Apollo Commercial Real Estate Finance Inc (ARI) 2011 Q4 法說會逐字稿

Good morning, my name is Holly, and I will be your conference operator today. At this time I would like to welcome everyone to the ARI fourth-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions).

I would 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 would 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.

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 at 212-515-3200.

At this time I would like to turn the call over to our Chief Executive Officer Joseph Azrack. Mr. Azrack, you may begin your conference.

Thank you, Operator. Good morning everyone and thank you for taking the time to participate in the Apollo Commercial Real Estate Finance earnings call.

Joining me this morning in New York are Stuart Rothstein, our CFO, and Scott Weiner, our Managers' Chief Investment Officer.

Before I turn the call over to Stuart to provide some additional color on our financial results, I will take a few minutes to comment on ARI's 2011 performance and what we are currently seeing in the markets.

Overall, 2011 was notable for the volatility experienced in the real estate capital markets. There was optimism during the first six months of the year as the economic recovery was continuing. Real estate transaction volumes were increasing and expectations for the CMBS market were high.

However, by the third quarter markets became volatile due to the impact of, and focus on global, particularly European macro events. Deal flow in the second half of the year slowed, and CMBS volumes for the year fell well short of expectations.

Despite a challenging environment, ARI had a successful year moving towards full deployment of investable capital. For the year we completed over $137 million of new investments and demonstrated our ability to find investments which we believe will generate attractive returns, while being well-structured from a credit perspective.

In addition to our success on the investing front, we also demonstrated our ability to manage our capital structure. We raised $50 million of equity capital at book value per share, which at the time was approximately 5% higher than the current market price. And as Stuart will comment on shortly, we also recently refinanced our TALF debt, which we believe will provide multiple benefits to the Company.

As we look forward to 2012 our view is that the recovery in commercial real estate and the related recapitalization still has a long way to go. For those that like baseball analogies, my view is that we're in the middle innings. We still see an environment that will provide attractive opportunities for ARI, and we believe it is quite possible that the opportunity set that will grow as the expected and much-needed recapitalization extends and gains momentum.

Our focus continues to be on providing an attractive combination of return and credit quality. Given our current portfolio construction, the focus is anticipating repayments and principal paydowns, so that ARI remains fully invested. Also, extending the duration of our investment portfolio and being disciplined about the credit quality of our investments.

I would also highlight that our Board again approved a quarterly dividend of $0.40 per share, which represents the seventh quarter in a row for such a dividend. In an environment with limited places to earn income, ARI has continued to provide consistent, current income to our investors.

Lastly, as you know from our 8-K filing last week, Henry Silverman resigned as Chairman effective March 15 of this year. We want to thank Henry for his distinguished service, particularly in the formative stage of ARI. As our earnings release indicated, effective March 15 we are pleased to announce that our Board of Directors has elected yours truly as Chairman, and my partner, Stuart Rothstein, will become ARI's CEO and President in addition to his role as CFO.

Now I will turn the call over to Stuart to discuss our financial performance.

Thanks, Joe. Before I discuss our financial results I did want to highlight that on our website for the first time this quarter we have posted a supplemental information package, which contains detailed information on the portfolio as well as our financial performance to date. We intend to provide this information each quarter in conjunction with the earnings call, and starting with our call next quarter will refer to the packet as we go through our review of results.

We continue to strive to make our reporting more informative and easier to follow, and we certainly welcome any future suggestions for improvement.

Turning briefly to the financial results for the quarter ended December 31, 2011, we announced operating earnings of $8.3 million or $0.39 per share, which represents a 44% increase over our operating earnings per share from the same period a year ago.

This was driven by a 50% increase in net interest income to $10.9 million in the fourth quarter of 2011 from $7.3 million in the fourth quarter of 2010.

For the full year of 2011 our operating earnings per share were $1.47, which is a 35% increase over the same period in 2010, driven by a 77% increase in net interest income from the prior year.

Please refer to our earnings release, which can be found under the Investor Relations section of our website for a reconciliation of operating earnings and operating earnings per share to GAAP net income and GAAP net income per share.

As Joe mentioned, 2011 was an active one in terms of investment activity with more than $137 million deployed during the year. During the fourth quarter we made a $25 million subordinated loan investment structured as a preferred equity investment in a JV that owns a grocery-anchored retail center in the Northern Virginia suburb of Washington DC. The underwritten IRR for this investment is approximately 15%.

