Apollo Commercial Real Estate Finance Inc (ARI) 2012 Q1 法說會逐字稿

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'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. 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 the Company's Chief Executive Officer, Stuart Rothstein.

Thank you, operator. Good morning and thank you for joining us on the Apollo Commercial Real Estate Finance first-quarter 2012 earnings call. Joining me this morning in New York are Joe Azrack, our Chairman; Scott Wiener, our Chief Investment Officer; and Megan Gaul, our Controller, who will review ARI's financial results after my remarks.

Overall the first quarter of 2012 was relatively stable in the commercial real estate finance industry as the pace of property recapitalizations and debt refinancings increased at a moderate rate. We continue to see capital flow back into the sector for stabilized cash flowing assets in primary markets such as New York City, Boston, San Francisco, Washington DC and Los Angeles.

Capital flows for transitional assets in secondary and tertiary markets are increasing, but at a much more measured pace given the continuing concerns over the relative weakness of the economic recovery and uncertainty around future employment growth and consumer spending levels.

More specifically to the real estate finance market, the conduit market has been fairly active. As Moody's noted in their April 16 report on the US CMBS market, conduit underwriting appears poised to transition from a level consistent with 2004 underwriting to one more consistent with the early 2005 underwritings.

In addition, Moody's noted that the conduit originator spreads are now within 50 basis points of portfolio lenders as the market becomes more crowded. What the conduit market is picking up speed US CMBS issuance is still expected to mirror 2011 when the annual issuance was approximately $35 billion, still well below the levels seen at the height of the market in '05, '06 and '07.

With respect to ARI, we are focusing on opportunities we see in the subordinated debt market. We completed two mezzanine loan transactions in the first quarter for a total of $30 million. Both loans were collateralized by Manhattan hotel properties and are expected to generate a weighted average IRR of 13.4%.

In addition, consistent with our previously stated strategy to lower our leverage and lengthen the duration of portfolio, we sold $137 million of CMBS in March which resulted in $262,000 of net realized gains, generated $14.6 million of equity proceeds for reinvestment, and lowered the Company's debt to equity ratio to 1.1 times.

Subsequent to quarter end we reinvested the proceeds into two senior sub participation interests with an aggregate face value of $23.8 million, part of a $120 million first mortgage loan secured by 20 acres of land in the South Boston Waterfront District which is entitled for over 5.8 million buildable square feet and is currently used as parking with approximately 3,300 spaces.

The aggregate purchase price of the senior sub participation interest was $17.8 million or 75% of face value and we expect our investment to generate an IRR of 21.9% after payment of expenses.

Our investment pipeline remains robust and we continue to see opportunities to keep our capital active in attractive risk-adjusted investments. Subsequent to the quarter end $24 million first mortgage loan on a hotel in midtown Manhattan was repaid and generated $8.6 million of equity for reinvestment. We are currently looking at several opportunities to recycle the proceeds into equal or higher yielding assets.

While our activity on the investment front remains steady, we have been proactively managing our liabilities and have lowered the borrowing cost on both of our loan facilities. As we discussed on our call last quarter, in January we refinanced the $250 million of debt we had outstanding under the TALF program with $264 million under our expanded Wells Fargo facility, resulting in an additional $14 million of investable capital. We also reduced the cost of funds related to our CMBS by 70 basis points and extended the term through August 2013.

At March 31, 2012 our overall weighted average cost of funds was 2.4%, a 20 basis point decline from December 31, 2011. In addition, in April we amended our JPMorgan credit facility to reduce the interest rate by 50 basis points to LIBOR plus 2.50%, which should result in an annual interest expense reduction based upon our current usage projections of approximately $250,000.

With respect to our investment portfolio, at March 31, 2012 we had a total invested portfolio of $666 million with a weighted average underwritten IRR of 14.7%. The credit quality of our portfolio remains stable and we continue to actively monitor each of our investments.

Turning our discussion to our dividend, our Board of Directors approved a $0.40 dividend per share for shareholders of record as of June 29, 2012. This is the eighth consecutive quarter our Board has kept our dividend at $0.40 per share representing the stability in our earnings stream. Based upon our closing share price on May 2 and annualizing the dividend, our stock currently offers an attractive dividend yield of 10.1%.

