Apollo Commercial Real Estate Finance Inc (ARI) 2012 Q4 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 in 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.

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'd like to turn the call over to the Company's Chief Executive Officer, Stuart Rothstein.

Good morning. And thank you for joining us on the Apollo Commercial Real Estate Financing fourth quarter 2012 earnings call. Joining me this morning in New York are Scott Weiner, our Chief Investment Officer and Megan Gaul, our Comptroller, who will review ARI's financial results after my remarks.

The commercial real estate sector regained its footing in 2012, a year in which we saw a strengthening CMBS market and improving operating fundamentals across the industry.

Transaction volume for commercial real estate sales in 2012 reached $147 billion, which, while still well off the $243 billion peak in 2007, was robust and was a 20% increase over commercial real estate sales volume in 2011. Investor demand was driven by improving market fundamentals and attractive yields relative to other asset classes.

Distress sales made up only 11.5% of observed trades in December 2012, the lowest level witnessed since the end of 2008. This reduction in distress deal volume has been driving higher, more consistent pricing.

Pricing in the six major metropolitan areas of the U.S. -- New York, Boston, D.C., Chicago, San Francisco and L.A. -- has returned to peak levels experienced in 2007. And, as of the end of 2012, commercial property prices nationally stood 33% above the levels reached in January 2010 trough, and 20% below the November 2007 peak.

The increase in transaction volume led to an overall increase in financing volume as well.

U.S. CMBS issuance in 2012 was $48 billion, a 37% increase over 2011.

2013 is already shaping up to be a strong year with over $13 billion of CMBS issuance year-to-date, and total issuance is expected to reach $65 billion for the year.

The strength in the commercial real estate market witnessed in 2012 enabled ARI to have a very successful year.

Our focus remained on identifying opportunities across our target asset classes that provide attractive, risk-adjusted returns. We worked very diligently to enhance our deal sourcing capabilities by making sure we are a first-call relationship for many conduit lenders, balance sheet lenders and mortgage brokers, effectively becoming the co-originator of choice for a piece of larger financings.

ARI also continued to benefit from the deep relationships that Apollo has built with many of the key players in the real estate finance market.

As a result, ARI completed over 264 million of new transactions in 2012, with a weighted average IRR of approximately 13% on $215 millions of committed equity.

The transactions represented a broad range of investments, including first mortgages, CMBS, and subordinated loans, and further diversified ARI portfolio, which had a total amortized cost of $669 million and a levered weighted average underwritten IRR of 14.1% at December 31, 2012.

Funding for new transactions came form a combination of capital recycling from older investments, a modest use of leverage and the proceeds from our two recent capital raises.

ARI's total stockholders' equity increased 62% in 2012, as compared to total stockholders' equity at the end of 2011.

In August, we completed an underwritten public offering of 3.4 million shares of the Company's 8-5/8% Series A cumulative redeemable perpetual preferred stock, generating net proceeds of approximately $83 million.

In October, we completed an offering of 7.4 million shares of common stock, including a partial exercise of the green shoot, and raised net proceeds of $124 million. Those offerings enabled ARI to raise capital for new investments while protecting the Company's book value per share.

As we indicated on our third quarter earnings call, we had a healthy pipeline in which to deploy this capital. And ARI has gotten off to a strong start, both at the end of 2012 and through the early weeks of 2013. Since the beginning of the year, we have closed three new transactions totaling $103 million of committed equity.

Our pipeline remains strong and we continue to find ample investment opportunities in our target asset classes. Shifting over to the other side of our balance sheet, ARI made considerable changes to our financing facilities in 2012, which resulted in a lower overall cost of capital for the Company.

In January, we refinanced our TALF debt, which generated $14 million of additional investable capital, lowered the weighted average of funds by approximately 70 basis points, and extended the term of the debt through August 2013.

In may, we amended the Company's repurchase facility with JP Morgan, which reduced the interest rate by 50 basis points to LIBOR plus 250. As a result of our diligent efforts in 2012, ARI is well-positioned for success in 2013.

Our investment pipeline is strong. Our balance sheet is healthy. And the credit quality of our portfolio is stable. We see considerable opportunities in our core businesses. And we look forward to reporting our progress to you throughout the year.

As noted in our earnings press release, our board of directors declared a $0.40 per share common dividend for the first quarter of 2013. This is the eleventh consecutive quarter of this consistent dividend level. And based upon the closing price of $17.36 on February 26, our common stock pays an attractive 9.2% dividend yield.

Finally, I would like to congratulate Megan Gaul for the board of directors appointed to the position of Chief Financial Officer, Treasurer and Secretary of ARI, effective April 1.

Megan is assuming those titles from me. And I will retain my role as Chief Executive Officer and President. Megan has served as the Comptroller of the manager since ARI's inception in 2009, and is an extremely valuable member of the finance team. Both the board and I wish her well in her new role.

