Q3 2020 Apollo Commercial Real Estate Finance Inc Earnings Call

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Factors that could cause actual results to differ materially from these statements and projections. In addition, we will still be discussing certain non-GAAP measures on this call.

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Our call Us at 2125153 200 at this time I'd like to turn the call over to the Companys Chief Executive Officer Stuart Rothstein.

Thank you operator, good morning, and thank you for joining us on the Apollo commercial real estate Finance third quarter 2020 earnings call.

Joining me. This morning is Jay Agarwal, our CFO and Scott winner, the Chief investment Officer of our manager, we hope that everyone listening continues to be safe and healthy as we all continue to navigate the challenging circumstances of the global COVID-19 pandemic.

For my comments with respect to Eri. It is worth spending a few minutes on what we are seeing in the market overall.

Since our last earnings call, there's been a modest uptick in the overall level of commercial real estate transaction activity.

Real estate has traditionally been a lagging indicator and as such the long term impact of the parent debit driven economic slowdown on commercial real estate is evolving slowly.

Consistent with the broader capital markets, we believe that at present, there is ample liquidity in the real estate market real estate private equity funds are seeking to deploy record levels of dry powder, while at the same time banks insurance companies credit funds and other real estate lenders are open for business that's capital.

Searches for yield in a low rate environment. It is also worth noting that the extremely low interest rate environment is enabling property owners that might be considered likely sellers could to.

To continue to cover debt service and play for time with respect to their assets even.

Even with excess capital in the system transaction activity is recovering at a modest pace with potential buyers and sellers work through the process of price discovery, which continues to be affected by unknown timing with respect to the end of the pandemic varying views on the potential long term impact to various property types.

Pipes and the potential for elevated market volatility around the upcoming election.

At this point, we believe the open it [laughter] pace and passives the recovery will continue to be very much linked with the overall recovery or the overall economy.

It is fair to say that six plus months into the pandemic. There are strong views emerging with respect to a few property types, but in general market uncertainty and differing views remain around most asset types and geographies ultimately as we have always done we will continue to take a bar.

Winds up approach to working through potential new transactions and addressing asset management issues [noise] turning.

Turning to air Ice third quarter results. The company had another solid quarter as earnings covered the 35 cents per share common stock dividend, while we continue to preserve access liquidity and maintain a thoughtful approach to evaluating new investment opportunities consistent with my prior comments as we evaluate <unk>.

Genady new loans, we measure that opportunity against the value we see in the current price of our common stock, which has been trading at approximately 60% of book value as such during the third quarter, we repurchased over 5 million shares of common stock and subsequent to quarter end, we repurchased and it.

Additional 3 million shares, bringing our year to date total investment in common stock repurchases to $119 million, representing 13.8 million shares repurchased.

With respect to the portfolio conversations with our borrowers in equity sponsors generally remain constructive.

Our borrowers are predominantly sophisticated well capitalized institutions and our ability to partner with them and offer well structured capital solutions will continue to benefit us as we get to the other side of this pandemic and markets normalize.

Our near term strategy for Iraq continues to emphasize ensuring adequate liquidity fortifying the balance sheet and Opportunistically investing capital. Our efforts are greatly enhanced by the management and expertise brought to a arrive from the broader Apollo platform and specifically from the commercial real estate debt team.

Which has continued to be active in the market.

With respect to liquidity IRI ended the quarter with over $450 million of cash and Undrawn credit capacity. In addition to over $1 billion of unencumbered loan assets. The balance sheet remains strong with our nearest corporate debt maturity in the third quarter up 2022 and healthy.

The ongoing dialogues with our bank lenders.

In terms of investing I mentioned that our commercial real estate debt team is in the market looking at opportunities and we will continue to consider transactions that offer attractive risk adjusted returns. While also continuing to consider the economic benefits of repurchasing our stock or other parts of our cap.

Structure.

It is also worth noting that somebody arrives investable capital is being invested into previously closed attractive investments, which have future funding components. As a result, we have the benefit of known uses of capital within the portfolio and we are not forced to be overly aggressive in pursuing new loans.

Year to date, we have invested $343 million through future funding with approximately a $100 million about invested during the third quarter.

As always all potential future uses of capital will be evaluated with a focus on maximizing shareholder value.

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

This is our third earnings call from home and our team continues to work seamlessly.

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 IRI is well situated situated to navigate whatever lies ahead and we will continue to communicate to our fellow stockholders when the situation.

Warrants it.

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

Thank you Stuart.

It took one of our operating earnings excluding unrealized losses on investments were $53.9 million with 36 cents per share of common stock.

GAAP net income available to common stockholders was 46 million was 21 cents per share.

Our dividend payout ratio for the quarter was 97%.

GAAP book value per share prior to the gentlest people to though was $15.30.

Compared to $15.14 at the end of the second quarter.

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

Our general people doesn't have decreased $5.8 million quarter over quarter, and our total piece of it as of now stands at 3.6% to our portfolio.

This decrease was primarily related to an improved outlook on a macro economic conditions compared to our last review in July.

