Q2 2020 Apollo Commercial Real Estate Finance Inc Earnings Call

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Please note that they are the property of Apollo commercial real estate Finance, Inc.

Any unauthorized broadcaster in any form is strictly prohibited.

Information about audio replay of this call is available in our earnings press release.

Also I like your call your attention to the customary safe Harbor disclosure in our press release regarding forward looking statements.

Today's conference call. Then we'll catch May include forward looking statements and projections every aspect you refer to our most recent filings with the FCC for important factors that could cause actual results could differ materially from these statements and projections.

In addition, we will be discussing certain non-GAAP measures on this call, which management believes a relevant especially in the Companys financial performance.

These measures are reconciled to GAAP figures in our earnings press release, which is available on the Investor Relations section of our website.

We do not undertake any obligation to update our forward looking statements or projections unless required by law 15 copies of our latest SEC filings. Please visit our website at www Dot Apollo TV Dot Com, our college that you're going to I one size. They choose years you at this time I'd like to turn the call over to the comes.

And he's Chief Executive Officer Stuart Rothstein.

Thank you operator, good morning, and thank you for joining us on the Apollo commercial real estate Finance second quarter 2020 earnings call I hope that everyone dialing in is healthy and say as we continue to navigate this challenging environment. Joining me. This morning as Jay I'll go all our CFO and Scott winner.

They are all I had a solid quarter operationally generating operating earnings in excess of the 35 cents per share a common stock dividend, while preserving excess liquidity and maintaining a cautious and thoughtful approach to considering new investment opportunities.

Their eyes team continues to operate extremely effectively and collaboratively from home offices and the entire platform at Apollo provides the company with ongoing support.

All time data and information and extensive resources I am proud of the over 50 person team that supports Eri daily and I'm confident in our collective ability to navigate a ri through this unprecedented situation.

Over the past several months Eri has achieved several critical objectives, we fortified the company's balance sheet working with our secured credit facility counterparties to extend modify and enhance air eyes borrowings, we have selectively sold certain loans at attractive prices to both generate a dish.

No liquidity and eliminate over $250 million of our future funding obligations.

As a result of our actions error I ended the quarter with over $518 million of cash and Undrawn credit capacity.

Finally, we have affectively maintained a constructive dialogue with the company's borrowers working with them to support and stabilize their underlying properties. We believe our actions position hey arrive for the ongoing market volatility and uncertainty that lies ahead.

With respect to air ice capital structure, our balance sheet strength begins with best in class banking relationships that are further enhanced by our affiliation with Apollo.

During the quarter, we took proactive steps to extend the duration of air eyes liabilities.

Polluting amending our facility with the nearest term expiration to a six month evergreen structure.

In addition at the end of June Eri refinanced its existing secured credit facility with Barclays into a private securitization with $782 billion of senior notes outstanding the collateral the collateral of which is six loans secured by properties throughout.

Europe.

There were several major benefits to the transaction, including a six month holiday for an evaluation requirements. The establishment of LTV based covenants with cure rights and additional flexibility with rice Rubin with respect to modifying underlying loan terms, we continue to be proactive.

With each of their eyes, Counterparties and since the last earnings call.

IRI completed an additional $59 million of de leveraging.

In addition, as of July 29 error I still maintains over $1 billion of unencumbered loan assets, turning now to our loan portfolio. The company ended the quarter with 71 loans totaling approximately $6.4 billion at amortized cost.

As a reminder, air eyes borrowers are generally comprised of sophisticated well capitalized real estate operators, who continue to maintain significant equity in the underlying properties for the second quarter.

Sure I received 99.8% of the interest that was expected to be paid from outstanding loans.

Not surprisingly within the portfolio certain hospitality and retail assets have been most impacted by the parent demos and these situations are being handled in a bespoke banner.

As we mentioned on last quarter's call discussions with borrowers may include but are not limited to flexibility with respect to certain covenants reallocation or delayed funding of reserves differing interest with a back ended catch up and extending maturities in all instances today.

Sponsors have made equity contributions alongside any short term interest deferral, our asset management group continues to do an excellent job communicating and working with air eyes borrowers and Billy and we believe we have a thorough understanding of the current issues within the portfolio.

As I mentioned on our last quarter call at the beginning of May Eri proactively sold interest in three Unlevered first mortgage construction loans totaling approximately $262 million and commitments $90 million of which had been funded later in the second quarter Eri sold the remain.