At this point, I would like to turn the call over to Megan to review our financial performance.

Thanks, Stuart. Before I discuss our financial results, I want to remind everyone that we've posted our supplemental financial information package on our website, which contains detailed information about the portfolio, as well as ARI's financial performance.

Turning to our financial results for the quarter ended December 31, 2012, we announced operating earnings of $7.4 million or $0.27 per share, as compared to operating earnings of $8.3 million or $0.39 per share for the three months ended December 31, 2011.

The decrease in operating earnings per share primarily was due to the timing of the deployment of the capital raise from the Company's common and preferred stock offerings that Stuart mentioned earlier.

As Stuart also stated, we made significant progress with our capital deployment in 2013 thus far, having announced $103 million of new transactions since the beginning of the year.

For the year ended December 31, 2012, the Company reported operating earnings of $33.9 million or $1.50 per share, representing a per share increase of 2%, as compared to operating earnings of $28.1 million or $1.47 per share for the full year ended December 31, 2011.

Net income for 2012 was $37.1 million or $1.64 per share as compared to net income of $25.9 million or $1.35 per share for 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, www.apolloreit.com.

GAAP book value per share at December 31, 2012, was $16.43. As a reminder, we do not mark our loans to market for financial statement purposes.

We currently estimate that there is another $0.41 per share value when our loans are marked to market. And, as such, estimate our market value per share to be $16.84 at December 31, 2012.

Based upon our closing share price on February 26, of $17.36, we are trading at a 6% premium to GAAP (technical difficulty) per share.

As Stuart mentioned, our investment portfolio, as of December 31, 2012, had an amortized cost basis of $669 million, with a levered weighted average underwritten IRR of 14.1%. The weighted average duration of our investments was 3.1 years, as compared to 2.2 years at the end of 2011.

Before I open the call up for questions, I would like to discuss some additional subsequent events from the first quarter of 2013. In addition to the $103 million new investments we announced, we also announced that the Company received repayments from two investments.

In January, we received the repayment of the final $6.6 million of principle from our repurchase agreement secured by CDO bonds. Upon repayment, the Company realized a 17% IRR in this investment. In February, two mezzanine loans totaling $15 million, secured by our portfolio of retail shopping centers located throughout the United States, were fully repaid.

In connection with the repayments, the Company received a yield maintenance payment totaling $2.5 million. Including the yield maintenance payment, the Company realized a 15% IRR on this investment. Also in February, the Company amended our JP Morgan facility to extend the term for two years -- one year initially, with a one year extension option.

Pricing on the JP Morgan facility will remain at LIBOR plus 2.5%. ARI paid a 50 basis point extension fee for the first year and will pay a 25 basis point extension fee for the second year.

As a reminder, the Company primarily uses the JP Morgan facility to finance ARI's first mortgage loan.

Lastly, we recently completed an amendment to our Wells facility which reduced the cost for borrowings for this facility.

Borrowings used to finance AAA CMBS will bear interest at LIBOR plus 1.05%. And borrowings used to finance the Hilton CMBS will bear interest at LIBOR at 1.75%. In addition, the term for the borrowings used to finance the AAA CMBS was extended to March 2014.

Finally, as of today, the Company has approximately $25 million of available capital for investment, including cash and capacity on our JP Morgan facility. And with that, we'd like to open the line for questions. Operator?

Thank you. (Operator instructions). Your first question comes from Gabe Poggi with FBR.

Hi, good morning, all. Nice job on the fourth quarter. Two just kind of general questions. One, Stuart, I think I ask you this every quarter. But about spread -- I mean, I get the question of spread-compression, spread-compression. Are you guys seeing any material spread-compression kind of in the mezzanine area where you guys are focusing?

And then, secondly, if you could provide any additional color around the pipeline? If there's any specific areas where you're focusing on looking, asset classes, that would be helpful.

Sure. I'll answer your question first, Gabe. And then I'll let Scott comment and also comment on your first question.

I think, in terms of areas of focus, look -- I think we tend to continue to be drawn to those transactions that might require deeper underwriting, more structure. I think, as we've stated many times before, there's significant confidence in our abilities to underwrite effectively, to use the Apollo network due diligence transactions. And to the extent that we can get paid a little bit more around transactions with greater structure, greater complexity, we think at the end of the day it moves the needle more.

But we're still looking across the U.S. We're still looking across property types. And I think we're trying to cast as broad a net as possible in terms of sourcing deals at this point in time.

And -- Scott -- on your spread comment, echoing what Stuart was saying, clearly, on the more liquid space, whether it be CMBS or even, I would say, the larger portfolios which might have subordinate debt, you have seen yield and spread-compression -- really -- you know -- anything that can trade on Bloomberg has definitely gotten tighter in sympathy, or in correlation, with the rest of the credit market's high yield, and everything like that.

