Q1 2021 Apollo Commercial Real Estate Finance Inc Earnings Call

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Please note the day of 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'd also like to call your attention to the customary safe Harbor disclosure in our press release regarding forward looking statements.

Today's conference call and webcast may include forward looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.

In addition, we will be discussing certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance.

These measures are reconciled to GAAP figures in our earnings presentation, which is available in the stockholders' section of our website we.

We do not undertake any obligation to update our forward looking statements or projections unless required by law.

To obtain copies of our latest SEC filings. Please visit our website at www Dot Apollo real dot com or call us at 2125153200.

At this time I'd like to turn the call over to the company's Chief Executive Officer Stuart Rothstein.

Thank you operator, and good morning, and thank you to those of US joining us on the Apollo commercial real estate Finance first quarter 2021 earnings call as usual joining me. This morning are Jai Agarwal, and Scott Weiner.

<unk> is off to a solid start for 2021 committing to over $500 million of new transactions and reporting distributable earnings well in excess of the company's dividend per share.

I stated on our last earnings call. We entered this year focused on growing ari's portfolio that focus was based on confidence in the strength of the company's capital position the performance of our existing loans and the ability of Apollo as real estate credit team to originate attractive risk adjusted return.

Opportunities for ally.

Continuing the trend we saw in the second half of 2020, the overall tone of the commercial real estate market remains positive as asset level performance is generally improving and transaction levels are increasing.

The economy clearly is benefiting from the combination of COVID-19 relief fiscal stimulus and the increasing pace of vaccinations specific to our business. We see both the strength of the real estate capital markets and increased investor optimism reflected in recent and anticipated loan repurchase.

<unk> sponsor support of their investments and our growing pipeline of opportunities.

During the quarter.

We closed two large European loan transactions on behalf of one of our larger clients.

In both transactions. The mandates were won due to our strong borrower relationship.

And the ability to speak for a sizable portion of the overall capital stack, which we were able to split with other vehicles managed by Apollo.

Her eyes affiliation with the broader Apollo real estate credit platform continues to be a key competitive advantage as it enables ally to avail itself of the knowledge and resources within Apollo M.

And to benefit from our collaborative efforts in winning large transaction mandate.

Given existing available capital as well as additional expected loan repayments. We are very focused on building a robust pipeline for ally.

Turning briefly to the existing portfolio. Recent highlights include the full repayment of a sizable office loans and the repayment of a preferred equity investment in a New York City Condo project.

<unk> also seen and we've also seen meaningful sales activity within the properties underlying our residential for sale loans consistent with recent news of the strength, meaning New York City housing market.

Finally, several of our sponsors have made equity commitments to rebalance, so certain loans and replenish reserves and we received a significant pay down on one of our Miami Hotel loans.

Turning now to the balance sheet.

<unk> completed a $300 million upsize of our term loan b during the first quarter.

Loan has a seven year term and bears interest at LIBOR, plus 350 basis points with a 50 basis point LIBOR floor and was issued at a price of 99.

Given the attractive pricing, we felt it was prudent to term out some of our financing as well as meaningfully increase our pool of unencumbered assets.

Before I turn the call over to Jay I, just want to highlight the ability of <unk> existing portfolio to generate earnings that covered the 35 per share quarterly dividend at one one times.

This was achieved even while maintaining excess liquidity on the balance sheet throughout the quarter. Our common stock offers investors a dividend and dividend yield in excess of 9% on a stock debt is trading slightly below book value, which we believe is extremely attractive in this current low.

Yield environment and with that I will turn the call over to Jay to review our financial results.

Thank you Stuart.

We had a strong first quarter.

But earnings of $56 $1 million or 29 cents per share.

GAAP net income available to common stockholders was $55 million or 27 cents per diluted share.

Our portfolio continues to perform well.

Generating.

And access is a quarterly dividend of 25 cents per share.

Yeah.

As of March 31st agenda season does have remained relatively stable quarter over quarter.

GAAP book value per share prior to the general seasonal flu was $15.35 as compared to 15 38 at the end of the fourth quarter.

Minor decline was due to vesting of restricted stock, which was partially offset by earnings in excess of the dividend.

At quarter end non portfolio grew to $6 8 billion.

The weighted average unlevered yield of six 2% and our remaining fully extended term of just around two years.

Approximately 88% from floating rate to U S loans have LIBOR floors that are in the money.

With a weighted average flow 1.46%.

In addition to the two new loans this quarter.

$133 million of add on fundings.

But the new loans will finance under our existing financing facilities.

