Q1 2022 Apollo Commercial Real Estate Finance Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2022, Apollo commercial real estate Finance, Inc. Earnings Conference call at.

At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

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I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo commercial real estate Finance, Inc, and that any unauthorized broadcast in any form is strictly prohibited.

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

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 we will be discussing certain non-GAAP 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 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 right dotcom.

Or call us at 2125153200.

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

Thank you operator, good morning, and thank you to those of US who are joining us on the Apollo commercial real estate finance first quarter 2022 earnings call.

I am joined today by Scott Weiner, our Chief investment Officer, and <unk>, New Chief Financial Officer Anastasia.

Carry forward the strong momentum from 2021.

We had an extremely active first quarter of the year.

Okay.

So state loan transactions.

The company's loan portfolio totaled $8 $4 billion at quarter end, representing a 22% year over year increase.

Our new investments encompass loan transactions for a variety of property types in both the United States and Western Europe . Most importantly, ari's portfolio produced another quarter of distributable earnings that covered the 35 per share common stock dividend and we believe the combination of the first quarter strong deployed.

Coupled with an active pipeline well positions <unk> to continue to generate distributable earnings that will cover the dividend for the remainder of the year.

Pivoting to the real estate investment and capital markets environment transaction volumes for new investments and financings remain active however at a slower pace than the prior year.

Not surprisingly there is increasing focus in dialogue around the impact of inflation rising rates and the ability of the fed to engineer a soft landing and avoid a recession.

To date the volatility in the broader capital markets has led to a widening of C. M. B S spreads as well as a slowdown in the CRE CLO market.

Our eye is not it is not active in the securitization markets and it is possible that the pull back in those markets may create interesting risk adjusted opportunities for ally.

We remain active in the market on behalf of Ari's seeking to capitalize on opportunities while at the same time being disciplined and thoughtful with respect to understanding economic uncertainty market volatility and the impact on underwriting or access to real time data and information from all areas of <unk>.

Colors integrated global investment management platform provides us with meaningful information and insight, which enhances our underwriting and analysis and enables us to thoughtfully think through appropriately pricing risk adjusted returns in a fast changing environment. Thus far in the second quarter <unk> is closed.

An additional $530 million of loans and we expect Q2 to be another strong one from an originations perspective with approximately $1 billion in clothing.

Shifting to the portfolio, we remain focused on proactive asset management as we reported on our prior call MRI was fully repaid including default interest on one of its largest loans, which was secured by a local well located retail asset in London.

During the quarter, we moved the junior mezzanine loan secured by 111 West 57th Street to a risk rating of five while we believe ari's basis is protected by expected sales on a nominal basis accounting principles and guidance require that we determined in present value of future cash flows and assessing read.

Cover ability and as such a R. I recorded a 30 million dollar reserve.

With respect to the May felt flower hotel air I engaged a brokerage firm to begin actively marketing the property and we are optimistic we will be able to sell the asset and an amount equal to or above our basis, given recent comps in the market for hotel assets as well as the significant amount of capital raised for.

Hotel investing over the past 18 months.

Finally, we are excited to welcome Anastasia as <unk>, New CFO . She brings a wealth of knowledge and experience to <unk> and we expect her to be a meaningful contributor to <unk> future success and with that we will open the call for questions operator.

Thank you.

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

To withdraw your question press the pound key.

Yeah.

And our first question comes from the line of Doug Harter with credit Suisse.

Hi, Stuart I was hoping we could talk a little bit more about all of them seven looks like the fully extended maturity is coming up and Oh, you know in a few days here.

On more of the loans can you just talk about you know kind of how we should think about you know they're coming weeks months says you know as to how that unfolds.

Yeah look I think the expectation I think we've been signaling this for quite some time I think a R. I will stay in the loan I think there will be changes in the capital structure broadly more at the senior portion of the loan and at the junior portion of alone <unk> got exposure throughout the <unk>.

Capital stack them, but I think we are you know weeks away from them.

Restructuring the financing in such a way that the project is absolutely fully capitalized to get to the finish line in terms of construction and also give some runway in terms of sales activity.

And I guess, just any update you can give us on.

