Q4 2019 Earnings Call
Earnings Conference call.
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Forward looking statements and projections and we ask that you referred to our most recent filings with the FCC four important factors that could cause actual results to differ materially from these statements and projections.
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Well I call us to once you find one 530 200.
This time I turn the call over to the company's Chief Executive Officer Stuart Rothstein.
Thank you operator good morning. Thank you to those of you heard joining us on the Apollo commercial real estate finance year end 2019, earning call joining me in New York. This morning is our Chief Financial Officer, Jay Agarwal.
I would like to begin the call by reviewing some of the highlights of a very successful 2019, and providing an update on the portfolio I'll conclude with some additional color on the dividend announcement contained in Yesterdays earnings release, and then turn the call over to Jay for an update on our financial results.
During 2019, we celebrated its 10th year as a public company and we are extremely proud of the success and growth of the company since 2009 as well as the strength of the platform. We have built apollo's commercial real estate credit team has established a leading position in the market predicated on it.
Sensors relationships and a well earned reputation as a reliable thoughtful and creative capital source.
During the year error, I committed to $4.2 billion or blown transactions and the strength and breadth of the platform was evidenced by the diversity of deal types property type and geography is represented in the book of business.
Highlights for the past year include a broadening of our geographic footprint throughout Europe as well as several sizable transactions, which we believe speak to the benefits Eri receives from the overall Apollo platform.
Specifically, our European team how to break out here in 2019, completing over $2.6 billion of transactions on behalf of they arrive and successfully expanding our business into Germany, Italy and Spain.
Apollo has been an active equity investor in European real estate and the integrated platform enables the commercial real estate credit team in London to benefit from shared relationships resources, and real time market information when originating and underwriting new opportunities.
I also want to add some color around our success in winning larger mandates. This past year I have frequently commented about our ability to use the broader Apollo platform to speak for larger transactions and create para pursue or senior junior structures, which provide single source solutions for borrowers and.
Sponsors.
Pollo recently closed the 850 million pound construction financing for the White leaves mix use development in London, and the approximately 800 million dollar financing for the retail portion of the Crown building in Midtown Manhattan.
In each instance, Apollo one the mandate due to our ability to underwrite and structure a complex transaction, our willingness to commit to the full financing request and our reputation as a trusted financing parton partner importantly by securing the whole loan mandates Apollo was.
Able to create attractive risk adjusted investments for air rights, which include the 675 million pounds senior mortgage position on white lease and a $318 million of the $587 million senior mortgage position on the Crown building with affiliated Apollo.
Capital subordinate <unk> REIT positions for both financings.
There are few additional trends with respect to our 202019 originations worth mentioning.
First our strategic focus on migrating the portfolio towards senior loans continued its 84% of 2019 originations were first mortgages and we ended the year with approximately 70% of air rise net equity invested in senior loans, while we still track the entire loan market.
And episodic lead come across interesting subordinate loans at present, we are finding more compelling risk adjusted returns for Eri in the senior loan space in several instances this year, Eric I opted to take a senior position in transactions in which other institutional capital was junior to air ice position.
And those transactions, we were comfortable with the risk associated with the senior portion of the financing and we had a high degree of confidence in both our relationship with and the expertise of the junior lender.
The other trend I would like to highlight was the fact that over 80% of their transactions. We completed had borrowers who were financial sponsors demonstrating how the amount of dry powder in close then real estate fund continues to support robust transaction activity, we do not see this trend slowing and 2020.
As our pipeline builds in both the U.S. and Europe.
Finally, a few comments on air rights capital market success, and the continued efficient management of our balance sheet and capital structure.
During the year Eri expanded its capital sources, extending the maturities of liabilities and when possible lowered its all in cost of capital.
Hey arise equity capital base grew by $350 million during the year principally through a common stock offering that was executed at a notable premium to book value. During the second quarter. We completed our debut offering in the term loan b market with a 500 million dollar seven year term loan.
Alone was priced at LIBOR, plus 275 basis points and subsequent to closing we swapped the floating rate loan to fixed at an all in cost for seven year money of 4.87%.
The successful loan transaction initiated air eyes ratings and enabled eri to add non mark to market term leverage to its capital structure.
Turning to an update on the loan portfolio at year end the portfolio totaled $6.4 billion, which is a 30% increase from the end of 2018 in general credit quality remained stable. However, I want to provide an update on two of our larger loans.
With respect to a predevelopment loan that we referred to as the Miami design District loan. The borrower has elected not to move forward with the plan development. The 220 million dollar loan was originated in 2016 and since origination. The loan has subsequently been paid down to approximately $180 million.
Which is roughly 50% of the borrowers cost basis. The property was recently brought to market with the intent to repay our alone as well as deferred interest and fees with the proceeds from the sale.