Our secured lenders continue to express a desire to grow their relationship with us and in certain instances, we are seeing financing spreads that are below pre COVID-19 levels.

Loans repayments for the quarter with $232 million from a combination of free.

Cash flow depends.

Lastly, with respect to our borrowings we are in compliance with all covenants.

Continued to maintain strong liquidity.

As of today, we have $290 million of liquidity and wanted to have $1 billion and unfinished loan assets.

In addition, we have $200 million of potential liquidity available from previously encumbered mortgages.

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

To ask a question. Please press Star then one on your Touchtone telephone to withdraw your question press the pound key.

Our first question comes from Doug Harter with credit Suisse.

Thanks.

Give us an update on our other loans, where you have specific reserves.

<unk> kind of growth or updates, there and kind of thoughts around timelines for resolution.

Yeah, Doug Hey, it's Stuart.

Obviously, the first thing I'd say is.

Nothing's changed in terms of the reserve levels, and obviously you should interpret that as moving nothing really material has gone gone on with respect to those transactions I think anecdotally.

To just highlight a few things I think I've commented previously that were spent with respect to the loan.

On the aggregation.

In Brooklyn, we're going ahead with a partner in building multifamily on that site, it's going to be a.

Several year process to actually do the development. So that gives you some sense of timeline and sort of when you might expect anything material to change with respect to that asset but.

I'm very confident in our partnerships.

Feel good about the market overall and like the path, we're headed on with respect to that.

Particular asset.

With respect to <unk>.

Miami again, I think you've heard me comment previously we've sort of taken the reverse approach on that asset relative to Brooklyn, which is despite the sites.

Ability to support greater density in terms of entitlements were actually going to leave the assets effectively as they are for now and focus on more of a shorter term.

Retail lease up strategy.

And while I'm not at Liberty to disclose anything at this point.

I would say the reception from the market.

Overall has been fairly positive both in terms of.

M national as well as local tenants.

Would expect debt.

You'll see some news with respect to lease up on that.

Sooner rather than later.

And I think.

The quality of tenants will highlight the long term value of that location.

And then with respect to.

Liberty Center.

Hi al.

And then our hotel asset in D C.

Really just blocking and tackling at this point I think we're encouraged by the pickup in the overall level of economic activity.

Still waiting for D C to open more fully.

With respect to the hotel asset, but I would say probably what is most encouraging.

Across the hotel portfolio is really just the amount of capital and the strength of bids that we're seeing in the market for well located.

<unk> hotel assets, so nothing specific to announce at this point, but probably more to come on that in the future.

Great. Thank you Stuart.

Sure.

Our next question comes from Steve Delaney with JMP Securities.

Good morning, everyone. Congratulations on being the first commercial mortgage REIT to report this quarter.

Good day everybody.

I think you'd get a props for that right from at least.

J D.

Absolutely absolutely.

Stuart kind of Big picture you commented on New York, because it was just great to hear that.

Detected optimism certainly in your voice and your reply there the dog.

Switching looking looking a little farther away you've got $2 3 billion almost a third of the portfolio in U K or the continent.

Can you kind of share with us what's your your team in London as well.

With the with the.

Environment is like there well relative to COVID-19 reopening.

Are they on pace with what Youre seeing here in the states or or lagging a bit just just a sense of what that market is like thank you.

Yeah sure I mean, I think there's you know what let me answer it a couple of different ways, because I think there's growth there.

Francis and similarities I think you know at a high level.

We think about it.

Europe is a.

Place in the more more time I spend in Europe, I realize it's actually just a bunch of disparate countries that happened to be on the same continent as opposed to actually being a place.

You know I would say clearly behind the U S in terms of.

Economic recovery vaccine rollout quad.

Quantum of fiscal stimulus right it lags.

The best macro economic analysis, I've seen some of which is done by talent inside Apollo would indicate that Europe as a whole collectively as sort of six weeks behind the U S in terms of recovery.

And you know call it a pacing towards back to normal and I would say the U K.

Ahead of that and then other countries that we would consider it.

Target markets are a little behind that so I think that's sort of the story on the COVID-19 side I think in terms of what's going on in the real estate market I think there continues to be.

A fair measure of similarity between the U S and Europe in the sense debt and.

There's a lot of capital available for real estate investment.

A lot of it is actually managed by the.

And the same sponsors you can see in the U S you'd see in Europe.

People are viewing real estate.

In light of COVID-19 is a place where they might be able to find yield they might be able to find opportunity.

So there's plenty of liquidity in the market, there's plenty of time to actually flow.

And I think what that means to US is a you know a lender is that there's lots of deal flow to look at and ultimately.