With that investment completed, as of December 11 -- as of December 31, 2011, we had a total invested portfolio with an adjusted cost basis of approximately $860 million, with a weighted average underwritten IRR of 14.2%.

As we highlighted in our earnings release, GAAP book value per share at December 31, 2011, was $16.39 per share, a $0.05 increase from the prior quarter. The increase is primarily the result of net unrealized mark-to-market gains on our CMBS portfolio and the interest-rate swaps put in place with that portfolio.

As a reminder, we do not mark our loans to market for financial statements purposes. We currently estimate that there is another $0.41 per share of value when our loans are mark-to-market, and as such our estimated adjusted book value per share is $16.80 at December 31, 2011.

Subsequent to year-end we did have some additional activity. As Joe mentioned, we proactively managed the right side of our balance sheet and generated additional investable capital and lowered our overall cost of borrowing by refinancing our TALF borrowings.

We created additional capital under our Wells Fargo borrowing facility, and in December -- which was created in December, and in January we completed a transaction where we used the same collateral under the TALF program to borrow $264 million from Wells Fargo, pay off the $250 million we had borrowed under the TALF program, and thereby create an additional $14 million of available capital for investment.

We also reduced the cost of funds on the overall borrowing by 90 basis points and extended the term of the borrowing through August 2013.

TALF borrowings had a weighted average cost of funds of 2.8%, while the new Wells Fargo borrowings have a weighted average cost of funds of approximately 1.9%, including the effect of interest rate swap agreements with an initial aggregate notional amount of $56.3 million.

Also, in January, we made a $15 million subordinated loan investment. It was structured as a mezzanine loan as part of an $80 million three-year acquisition financing package on a 165-room hotel in midtown Manhattan. The underwritten IRR for this investment is approximately 14%, and the LTV is approximately 63%.

As we now move further into 2012 our priority remains on staying disciplined as we monitor the credit of our portfolio, which we are currently comfortable with, along with identifying new potential investments.

We are also working to deploy the additional available capital with the goal of increasing our earnings run rate, while at the same time building a pipeline in anticipation of redeploying capital from our CMBS investments, which are scheduled to come due starting in the second half of the year.

As of today, we have roughly $15 million of cash available for investment, and we anticipate an additional $50 million to $60 million of capital during the year as we receive principal paydowns in our CMBS and loan portfolio. And as I mentioned, most of that comes in the second half of the year.

Our focus, as always, will be on sourcing first mortgage or mezzanine investments that will lengthen the duration of our overall portfolio, while also seeking to maintain or increase returns. We will remain disciplined in our approach to deploying and recycling capital, taking into account the cost of capital and the anticipated risk-adjusted returns.

With that, operator, we will open it up for questions.

(Operator Instructions). Joel Houck, Wells Fargo.

Good -- nice 2011. I guess a way to start off is looking at 2012, we have heard the story it seems like it is becoming more true that there is a lot of restructuring to occur. How do you guys look at the risk/reward trade-off of senior versus mezz? Obviously, you can lever senior more with your financing vehicle, but how do you look at in terms of where you want to be on the capital structure as you deploy more capital this year?

This is Scott. I will answer that. I think it is very subjective. Clearly, as Stuart mentioned, we do look at both, and I think we really look on a deal by deal basis. Early on with ARI when the first mortgage market was effectively shuttered we took the opportunity to do a lot of first mortgages with call protected, and we are doing loans at 8%, 9%.

As the first mortgage market became much more active and aggressive, we shifted our attention to what I will call lower leverage mezzanine debt, where we could get attractive returns.

And today, I don't want to say it is a tale of two markets, but there is some types of first mortgage loans which are getting done at 3%, 4%, and there are some types of first mortgage loans getting done at 7%, 8%. And so for us it is really -- and then, obviously, there's the mezzanine loans which we continue to see kind of where we can get, call it, 12% to 14%.

So it is tough to give you specific answer. It is a trade off. Can we do a mezzanine loan on a cash flowing stabilized property at 12% or 13% or we can do a first mortgage loan up to the same effective loan to value, but it is a more transitional property, where maybe there is a lease-up or a roll and so we are getting, call it, 7%, but then we are putting leverage on it and getting to the same return.

It would really have to -- it really is going to depend on what the property is, but we are seeing plenty of opportunities on both sides.

So you are not looking at this as favoring one part of the capital structure over the other. We should expect to see continued investments on both sides?

