Apollo Commercial Real Estate Finance Inc (ARI) 2013 Q1 法說會逐字稿

I would like to remind everyone today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance Incorporated 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 filing 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 forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filing 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. Please go ahead, sir.

Thank you, operator. Good morning and thank you for joining us on the Apollo Commercial Real Estate Finance Inc. First Quarter 2013 Earnings Call. Joining me this morning in New York are Scott Weiner, our chief investment officer; and Megan Gaul, our controller, who will review ARI's financial results after my remarks.

The commercial real estate debt market had an extremely active first quarter in 2013 fueled by increased real estate transaction activity, the further refinancing and recapitalization of maturing loans, and the benefits of the continued low interest rate environment.

US commercial real estate transaction volume totaled $94 billion in the first quarter of 2013, an 8% increase over transaction volumes in Q1 2012.

According to a report released by [Trep] last week, for the first time since the downturn loan originations by the nation's largest banks exceeded the outflow of maturing and liquidated mortgages last year marking an important turning point for the industry.

CMBS transaction volume has continued to accelerate with over $31 billion of issuance year-to-date as compared to just a $9.3 billion of issuance for the same period of last year. There has also been a resurgence in the construction lending market driven mostly by residential construction. In March, home builders broke ground on the most multifamily homes including condominiums and rental apartments in over 7 years.

This increased activity bodes well for ARI as more potential investments are coming through our preliminary screening process and our pipeline of potentially actionable deals has grown. However, I would caution that the abundance of capital looking for attractive fixed income returns with asset protection has made the market for deals more competitive.

As we have stated previously, we've noted significant spread compression in certain parts of the real estate debt market. Most notably in first mortgages for either conduit eligible or core properties which are well-bid by the insurance companies. In addition we have witnessed increased competition for what we would call senior mezzanine loans from lenders who historically have been more conservative and are now stretching LTVs to find yields.

Since going public in 2009, ARI has remained focused on identifying compelling investment opportunities in our target real estate debt asset classes. The challenges presented by the current environment have clearly increased the importance of having a well-defined investment philosophy and a strong operating platform to effectively deploy capital.

It is important to note that between ARI and the other real estate debt funds and separate accounts managed by Apollo, the real estate debt business at Apollo today oversees approximately $5.5 billion of investments representing the deployment of over $3 billion of equity throughout the entire real estate debt spectrum' from AAA rated legacy CMBS and highly rated newly issued CMBS through junior mezzanine loans and preferred equity.

This level of activity has enabled our manager to develop deep relationships with multiple counterparties and deal sourcing relationships and has enhanced our reputation as a lender who thinks creatively and works quickly to close transaction.

At present, we are finding compelling investment opportunities in properties that are outside of the conduit box due to property type or transitional activity whether it is renovation, releasing, or change of use that the property.

Often times, these investments are bespoke financing transactions which require a very thorough underwriting. ARI's infrastructure and expertise enables the company to perform deep dive analysis resulting in highly structured transactions in which ARI is well-protected and appropriately compensated for taking the underwritten credit risks.

This was evidenced by the three transactions completed in the first quarter comprised of a construction financing for a New York City condominium development, a subordinated financing for a New York City multifamily conversion project, and a subordinated financing for a hotel portfolio located in Rochester, Minnesota.

In total, these transactions represented $103 million of invested capital and had an underwritten weighted average expected internal rate of return of 14.2%. As we continue to execute more transactions, our reputation as a flexible knowledgeable reliable source of capital continues to grow, and as a result our transaction pipeline, continues to build.

In order to fund our pipeline in March the company completed an underwritten public offering of 8.8 million common shares resulting in net proceeds of just over $148 million.

The company is actively engaged in deploying this capital; however, I would again like to remind everyone that each of our investments is effectively a privately-negotiated transaction that tends to take several months from when we win an investment mandate until closing.

Therefore, we would expect that our operating earnings in the second quarter will be impacted by this investment ramp-up period, but we are highly confident in our ability to get the capital raise a deployed quickly.

Before I turn the call over to Megan, I would like to mention that ARI recently filed a new shelf registration statement as the company had utilize most of the capacity under the previous a shelf filing.

In addition to using the shelf for future capital raises, we expect to use the shelf to establish an at-the-market or ATM program which we believe will offer ARI flexibility in raising capital with lower execution costs and minimal disruption to the market.

We also believe the ATM program will enable us to balance the timing of future capital raises with our need to fund transactions while at all times remaining cognizant of protecting our book value per share.

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

Thank you, Stuart. Before I discuss our financial results, I want 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.

