Apollo Commercial Real Estate Finance Inc (ARI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Real Estate Finance, Inc. Apollo Commercial earnings conference call. (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 like to also call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements. Today's conference call and webcast include forward-looking statements, 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 these 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. Sir, please begin.

Thank you. Good morning and thank you for joining us on the Apollo Commercial Real Estate Finance first-quarter 2016 earnings call. Joining me this morning are Scott Weiner, the Chief Investment Officer of our manager, and Megan Gaul, our Chief Financial Officer, who will review ARI's financial results after my remarks.

Despite widespread capital markets volatility in the first quarter of the year, ARI had a strong start to the year. The first quarter was highlighted by the closing of new transactions totaling $328 million and our announcement of the acquisition of Apollo Residential Mortgage, Inc., which we view as a cost effective and accretive way to raise incremental capital for ARI.

From a financial perspective we announced operating earnings per share, excluding expenses related to the AMT transaction, of $0.51 per share, a 16% increase over the first quarter of last year. These numbers reflected adjustment to exclude approximately $5 million of transaction expenses recorded during the quarter.

We believe the strength of ARI's operating earnings is reflective of our success in keeping the Company's capital invested. Given ARI's robust investment activity in the first quarter, as well as known future funding commitments on previously closed transactions, we ended the quarter effectively fully invested.

We enter the second quarter with a limited amount of dry powder and, based upon our current pipeline, we expected available capital to be invested during the quarter as we continue to see attractive opportunities in the market.

Overall commercial real estate transaction volume in the first quarter took a brief pause due to the uncertainty and volatility in the broader capital markets. However, there continues to be significant transaction flow for ARI driven by the pending maturity wall, ongoing healthy transaction levels, continued low interest rates and the uncertainty surrounding the CMBS market.

In addition, we believe ARI is clearly benefiting from the reputation we have built over the last six years as a reliable, thoughtful and creative source of real estate debt capital. Given our positive outlook with respect to ARI's opportunity set, we are excited about the capital we will have to deploy as a result of the transaction to acquire AMTG.

I will add a few comments about the transaction towards the end of my remarks. But in terms of ARI's ability to continue to invest and grow its portfolio, we strongly believe that the capital generated from the acquisition will position ARI very well for the second half of this year.

Turning to our portfolio, at quarter end ARI's commercial real estate debt portfolio totaled $2.6 billion representing 48% growth on a year-over-year basis and generated a leverage weighted average IRR of 14.5%. The weighted average loan to value of the portfolio was 64%. The portfolio continues to remain diversified both geographically and across property sectors.

With respect to ARI's CMBS investments, consistent with the broader capital markets, the CMBS market experienced notable volatility in the first quarter of 2016 which impacted the [volume] and pricing of new issuances as well as the pricing of legacy securities. We believe the primary drivers of this volatility were more technical in nature with traders and investors reacting to general capital market fears which caused spreads to widen across the entire asset backed securities market.

ARI was impacted by this volatility as the CMBS bonds we own experienced significant price fluctuation throughout the quarter. Specifically our bonds, which were marked on a weighted average basis at [96.4] at year-end hit a low of [90.9] towards the end of February and then started to recover in March and closed the quarter with a weighted average price of [93.5].

As a result during the quarter ARI experienced an unrealized loss on CMBS of approximately $15 million or $0.22 per share which drove the decline in book value. As a reminder, this is an unrealized loss and therefore does not impact our operating earnings or our ability to pay our dividend and we expect to fully recover the unrealized loss over the life of the bonds.

The market has continued to improve subsequent to quarter end with spreads narrowing and prices rebounding further which has positively impacted the value of ARI's CMBS. At March 31, 2016, ARI owned a diversified portfolio of CMBS allocated across 20 CUSIPs with a face amount of $505 million, an amortized cost of $498 million, and an estimated fair value based on quarter end marks of $472 million.

