Q2 2022 Apollo Commercial Real Estate Finance Inc Earnings Call
Good day.
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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.
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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 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.
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To obtain copies of our latest SEC filings. Please visit our website at www Dot Apollo craft dot com or call us at 212515300 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 today on Apollo commercial real estate Finance, Inc. Second quarter 2022 earnings call.
I am joined today by Anastasia <unk>, our Chief Financial Officer.
The first half of the year with the most active in <unk> history as our team completed a record $3 $1 billion of new loan originations on behalf of the company.
The robust pace of deployment enabled era to effectively and efficiently deploy capital, including the $530 million of net equity received from approximately $1 $2 billion of gross repayment and importantly, <unk> achieved distributable earnings that covered the 35 cents.
Our share of quarterly dividend and is well positioned for the remainder of the year, while the broader Apollo CRE debt team remains active in the market. We can now be selective with respect to additional deployment on behalf of MRI, while continuing to produce distributable earnings that support the 35 per share quarterly.
Common stock dividends.
Also reaffirming prior comments.
He is in position to repay.
The 2022 convertible senior notes that mature in that mature in August with available capital and without having to complete any public capital markets transactions ship.
Shifting to the portfolio <unk> loan portfolio totaled $8 9 billion at quarter end, a 19% increase over the second quarter of 2021 credit quality remained stable and as evidenced by the repayments in the quarter, our borrowers continue to achieve business plans.
Have access to capital to refinance our loans.
As a reminder, 98% of the portfolio is comprised of floating rate loans. So as illustrated on page 15 of our financial results.
The increase in benchmark rates over the past quarter has had a clear benefit to air is net interest income and we are clearly well positioned for further increases in benchmark rates. It is also worth noting that 40 plus percent of Ari's portfolio is comprised of loans on European assets, we continue to.
Main comfortable with Ari's European credit exposure and.
Page nine of the financial results highlights.
<unk> has used local market financing and hedging to effectively mitigate any currency risk.
With respect to repayment activity year to date, 11 loans, representing approximately $1 billion fully repaid and there was additional $200 million of <unk>.
Partial repayments included in the second quarter repayments was one of <unk> larger in New York City office loans, which contributed to <unk> overall office exposure being reduced to 20%. We continue also to make progress with our focus loans construction has begun on the phone the threet multi.
Family Tower in Brooklyn. The project is now known as the Brook and we are excited about <unk> partnership with the wet cough company to execute the development.
Support for the project is evidenced by the fully negotiated construction loan we received from two well regarded real estate lenders, which is expected to close in the next few weeks. It is also worth noting that operating performance of the Mayflower Hotel continues to improve as mentioned on prior calls we.
We're actively working on selling the hotel and are encouraged by the response from potential investors finally with respect to 111 West 57th Street unit closings have begun with additional units under contract expected to close in the coming months. The traffic numbers are strong and have been.
<unk> recently with more foreign buyers returning to the market interest in the building remains high with.
With several active negotiations currently taking place in the response to the furnished model resident is positive.
That being said there is still work to be done with respect to increasing the pace of sales activity, which we anticipate will pick up in the fall coinciding with a robust marketing campaign and finished amenities.
With that I will turn the call over to Anastasia to review <unk> financial results for the quarter.
Thank you Stuart and good morning, everyone.
For the second quarter, we reported another quarter of stable financial results with distributable earnings of $49 5 million or <unk> 35 per share.
GAAP net income available to common stockholders was $6 to $7 9 million or <unk> 48 per share and diluted net income of 44 cents per share.
GAAP net book value per share prior to the general seasonal islands, and depreciation increased slightly to $15.19 as compared to $15 and one at the end of the first quarter, primarily attributable to net unrealized gains on our foreign currency and interest hedges.
As we have previously highlighted we take several steps to mitigate our foreign currency risk.
Given that 44% auto loans in our portfolio are secured by properties in Europe .
We hedge our exposure on net equity basis for all foreign currency denominated transactions by entering into forward currency contracts. This closing.
As we have witnessed during this period of significant fluctuations in foreign currency rates.
<unk> strategy has proven effective.
Our portfolio remains well positioned for rising interest rates with 98% of our loans are floating rate.
At quarter end, 87% of our U S and 100% of our UK floating rates loans, where in axis over their respective floors.
Therefore, we have begun to see the benefits of the <unk> rates flow through to our net interest income.
An additional increase of 50 basis points in the U S and the UK would lead to an incremental <unk> <unk> per share respectively of net interest income.
As of June 30th our junior Oc still allowing increased slightly quarter over quarter due to new loan originations and the more adverse macroeconomic outlook, which was partially offset by the impact of portfolio seasoning.
With respect to specifics to fill allowance during this quarter, we reversed $10 million of previously recorded allowance against though loan secured with the multifamily development in Brooklyn, knowing that's the problem.
