across the board or any area where it's more robust than elsewhere?

I would definitely say it is robust. I mean we are certainly seeing a heightened transaction activity. I mean I think people -- there's more acquisition activity going on, so we're seeing a lot of requests for acquisition financing. That may take the form of someone buying a property from a third-party or being able to go back and do a DPO on their debt with the existing lender. We are seeing more activity on that front.

We're still certainly seeing plenty of deals that make absolutely no sense, tertiary markets, things like that. But I wouldn't say that there's one property type or another where we're seeing it disproportionately. As I said, I think -- as I mentioned, the hotels certainly have lessened in terms of the amount of pipeline with office and retail increasing.

Okay. Thanks, guys, good job.

Thanks, Gabe.

Joel Houck, Wells Fargo.

Thanks and good morning. I guess kind of continuing with that theme, maybe if you could talk about the expected IRRs you're seeing in the pipeline relative to what's in the existing portfolio. Obviously there's spread comparison, but -- and you guys seem to have a window into unique opportunities. Give us some sense for if you're going to be able to kind of maintain these IRRs on a go-forward basis.

Yes, I mean look, that is probably the only advantage of being small, if you will, is that we can block and tackle end do deals on institutional quality real estate and generate the type of returns that we've been getting. So I would say the pipeline is certainly in the 11% to 13% range still. With duration, I would say duration kind of more in the five-year range rather than the 10-year deal like inland. But we're certainly seeing opportunities there.

I would say if we wanted to drop our returns to more of the 10% area, then it's -- the market has only grown with the Street coming back and doing floating rate CMBS which then creates subordinate positions because they only securitize investment-grade or some of these larger pool deals. There are plenty of opportunities to get yield. Again more probably in the 10% area, the 11% to 13% is more asset specific where it's a relationship where we're really getting into the underwriting and adding value to the process.

And like I mentioned before, we do have relationships with numerous senior banks who generally don't like subordinate debt behind them, but if it's someone like us who they look at the overall Apollo platform and they're comfortable with us as a borrower, then they would allow us to put that subordinate debt on -- behind them.

Okay.

This is Joe. I just want to add to what Scott said, to mention that I think the depth of the pipeline and the market opportunity has increased considerably in the last six months. I think we're really now starting to see the breadth and the depth of the recapitalization trade as the hundreds of billions of existing loans come up for refinancing and they will not pencil with a straight first mortgage in many cases.

But they're still money good and because of the low interest rates can afford to pay that kind of mezzanine rates that Scott has been mentioning. So we see only a building inventory and demand for this type of product. It's all very well covered in terms of debt yield and loan to recapitalized cost and we think it will, if anything, increase in coming months.

I appreciate the additional color, that's important. Just to kind of finalize here on the topic of core EPS going forward. I think you guys said that the new definition would be adequate to cover the dividend, is that correct?

Yes.

Okay. Thanks, guys.

(Operator Instructions). And there are no further questions at this time. I would now like to now turn the call back over to Mr. Azrack.

Okay, thank you, Operator. Thank you, everyone, for dialing in for this call. As always Scott, Stuart and I are available to talk with you at your convenience and to answer any questions that you might have on a one-on-one basis. We appreciate your attendance and your support of ARI. So, thanks very much for participating. Thank you, Operator.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.