Turning to our financial results, for the quarter ended March 31, 2013, we announced operating earnings of $12 million or $0.39 per share as compared to operating earnings of $8.8 million or $0.42 per share for the three months ended March 31, 2012.

As we indicated in our press release, operating earnings this quarter reflect the $2.5 million yield maintenance payment the company received in connection with the prepayment of two mezzanine loan totaling $50 million.

Net income available to common stockholders for the quarter-ended March 31, 2013, was $10.1 million or $0.33 per share as compared to net income available to common stockholders of $9.1 million or $0.43 per share for the quarter ended March 31, 2012.

The difference between operating earnings and net income available to common stockholders this quarter was related to the mark-to-market on our CMBS as well as equity compensation expense.

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.apollo reit.com.

GAAP book value per share at March 31 was $16.41. As a reminder, we do not mark our loans to market for financial statement purposes and currently estimate that there is another $0.30 per share of value when our loans are mark-to-market.

As such, we estimate our market value per share to be $16.71 at March 31, 2013. Based upon our closing price per share on May 1 of $17.52, we are trading at a 7% premium to GAAP book value.

Our investment portfolio as of March 31 had an amortized cost basis of $688 million with a levered weighted average underwritten IRR of 14.2% and a weighted average duration of 3 years. The credit quality of our loan portfolio remains stable and the company has determined that an allowance for loan office was not necessary at March 31, 2013.

Shifting over to the other side of our balance sheet, ARI made considerable changes to our financing facilities for the quarter. In February the company amended our JP Morgan facility to extend the term for 2 years and pricing on the facility will remain at LIBOR plus 2.5%.

The company primarily uses the JP Morgan facility to finance ARI first mortgage loan. In addition, the company completed an amendment to our [well] facility which resulted in a reduction of our interest rate to LIBOR plus 1.05% for outstanding borrowing used to finance AAA's CMBS and LIBOR plus 1.75% for borrowings used to finance the Hilton CMBS.

In addition, the term for the outstanding borrowings used to finance the AAA CMBS was extended it to March 2014.

Finally, as noted in our earnings release, our board of directors declared a $0.40 per common share dividend for the second quarter of 2013. This is the 12th consecutive quarter of this consistent dividend level and based on the closing price of $17.52 on May 1, our common stock pays an attractive 9.1% dividend yield.

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

(Operator Instructions). Our first question comes from Joshua Barber of Stifel.

I'm wondering if you could talk a little bit about your Hilton CMBS loan. What's your expectation with that as the year continues to go on? Obviously the REIT market has done quite well and there has been some various news reports about that being considered as an IPO but obviously there are some structural issues with that particular piece of paper. Do you have any expectation with that in the next 12 months?

Hi, Josh. It's Scott. I think the company itself is performing well as I think Blackstone has stated. I think Blackstone has talked about what they are doing with their overall portfolio. Obviously Hilton and EOP are two of the larger ones. We are not privy to any kind of information where an IPO or anything like that is an imminent.

So we would expect to continue -- it's overall, a very low cost of funds for Blackstone and they are continuing to execute the business plan in terms of expanding the management business. So we have been very pleased with the investment. It's appreciated -- the dollar price has appreciated considerably since we bought it and we are very happy with the levered return.

Any levered return it we've disclosed related to the investment, Josh, was predicated on holding it to maturity and we have financed it as such. To the extent anything happen sooner would be beneficial to the return as we presented it but that's not -- certainly wasn't part of our thesis at the time we bought the piece of paper.

Okay. That's helpful. Thanks. And also, with your balance sheet growing today, you suddenly have a bit more scale, what would be the upper limit of a deal size that you could actually take down today not just something that you could actually potentially carve up, but something that you'd actually hold the maturity of? Is $60 million about the upper limit of what you would be willing to do?

If you look at our pipeline today, Josh. There's things that I would say are above $60 million. There are some things between $75 million and $100 million range. I'd say upper limit today, I wouldn't say a hard and fast rule, it's probably around $100 million depending on funding components. Is there a future funding component? When does the capital go out? When do we think the capital will come back?

Is it a first mortgage or what is it?

I think we have looked at things that were north of $60 million. I'd say $75 million-$100 million is probably the upper band of what we would look at.

All right. Great. Thanks very much.

Thank you. Our next question comes from (inaudible) of FBR.

Thanks. Good morning. I just had a question. Stuart, I think you mentioned how the environment is getting a little bit more competitive particularly on the mezz side. Can you give a sense of what the yields, the actual loan yields you think you are achieving on some of these newer deals and some stuff you see in the pipeline?