Yes, I would say definitely. As we stated before, we are not looking to get into the conduit business. So you're not going to see us originating fixed-rate loans with the intention of securitizing them.

So if we were to do a first mortgage loan we would look to put leverage. And, obviously, we have a JP facility. And there are -- and there is more availability in that market today as well in terms of more lenders willing to offer leverage on first mortgages.

Thank you guys very much.

Joshua Barber, Stifel Nicolaus.

I'm wondering if you can talk a little bit more about what you guys are building up on the origination side especially now? My guess is that you're looking to transition some of your CMBS book, as you discussed, over the next couple of years into first mortgage.

Can you discuss how the Apollo team has been built out over the last year or so, and what areas of the market you guys have been active in?

Sure, this is Scott again. I would say we have been very active on the origination side. As stated before, the debt team is part of an integrated Apollo team. Apollo, as we referenced before, really has no walls, so we have both a dedicated real estate team as well as other professionals in [fig] and lodging and hospitality who we work with together, not to mention obviously our relationships in the broader real estate community.

So I would say it is a balanced pipeline today of first mortgage loans. Again, not conduit, so really we are looking at a lot of acquisition financing. We are looking at unsold inventory loans in established markets at very low basis.

We are looking at office properties, where maybe there is some roll or the leasing -- the current leasing is not in a place where a securitized lender or an insurance company might want to do it, but again, the basis is good and we can capitalize it.

And then we're also looking at mezzanine loans as well on the hospitality and other products. So I would say it is pretty broad.

That is helpful. I may have missed this earlier on the call, but I don't know if Joe Azrack is on the call, but is Joe still going to be involved with the private side of Apollo's real estate -- Commercial Real Estate Group?

I don't think the role is going to change a great deal. We wanted to exercise the best practices of separating the Chairman and the CEO, and I'm going to be -- still continue to be very involved in all aspects of our real estate business.

Great, well, congratulations, and thanks very much.

(Operator Instructions). At this time there are no further questions. I would like to turn the conference back over to management for closing remarks.

You do have a question that has come into the queue from the line of Rick Shane, JPMorgan.

Sorry, we clearly had a little phone problem this morning. Obviously, you guys have laid out a pretty clear roadmap in terms of deployable capital in terms of cash and principal repayments on the CMBS. You have done a good job optimizing the liability structure now. As opportunities present themselves would you be -- consider more aggressively bringing down the CMBS portfolio in 2012?

Absolutely, the Wells Fargo facility is freely prepayable, so absolutely. We do look to get ahead of the repayments. Obviously, with the CMBS there is no amortization schedule, but to the extent we find attractive deals with duration and call protection that are there and ready, we will sell CMBS to facilitate that.

As Stuart mentioned, we have about $15 million in cash. We have a deal that we are actively working on, which we think should close in March that will use up that remaining cash at the type of returns that we've been talking about. And then going forward, as we look to the rest of the pipeline in the near term we would sell CMBS to fund the deals that we are currently working on.

This is Joe. I think we took advantage of the disruption in the CMBS market and the government TALF financing early on. We have transitioned from TALF into private financing of the CMBS. And it is pretty clear, I hope, that we think the real opportunities are in the first mortgage and mezzanine financing and with that the ability to extend the term of our investment portfolio.

So I hope we have made it clear the direction in which we expect to go during the course of this year.

Absolutely. And to follow up on that, given the relatively low cost basis you have in that portfolio, to the extent you would be exiting those through sales, I assume that triggers potential taxable gains. Would those -- if that occurs in a meaningful way, would you include those in the recurring dividend or would you consider paying a special associated with that?

You can tell from the mark-to-market, Rick, somewhat of the magnitude of the numbers, which given the duration of the paper and when we bought them, there is some mark-to-market positive, but it might not be as much as you think, and I think what we would try and do is smooth that over a period as opposed to -- I don't think there is enough to make anything on a one-time nature all that meaningful.

Okay, great. Joe and Stuart, good luck to you guys both in your new roles, and congratulations.

At this time there are no further questions. I would like to turn the conference back over to management for closing remarks.

Thank you everyone for your questions and for participating. We are happy to have discussions one-on-one with you. Should you have any further follow-up questions you can always call Scott, Stuart or myself.

We look forward to talking with you and executing during the course of the year. So thanks, everybody, and look forward to further conversations and results. Thank you, Operator.

Thank you for participating in today's ARI fourth-quarter earnings conference call. You may now disconnect.