At quarter end was 6.4 billion loan portfolio have you read it average unlevered yield of 6.2%.

It is amazing to me extended term of just under three years.

Approximately 90% of our floating rate you must loans have LIBOR floors that are in the money today.

Weighted average floor of 1.48%.

During the quarter.

We sold in 97 million pounds mortgage loan secured by only residential property in London, The third party.

I think nine and a half before.

In addition, we didn't finance the $68 million or New York City condo construction mezzanine loan and doing more of the same about this.

This loan was subsequently financed.

$44 million in proceeds.

Lastly, with respect to our borrowings we are in compliance with all covenants and continue to maintain strong liquidity.

As of today, we have $234 million of cash on hand, $19 million of approved an undrawn credit capacity and $1 billion in Unfinanced loan assets.

And with that we'd like to open the line for questions. Operator. Please go ahead.

Thank you I want to ask a question you want me to press Star one on your telephone.

Withdraw your question press the pound key please standby will be compiled it kinda give us there.

Our first question comes from Doug Harter with Credit Suisse. Your line is now open.

Thanks, just wanted to touch on the last point you brought up about liquidity.

Been affected about deploying it into share repurchase.

How do you view your excess liquidity position today, you know how much more of that could you use versus how much do you kind of need to hang on given the ongoing uncertainty.

I mean, I think it's fair to say dog, but given where we sort of ARCC today given jays. Most recent comments I think were generally.

Around the range that we want to be in it's fair to say.

We also have information on what we might expect to get repaid either through a refinancing or through the sell down of this specific asset.

So will it various times be.

Call it slightly on either side of that as we might be anticipating events and if we're confident.

Capital coming in we might get a little lower on the on the liquidity funds, but I think given where we are today.

Given jay's comments about not just the ended the quarter, but sort of a more current update.

I think were generally in the range, where we want to be from a liquidity perspective going forward.

Thanks, Stuart and I guess around that could you just give us an update as to kind of I guess, where you stand on de leveraging your credit facility as you know kind of how you're thinking about you know how those might might trend in the next several months.

Yeah, I would say you know there's no.

Active discussions of a material nature that we're particularly concerned about right now we do maintain a regular dialogue with all the banks and certainly we're always trying to be on our front foot with respect to those dialogues I would say.

There's nothing material expected in the coming months, there might be some niche here and there, but nothing which would dramatically change our view of where of how we're managing liquidity right now.

Thank you Stuart.

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Thank you. Our next question comes from Steve Delaney with JMP Securities. Your line is now open a.

Good morning, everyone and good work on the buyback.

The thing I guess that jumped out of the debt. The most for me in the quarter was the drop in the weighted average loan yield to 6.2 from 6.7 at June. So just wondering Stuart you could comment on that in terms of the primary drivers were the non accruals modifications loan sales what what was primarily.

Going on there.

Yeah, I mean at a high level you know for the most part it's a little bit of loan modifications, particularly on one of a one or two of our larger mezzanine loans, which we think was the right thing to do just given how we're thinking about.

Longer dated returns in protecting our principle, but it's probably more primarily loan modifications and then you know.

Secondarily.

Some slight movement due to the loan sales, but primarily primarily modifications and one sizable you know loan sale that took place in Europe right.

Right and on the loan sale, the London, a ready for sale.

When we saw the drop in the Ses Reserve I guess your first reaction was Oh, well I guess you know they are the some of that May have had to do with that then in jay's comments it sounded like no. It was more macro.

Modification. It can you clarify that a little bit or was a little bit of both.

No. It's it's for the most part you know macro factors, obviously shorter duration works one way I'm changing passive the economy work the other way, but specifically to the asset.

You referenced we've always been I would say fairly comfortable in terms of where our position was in this asset in terms of being principal protected and it was really sort of then.

Well again being in the market and opportunistic ability to sell down some exposure that was the right right decision for the company.

Got it got it and just to close out one final one for Jay.

I think there's been some confusion in the market place really ever since first of the year when the see some reserves went up but when for those companies that offer a core operating U.P.S. as you as you do and I think most of the all your peers do that there's been some confusion about.

Ill when any actual realized losses or impairments.

Would affect operating yes, and now we're hearing that the Fccs, maybe mandating that any definition of core operating reflects seasonal. So it's I think it's already confusing and maybe it's going to get worse, but Jay any thoughts you could you know say.

Yes on to investors through the analyst community as to you know kind of profit. The most practical description possible you know when its core operating he is going to be affected by any real credit problems any real losses.

Yeah, I think Steve you know I think that's going to be more to come on this topic given the given the fccs recent last year. So I think whatever has been done in the past I think maybe just going is kind of not necessarily no. No. This is not not necessarily what happens in the future.

Sure I think more you know more companies will evolve involve the definitions, but we don't you know we don't have core earnings because you didn't have an incentive fee.

Right. So I think it might be different for us versus others that have an incentive fee and where core earnings in a defined stone pursuant to the management contract.

Well I think overall much more to come on this topic in Q4 as he is.

Figure out what the best well the best of the best way to put this is.