You know as we think about our business what we do in Europe is very similar to what we do in the U S and vice versa similar types of transactions.

Similar quality.

Borrower or sponsorship.

Generally speaking similar deal structures with some minor tweaks to deal with different.

Different tax regimes et cetera.

In Europe.

But overall.

We sort of taken agnostic view between the U S and Europe is we're looking at new deal flow because there really is a lot of similarity between what we do in both regions.

Got it very helpful. A quick follow up.

Caravan holiday home property type.

Just quick description generally that I assume it's somewhat seasonal.

Vacationing and such but are these kind of like you know moderate price resort type properties, how would you describe it.

I would you know and I don't want to disparage and I'd probably just.

There are somewhere between moderate price.

Hotels, and moderate price sort of campgrounds for lack of a better phrase sure surely they are viewed as a business.

That is very well suited.

Where there is a clear desire to vacation, but it is.

Quite likely that a greater percentage of that.

Travel will be more.

Intra regional as opposed to interregional and it is both boats a real estate business as well as an operating business at the end of the day no difference in hospitality.

Hum.

And you know a business debt I would say in underwriting the transaction.

The big benefit to the real estate team at Apollo from being able to speak with other parts of Apollo that have looked at this type of.

Real estate from a business perspective, historically, but that's the way I think about it yeah, no very interesting sounds pretty solid so thanks for the comments.

Thanks, Dave.

Our next question comes from Stephen laws with Raymond James.

Hi, good morning.

A couple of questions as things continue to normalize a little bit around pick income year over year, obviously impacted but how do we think about that moving forward and what do you view as a really a normalized level there.

M.

The loan portfolio.

Puts puts COVID-19 free funds.

Yeah.

Let me answer it this way Steven and I take it.

It's hard to say this is what's going to be a normalized level on a go forward basis, because I think it's somewhat dependent on.

Portfolio mix in terms of.

High level, obviously, you're more likely to see picked and are construction loans and in a non construction, though and you're more likely to see pick in a mezzanine position versus a senior position.

As you look at our portfolio.

And sort of think about where the portfolio was and where the portfolio is headed if you just look at our continued shift from.

Mezzanine loans to first mortgages and then also some of the prior comments that I've made.

On recent calls with respect to.

Probably limiting the appetite overall for construction and also <unk>.

Highlighting that while we're still open for business, they're probably not as many discrete mezzanine opportunities to look look at so maybe well create some of our own along the way from whole loan positions, but they're certainly not as much to look at on the discrete side of things.

And then some of the Lumpier.

Mezzanine transactions that are already in the in the loan portfolio that people are aware of.

I think we are probably running right now what I would consider to be.

The high end of the range with respect to Pik income and if you look out you know over coming quarters and years.

Unless we make a.

Shift in where we see opportunity at some point in the future I think you're likely to see the pik income.

<unk> continue to tick down over time.

Things pay off things get to stability et cetera.

Great. That's helpful color Stuart Thank you.

Sure.

Jay touching base on our G&A kind of as we you know.

Look forward, it's down from a trending down a little bit looking back at 2019 that was it was 20 million kind of as we look at our pre COVID-19 year, what are your thoughts on what.

You know given what's in place now what the annualized G&A expense line.

Sure Yeah, I would think of the annualized G&A ex current skus.

From nine nine in the quarter million dollars.

When you run a good business.

Great. Thank you very much I appreciate it.

Our next question comes from Jade Rahmani with K B W.

Thank you very much for taking the questions.

Stuart I just wanted to see if you could comment as to where Youre seeing levered returns, if youre seeing compression and the magnitude of returns and also where are you finding the most interesting opportunities right now.

Yeah, I mean, I think look I think from a return perspective.

You know things feel very similar to where they were.

Pre pandemic, so I would say the components of it have shifted a little bit I would say from the loan perspective.

Spreads are definitely.

Compressing generally speaking I would say, we're sort of in a broad range call. It.

<unk> threes to high fours. These days for the types of stuff, we look at on the senior side.

<unk>.

Lower LIBOR floors right LIBOR floors are probably you know.

25% to 50 bps these days versus where they were you know.

Previously.

When LIBOR was higher and if you look across our portfolio of LIBOR floors are probably one 5% on average today that being said.

You know, we're able to pick up.

Some benefit in terms of how we lever.

Our first mortgages with our various bank relationships I would say we picked up you know.

Some spread in our favor there.

And I would say, we're continuing to get.

A comfortable leverage level on what we showed at banks and I'll again remind everybody that rarely if ever do we take full leverage on anything that we're levering so again.

Levered Roes are still in that.