You made the comment that you feel.

Oh, no I'm kind of with the sales activity kind of what are you seeing there and you know kind of the broader trends are kind of giving you comfort in that statement.

Yeah, I would say you know a couple of factors one is from a construction.

Process.

Someone from Apollo's, they're sort of on site on a weekly basis, there's clearly strong progress in getting to the finish line first and foremost in terms of the amenity package, which we think is critical.

To sales momentum at the asset and then finishing construction.

Struction throughout the asset so that's a positive development.

Prior units that were put under deposit have begun closing as a T. C. O has received sort of in sections of the building or a T. C. O's are received in sections of the building so that is creating I.

I would say positive momentum from a from a marketing perspective as people see units actually being closed.

And.

And people being able to move into their units I would say foot traffic on a year over year basis.

<unk> is clearly up and it continues to be.

I would say predominantly domestic.

Interest, though you know certainly if if the world continues to move in a positive direction from a COVID-19 perspective, we would expect there to be some.

Meaningful foreigner foreign interest.

As well and then lastly.

There has definitely been a.

Legitimate interest on units in the last few weeks that we believe will result in contracts getting signed though nothing's been.

<unk> publicly announced yet on that front.

Oh, and I guess, the last thing I'd say, Doug is that.

From a.

Pricing perspective in terms of discussions around actual units that I believe will lead to contracts.

The numbers people are talking about are reasonably consistent with where we think.

Things will clear from an underwriting perspective, as we've sort of re underwrote the transaction from our perspective.

Great. Thanks for sure.

Thank you and our next question comes from the line of Steve Delaney with JMP Securities.

Thank you good morning, everyone.

Sure.

Obviously, you're all sitting here thinking about rates hopefully some people in deferred are too but.

But thinking ahead, a year or 200 5300 basis points higher.

We haven't had to have this conversation in the last several years, but it does.

The front end when you guys are underwriting a project how important is that do you stress test the business plans for various rate cycles. So that's you know that's the first part and I guess are you trying to build in a cushion there for higher interest carry and then the second.

Follow up is you know do you require your borrowers in some cases to bought a to use swaps or caps to kind of protect that that risk. Thanks.

Yeah sure. So the so the I'll answer your questions in reverse Steve. So the answer is yes on the cap side of things. It is right now I would say the preponderance of transactions, we're forcing people to buy you know out of the money caps that.

And protection in terms of you know excessive.

Excessive rate movement excessive rate movements I think on your underwriting point.

We certainly stress S rate movements from a carry perspective, which I think in some in some regards is almost the easier exercise from a mathematical perspective, I think the harder.

Apart from an underwriting perspective, and certainly not anything we shy away from because it's part of what we do but it's really trying to figure out the interplay between <unk>.

Rate movement cap rate exit values et cetera.

Well look through.

You know one of the big debates inside our shop, and probably not different than a lot of other shops is.

Our rate movements, a one to two year phenomenon are they a longer term phenomenon or their rate movements.

Hi to economic growth is there a pulled back obviously all of the variables that.

You, we and others think about but there's definitely you know I would say a real emphasis these days.

There isn't at all times on various scenarios and what our path to exit is in various situations and if anything.

You know, making sure things are capitalized too.

Be carried for some time to the extent there's continued choppiness in the capital markets.

Yeah, Yeah that makes sense of course, you've got you've got to look at the macro both not only in the U S, but the U K and Europe as well with what's your broader lending.

Lending markets.

Sure.

Last Friday, our CMA ran up a piece about your Brooklyn project, the Brook I'm, suggesting that you've reached a point in the planning to.

Higher W. D to to look for a construction loan just two questions on that.

I don't know with costs could you make just some general comments that are market general market knowledge about wykoff and and what they bring to the table and then some idea of the timeline for a built out build out of this big project. Thanks.

Yeah, I think if you talk to people in and around the real estate business, particularly those.

New York, and Florida focused with Cop's got an excellent.

Our reputation on the construction side have done quite a number of high end projects.

Successfully they have been historically.

A reasonable sized client of ours. So we've had a first hand look at their skills and expertise, but I would say, there's a lot of confidence in terms of what they bring to the table from a.