We finance ARI's CMBS with two termed out repurchase facilities and the amount of net equity at cost allocated to the CMBS strategy was $144 million at quarter end or approximately 9% of invested equity. The bonds are all legacy 2006 and 2007 [AJs] and [AMs] formally rated AAA, with a weighted average remaining life of about 1.5 years.

Based upon our regular re-underwriting of the bonds we anticipate that ARI will receive approximately $500 million of principle as underlying loans are repaid through refinancing, restructuring or asset sales and have been recognizing income based upon that expectation.

To the extent that the principal ARI receives on the bonds is in excess of the current estimated fair value, which is our expectation based upon our underwriting, ARI's book value will increase in line with the excess and the unrealized loss should reverse.

Turning now to ARI's for-sale condominium loans. Our portfolio continues to perform well. At quarter end we had approximately $478 million in net condo exposure spread across eight investments. The weighted average loan to net sellout value on the condos is approximately 55%.

Sales at condominium projects in both New York and Bethesda that are actively being marketed are tracking well and we are very comfortable with ARI's loan basis and the structures we have in place with each of these loans.

Two highlights to note from the portfolio include the near sellout of the condo conversion that ARI financed in Greenwich Village as well as the sale of over 100 units in the first 60 days of marketing for a still under construction condominium ARI is financing on the Upper West side. Both properties are currently exceeding our underwritten expectations.

Finally, with respect to our $54 million first mortgage loan on a multi-family property located in Williston, North Dakota, we continue to monitor the loan closely as occupancy and rents remain below original underwriting. As we stated on our prior earnings call, we re-underwrote the asset at year end which resulted in an increase to our disclosed LTV but did not result in the Company booking a reserve.

Through the early part of this year leasing activity at the property was limited, which is in line with expectations for the winter months. And while net operating income continues to be less than our original underwriting, the property covered debt service during the first quarter. As such there has been no material change to our underwriting from year end and to date ARI has not recorded a reserve against the loan.

Given recent announcements regarding the mandatory closings of man camps and the continued need for permanent housing within Williston, both we and the borrower would expect leasing activity to increase during the spring and summer months. As we do each quarter, we will monitor and review the property performance as well as the overall market closely and determine if a reserve is required when preparing our second-quarter financials.

Lastly, I would like to take a moment to briefly comment on ARI's pending acquisition of AMTG. On February 26 we announced the signing of a definitive agreement to acquire AMTG in a cash and stock transaction. The acquisition price equals 89.25% of AMTG common book value as of a future pricing date which will be three days prior to the mailing of the definitive proxy statement to AMTG shareholders, a majority of whom must approve the transaction.

As I said earlier, we view this transaction as an extremely cost effective capital raise as we will issue 13.4 million shares of ARI common stock at $16.75 a share which is a 5% premium to ARI's March 31, 2016 book value per share. In addition, upon closing we will assume AMTG's $172.5 million 8% cumulative redeemable perpetual preferred stock which, in our view, we would be unable to replicate in the current market environment.

As we stated in the announcement release, we do not intend to enter the residential mortgage business. We have already arranged the sale of approximately $1.2 billion of non-agency RMBS to certain subsidiaries of Athene Holding expected to take place upon closing.

In addition, we intend to sell the remainder of AMTG's investment portfolio and redeploy the capital into commercial real estate debt investments. We are very confident in our ability to accretably deploy the incremental capital and have already started the process of building a robust pipeline.

As far as timing, at the beginning of April ARI filed a registration statement with the SEC which includes the preliminary proxy statement and prospectus and we are currently waiting for comments. Pending AMTG's stockholder approval and other customary closing conditions, we anticipate the transaction will close early in the second half of the year.

Before I turn the call over to Megan, I wanted to comment on our CFO search. I am pleased to announce that we have identified a candidate who we believe is extremely well-qualified to fill the position and we anticipate announcing the candidate's appointment in coming weeks following approval of the ARI Board of Directors. We look forward to introducing the new CFO on our next quarter's earnings call. And with that I will turn the call over to Megan.