Plus or minus 11.5% to 12% range. These days.

Feels very much like it did.

Free pandemic, which again I think goes back to comments I've made in the past on just how quickly the capital markets for real estate.

In general recover I think there are probably.

No.

Somewhat better Roe's available today, if you wanted to get.

A little bit more aggressive with respect to.

Construction, a little bit more aggressive with respect to certain types of hospitality assets not all types of hospitality assets.

And then I won't even really comment on sort of retail these days, because we don't have much appetite for it.

<unk>.

And then I think in terms of opportunities obviously the question Steve asked.

Gave me a chance to highlight that we continue to be active both in.

In the U S and Europe, and I think if anything.

As I think about Europe on the margin, maybe slightly less competitive maybe a little bit easier for us to dis intermediate.

Banks are securitization financing than it is here in the U S.

But then I think for things in the U S again.

What types of assets, we're looking at.

I would say that the biggest difference I would probably draw between what we're doing today versus what we've done historically.

On the margin.

Slightly less in.

In the New York area, but we're still willing to look at New York, but slightly less than the New York area.

And then again.

Not as much focus on construction not as much focused on for sale residential. These days as we think about opportunities and in a positive way, we're still finding other places to put capital.

And have you seen any pullback from the GSE is and does that presents a potential opportunity to maybe lend on.

More stabilized multifamily.

And potentially put more financing on those kinds of assets then.

Typical alone.

Yeah, I would say at a high level Jade from our perspective, we haven't really seen a noticeable shift what we're able to do on the multifamily side continues to be more.

M lease up you know call it bridge financing in between construction during the lease up phase with an expectation that there's a GSE take out on the backend.

We spend a lot of time looking but I would say at this point in time, no real material change in that overall environment that has led to any material opportunities for us.

Thanks, very much just lastly, touching on credit.

Could you talk about what drove the increase in amortized cost of the loans that already have specific piece of reserves and just generally speaking were there any negative change.

Changes in credit.

Yeah, I guess I'd answer your questions in reverse I would say credit generally stable.

The biggest.

Increase in reserves for it.

Dancers, where cost for stuff that we've already got reserves on.

About two thirds of that.

<unk> was due to the acquisition of some air rights relative to the development, we're going to do on the Fulton Street development in Brooklyn, and then there were just some other small sort of immaterial protective advances made on some of the other loans, but the bulk of what you are seeing any increase in amortized cost.

Was the acquisition of Air rights for the development in Brooklyn, which was always part of our business plan. Once we decided to go forward with the development there.

Thanks very much.

Sure.

Yes.

Yeah.

Our next question comes from Charlie interest do you have with J P. Morgan.

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

I was looking at the interest income line for the subordinated loan portfolio I noticed it.

Lower in the fourth quarter and rebounded pretty sharply this quarter despite.

Despite the overall loan balances being pretty flat there. So I'm just wondering how should we think about the <unk>.

Ron rate of that portfolio, given I'm, assuming the new origination volumes are probably going to be more focused on the senior loan side.

Yeah, I think what Youre seeing trial. He is really two things I think with respect to sort of.

The dip in the fourth quarter of last year I think in some respects.

As we were working through.

Extending duration on certain of those loans working with borrowers to give them a little bit more runway.

Maybe adjusting economics, a little bit.

Probably more of that than we expected hit it hit in the fourth quarter and it was really reflective of sort of as the economics of a loan.

Changeover time, you need to be at the right point at sort of a moment in time with respect to how you're recognizing certain fees that you might get paid for.

Extension are on pay off things like that and you saw more than we would've expected of that true up hit in the fourth quarter I think Q1.

More reflective of sort of where economics are on those loans today sort of on a run rate basis, but to my earlier comments I do think you know.

And it was sort of prefaced in your question I do think.

There's not a lot of fresh mezz coming into the book right now so as we get.

Debt paid off on some of the higher yielding mezz debt in our book today, I think you're going to see that line item.

Just tricked trickled down over time more just due to portfolio construction.

Okay. That's really helpful. Thanks, They werent and then if we could get.

Any update on 111 west 57th I think we're getting kind of close to the maturity date on that one so just curious how things are progressing on that.

I mean look from a from a construction perspective it is progressing.

To the extent you're in the area.

Building looks more and more finished from the outside and there is significant amount of work going on on the inside.

Yeah.

It's fair to say I would I would expect things to be extended beyond the stated maturity date just given.

You know sort of.

Delays that occurred last year.

And you sort of need to make up that time on the back end I would say foot traffic is very positive in terms of sales activity and we would expect there to be more.

<unk>.