Development partner.

<unk> got timing wise.

We're at the point, where we could start doing foundation work, you're looking at a two year build roughly it's a pretty significant it's a 50 story tower plus or minus a floor or two so it's roughly a two year build W. DS out doing the construction financing for us I would.

Say too early to commit to anything but I would say the initial reaction from those interested has been.

Pretty positive and I would say the <unk>.

That are based on the discussions around financing and partnering with with Kos has proven to be a a good strategy.

Great.

Thanks for the comments Stuart sure.

Thank you.

Next question comes from the line of Rick Shane with JP Morgan.

Thanks, everybody for taking my questions.

So you know I'm I'm sitting and looking at the interest rate sensitivity chart or table in the 10-Q when it talks about a hypothetical 50 basis point immediate shift.

Basically since March 31st we've covered about 75% of that ground and in a month or.

So we really are sort of experiencing that I am curious if you can sort of walk us through in a little bit more detail sort of where the.

Window is where you are not rate sensitive as you sort of shift through the floors and then where are at what levels. Do you think you do become asset fully asset sensitive again, just so we can understand in this volatile environment how to model things.

Yeah, I think the best place to look at it to be honest with you. Rick is we put a pretty good chart I think in our supplemental which basically goes from a 50 basis point move out to a 200 basis point move so I think that gives you.

A better sense of how to think about it I would say high level the way to think about it is.

In terms of U S dollar.

Sort of contracts right. So moving to the you know from the LIBOR to the sofa.

<unk>.

World I think you start seeing us become possible positively correlated with interest rates when you cross a roughly 1%.

Sort of move and then I would say in <unk>.

Europe , it's actually a little lower so you know 50 basis points in Europe starts to make us positively asset correlated from an interest rate perspective.

And then once you become positively correlated should we think about it that the theme.

Data on an ROE basis is about <unk>.

Six.

Given the leverage so that for every 100 basis points of increase in LIBOR, We would expect about a 60 basis point pick up in a row.

Yeah, I mean, that's directionally or are broadly correct, right, where typically financing things with two turns of leverage at this point some at 60% LTV sum at 70% LTV. It's it's you know, it's certainly ballpark correct.

Okay, great. Thank you sure.

Thank you and our next question comes from the line of Jade Rahmani with K B W.

Okay. Thanks for that thank you very much for taking the questions Hey, Jamie could you. Please give some color on activity.

Activity levels in the market.

Seeing some kind of mixed signals or trends that we're picking up.

You know on the one hand, I would say transaction volumes in the first quarter surged up 56%, but that was pretty much all driven by our average deal price.

Unit trading was up about 4%.

The MBS, which is very rate sensitive volumes were consistent in the last two months.

Not sure.

If the outlook is being diminished at this point, but what how would you characterize overall deal activity currently healthy some fall off as the market Recalibrating.

What are you seeing yes, I think I think it is healthy but definitely moderating from what we saw call. It from you know the latter part of 'twenty 'twenty all throughout 2021, and I think the one thing I would say you know with respect to first quarter.

The numbers you know I always view first quarter numbers is really finishing a lot of you know year end prior year business. So I think you came into the year.

With a lot of momentum because things were still humming along in the fourth quarter of last year. There was still a lot of deal activity and I sake.

A lot of what you saw in the early part of this year was just getting to the finish line on things that were done.

Or agreed to.

At the end of 2021 they're still yes there.

There is still plenty to look at you know I look at it from both what we're seeing on the credit side, but then I also obviously spend a lot of time in dialogue with the folks at Apollo on the real estate equity side and there is still.

A lot of activity going on a lot of deals to pursue.

I would say it is taking a little bit longer to get things to the finish line I would say lenders are being.

A little bit more cautious or thoughtful I think to the extent on prior earnings calls I've made the comment that.

The world favors borrowers.

I'd say theres still plenty of options for borrowers these days, but I would say thing the pendulum is probably moving a little bit more.

Towards the center or more towards equal equilibrium I think there's definitely a yeah.

Somewhat of a slowdown in the securitized market. So all of which I would describe as there are still things to do which to me sort of define a healthy market, but I would say the pacing.