And are up one of the loans, bringing the total to $122 million of liquidity generated and eliminating over $250 million a future funding obligations for the remainder of the year Eri expects approximately $92 million of net future funding obligations, which is net of expected.

Secured credit facility advances and self funded interest payable to eri.

And construction has resumed across all areas entire portfolio of construction loans.

Subsequent to quarter end the company sold in 97.5.

Million pound inventory loan secured by the remaining units and an ultra luxury residential for sale project in London to a third party at 99.5% of par generating excess liquidity as well as reducing London residential exposure.

In addition in July we converted an existing New York City multifamily mezzanine loan into a mortgage loan and subsequently finance the mortgage loan, resulting in proceeds of approximately $44 million.

In terms of new business and the overall market deal activity is slowly returning.

Alright continues to benefit from being part of the broader commercial real estate debt platform at Apollo, which has remained active in the market and consistently reviews transactions in both the U.S. and Western Europe.

The bar is high for any new Eri investment, but the breadth and depth of the Apollo real estate credit platform allows us to continue to explore opportunities on behalf of the company.

Lastly, it is worth noting that as we've that new opportunities for a arrived we consider both additions to the portfolio as well as the use of capital within a arise existing capital structure consistent with this approach we invested approximately $52 million in repurchasing six in it.

5 million shares of air I common stock year to date, which is accretive to both book value and earnings per share.

Before I turn the call over to Jay I again want to take a moment to take the entire team focused on Eri, who have worked tirelessly and have shown the mens dedication and determination and unprecedented circumstances.

Given our excess liquidity and low leverage our strong borrower and lender relationships and the power scale and expertise of the entire Apollo platform, we believe eri as well situated to navigate what lies ahead and we'll continue to communicate to our fellow stockholders when the city.

Duration warrants it.

And with that I will turn the call over to Jay to review our financial results.

Thanks to it.

The second quarter 2020, or operating earnings excluding realized losses were 59 million 38 cents per share of common stock.

GAAP net income available to common stockholders was 56.8 million.

Six cents per share.

[noise] realized loss is comprised of loss from the sale of through construction loans and unwinding of the 500 million notional interest rate swap we entered into last year to fix the rate terminal b.

The swap termination is expected to result in annual interest expense savings of approximately 10 million, which just seems it's not one month LIBOR.

During the quarter, we increased our own specific season reserve on the Miami design and the pitch room hotel.

Total of 500 has been a daughters.

Our general seasons or decrease quarter over quarter.

And our total fees funds are now stands at 3.7% of our portfolio.

This decrease was primarily related to asset sales seasoning of our loan portfolio as well as a modest improvement in overall economic assumptions relative to the approach taken at the end of March.

Moving to book value.

GAAP book value per share prices agenda, and see citizen or was $15 and club sense as compared to $14 in 94 cents. The ended the first quarter.

This increase was primarily related to be accretive share repurchases Stuart mentioned earlier.

[laughter] corner, and 6.4 billion dollar loan portfolio had a weighted average unlevered yield of 6.7%.

And the fully extended term of just over two years.

Approximately 90% from floating rate U.S. loans like machines that are in the money today.

Lastly.

Is that do a borrowings we are in compliance with all covenants and continue to maintain strong liquidity.

As of today, we are 400 illuminate doors of cash on hand.

$10 million approved an undrawn capacity and $1 billion and Unfinanced loan assets and that we'd like to open the lines for questions. Operator. Please go ahead.

Thank you as a reminder to ask a question you want me to press Star one on your tough. So we're trying to your question touched upon Qi Ji standby will be compiled the candy roster.

Our first question comes on Steve Delaney with JMP Securities. Your line is now open.

Thank you look first Stuart I want to applaud you guys just for the buyback activity you.

That.

Really does seem to strong message and as you know in terms of how you allocate capital that's a that's greatly appreciated and respected.

He was speaking sure speaking of of capital in cash and cash truly is if the youre, saying cash is king probably never been more true than it is today, regardless of what business your rent, but the when we look at the 500 million a that you're sitting on now roughly should we when we model for you know cash is obviously an allocation.

I mean is is it likely that you will given the high bar for for spending some of that would you would boston to maintain cash levels and our balance sheet for something near that level going on over the next couple of quarters.

Yeah, I think it can move around a little bit c., but I think you know as I indicated in his remarks, you know I think we're still defensively bias for lots of a better appraisal or they could result that means we're focused on keeping you know excess cash on the balance sheet opportunities arise both in the market and certainly with it.