Sales activity.

Coming in the near to mid term.

So it's moving in the right direction, but it definitely lost some time.

Last year due to both.

The pandemic as well as some.

Construction challenges due to weather et cetera.

So we'd expect that will be in that loan beyond the stated maturity date, but it is moving in the right direction.

Thanks very much.

Sure.

Our next question comes from Tim Hayes with BTG.

Hey, good morning Stuart.

Just one more from me and I know that you've had pretty constructive comments on credit broadly, but can you just touch on on your New York City office exposure and maybe if you'd be able to pass along some just some broad trends you know how rent collection has been in that portfolio and how about occupancy and rent trends been there with them.

Those assets and any types of promotion that sponsors are kind of running to get some tenants in the building without locking themselves into a much lower rent for the next 10 years.

Yeah, I mean I'll go.

You have a mix of sort of anecdotes that are both with respect to our portfolio as well as obviously just being in the market sort of what we're hearing what we're seeing people do and then also working for a company the day.

Looser of space in New York, as well first and foremost.

Most not all but most of our portfolio in office in New York.

Obviously, we were the lender on something that was transitional right something was being done to the real estate it was being.

Renovated redeveloped with a plan towards sort of lease up and most of our portfolio is sort of still in the lease up phase. So there's not much to be gleaned with respect to the actions.

In place tenants.

Say anecdotally the foot traffic amongst those that are.

Potential users of space is.

Is definitely increasing and I always say it is increasing in the context of rent levels, probably being down.

Or minus 15% relative to where they were pre pandemic.

M.

So I think youre starting to see more activity I feels like the market has adjusted a little bit and obviously there continues to be a fair bit of.

Sublease overhang in the city as well.

M I.

The other thing that's going on right now as I think most companies are still trying to figure out.

What they are what their strategy will be going forward.

From a new York footprint perspective, I think.

She seems to be a general consensus that people want to maintain a footprint in New York I think people are trying to figure out the balance between.

You know the need maybe to shrink that footprint slightly to give people more optionality in terms of where they were versus the need to probably use space a little differently than you have historically, which may lead towards.

<unk>.

More space per person than we saw heading into the pandemic.

I still think this is going to play out over a long time.

In New York is sort of for.

For the most part you've got long place long term leases in place and people are still sort of thinking through their decisions.

Would say the last comment I'll make on our portfolio specifically.

M <unk>.

Hey.

I'm.

Very confident in the quality of sponsorship we've got on each of our.

Office deals I would say the strength of the capital markets in general.

It leaves us feeling pretty confident that.

There are definitely path to liquidity for our borrowers to take us out if and when they start proving.

Some measure of business plan, they don't need to achieve full business plan.

And then lastly, I would say.

We continue to see our equity sponsors committing additional capital to their deals as they need to.

Either too.

Rebalanced their existing loans as necessary.

Or in working in partnership with Us.

Moreover, as they adjust their business plan.

Lately.

So all in all.

It seems to be moving in the right direction, but I would say.

At this point what.

What we need our borrowers to do is really to create the product they envisioned.

It's more about doing that and having something that is a refurbished office asset from the market. It's less about worrying about in place tendency right now.

Mhm.

That's all really good color.

And I guess just on one of those last comments there about and I know modifications are normal course of business for you even before the pandemic, but how would you describe the cadence of modifications this quarter versus the past view is it.

Lower than it had been or is it still just are you seeing kind of more borrowers come back to the well on that front.

Oh, it's definitely lesser day frenzy than it was call it than prior quarters in the middle of the pandemic there are still various assets that require.

Dialog, but in many respects sort of the way you preface the question it feels.

Like it was.

Maybe before the pandemic right certain borrowers achieve business claim certain borrowers don't achieve business plan and in the nature of lending against.

Transitional assets there are things that require.

Discussion, but I would say the discussions are much more of what we would describe as sort of.

Ordinary course of business as opposed to.

If we were having this conversation nine to 12 months ago. When we were sort of in the depths of this thing and there was a lot less clarity in terms of where things were headed.

Mhm.

Makes sense.

I guess just.

Last one from me.

Yeah, just a quick maybe housekeeping question is there any notable change in interest collections from you this quarter I imagine the answer is no given your comments around credit, but just curious if there is.

Any notable change quarter over quarter there.

Yeah, nothing nothing worth noting.

Okay, great well, thank you for taking my questions.

Thank you Tim.

I'm showing no further questions in queue at this time I'd like to turn the call back.

Accused or rough team for closing remarks.

Thank you all for participating this morning, and we'll talk to you again next quarter. Thank you.

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

Okay.

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