Thank you, Stuart, and good morning, everyone. For the first quarter of 2016 the Company announced operating earnings of $29.8 million or $0.44 per share.

Excluding one-time expenses associated with the pending acquisition of AMTG, which totaled approximately $5.1 million, ARI reported operating earnings of $34.9 million or $0.51 per diluted common stock, representing a per share increase of 16% as compared to operating earnings of $22.2 million or $0.44 per diluted share of common stock for the three months ended, March 31, 2015.

Net income available to common stockholders for the same period was $12.8 million in 2016, or $0.18 per share, as compared to $23.7 million, or $0.47 per share, for 2015.

A reconciliation of the operating earnings to GAAP net income can be found in our earnings release contained in the Investor Relations section of our website, apolloreit.com. GAAP book value per share at March 31, 2016 was $15.89, a 2% decline from last quarter driven, as Stuart mentioned, by unrealized mark-to-market losses on our CMBS portfolio.

At March 31, 84% of the loans in our portfolio had floating interest rates and we continue to position the portfolio to benefit from an increase in short-term rates. We anticipate that if LIBOR were to increase 50 basis points our portfolio would generate an additional $0.09 per year in operating earnings. With respect to ARI's leverage, ARI ended the quarter with a 1.3 debt to equity ratio.

Finally, I wanted to highlight our attractive dividend yield. Based on Monday's closing price, ARI's stock offers an attractive 11.6% yield. Given the strength of our results to date and our previously stated goals to establish a consistent quarterly dividend that is covered earnings and meets the REIT distribution requirements, we are confident in ARI's ability to earn the quarterly dividend in 2016.

The Board will meet in mid-June to discuss the Q2 dividend and we will make an announcement shortly thereafter. And with that we would like to open the line for questions. Operator?

(Operator Instructions). Steve DeLaney, JMP Securities.

Stuart, you have a slide in your deck, your supplemental on page 6 about the $328 million. And it gives us the terms and -- the average terms, etc. But you could you just give us a little color about these three new investments in terms of property type and location? That would be helpful, thanks.

Yes, I will let Scott do that.

Sure, I think we disclosed the largest of the investments was a first mortgage loan down in Miami secured by an existing retail property in what is known as the Miami Design District. It was about a 65% loan to cost first mortgage. We underwrote it based on the existing buildings and structures.

I think the sponsor thinks that there are some higher, better uses there just in terms of repositioning the properties. Maybe some of the buildings aren't fully built out; they think there might be some other uses that could be appealing to that market. So that was the first one.

But our view, to be clear, does not allow any demolition and redevelopment. We are alone, that gives them time to figure out their plan. But there are tenants in place; it is a current pay loan.

The second first mortgage loan that we did was up in Boston, again circa 65% loan to cost, existing office building, currently leased to not-for-profit. The sponsor thinks there is upside from retaining the property with more for-profit companies and upgrading the building. They are also looking potentially at a change in use down the road maybe of the condos or something. But we and they underwrote it as office, so again a cash flowing first mortgage.

And then our last deal was a mezzanine loan in the Tribeca neighborhood of Manhattan to convert an existing office building to condos. As you might remember, we have had two other condo deals in that market, both have been paid off. One was a conversion actually across the street from this deal and one was ground up down the street. This one is about a 60% loan to net sellout deal where we partnered with a bank. This was a repeat borrower as was the deal in Miami -- were repeat borrowers.

The color is helpful. Thank you, Scott. And guys, are you seeing, given all the disruption that we had late last year and early this year in CMBS -- frankly I think the flow -- it seems that borrowers are continuing -- they are still in the game, and that is nice to see in the reports that have come out so far.

But I am just curious if you are -- from your seat, if you believe that you have some degree of incremental pricing power in terms of negotiating loan terms given what has happened in CMBS, etc.