The reversal is primarily driven by additional value creation in the underlying property achieved through development activities performed to date.
This reversal is specifics diesel allowance was partially offset by a 7 million allowance. We recorded this quarter against the loan secured by a hotel in Atlanta, Georgia.
The hotel has had a slower than anticipated recovery following the onset of COVID-19 pandemic.
The aggregate changes during the quarter resulted in overall <unk> reserve of approximately two 2% of amortized cost basis, and is relatively flat quarter over quarter and compared to year end.
With respect to Oh boring, we are in compliance with all covenants and continue to maintain strong liquidity.
We ended the quarter with $266 million of total liquidity, which was a combination of cash and <unk>.
Undrawn credit capacity on all existing facilities and $1 7 billion of unencumbered loan assets.
Our debt to equity ratio at quarter end increased to three <unk>.
Our portfolio continues to migrate towards predominantly first mortgage loan.
And with that we'd like to open the line for questions. Operator. Please go ahead.
As a reminder to ask a question you will need to press star one one on your telephone to withdraw your question. Please.
Please standby, while we compile the Q&A roster.
Yeah.
One moment for our first question.
That will come from the line of Doug Harter with Credit Suisse. Please go ahead.
Thanks, Stuart I'm, hoping you could talk a little bit more about your current liquidity, especially in light of the upcoming convert maturity.
Just kind of how that might impact.
Our liquidity balances going forward and what that might mean for future loan growth.
Yeah, I think it's a good question, Doug look I think even with.
Paying off the convert I think we're still on track at this point.
To end the quarter in the third quarter.
With call it several hundred million dollars of liquidity I think for us.
As we think about that liquidity and how aggressively we want to put it into new deployment I think it's part driven by <unk>.
<unk> that we see in the market and then I would say, it's also part driven by.
Our evolving view of what we think expected repayments throughout the rest of the year will look like just given what's going on in the overall market I think if.
Things play out.
As expected I think we are comfortably sitting on.
Call. It several several hundred million dollars of deployable liquidity that could support.
With back leverage.
All at somewhere between $752 billion of deployment.
As I indicated in my remarks.
We're feeling very comfortable about where we are from an earnings perspective for the rest of the year. So I think we are going to be.
Selective.
Yeah.
Try and find things that are really interesting as we think about deploying that capital.
Got it I guess just more on how they kind of how you kind of get to that ending the quarter with still a couple of hundred million dollars is that sort of tapping into some of the unencumbered assets or kind of using deployment repayments as they come in to kind of.
It's a combination but yes, it's a combination.
Nation of both I think one of the one of the big events is what I referred to in my remarks, which is the construction loan on the development in Brooklyn with that allows us to do is cut.
Pull out a fair bit of the capital that we funded into the project to date.
That capital will theoretically go back in.
Over time.
As the as the development moves along but.
It initially puts a fair bit of capital back in our pocket and then Theres some other.
Larger transactions that we've created during the year, we will complete the financing on those and that will give us increased liquidity as well.
Great. Thank you.
Sure.
Thank you one moment for our next question.
That will come from the line of Jade Rahmani with <unk>. Please go ahead.
Thank you very much Stuart as you consider the outlook for commercial real estate.
<unk> portfolio for the transitional lending market in particular.
What benchmark.
In the fixed income market do you think matters most what should we be focused on for example, the 10 year Treasury has declined meaningfully.
Blake.
Could suggest a soft landing in terms of where cap rates ultimately settle would you agree with that or do you believe it's more reflective of the current risk off environment.
And not really signaling anything with respect to commercial real estate, maybe if you could just provide what you look at and also ring fence, some magnitude of severity or turbulence that youre kind of expecting.
Yeah look I think first and foremost it at the end of the day Jade we spend a lot of time looking more at.
Call it broader speaking macro data as opposed to just interest rate movements as we think about what's going on vis vis the broader economy are we going to have a soft landing or we're going to have a hard landing what's going on with inflation etcetera. So as we think about the <unk>.
Environment into which were lending into we try and use the real time data that we are getting from.
The loans that we are long and what we're hearing from borrowers both with respect to those that are loans that are in the IRI portfolio in those loans that are.
Elsewhere within the broader Apollo real estate loan portfolio. We also obviously are getting a fair bit of data.
From what Apollo does on the real estate equity side of our business and we're also getting beneficially a fair bit of data.
Broadly speaking from what others of Apollo are doing away from real estate and what they are seeing.
In the sectors or industries that they and they invest in.
And then there's also a fair bit of macroeconomic data produced at Apollo two that I would say broadly speaking.
Is how we start to think about where is the economy headed what are we seeing.
And how do we think about deploying new capital or what does it mean for our existing portfolio. We don't ignore interest rate in the sense that it certainly has an impact on.