Our own capital structure, but for now.

I would say you know I wouldn't pega to the dollar, but you're certainly going to see an elevated cash level relative to what we've historically captain and more similar to what we've kept at the end of the first and second quarter's.

Got it and probably thing it jumped out to me and the end that Jack was the unique transaction with Barclays and obviously that was European loans and not a mainstream type of situation, but we also saw it latter did that private COO with Goldman and I don't think the terms were released but.

That concept of finding a very sophisticated counterparty that has the flexibility to do off the grid.

Types of transactions and Barclays and Goldman kind of fit that that deal is that type of negotiated you know unique structure is is that something that you think is available on other loan collateral that you have that's currently under you know bank more traditional bank financing facilities.

I mean look I don't think it's widely available I think there are certainly sophisticated players in the market, which you alluded to and I think we clearly benefit.

From having regular dialogue with a lot of sophisticated parties in the market I think this specific transaction that.

We were able to get to with Barclays. You know was predicated on the fact that we've had a long relationship with Barclays on the lending side for quite some time.

In Europe, and I'd give our team credit in Europe in particular, you know there talk into their.

Counterparties on a regular basis Barclays understood. What our concerns were I think we understood what Barclays concerns work in terms of being a lender in the market and I think it was something that.

Occurred from just from having a regular way dialogue and sharing ideas with each other so it's not to say it won't.

Correct again, but I think it all comes back to constant dialogue with.

Our banking relationships and also to some extent, we continue to benefit from the broader Apollo relationship and I think you heard me mentioned on the first quarter earnings call. I think is a for we've done a really good job of taking a clearing house approach to banking relationships and making sure that is Apollo is.

Speaking with one voice with our various banking relationships, so that could occur if I understood, but I want you know well see where at least.

It sounds like it wouldn't happen unless Apollo had boots on the ground in London. So yes, congratulations on it thanks to the cottage stewardess, everybody stay well, thanks to you as well.

Thank you Sir our next question comes from Jade Rahmani with KBW. Your line is now open.

Thank you very much I'm just a big picture question, what do you think the overall cost of capital for the mortgage Riet business is currently.

If we look at pretty Cobank dividend yields that were in say, the 8% to 10% range and use that as a proxy what would you think it is today.

Oh, you know first of all you and I can have a longer debate jade as to whether the dividend yield is the cost of equity capital are actually your earnings is the is the cost of equity capital, but if you know if you looked at our capital structure and.

And looking at pretty simple between between the mix of what equity capital costs today, given what were given where we're trading on a book value basis as well as the cost of our.

Cost of our borrowings you know you're probably in a low double digit.

Weighted average cost of capital today across you know across most of the sector.

And with Air rights trading at a 14% dividend yield.

Do you think that it's fair to assume relative to that low double digits. A number that you cited the stock is implying dividend cuts in the future.

Oh I don't know what it's implying I think it's probably implies a lack of active investors actually focused on the sector and doing the work as it pertains to both price to book value and dividend yield so I'm not sure I read the same conclusion that your question imply.

With respect to dividend posture.

I think you mentioned last quarter that the board takes you know a longer term.

You have the dividend with respect to future earnings and could you give any commentary with respect to the sustainability of the current dividend.

I mean again when we when we declared a 35 cents per share. It was certainly predicated on the notion that it's not meant to bounce around quarter by quarter, I think the 92% payout ratio.

This quarter, obviously, which indicates we covered the dividend.

There is a sense of where we think things are headed we certainly appreciate the importance of the dividend to all our.

Shareholders, we've obviously got significant liquidity.

We'll review the Q3 dividend with the board in the Middle of September as we always do.

But the policy for solving it and the perspective in which we said it has not changed on a go forward.

Okay. Thanks for that we've seen a number of rescue transactions in a in that space and I was wondering if.

That was something a error I might contemplate directly being involved in.

We looked at a lot of opportunities broadly, we're certainly aware of what's taken place in this space.

I can't comment on anything specifically, because obviously when whenever you look at something like this new side [noise].

Confidentiality agreements, but we are certainly always aware of what's going on in that space and.

Oh ways gather as much information and consider all different sorts of opportunities on a go historically and on a go forward basis.

Thanks for taking the questions.

Thanks Jay.

Yeah. Our next question comes from Stephen Laws with Raymond James Your line is open.

Hi, good morning.