Okay, well, maybe well, let's leave it there and maybe we'll follow up offline on that just for modeling purposes. Okay. Thanks. Thank you for your content comments, thanks, David Yes.

Thank you Ashley reminder, to ask a question you won't need to press star one on your telephone. Our next question comes from Jade Rahmani with KBW. Your line is now open.

Thanks, very much can you just start off with given update as to the company's New York City exposure at around 37% of the portfolio and no the loans within that maybe on the hotel side, but just overall I think investors are very eager for an update as to the New York.

City loan outlook.

Yeah, Obviously, you know what we reported for the third quarter, both in terms of reserves and any other details sort of indicate I think for the most part we are feeling fine with respect to the New York portfolio I think at a high level.

And again, I'm, probably not talking specifically about our assets on the hotel side right now, but just in general I would say in.

In terms of property types hotels were probably the most along the spectrum in terms of in terms of price discovery right now there's up there's been a lot of capital pull together on the equity and credit side to pursue.

Opportunities in hotels, obviously, the income levels of hotels adjust the most quickly and I think as a result.

You're starting to see transaction activity and hotels, which give a clearer view of where value may be on a go forward basis. We had had I think as most on this call know and asset specific reserve on one hotel that we took in the first quarter.

That obvious that got rectified in the second quarter with the equity sponsorship contributing additional equity and we as lender writing off a part of that loan. Since then nothing specific has has occurred from the material nature with any of the hotel assets in New York.

And then I think for our other New York exposures I would say we are comfortable.

Comfortable across the portfolio I think you know maybe to anticipated question I would say on the for sale residential side I would say there's actually been.

A modest pick up in activity recently, you are seeing some sales get done and you are seeing in general sales reports pick up in terms of showings or viewing.

I would describe it as a high level I would say pricing is off a little bit on the condo side I think we continue to be more focused on pacing, which is clearly going to be slower than anticipated, but given where we are.

From a loan to value perspective across the Colorado portfolio, we still feel comfortable with all of them are exposure on that side.

And on 111 West 57th is the aggregate exposure around 304 million.

I think yeah, I think approximately that's pretty close.

Okay I saw the joint venture disclosure on the Miami Design District deal can you touch on that.

Oh look I think at a high level and just to remind everybody Miami design district is a planned redevelopment, but there are existing assets. There to date I see you know where we are today is we think we can mitigate the near term impact by leasing.

Some of the existing buildings that exists and that was primarily the genesis.

Of the partnership for the JV that you saw.

Reported ultimately the long term a path for the Miami design District is for this site to be redevelop or the sites to be redevelop and again way too early to determine whether that is something that we would be a part of long term or we would you sell that opportunity to someone else, but in the short term.

We think there's ways to start mitigating or losses through a more robust leasing effort and that was the primary driver of what you saw now.

And lastly, it seems like the stock repurchases continued post the quarter.

Quarter end.

I'm just wondering how you're thinking about you know capital management.

Continued stock repurchases and even whether you would consider perhaps repurchasing some of the convert.

[noise], yeah, so as I mentioned to.

Doug you know were definitely still bias towards keeping excess liquidity, even with the view of keeping excess liquidity, we do have some capital.

To deploy whether it gets deployed into repurchase of common stock or new transactions you.

You know, we still source transactions, we still look in them and then as we underwrite that we compare them to the opportunity to buy back the stock certainly at these levels or buying back the stock is the more compelling economic use of capital right now.

We do look at other parts of the capital structure. The reality is given where the converts are trading right now Jade again economically not at not as appealing to do something on the convert side is it is relative to Tommy right now.

Thanks for taking the questions.

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Thank you.

Next question comes from Charlie I rest, yeah with JP Morgan Your line is now open.

Hey, good morning, guys. Thanks for taking the questions I.

I noticed some of the interest payments were deferred under a forbearance agreement, which was trending a little bit lower in October could you guys just give us an update on on kind of what portion of the loan portfolio is under those.

It was kind of agreements and how the conversations are going with borrowers on that.

Yeah look I think the conversations have not changed much I think they continue to be.

You know fairly productive for lack of a better phrase which is we're perfectly happy to engage with with borrowers on discussions around the use of reserves potential deferral and to the extent, there's a forbearance forbearances typically coming.

With and additional equity contribution.

From a from an equity sponsor as well so the nature of the conversations has not changed much.

If you think about our six and a half billion dollar.

Portfolio I would say, we've agreed to forbearance agreement with plus or minus loans, representing about 10% of that portfolio.

Okay, Great. That's very helpful. Thanks, and then I apologize I hopped on the call little bit late so if you've covered this go ahead. He told me but any.

Any updated thoughts specifically on the Liberty Center assets.

No specific material updates the good news is most of the tendency is.

Open for business now things are obviously again keep this in perspective better today than they were six months ago, but there's still a long way.

To go for this for that asset and we are very much engaged and focused on the asset management challenge the Internet explorer exploring a lot of different alternatives.

Understood Thanks very much.

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

Thank you operator, thanks to those of you that participated and obviously to the extent there are questions post call myself Hillary Jay are available to speak as needed. Thanks, everybody.

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

I will.

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