How we think about pricing and what others away from the Apollo environment might be thinking, but I would say, we come back to data and I would say as we think about new opportunities and as we think about.
Even just protecting ourselves in the current Apollo portfolio I would say.
Given my earlier comments about us getting somewhat ahead of things from a deployment perspective.
I would say we are certainly approaching new deployment.
With a more cautious view as to what may happen in the economy.
And I think until we see some real evidence of a.
Achievable soft landing I think we will continue to take that somewhat cautious view in terms of.
Underwriting new business plans or even.
As we think through asset managing the existing portfolio and the various requests we get from borrowers from time to time.
And that data that you're tracking in terms of the real time data from the loan portfolio as well as the <unk>.
Are there areas you referenced are you seeing anything pointing in either direction of soft first hard landing and specifically with <unk> credit outlook.
How are you feeling about the portfolio are there other areas aside from the watch list assets, including the Atlanta alone that we should be attuned to.
I mean, it's a broad question and let me try and answer it in various pieces. If I can obviously, if you think about it.
The various either geographies or property types that are.
Important to the <unk> portfolio.
Generally speaking.
Hotels are performing quite well.
Putting aside the Atlanta transaction, which just to be clear the Atlanta Hotel is still <unk>.
Cash flow positive and covering debt service so.
The definition of challenge can be debated button and then take my earlier comments on the May flower and then look at our hotel portfolio more broadly certainly we continue to see positive trends.
Throughout the hotel portfolio I think the office.
Portfolio, obviously I commented earlier on the.
Repayment of one of our major New York City Office exposures, which was a refinancing on the back of some very successful.
Leasing activity and I think.
Generally speaking two comments I've made on prior earnings calls I would say newly created office space.
Is generally getting an audience as I think you know.
I think there is many companies still in the mindset.
In order to get people back to the office you need to offer them more modern more highly of monetized office space and that's a theme we continue to see.
Throughout the portfolio I would say on the.
For sales side of things.
There continues to be activity, it's not as broadly speaking, it's not as good.
Robust as it was in 2021, but we're still seeing transactions close we're still seeing units put under contract.
Thank you I think at some level.
All of that activity that I just referenced.
In some respect supports the notion that there is still the economy is still churning along and wouldn't be surprising to see the need for continued rate movements to sort of cool things off a bit.
But for now the.
The watch list represents those assets that were concerned about and generally speaking the portfolio beyond that is.
Fairly stable to performing quite well.
Thanks for the comments I appreciate it sure.
Thank you and one moment for our next question.
That will come from the line of Eric Hagen with BTG. Please go ahead.
Eric Thanks, Good morning, a couple of follow ups on the unsecured hey, good morning can you guys hear me okay.
Got it.
Okay, Eric Thanks.
Couple of follow ups on the unsecured.
<unk> can you get more specific around the borrowing rate, we would expect to pay from drawing on the unencumbered assets and is there a level at which you'd be constructive on <unk>.
Possibly even issuing here with spreads continue to tighten global out of Rollouts.
Yes look I think.
I think it's fair to say generally speaking that the repo market has moved.
A little bit.
Away from it in favor of the borrower and more towards in favor of the lender I think that's not surprising as you think about what's going on in the.
Broader securitization markets with the MBS market, the CRE CLO market as things have gotten a little bit more expensive or spreads have gapped out.
Some of that has taken place in the market or the banks that we borrow from as well that being said.
I'd say, we're still borrowing at rates that work extremely well for us and call that high level at benchmark plus.
High ones to low twos, depending on the asset and depending on how much leverage we're using so as I think about borrowing at those levels versus what might be available in the broader public capital market whether it be.
The term loan b market or the convertible notes market I would say continuing to use.
The bank market and sort of.
Maintaining optionality before we really do anything with real duration to it still seems to be the much more cost effective.
Way to do things right now and I think again being inside the Apollo.
<unk> I think we've benefited from the efforts of the firm overall as well as some folks.
Specifically on the real estate team and doing a very effective job of making sure. We continue to broaden our group of bank lenders. So we always have multiple places to take assets. So long winded way of saying I don't envision us doing anything in the public capital markets given what we're seeing on offered today.
Gotcha.
Thank you.
Certainly when you guys think about overall conditions in the U S and in Europe .
And we've seen the euro weakening versus the dollar.
How sensitive you think will be mandates for commercial real estate.
Hudson Global.
With respect to that vibration with Commvault.
Are you talking about the demand for assets in Europe in light of the currency movement.
Exactly yes.
Yeah look I think sitting here today.
If you looked at the European market, there still seems to be.
A healthy level of capital looking on the equity side for opportunities I would say again no different than what I would say.
About the U S I think theirs.