I also want to provide an update on our loans securing the Steinway building in New York City. This quarter, the senior and mezzanine lenders agreed in principle to modify and extend the in place loans until September 1st 2020 in order for the sponsor to complete construction and begin unit closings as part of the extension.
And the ex <unk> equity sponsors have agreed to contribute approximately $50 million of equity to the project and in light of the construction and sales progress made to date. The lenders have agreed to a reduction in the interest rate, bringing the financing more in line with current market turns we expect that the in place capital structure.
We'll be refinanced prior to the end of the year.
Lastly, I would like to discuss the dividend announcement, we made yesterday with our earnings release.
As noted in the release their eyes Board of directors considers multiple factors when setting the dividend, including the sustainable level of operating earnings. The current loan portfolio is expected to produce the achievable risk adjusted returns on equity and our I can generate when reinvesting capital and the appropriate less.
All of leverage utilized in achieving these underwritten aro ease.
Since 2017 achievable risk adjusted returns in both the senior and subordinate loan markets have steadily declined due to a confluence of factors, including increased competition from capital seeking alternative yield spread compression and a decline in short and long term benchmark interest.
Rates. In addition, during the year several of our older vintage higher yielding subordinate loans were repaid and we noted several more will either be repaid or restructured in twentytwenty, resulting in the capital being redeployed at a lower return.
We have consistently stated our commitment to delivering high quality earnings and a stable are really without assuming except for excessive risk through increasing leverage or deploying capital into loans with a higher risk profile. We remain steadfast in our belief that we will not chase a nominal return and most.
Continue to remain disciplined in both our approach to new investments as well as leverage we also want to reiterate the board's desire as much as possible to set a consistent dividend level. Accordingly, the board of directors announced a 40 cents dividend per share of common stock for the first quarter of Twentytwenty and ill.
Back to maintain that level for the remainder of Twentys 20 subject to performance and the boards approval and discretion, that's new dividend level offer stock holders and approximately 8.9% dividend yield based on current stock trading this morning.
As we look to the year ahead, we remain confident in air business model and market position, our focus remains on finding investments, which generate attractive risk adjusted returns within a arise core business 2020 is off to a strong start since January 1st Eri has committed to 560.
Million dollars of new commercial real estate loans, and our pipeline remains healthy.
We will remain steadfast to our credit first methodology, while building a arise pipeline and will be prudent in our capital management in finding new business. We believe the combination of our platform pipeline and financial flexibility will enable eri to continue to generate attractive risk adjusted returns on it.
Invested capital and with that I will turn the call over to Jay to review our financial results.
[noise] fourth quarter plenty 19, our operating earnings were $70.9 million.46 per share.
GAAP net income for the quarter was 68.5 million 42 cents per share.
During the fourth quarter, you closed nine loan transactions totaling over 2.2 billion.
1.2 billion, if which funded during the quarter.
We also funded an additional 143 million for previously games.
Repayments during the quarter totaled 1.2 billion.
Does that thing in net portfolio growth of 4%.
Honest, a new loans more floating rate mortgages.
The ended the year.
He was comprised of 72 loans and had an amortized cost of 6.4 billion it 30% increase over last year.
The portfolio had a weighted average unlevered yield of 7.4% and they fully extended remaining 10 of just over two years.
We have approximately 1.9 billion future funding commitments.
Roughly 850 million of which we expect to fund in 2020.
Mhm Proximately 1.5 billion for U.S. loan portfolio as LIBOR floors that are currently in the money.
[noise]. These loans have an expected remaining term of just over one you read the weighted average lagging floors, 2.1%.
With respect to liquidity and leverage.
As of quarter end, we had over 750 million of available capital in the form of cash and availability on a credit lines.
And we ended the quarter with the 1.4 times debt to equity ratio.
As a portfolio migrates to his first mortgage loans leveraged will gradually increase.
During the quarter, we entered into a repurchase agreement with Barclays Bank, bringing total financing capacity to 4.3 billion with six counterparties.
Lastly, I'd like to mentioned the upcoming accounting guidance on current expected credit losses or C. So.
We expect our January 1st 2020, additional Cecil is there will be approximately $31 million 50 basis point of our amortized cost.
Which will have the 20 cents impact to book value per share.
For further information please refer to a form 10-K size last night and with that we'd like to open the lines for questions. Operator. Please go ahead.
Thank you.
As a reminder to ask the question you went to press star one on your telephone.
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He said probably compared to Q and a roster.
All right and our first question comes the line of Stephen laws from Raymond James You May begin.
Hi, good morning.
Earnings.
Morning, appreciate the comments Stuart I guess first if you can start with the Miami outside and talk about where in the product process goes from here and.
Timing of how you expect to the point you you know at this point any outlook on timing of resolution of that loan.
Yeah.
His point.
Filters have been retained.