Please keep in mind that when our Board of Directors evaluates our dividend policy they do so by considering a number of factors including the annual operating earnings forecast, realized gains and losses, an internal estimate of taxable income and compliance with REIT distribution requirements, as well as a desire to minimize the volatility in quarter-over-quarter dividend levels.

Lastly, I would like to introduce everyone to Megan Gaul, Controller of ARI's Manager. Megan has been supporting ARI since 2009 and will be taking on a more active role with respect to interfacing with the investment community. At this point I would like to turn the call over to Megan to review our financial performance.

Thank you, Stuart. Before I discuss the financial results I wanted to remind everyone that we have posted our supplemental financial information package on our website which contains detailed information about the portfolio as well as ARI's financial performance to date. We received positive feedback from our first supplemental package posted last quarter and, as always, welcome any suggestions for improvement in making our reporting more informative and easier to follow.

Turning to our financial results, for the quarter ended March 31, 2012, we announced operating earnings of $8.8 million or $0.42 per share, which represents a 45% increase over our operating earnings per share from the same period a year ago. This is driven by a 47% increase in net interest income which rose to $11.2 million in the first quarter of 2012 from $7.6 million in the first quarter of 2011.

A reconciliation of operating earnings and operating earnings per share to GAAP net income and GAAP net income per share can be found in our earnings release contained in the Investor Relations section of our website at www.ApolloREIT.com.

Overall ARI's leverage decreased significantly in the first quarter from 1.6 at year-end to 1.1 at March 31, 2012. This was primarily driven by the sale of $130 million of CMBS. Additionally, our debt service coverage ratio, which we calculate as EBITDA divided by interest expense, increased from 3.9 to 5.4 for the same period.

As we highlighted in our earnings release, GAAP book value per share at March 31, 2012 was $16.46, a $0.7 increase from the prior quarter. The increase is primarily the result of net unrealized mark-to-market gains on our CMBS portfolio.

As a reminder, we do not mark our loans to market for financial statement purposes. We currently estimate that there is another $0.58 per share of value when our loans are mark-to-market and estimate our market value per share to be $17.04 at March 31, 2012.

As Stuart mentioned, our investment portfolio as of March 31, 2012 had an amortized cost basis of $666 million with a weighted average underwritten IRR of 14.7%, an increase of 50 basis points since last quarter. The weighted average duration of our investments was 2.8 years, an increase from 2.2 years at the end of 2011.

We expect to lengthen our duration as we recycle our capital from some of our shorter duration CMBS scheduled to start coming due in the second half of the year into longer duration first mortgage and subordinate loans. Taking into account the cash on our balance sheet and the remaining equity in the CMBS portfolio, we have approximately $50 million of equity for potential investment in new transactions.

Lastly, with respect to senior sub participation interest we purchased subsequent to quarter end, we expect to record a one-time charge of approximately $700,000 or $0.03 per share in connection with the brokerage fee paid to a third party in completing the transaction. This charge will be reflected in our second-quarter income statement and will impact Q2 operating earnings per share. And with that we'd like to open the lines for questions. Operator?

(Operator Instructions). Gabe Poggi, FBR.

Two quick questions. One, the capital recycling idea, you guys sold a big chunk of CMBS. And if I heard you correct, I think the equity from that was redeployed into the Boston opportunity.

Yes.

The Boston opportunity, does that have -- I assume -- the CMBS obviously had a current yield to it that helped pay the $0.40 dividend. It doesn't look like the Boston -- at least has as much current yield. Can you just kind of walk me through that thinking? And then as it pertains to the equity that you got back in the repayment of the first mortgage loan, the $24 million, I think you said $8.6 million of equity, you had mentioned some other irons in the fire. Is that in the mezz bucket?

Sure, Gabe, it's Scott Wiener. I would say on Seaport you are correct. This was a legacy loan that was housed in a liquidating CDO where the sale process was not so efficient, which is why we were able to buy it at such a nice discount. And we had a relationship with someone who knew the deal very well who helped us vest the brokerage fee that Megan mentioned.

But the participation itself is a very low LIBOR spread, so the IRR is generated from the discount. The expectation is that over time there will be partial repayments on that loan. But also, as mentioned, the loan has a maturity at the end of 2012 with a repayment for extension or it will be repaid in a final maturity December 2013. So the IRR, as we mentioned, is really coming from the discount.

Are you factoring that discount then into obviously forward dividend consideration?