A lot of capital available I think everybody is trying to figure out where the overall economy is headed I think we've said on prior calls and I would say it today.
Europe , probably feels potentially closer to a recession today than the U S does the both have the ability to achieve it if things don't go.
Well I think people are clearly taking a more measured view of what the next few years look like I also think.
Lending has pulled back a little bit. So I think there is clearly demand for assets, but I think volumes will be down it will take longer for people to.
Get comfortable and complete.
Transactions.
There is still an open and functioning market and theyre still bids at various price level.
Okay. That's helpful. Thank you very much sure.
Thank you and one moment for our next question.
That will come from the line of Steven Delaney with JMP Securities. Please go ahead.
Good morning, Stuart and Anastasia Congrats on the.
The progress in Brooklyn on the <unk>.
<unk> office repayment.
Second quarter.
Repayments in the first half of Europe pretty healthy at $1 2 billion could you give us some sense steward of what you expect over the second.
Second half of the year.
Relative to that one too.
Yes.
Yeah, I think it's a fair question look I think if things.
Generally speaking go according to plan and that includes some call it biased.
Sort of ranking up things on on our part I think youre potentially looking at another.
Call it.
Few hundred million dollars of.
Repayments on sort of a net equity basis, which sort of implies $4 million to $500 million of gross repayments. If you think about it.
On a gross level.
I think for the stuff that we expect to get repaid in Q3, we feel pretty comfortable about that because we know a fair bit of it is effectively just moving towards closing at this point as we move a little bit further out.
As you move a little bit further out in the year.
Do you see a little bit more risk to those things happening, but generally speaking.
The market is functioning.
We expect.
To be pretty close in our estimate of what we think.
Will happen and I think that sort of implies probably plus or minus $400 million of repayments between now and the end of the year, which will give us a couple of hundred million dollars to.
Deploy should we choose to deploy it.
Okay, great. So the $4 million to $500 million compares to the one point too.
They're both gross figures okay, great. Thank you.
Stuart.
Short term rates are probably everybody's worried about the economy longer term, but I think short term rates are sort of top of mind for the market.
And $1 50, now on LIBOR, maybe were $3 50 by the end of the year.
That's a pretty significant impact of a couple of hundred basis points, when you're making $100 million loans to people in your front end underwriting how much sensitivity stress do you do you put on the cost of carry.
And then to what extent would you require caps or swaps.
Oh obtained by your borrowers.
We will always require a cap or a cap so 100% of the things. We will do will be interest rate hedge will typically cause someone to hedge for the initial borrowing period any extension beyond that will require an extension of any hedging instruments. So we're certainly.
Well protected from that perspective, and then as we think about cost of carry where basically.
Using the capped cost and the forward curve to think about.
What's needed inside the deal in order to cover that debt service over the initial period.
Yeah makes it makes perfect sense I just wanted to get confirmation because I'd ask the question before.
I've received the answers they weren't nearly as clears, which David maybe I would think.
Maybe I'm getting better at this.
Yeah.
Question, you did pretty good.
Last question from me Miami I think we all.
Took note of Citadel's decision to relocate its headquarters.
With respect to your Miami property.
How far away are you from where the current path of.
New office development to support.
Incoming corporate tenants.
Or sort of more mixed use as my memory of Havent walked the property with you but is it feasible that over the next three to five years that <unk>.
More decisions like Citadel could positively impact your your exposure there in Miami.
Yes look I think citadel, aside and it's obviously great news to Miami.
I can only describe as a clear.
Post pandemic winner right Brian .
Demographic shift tax implications.
You know more.
Working remotely or in different locations for people. There has just been so much positive news for Miami I think citadel only adds to that I think we are maintaining.
Full flexibility with respect to what.
Our site in Miami could become if you've looked at if you were part of the various discussions over the last.
Six months certainly some type of.
Boutique office as possible, but there are many other thoughts as well I think the net net of all of that Steve is that I would say.
The incoming dialogue to us with respect to the sites in Miami continues to be.
Increasing and more positive and optimistically I would say that over the next.
Three to six months, we should be in a position to have a much clearer picture about what the resolution for us will be on those sites.
When you own a piece of property, it's nice when the phone rings isn't it.
Yeah.
Cost of goods.
<unk> rep or something yeah.
So.
I think there's.
I don't want to over promise by Q3 earnings call, but I think between the next turn it to earnings calls there'll be definitely some.
Some commentary from us on what the path forward is on Miami.
Well, thanks for the color stay well and all the best in the second half.
Thanks, Steve.
Thank you all for participating in today's question and answer session I would now like to turn the call back over to Stuart Rothstein for any closing remarks.
Thank you operator, and obviously, thanks to everybody who participated this morning.
Okay.
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Ladies and gentlemen, thank you for participating in today's conference.
You may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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