Has slowed down and I think it goes back to my earlier comments and that I think there still.

Varied opinions on what the rate movements mean, what it means for the economy, obviously the volatility in the capital markets in General has had an impact on the securitization markets and I think when you.

Yeah.

When you put that all together it indicates a you know a modest slowing in pace, but still something that I would define as a healthy market and that Theres bar.

Borrowers looking to do things equity capital looking to buy things and lenders willing to participate in the market.

Thank you very much and then can you talk to the theme of how significant the fact their cost of debt is and borrower business plans.

Keep in mind. These borrowers these sponsors are already looking at non banks as the primary.

Or one of their primary avenues of capital so by that definition they are paying a premium.

In order to have flexibility on the business plan and their execution strategies. So perhaps they may be less rate sensitive as theyre looking at valley.

Value add strategies, how do you think about that do you agree or do you expect further rate increases by the fed to significantly diminish deal flow.

I think you raise a fair point right I say, you know I think where you are sort of going with your question right. If you think about the returns on equity most of these borrowers are seeking to achieve them. There's a lot of room between.

The cost of.

<unk> leverage and what they're at what their sort of target returns on equity. So there's positive leverage generally speaking.

Despite a gapping out.

In the cost of credit I would say, we haven't seen a gapping out yet we've seen sort of a modest uptick in the cost of credit So I would say still within.

The sensitivity ranges as most people think about.

The cost of leverage and what's achievable, but I think it's a fair point and I think to be honest with you.

As we think about it it's.

Do you believe less relevant on sort of the cost of getting something done and probably more.

Relevant as people think about what continued rate rises means for economic impact on lease up sell through et cetera, whatever the business plan actually is and then ultimate exit value on the real estate to the extent you know we're in an elevated rate environment for some time.

So I would say.

People definitely sensitize, it but I would say, we're not yet at a level at least from our perspective, where we're seeing it dramatically impact business plan.

Okay.

Dramatically impact business plans are dramatically impact the deal flow I would say both in the sense that I think people are still confident in their business plans, they sensitize rates and Theyre still generally moving forward.

With their equity investment strategy.

And you're still seeing activity.

Great and very good to hear.

In terms of New York overall, I'm not sure at the outset, you made a comment as to your market view.

Just getting some investor questions recently.

I think people are just looking for weak spots. So 17 40 Broadway there was a large loan default.

And they are you know a large large asset that got people's attention clearly theres a lot of debate about Midtown office in class B Class C Office in New York City, and then the condo market has been very strong, but perhaps might be slowing.

Also perhaps geopolitical.

Uncertainty plays into that market what are your thoughts around the overall, New York City, the health and vibrancy of the market and the outlook for real estate.

It's a big question and I think there's not one answer that fits all all parts of it I'd say you know specifically with a couple of things that you've touched on I think what we're seeing on the office side.

At least in the exposures are.

Portfolio and sort of what we're hearing anecdotally is that there's a clear sort of separation between recently created whether developed renovated remodeled office space and older more commoditized space I can tell you that in two transactions.

We're involved in them.

Rent levels on new leases have exceeded what was underwritten.

Not surprisingly T I's and Ti and leasing commission, there's a little bit above underwriting as well both due to the need to provide some added.

Concessions and then also just the cost of getting things built out, but I would say in a in a positive sense there seems to be real demand for newly created space and my expectation is that we're probably likely to get refinanced out on a couple of our more significant.

Office projects in New York, which are sick.

Secured by newly created space I think on the Commoditized or you know as you said b or C quality space I think there's actually a you know.

So the interest lack of activity. So I think there's a real bifurcation on the office side I would say on the condo side the market's been.

Extremely strong for the last whatever it's been 15 to 18 months coming out of the pandemic and at least sitting here today.

We have not seen any evidence.

The slowdown.

There still seems to be.

Very healthy demand and strong price per square foot numbers.

So we continue to see positive momentum on the condo side and then I think the last.

The last asset class that we spend a lot of time thinking about you didn't ask about it but I'll comment on it any way is on the hospitality side, you know clear omicron impact in January and February , but a I would say better than expected pick up in March and April and.