Great news out to the market.
And da's have been signed in are still being sign I think theres north of 50 at this point. So there's there's significant investor interest. It's obviously a somewhat complex project given the read the redevelopment nature of it and there is effectively two different parcels I would expect.
We'll learn a lot more in the next six to eight weeks as we start to get feedback.
Back from investors and people dig in and ask questions and I.
I think realistically, we'd certainly expect that when we're doing this again two months from now there should be a lot more color.
On the process and sort of more information with respect to potential scenarios and likely outcomes, but the deals in the market now.
The initial response is what we would have hoped for in terms of Investor interest and then we'll let we'll know a lot more six to eight weeks from now after people have a chance to underwrite dig in and do their diligence.
But it's off to the ratios at this point.
Appreciate the color there.
Okay, a couple of questions first on leverage.
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It makes perfect sense, we increases the mix of senior loans, increasing their mathematically how should we think about it or where is there a target for where you would run leverage if it was 100% senior loans.
As we kind of think about ramping to get there as the mix of meds continues to decline.
Yeah, I think Steve in the way, we think about it is at a high level to your point, if we ran the goal posts right there'd be no.
Effectively zero leverage if we were all mezzanine loans and most first mortgages today are being.
Finance somewhere between.
Two and a half to three times on an individual deal basis I.
I think it's important.
As you think about that as as a goal posts and I'm not sure we ever get to the extremes of either goalpost. The other thing that I think is particularly relevant is.
As leverage moves up sort of the mix of that leverage whether it is repo specific leverage or whether its and and asset specific.
Turn levered term leverage will be which we've actually.
Approach the market several times successfully either on the convertible note side or on the term loan side. We ended this quarter at 1.4 times. So theres a long way to go as we start thinking about.
Those goalpost, but the way I would think about it is on an individual deal.
We're probably no more than two and a half to three terms leverage on an individual repo financing and from a corporate finance strategy, our desire will always be to mix, both repo as well as non asset specific term leverage.
Great. Those comments are helpful and last question for me regarding Cecil.
Hopping.
Think about diesel and how the reserves just from here I know, it's not broken out but.
How will the 50 basis points trend as the mix shifts the senior loans and Additionally, regarding the Miami development as their specific reserve there or how big of a component of the general reserve related to the new for rated assets.
Yes.
Specific is over.
On that asset just yet and then to answer your first question.
As we shift our portfolio mix right. So mezz loans generally have higher.
In terms of percentages.
So and mortgage loans have smaller percentage of seasonal dessert.
Our portfolio would have become 100% for first mortgages say.
Percentage see sort of you would go down to that 50 basis point number would go would go down significantly.
Can you quantify that impact or is it still too early in this process to know exactly where that would show [laughter], yes, it's still too early given given there's future funding components might change no one loan when expectations might change credit quality might change macroeconomic views et cetera might change so.
It's still too early to quantify that.
But is it safe to assume given that the focus on increasing the mix of senior loans were likely not going to see an IND.
It's in the seasonal reserve run through the income statement or how how should we think about the reserve on a going forward.
That's fair if he will do just shift the portfolio. Then you would not see as you would not you increase in the seasonality of but.
We will do just simply grow right. Then you would see if you will see an increase in the season deserve.
Okay, great. Thanks for the clarification thanks, Jeff.
Thank you and our next question comes from line Rick.
Rick Chang from JP Morgan you may begin.
Thank you good morning, guys.
Just wanted to follow up on on the see some question and related to the unfunded commitments.
Our understanding is you guys do you have to take.
Let's see so reserve against unfunded.
The ratio on the balance sheet between funded and unfunded is at a relatively high watermark for you guys.
Curious the sort of.
How do you think about that going forward into Cecil environment, because there's a billion dollars there that won't be funded until next year based on the comments, we heard but you'll have to take a reserve for today.
Yes, I mean look very very sick when it goes Cecil penalty on these unfunded commitments, but we don't think that impacts our business. We also the thesis penalties. If you will is not 100% of the unfunded commitments. Because you you do after sedan estimated time weighted component of that so.
If.
If you have unfunded commitments of $2 billion. The c.. So there's enough good theoretically be and I'd say half of that.
Got it and how capital perspective, how do you how do you mean, just how much visibility do you have do you get sort of two quarters of visibility from the developers about what the draws going to be.
Your how does how does that work.
Yes, I mean depends on a loan by loan basis, but somewhere between you know.
Six months to one year visibility.
Okay.
You guys perspective, but we just to be fear Reg we've got a on any construction deal right. We've got a construction consultant working on the Apollo side of the equation as well right. So were.
Part of the monthly call. It construction draw cost estimate process and have reasonable visibility you know as Jay says looking out six to 12 months in terms of whats coming it's not just getting an estimate from the developer. It's it's a more active process and were very.