I would say we do feel we have a little bit more of a strong position, but I don't know if it is really tied directly to CMBS. I mean what is going on in CMBS (inaudible) market, but that has really never been our market. I would say they are focused on kind of smaller secondary tertiary and obviously longer-term fixed-rate, that is not where we played. But obviously that gets a lot of news as does other things.

So I think just like anything, kind of sentiment and whether it be borrowers and lenders, we kind of feel that maybe it is -- lenders have a little more of an advantage and so we can use that. But I don't know about -- again, that is directly tied to that.

I think the absence of a floating rate CMBS market clearly helpful, but at the same time we still do see a very active bank market. And there are deals again where we partner with banks. So it is obviously helpful in a sense for what we are doing for other markets not to be as robust, but not directly tied.

Understood. That is about it that I have, guys. Stuart, your comments on AMTG and on the CMBS mark were very thorough. So those questions I had have already been covered. So thank you, Scott, for the comments.

Rick Shane, JPMorgan.

I want to just sort of dive in a little bit, Stuart, in terms of your comments that at this point you are fully invested and that you are essentially waiting for the AMTG deal to close to give you that next slug of capital. And I think it is a very creative way to increase your capital in a tough market.

But I am curious sort of how you approach the second quarter in building that pipeline given the uncertainty of when loans will close and ultimately at least a modest degree of risk related to the AMTG closing.

We have got a couple things that we will likely get done in the second quarter just with a little bit of capital that we went into the quarter into that I alluded to in my remarks. So we'll stay somewhat active during the quarter.

I think the challenge you reference is sort of the daily dialogue that goes on between Scott and I in terms of confidence around the merger getting to the finish line, which at a high level we are pretty confident about that right now. What we think truly looks interesting for our next slug of capital.

I think this is one of those situations where ARI benefits tremendously from the fact that beyond ARI we manage other pools of capital in the credit space. And while those pools of capital are not competitive with ARI, they allow Scott and his team to remain active in dialogue with counterparties, borrowers, intermediaries around transactions that will get done in our credit business regardless of whether the ARI can find additional capital or not.

So it is important, I think, for us to continue to be out there and active. And, look, a lot of what we do is somewhat long dated. We are not buying off a Bloomberg screen. There is much that we do that sometimes takes 6 to 12 weeks to close even though it is signed up. And we are also fortunate to be able to do things with either repeat borrowers or repeat co-investors in transactions.

So, I think it is a juggling act but I think it is one that we are comfortable with and in a lot of respects are benefiting from the fact that there is just a lot to look at in the market right now. So it is not as if we are sitting here today worried that things are going to dry up in the next couple months. If anything, I would say the market is moving towards us as people need to deal with the 2006 and 2007 vintage loans that need to be restructured, refinanced in one form or another.

And is there any potential backstop from your parent? And the reason I say that is that we, as you know, cover a lot of companies with a lot of different sponsors or different parents. And we have seen your parent step up in the past in certain situations in a -- of what I would describe as a very forthright way. Is that ultimately, if something did come down the pipeline, another resource?

I don't think -- look, I don't think they're -- we have it used the parent so to speak -- and it wouldn't be the parent, it is other pools of capital that we manage here at Apollo. I would say we have used the broader umbrella to help us with size in the past and have certainly used it, A, to manage ARI's exposure to any one deal to make sure that nothing gets too large.

But just as importantly to allow ARI to potentially participate in things that would ordinarily be too big. Given the size of ARI I would say we are not approaching the next few months, just because we have got this pending merger going on, any differently.

Yes, and I would also add, as you remember, we also have loans that are getting repaid. So there always is money kind of coming and going. And depending on what we are doing we also have very good relationships with other lenders who might -- we might partner with who might hold a piece and then when we have more capital sell it to us at a later date.