But -- you know -- the stuff we do, clearly, you can't do it on Bloomberg, whether it be direct original, co-origination. It's stuff that you need to be able to underwrite, the real estate. You know, the senior lender wants to know who's in the capital stack with them, as does the borrower, so it does not lend itself to an XYZ hedge fund buying it through their sales force.

Thanks, guys. That's helpful. Thanks. Good job.

Thanks, Gabe.

Thank you. Your next question comes from Joel Houck from Wells Fargo.

Good morning. And just to kind of, I guess, follow on to that question -- I mean, in terms of where you guys see incremental value in the mortgage chain as you look at on 2013, your spreads have come down but it looks like -- you know -- particularly for mezz or sub-product when you're able to do deep due diligence, you're still getting very attractive attachment points.

I mean, how do you see the mix between kind of seeing your sub playing out in 2013 with respect to where you guys invest new capital?

Sure. I mean, I would say we don't really see the opportunity today on the most liquid space. We don't see, really, any opportunities with or without leverage on the security side.

I would say on the first mortgage side, we are still seeing opportunities. It would be stuff that does not fit into the securitization bucket or into kind of a lower leverage bank balance sheet, which might be a conversion type deal like we did in Manhattan. Maybe an inventory loan on condominium projects that's finished, or some sort of property going through lease up or transition.

And those are the type of deals that we can put -- hopefully, the unleveled deal works, but also it's the extent we want to increase the leverage and the yield. We can use our JP Morgan facility for that.

On the sub space, whether it be mezz or preferred equity, it's really all property types. I mean, we still are working on long term fixed rate loans where the senior mortgage gets securitized. We're looking at loans where the senior is a balance sheet lender.

So, I would say it's properties that might be going through some sort of transition or conversion. Like one of the properties we also did in New York where it's being converted to multi-family. Or it could be a cash fund hotel portfolio or some other property type where, for execution reasons, it makes the most sense to put the senior into a CMBS deal. And when the borrower looks at his blended cost of funds, it's still very attractive, even layering in our [mez].

Okay. And can you just remind me just like on the JPM facility for the senior stuff, or the first mortgage loans, what's the advance rate there?

I mean, just to keep it as simple as possible. To the extent we do a first mortgage that is in the 60% to 65% LTB envelope, we're getting 60% to 65% against our 60% to 65%.

Okay. Because one of the reasons I asked is, obviously, the leverage weighted IRR is much higher than what you're currently carrying on it. So, we're trying to gauge where that could go because I think that's incremental earnings power for you guys, if you choose to use that leverage facility.

We have used it in the past. And I think Megan's comment earlier about us having -- call it $25 million of capital left to deploy. That is sort of based on what we know is in closing in our pipeline today. And it also assumes that as cash winds down we start using the JP Morgan facility.

So, that $25 million, I would say is inclusive of us using the JPMorgan facility to the extent we have collateral to support borrowing.

Okay. Thank you very much.

Thanks, Joel.

Thank you. (Operator instructions). Your next question comes from Rick Shane with JPMorgan.

Thanks, guys. Good morning. Can you hear me?

We can hear you fine, Rick.

Awesome. Thanks. My question for you is just related to the equity compensation in the fourth quarter. We had some variants versus our model. And I want to make sure that we full understand the drivers there.

We've gone back -- and, obviously, it's related to the [L-TIP] program. Can you sort of help us understand how to think about what happened in the fourth quarter. And, Megan, if you can sort of walk us through expectations for 2013? And the challenge I have is when we look at, for example, the vesting schedule on the RSUs, those tend to be pretty concentrated in the first quarter, but the expense doesn't seem to be. And there doesn't really seem to be a lot of correlation with the vesting schedule, either to the RSUs or the restricted stock throughout the year.

The expenses -- the fluctuation in it -- is primarily related to the stock price. At the end of the third quarter, the stock price was in the 17s. And at the end of the fourth quarter, it was in the 16s. So, you do pick up the cumulative effect of that decline in the stock price over the quarter.

And is there a true-up that occurs in the fourth quarter related to what happened throughout the year? Is that the other aspect of this?

Correct. There's a true-up related to -- you know -- you value that whole pool at the current price. So, as the price fluctuates, there will be some true-up in that number for a like (technical difficulty) of the invest --

And so when we look into 2013, the restricted stock vesting goes way down. It goes down by about 90%. But the RSU vesting only goes down much more modestly. Should we expect a -- if the stock price were to stay constant, a pretty significant decline in equity compensation on a year-over-year basis, then, because of the decline in the restricted stock vesting?

If there are not additional stock grants, that would be the case. But as additional stock grants come into play, that number will increase with those grants.

Got you. Okay. Another variable we hadn't thought about. OK. Thank you very much. And, Megan, congratulations.

Thank you.

(Operator instructions). At this time, I'm not showing any further 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.