Well first start.

I saw the Q unfunded commitments are around 1.5 billion and the deck I believe shows about 1.1 billion 2021 and after.

You know one that are those numbers the rice comparisons you know when and if so kind of.

You know is that a proxy of how you think about cash or cash hovering near term of funding commitments.

Maybe maybe a break down how many of those commitments kind of are available to be drawn today as opposed to having some type of you know threshold they have to reach to drawdown additional funds.

Yeah look I think so so we've provided a lot of detailed information on the 2020 future funding in the supplemental in certainly have given a sense of.

Hey, what we think the net funding amount is going to be and then just as importantly, how much of that there's sort of available.

Just ordinary course of spending and then how much is really dependent on good news I eat tenant improvement leasing commissions when you think beyond.

This year all future funding commitments are based on.

Specific hurdles they vary by deals some could be the contribution of additional equity some could be the achievement of certain approvals vis-a-vis construction. It's also fair to say that as you look out beyond this year.

There's one transaction in particular in Europe, which comprises a fair bit of the future funding.

We've commented previously that the plan all along has always been to at some point sell down a portion of that commitment that is still the long term plan and we still remain confident in our ability to do that but as you're looking at the numbers you're focused on the correct numbers.

Okay, great Thanks for that and you.

<unk> expenses flat on Gionee and you know we've seen a lot of a your peers incur additional expenses here given everything going on I'm, hoping you can you talk about your expense control.

It's a six and a half million level and DNA that the right number to think about going forward.

Yeah look I think you know we've always been highly focused on getting as much operating leverage out of the platform as we can I think as it pertains to GE in a.

Like we continue to be highly focused on it I think we're comfortable with what we have in place in terms of.

Call It team talent technology relationships with third parties.

So I wouldn't expect a lot of variability in that number on a go so.

Great. Thanks, a lot.

Thank you. Our next question comes from Rick Shane with JP Morgan Your line is kind of open.

Hey, guys. Thanks for taking my questions. This morning, and you know.

I appreciate the comments that you guys are starting to through the platform through the broader platform start look at some transactions again.

In general we're hearing from peers, almost no transaction activity and so I'm curious and I suspect in this environment transaction structures are very very different from what we've seen in the past.

I realize it's getting he really opportunistic as incurred guys deployed capital.

And I'm curious, how we should be thinking about what those transactions might look like.

Yeah look I think you know look real estate is living up to with.

Sort or traditional role as being a lagging indicator not a leading indicator risks I think there's you know people are starting to look at things look we sit in a platform that manages both equity and credit and I could tell you that are you know our equity team is certainly looking at things, but it's a slow moving process and give them.

The uncertainty in the market not surprisingly as people try and get a sense of where the economy.

Is headed I think not.

Not dissimilar to what you would expect coming out of what we've seen recently.

Certainly as we think about potential transactions, yeah, we tend to look a little bit higher up in the capital structure right now and think that you might be able to find situations.

Where you get paid in situations like that but let's be perfectly candid right. There is.

A lot of capital in the world looking for opportunities.

We compete with everybody else and are confident in our ability to compete.

But I would say generally speaking there's not been a lot. If what your question is implying to like more esoteric structures on the bottoms of capital structures I would say were not moving in that direction right now and maybe I'm inferring too much from your question, but I would say we're still looking.

At.

Paul at regular way business with good sponsors.

Where we end the sponsor or somewhat aligned in the view of what we think the asset can be in the future and I take this is again one of those situations, where you know everybody on the call is aware that our real estate credit team manages capital for others beyond just a ROI and I think as a result.

We're constantly in the market, even if we're not finding things sure eri, but I think by constantly being in the market. We continue to have the reputation as a platform and we continue to create real time market information for I suppose we think about what might be interesting Cray arrived going forward.

No that.

Thank you actually you did in interpret my question correctly in terms of whether or not the transaction structures or might look a little bit more esoteric. So I think that take away from what you're saying is.

Probably can eat transactions that looks similar.

Clearly better terms, but for now more episodic then sort of a we've seen in the past.

I think that's right and I you know again go back to the comments I made.

Within the speech right as as we look at each deal I'm looking at every deal and then I'm also looking at.

Being able to buy back my stock it at 60% of book value and sort of weighing the too, but you can certainly infer from our actions recently, which we find more compelling right now.

Got it and then last question as you're looking at those and again I realize it's probably trying to glean a little too much from very limited datasets, but are you finding that the equity values on the properties are adjusting in ways that you think makes sense.