There is a lot of different options. But as Stuart mentioned, we are definitely in the business, we are active, we will be making some new loans in the second quarter. But clearly, assuming the merger happens, that is a large chunk of capital, which we are proactively trying to line things up for. At the same time we don't want to commit to things until we know we are going to have capital.

Got it, okay, totally fair. Last comment -- I just wanted to say thank you, Megan; we have enjoyed working with you over the years and wish you good luck in whatever is next.

Thanks, Rick.

Jade Rahmani, KBW.

This is actually Ryan Tomasello on for Jade. Thanks for taking my questions. I was just wondering if we can talk about the loan repayment activity during the quarter. It seems that there was a sharp decline. Can you give any color on your expectations for repayments for the balance of the year and how that relates to your expectations for liquidity and investment capacity as you were talking about earlier?

Sure, look, I think by its nature it is somewhat lumpy and there are situations where you expect to get paid off and to our benefit someone wants to either extend or restructure and keep it out longer. We presented in our supplemental what the stated maturities are for the portfolio. And if you look at 2016 there is basically another $225 million expected to mature this year.

I thing that is as good a number as any. It is quite possible that one or two loans that make up that $225 million might extend. But it is also possible that something that is slated to pay off in the early part of 2017 might prepay early and we will get some incremental economics from that. So I think you are roughly looking at a number of a couple hundred million dollars between now and the end of the year.

Right. And then we also do have some future funding obligations and some deals helps to offset that.

Okay, great. And then I appreciate the incremental color on the North Dakota multi-family loan. Just hoping to dive a bit more into that. Can you disclose if the LTV is actually assessed every quarter? And did the lack of change on the LTV from 1Q to 4Q result from a decline in transaction volume as comps in the quarter? Just any color you can give on where the occupancy of the property is today, what the cap rate potentially is on the property given the 90% LTV, any color would be helpful.

Yes, look, at a high level we look at the loan every quarter, we assess what we perceive that [view] to be. We have not previously disclosed cap rates and I'm not going to get into an attempt to try and predict cap rates. What I tried to indicate in my remarks on -- prepared remarks is that not much has really happened between the end of the year to today.

If you actually think about reporting in fourth quarter at the end of February and now we are sitting here at the end of April not a lot has happened. And to be honest, it was sort of expected that not a lot was going to happen. Because if you look at leasing activity in January, February and March in Williston, North Dakota it tends not to be the peak leasing season.

I think we are going to know a lot more about the asset when we see what happens over both the spring and summer leasing cycle as well as if there is any impact to the market overall from the mandatory shutdown of some of the man camps.

But generally speaking, I think if you look at market data broadly -- and this is not our asset specifically -- about multifamily leasing in Williston, you are somewhere in the 60% to 70% range in terms of occupancy for comparable multi-family and I would say we are performing with the market these days.

Okay, thanks. And then just lastly on current spreads that you are seeing. I know you gave some color on the originations that took place in -- during the quarter. But just broadly speaking where are yields currently on the types of first mortgages and mezzanine loans that you are doing today and how does that compare quarter over quarter?

And just given the rebound in the CMBS market that has taken place over the past few weeks, has that actually resulted in some potential spread tightening in the types of loans you are doing today?

Yes, as I said, we are not really directly impacted by CMBS. I would say for -- the first mortgage loans we are doing in particular are more impacted by availability and cost to repo financing or availability and cost of selling A notes. Because a lot of what we are doing doesn't fit necessarily the narrow box of maybe some of the banks who are certainly, like we talked about, there really is no floating-rate CMBS market.

So I mean, like on the margin I think maybe spreads a little wider, maybe the attachment point is a little greater. But I mean again, depending on the type of first mortgages, there's first mortgages that we do that are in the 4s, and some are in the 5s and some are in the 6s. It's going to be very dependent on the type of deal that we are doing.

And I would say on the mezz side, high-single-digits to low-double-digits, again very dependent on the type of deal that we are doing. But CMBS is not what is driving spreads in this market.