Yes, to be very clear, we draw a distinction between what I would call our senior mezzanine loan versus junior mezzanine loans and ARI has consistently been focused on the bad bottom dollar piece of risk where junior mezzanine loans or press equity irregardless of structure.

We've continued to find opportunities and call it the 11% to 14% range to keep it a broad range, but there certainly variability depending on market property type structure.

I think where we are actually seeing yields compress and this was more a comment on the market as opposed to ARI's opportunities that is what we would describe is a senior mezzanine loan which is call it a piece of paper between a first mortgage of that is somewhere between zero% to 50% or 55% LTV and you've got a senior mezzanine loan that is let's call it 55% to 65% LTV where you are getting returns in the call it 8% to 9% range through 2011, 2012, and that stuff today is more like a 6.5% to 7.5% market.

So it's not something that ARI has particularly played in overtime, but I think it is indicative of just capital looking for yield and various parts of the capital structure getting squeezed.

And I would say that that senior mezzanine is really on cash flow and stabilized properties where maybe a bank or street firm takes it down and then sells that to someone who doesn't necessarily have or need the real estate expertise or doesn't think they need the real estate expertise so I think that at market is trading in tandem with the high-yield market which is as you know is at all-time tights.

So I think people are coming into that senior mezzanine space as an alternative to high-yield and saying I'm getting a little bit of a pickup in yield given the illiquidity and stuff.

Got it. And then just a quick follow up on the new -- -- at the money shelf. It seems like from the cash on hand that there's a still significant capacity after the two raises that actually executing on the shelf -- -- inaudible -- -- may not be really necessary in the near term just kind of to say precaution or an opportunistic thing to do several quarters down the road as opposed to immediately?

Yes, I think it falls under the category of there's no reason not to put it up to give ourselves flexibility in the future. There's no near-term plans to use it but it's relatively cheap to get one established and it's one of those things where you should get through the SEC while you can as opposed to when you may really need to use it but I think we've still got work to do through the capital that we've raised previously before we think about raising any other additional capital in any form.

Yes, that makes sense. Okay, great. Thanks.

Thank you, our next question comes from Vick Agarwal of Wells Fargo Securities.

Just curious. Are you going to deploy to capital or do you envision deploy in capital at roughly the same type of equity allocation between inaudible and first mortgages as you currently have?

Yes, I would definitely say those are the two asset classes. Having said before, we are not really seeing any opportunities on the security side delivered or un-levered so what we are seeing is I would really break into three categories; senior loans where maybe there's some transition or conversion component and then mezzanine loans and again the mezzanine loan that might be on that type of conversion construction type element, or something that we've always done is the mezzanine behind long-term fixed-rate or cash flowing assets. So I would say that is really the pipeline and what we have in closing.

Okay, and can you remind us how much is remaining of equity yet to be deployed?

We basically following the offerings had a couple hundred million dollars' worth to deployed which was after what we announced in Q1 so if you just look at March 31 two can say we had roughly a couple hundred million dollars of equity to deploy and I think I indicated in my comments a lot of that has been spoken for vis-à-vis mandate but it'll take time to close and as we've done historically when either an individual closing is material or we aggregate a few, will certainly attempt to update the market as the capital is being used.

Thanks.

Thank you. Our next question comes from Rick Shane of JPMorgan.

Thanks for taking my question. You were clear upfront about the level of competition heating up and you had a couple questions on that. I'd love to hear if that drives you to either different property classes, different geographies. Are there markets or niches besides structure where you think there's less competition? Is everybody sort of fighting over the same A-class properties in the obvious cities?

Hello. It's got. I'll take that. I would say where we compete the best and where we focus on is the more inaudible products, so anything that is Bloomberg-able -- I'll use the expression -- that's not really where we are adding value. Where we are adding value is certainly the execution, reliability, so someone is buying a property and has a hard money deposit and needs to close, he knows that we will figure out and work with them.

That could be directly with the borrower or we have plenty of relationships with senior lenders who are looking to layoff something and they want to have a partner and that includes both people looking at securitization as well as balance sheet lenders.

So I would not say it's pushing us anywhere. I think we've been very focused and sticking to what we've done. We haven't done any of these equity like strategies or nonperforming strategies. We've always continued to do are performing debt investments.

We have been able to actually do a lot in New York which is obviously a large market of all different types of properties; cash flowing assets, conversion assets. In some respects, we find a relative value basis, some of the for-sale properties ordeals in New York to be more attractive than say a low that yield on a suburban office asset for instance.

So we're not redlining any markets or focused specifically on any markets other than the performing debt that we've been doing historically.

Scott, thank you. That's very helpful.

Thank you. (Operator Instructions).

Thank you, operator. I think we're good at this time.

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