You know, from an accounting standpoint from a GAAP perspective we're obviously accreting the discount up over time. As we think about future dividends, we certainly consider, just from a pure cash flow perspective, what we have and what we don't have to pay out. But I would say the magnitude of what we're talking about given, call it, the spread between accreted earnings and actual cash received is not going to materially impact the way we think about dividend levels going forward.

Perfect.

And then I think your other question was on pipeline, if I heard correctly?

Yes.

Yes, I would say we're continuing to see opportunities in the subordinate debt space on cash flow and performing assets where we can generate north of a 12 IRR, all property types. Clearly in the first quarter we did two hotel transactions here in New York, which is still a market that we very much like. We are cognizant that the district, the first mortgage would be being repaid, so kind of balancing out one Manhattan hotel being paid off and adding some other exposure.

But clearly we're seeing across all property types, probably with the exception of multi-family, just given the continued GSE involvement. We also are actually looking at first mortgages. Again, I would say that probably with a little bit of transition or something that doesn't exactly work well for the CMBS market, clearly, as we talked about previously, we're not in that market so we're not trying to do 5% first mortgage loans.

Okay, that's helpful. And then one kind of quick nitpick question. And Megan may have mentioned this; I just may have missed it. G&A was up quarter over quarter. Is that kind of that $2 million-ish ballpark? Should I assume that as a run rate or do you think it goes back to kind of the 1.4, 1.5-ish level?

I would say somewhere in between. It's up because of the non-cash compensation expense, which is related to the price of the stock.

Okay, okay, perfect, thank you.

(Operator Instructions). Joshua Barber, Stifel Nicolaus.

I'm wondering if you could discuss a little bit more broadly your origination capabilities today and how that's been coming along over the last few months, especially now that the CMBS is starting to transition into loans. And if you could comment on that in light of the brokerage fee paid on the Seaport deal?

Sure. I think the brokerage fee was, call it a brokerage/advisory fee. I mean the genesis of that deal was that there was a liquidating CDO which housed both securities and loans. And thankfully the trustee of that CDO opted to sell loan interest as if they were securities, which clearly is not an efficient process and the information that was made available was if you were buying a highly rated bond, which you're not.

So through a relationship of ours, we were familiar with people who were involved in the deal and helped do it, have continuing involvement in the deal. And with that we were able to get information that other bidders would not have. Had we not had that relationship we would not have pursued the deal.

So that was call it a broker/advisory fee, that's a little different -- and there was an incentive component. So the lower the price that we got the more that we paid them. So even factoring in that fee we're still projecting north of a 20 IRR for a very low leverage first mortgage loan, so clearly an attractive deal.

Away from the origination side is a combination of relationships that we have directly with borrowers and their advisors as well as relationships we have with other lenders both of Street as well as banks and insurance companies. We're very active in the market. I think we've talked about before, in addition to ARI we have numerous separate accounts looking at different parts of the capital structure whether they be highly rated CMBS or lower yielding positions.

So through that we are one of the more -- we think we're one of the more active participants in the market and through that ARI benefits from that active dialogue with the larger players.

That's helpful. Thank you. Just one quick follow-up on that. Is your 21.9% IRR net of that brokerage fee?

Yes.

Okay. And -- I'm sorry, go ahead.

No I'm saying that IRR assumes that -- as we mentioned, that there's a mandatory repayment to get an extension at the end of the year and then it goes all the way to 2013. Given the borrower's motivations and what's going on the property, we're hopeful that that deal actually will get some early repayment's, it's kind of a -- because we bought it at such a discount, to the extent it gets paid back earlier our IRR will be higher. But we -- the way we modeled it out is the contractual right that the borrower has.

Great. And last question on that basis, what is your total levered investment capacity today?

We have $50 million of cash equity between selling CMBS or cash on the balance sheet to invest. From a first mortgage perspective we can lever those two to one times. So if you think about putting all 50 in first mortgages and borrowing you could do in the neighborhood of $150 million. I think the reality is we see far more opportunity in the subordinated debt space today than we do in the first mortgage space today. So I think the $50 million of equity will most likely not to have a lot of leverage associated with it when it gets deployed.

Thanks very much. Good luck, guys.

(Operator Instructions). Mr. Rothstein, I'll turn it back over to you. I'm not showing any questions.

Thank you, operator, and thank you, everybody, for participating.

Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. You may now disconnect.