Forward bookings for the spring are looking pretty strong, which hopefully is an indicator that.

Absent anything unforeseen from a pandemic side or to your point G. O politically you know it.

It seems like from a tourism perspective, and what that means for hospitality is trending at a fairly positive direction. So it's.

It's definitely mixed in New York, but I would say, there's you know.

Clearly things that are doing well and yeah. I think you just need to be very thoughtful about what exposures you are willing to live with.

Thank you very much for taking the questions. Thanks Jade.

Thank you and our next.

Question comes from the line of Stephen laws with Raymond James.

Hi, good morning.

Mr. Robert a lot, but I thought I'd ask about Europe , I know I asked about this last quarter, but maybe you're able to leverage the Apollo platform and you've got.

Closure.

In Europe and has provided a lot of growth can you talk about maybe some of the last conference call.

Any conditions improve there for the lending environment and Conversely is there anything that youre more cautious on there than when we spoke three months ago.

I mean, I think at a high level.

It still continues to be an attractive environment from a lender's perspective, if your perspective is.

Basically same quality of equity sponsorship same general business plans around assets shame.

Quality of assets and ultimately same ability generally speaking to protect yourself as a lender legally so there's a lot to like about Europe and it is again.

My team in London doesn't appreciate this when I say it but it's it's competitive but it is.

On a relative basis, just not as crowded in the U S. Either in terms of number of players size of securitization market et cetera. So.

I think our team on the ground there has done a fantastic job in building their presence are becoming a leading lender in the market.

I'm, having great relationships with borrowers and just continuing to generate it.

Interesting opportunities I think the flipside to that is that I would say.

The European economy has its challenges as well if anything you know as we talk broadly inside of Pollo I'm not that we spend a lot of time trying to make macro economic predictions, but to the extent there are those inside the firm who think about those things I would say Europe is.

Yeah.

Probably slightly more at risk for recession in the U S is so that certainly factors into underwriting decisions et cetera. So.

It's been a positive you know 12 to 18 months in Europe from from our business perspective, we think we'll still see.

Really interesting opportunities just given the strength.

Of our team over there, but I would say.

More focus you know in terms of stressing deals and thinking through economic uncertainty as we.

Debate, whether or not we can get comfortable with something from a credit perspective.

Thanks, Dan I appreciate the comments thank you.

Yeah.

Thank you and our next question comes from the line of Eric Hagen with B T I D.

Hey, Thanks, good morning.

A couple for myself number one if markets do say a little choppy how big of a cash position do you feel comfortable running and then the second one on the origination of the retail alone in the U K since the end of the quarter can you share some of the key metrics like the coupon on the loan and how you're financing it. Thanks.

Oh, Yeah I think.

You know in terms of cash or liquidity, we tend to think more about liquidity and cash.

We've typically been running just short of as best we can visa V efficiency in both money going out and money coming in.

You know we are we will probably always have a few hundred million dollars of actual cash, but remember we've got.

You know a.

1 billion six of unencumbered assets on the on the books, which are always available to the extent we need to.

Address any liquidity concerns so we feel very well protected there in terms of the.

Retail transaction.

That we just announced.

It was two best in class.

Outlet centers.

In the U K.

Base that has proven to be.

Remarkably both pandemic resilient as well as shifting nature of retail resilient.

Our exposure is roughly a 60%.

L. T. B, we think we're sort of on a debt yield perspective.

You know lending at sort of low double digit returns. If you think about where cap rates would need to go for us not to be protected and then you know we typically don't disclose a specific yield on the deals, but it's sort of consistent with what we've done in Europe broadly, which is sort of a you know.

Floater plus.

<unk> Park.

Three or 400 basis points and that we've lever into a low double digit ROE from for all our capitals perspective.

That's really helpful. Thank you very much.

Yeah.

Thank you.

I'm showing no further questions at this time, so with that I'll turn the call back over to CEO Stuart Rothstein for any closing remarks. Thank.

Thank you operator, I appreciate everybody taking the time this morning, and obviously if there are any follow up questions Hillary myself and now anesthesia are all available to answer any questions on a go forward basis. Thanks.

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

[music].

Mhm.