Okay varies by situation. Some yes, so no I still think we're in a in a period and this this is with respect to real estate and broadly where I think we're still going through some high level price discovery or are they not surprisingly.

Equity flash potential buyers want to take a more pessimistic pessimistic view and look for value and obviously existing owners want to take a more optimistic or protective view of value and I think it varies.

Deal by deal in terms of whether you'd argue that people are being reasonable or not.

Appreciate that thanks Stuart.

Yeah.

Thank you Yeah. Our next question comes from Church Bahama <unk>, Let's start your bank. Your line is now open.

Hi, good morning, everyone.

Thank you for taking my question. Your Stuart you had mentioned in your prepared remarks that construction has resumed across all eri.

Construction loans youngest wondering.

Speaking to folks on the ground.

Are these construction site operating at full capacity and and do you have a sense for no roughly how long timelines may have been extended I'm, just kind of given constraints around resources and ability to.

Function the way that they were pretty confident.

Yeah, I mean generally speaking Jordan. This is this is a broad generalization, but you're talking.

Weeks, a few months, you're not talking much beyond that I'm generally across the board.

Most construction sites opened up pretty quickly there's clearly a delay that comes not just with the shutdown of construction sites, but also you know there's sort of a.

Ramp back up but I would say things are moving a pace right now I would say broadly across our portfolio.

Don't delays are not concerned so to speak we're comfortable with the pace at which construction is moving early on there was a concern with potentially some supply chain disruption given how much in terms of building materials comes from.

Both Asia, and Europe, but I would say a general comment right now of all the things that we are monitoring and focused on I would say overall construction delays is not a primary concern right now.

Understood. Thank you and my questions have been asked and answered starts up trading today.

Thanks, Joe.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Next question comes from Jade Rahmani with KBW Your line is Hamilton.

Thank you very much with respect to the standstill agreement you've negotiated with your credit facility providers could you comment as to how long the mark to market.

Later period is expected to last through year end.

The one that's most notable that we've commented on Kid, which is our you know the new structure, we put in place with Barclays in Europe that that's basically a six month.

I now.

Everything else, there's nothing else material other than that private securitization at this point in time.

Some meaning when you say everything else is nothing material, meaning no material changes are done material potential credit marks through year end.

Meaning there is nothing changed with the agreements. So we're still in place as it always book.

Which means okay, we haven't announced any other standstill agreement.

And then just looking at the loan portfolio overview and the fully extended maturities of you know that occur within the next few months in the 2020 timeframe any.

Anything to point out there with respect to maturity default risk or.

Credit issues that we should be aware of.

In our.

Other than what we've disclosed in the first quarter in this quarter, there's nothing else that rises to the level of disclosure at this point into.

And I feel like obligated to ask this every quarter could you give an update these on 111 questions. The seven.

Liberty Center, and the status of the Red Sky capital loans.

[noise]. The short answer is obviously after we took the reserves on the Red Sky loans and the additional reserve on the Liberty Center transaction in the first quarter nothing material has happened.

Since then we're still where we were which is extensive conversations with a number of potential.

Buyers JV partners operating partners et cetera, with respect to the to read Sky transactions, one in Brooklyn, and one in Miami when something.

Other material nature occurs we'll certainly update everyone on that and Liberty Center is back open at this point after having been shut down pursuant to the rules in Ohio and.

We continue apace with respect to our efforts to both improve occupancy at the facility as well as to change the nature of some of these space usage.

At that facility is most positive thing with respect to Liberty centers. There was recently approval of another.

400 unit multifamily complex right right adjacent to it which will continue to improve the density around the location on whether 111 West 57th Street continues to get.

Move towards construction completion, obviously temporary.

Occupancy on some units already which led to closing and they continue to market and show space virtually to people and no change because other than that.

Yeah. The two sales I think that recently took place at 111 West 57th is that what goes a long time in coming or is that indicative of an improvement in terms of the sales outlook for that project.

You know I think it's tough to highlight an improvement I think all sales are fairly long coming on an asset of that size. I think it's continued to be indicative of interest level in the project and what it represents in terms of being a fairly unique offerings in Manhattan.

Thanks for taking the questions.

Sure.

Thank you I'm not showing any further questions at this time I would now like you tend to call back over to Stuart Rothstein for closing remarks.

Thank you operator, and thanks to those you view that participated this morning.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].