Much sitting at the construction table getting a sense of whats coming in the future.
Got it so you're you're this is up also based on sort of your own assessment of milestone achievement, Yes, that's right.
Great. Thank you guys.
Thank you and our next question comes online.
Hey drum money from KBW you may begin.
Thanks very much.
To start with the revised dividend does that take into account the lower stylet yield and the non accrual on Miami.
Yes.
Can you give some color as to the Steinway loan and what the revised yield is what you're a whatever eyes exposure is at this point and if the additional equity when to pay down any of the death.
In no particular order the additional equity they didn't go to pay down debt. It was to basically ensure that there is.
In sort of any reasonable eventuality more than sufficient capital to complete the development.
Without being overly specific on where.
Yeah rise return when we were short of plus or minus 20% on our old capital and we are calling plus or minus tenish percent, 11% on our new capital.
The overall capital commitment as of today, it's about $260 million you 60.
Yeah.
The mix of both senior and junior Mezz and as we said in my comments.
Yes. This was basically us in the other lenders.
Turning to putting into place a capital structure that gets this thing to completion gets it to the point, where they started closing some additional units and fully expect but as they move towards that.
We'll be take it out with some sort of inventory refinancing towards the latter part of this year.
I think commercial mortgage alert reported that they were looking for a refinance so does this suggest that there wasn't interest from other lenders at this point.
I would say I'm not going to be in a position of speculating on the accuracy of things that are in commercial mortgage.
Okay, and do not have an update as to what percentage of the units have been sold.
They haven't I and we have information, but they haven't released anything publicly so I'm not at liberty to sell.
Okay.
On the Miami design District loan JV capital, which is a partner with threats Guy capital in February 10th published an update in which they said that both the Miami design district loan and the Fulton Street loan the I'm not the loan there their equity and it would be completely written off.
The words, they don't expect any recovery in value. So do you expect any impairment.
On either of those loans.
Based on the accounting treatment, we use this quarter the answer would be no.
Again, I'm not at Liberty to comment on why they did or what they did in did but sitting here today, we below believed that both loans are.
Value protected in terms of our loan basis.
And in terms of D or how those or how the Miami projects will be marketed since I don't believe there's been much leasing so there's not much cash flow.
On what basis, we'll do well the project the market. It is it going to be priced on.
You know some dollar amount per per acre or per.
The square feet of developable space.
What's going to be the favour value there, it's a redevelopment site no different than any other redevelopment site that gets marketed their existing buildings. There that we're intentionally emptied out but still sit there is buildings, so anybody's pro forma could assume.
They might want to release for a period of time and develop on one parcel versus another parcel, but it is existing real estate that his own for significantly more density.
Adjacent to.
An existing area, whose metrics in terms of sales per square foot of their current tenancy are increasing rapidly and the acceptance of the design district.
As a true.
Submarket or as a true commerce area.
The metrics are getting better every day, so it's being marketed as a redevelopment slight theres also flexibility in terms of what people decide to put on the site.
And obviously based on what they determine in terms of asset type whether office hotel retail will have impact on how they think about value.
Okay in terms of this quarter's earnings 46 cents I believe included about two cents of.
Prepayment income so 44 cents would be a run rate.
There were some backend weighted originations and you also noted.
Originations to date.
We know that the blended yield on incremental deals is 5.6% and we can make an assumption on whats paying off and then the modification in Steinway, which I believe steinway was running at around 20% of the company's earnings and then the design district, not accruing interest is it reasonable to assume.
For modeling standpoint that earnings.
We will meet or exceed the dividend.
Perhaps exceed the dividend in the early part of the here and then run lower through the back ended the year, depending on the cadence of investment activity.
I actually think about it the reverse way Jay to be clear when we talked about the dividend predominantly most of our dividend discussions with the board focus on annual performance not quarterly performance, which we've talked about many times before but as you look at.
Our 2020 is shaping up and some of the comments you made.
Leading into your question and then obviously some knowledge we have about the timing of when we expect things to repay when we expect certain future findings to take place as well as some other things in the pipeline.
We would expect the trend for the year actually to be more upward upward sloping in terms of earnings so sort of be at a low point in the early part of the or and then moving up throughout the year.
And then potentially some upside beyond that depending on the pacing and timing of some of the assets that you referred to getting resolved.
Okay and on a full year basis cover covering the dividend.
Meeting or exceeding even.
Yes.
The repo facility is given the mix towards Europe, whereas the all in costs running out right now.
All in cost is.
Those two L plus two.
Slightly over outlets to with fees.
Okay.
Thanks very much.
Thanks.
Thank you and I'm currently showing nice and any further questions at this time I like to turn the call back over to Stewart for any closing remarks.
Thank you operator, thanks for those of you participating this morning.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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