Okay, and then -- that was helpful. Just one last one for me. Should we be expecting any incremental transaction costs from the AMTG deal prior to the closing in the second half of the year?

Yes, you will, there is sort of ongoing legal expenses around the deal. There are some other expenses. And then there are some fees that are contingent upon the deal closing. It is tough to predict, to be honest with you, what is going to happen in either Q2 or Q3 because I don't know when the deal may or may not close until I get comments back from the SEC on the filings. And as I think we indicated in our remarks, we are still waiting for those comments.

But I would say at this point expenses are as we expected them to be. And we certainly -- when we agree to pay 89 spot 20 (technical difficulty) AMTG and were confident that we were doing something that was accretive to AR right on a capital raise basis, that certainly assumed an amount of transaction or deal expenses. And what we have incurred to date is consistent with what we assumed as part of the deal.

Great, thanks for taking my questions.

(Operator Instructions). Jade Rahmani, KBW.

Hello?

Sorry, this is a Jade. Just want to confirm, are there additional transaction costs expected on the AMTG deal? And with respect to the assets that you will be boarding, over what time period do you expect to sell those assets?

So, yes, there will be incremental expenses. As I stated earlier, everything we have incurred to date is sort of in line with what we assumed when we complete -- announced the transaction. So timing is a little uncertain because you just don't know when you are going to incur certain costs with respect to legal work around filings and proxy solicitation and those sorts of things. But I would say the expenses are tracking with what we expected.

And then I think in terms of asset dispositions, as I have stated, our desire is to get out of all of the AMTG assets as quickly as possible and convert the capital to credit -- real estate credit investments, commercial real estate credit investments. And I think we will be able to get out of the bulk of the investments in no worse than a quarter and hopefully sooner.

And can you just remind us -- or perhaps based on projections with respect to the repayment rate on that portfolio, what the balance of assets will be that you will be putting on the ARI balance sheet?

Well, you know, it is a mix of agency and non-agency securities and AMTG has certainly filed publicly what their portfolio information. So you can grab their 1231 information for now and they will report in the coming weeks.

The non-agency, the bulk we have announced as part of the deal that are already presold to Athene, an affiliate of Apollo. And the agency securities for the most part are highly liquid traditional agency securities that we think we will be able to sell very quickly, but prudently obviously just so we are not fire selling them into the market.

Thanks for taking the follow-up.

Rick Murray, Midwest Advisors.

I was hoping you might be able to provide a little bit more detail surrounding your investments in the UK and any commentary on activity in that market and your outlook. Thank you.

Sure, go ahead, Scott.

So, we have three investments in the UK, one is a portfolio of healthcare-related properties throughout England that is performing well as an acquisition. I don't think that's at all impacted (inaudible) that these are English people who are aging and need a place to go. So that is performing well.

We have two loans in London, both kind of predevelopment loans where the ultimate plan is condos. One of those we are in the process of being refinanced out. We had the option to do the ultimate construction financing and chose to pass for a variety of reasons. So, we expect that loan to get paid off in the next month or two kind of right prior to maturity.

The other loan is a prime site in central [London], what they call the Golden Postcodes. That is also a predevelopment loan where the maturity is the end of this year. That sponsor is commencing presales and seeing very -- what we are anecdotally hearing very strong interest.

And again, given that price point and location of that property, we don't foresee it being hurt by any kind of Brexit because it is not that -- again, that type of buyer who might be impacted by that. So really those are the three deals that we have in London -- soon to be two. Did I answer the question?

Yes, thank you.

And from an FX perspective obviously we hedge all our UK loans, which is why you see some gains and some losses as we are rolling the hedges. But we do fully hedge our loan investments in the UK from a currency exposure.

Thank you. At this time I'm showing no further questions. I would like to turn the call back over to Stuart Rothstein for any closing remarks.

Thank you, operator, and thanks, everybody, for participating this morning.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.