May 3, 2013
Executives
Stuart Rothstein – President and CEO Megan Gaul – CFO, Treasurer and Secretary Scott Weiner – Chief Investment Officer
Analysts
Joshua Barber – Stifel Dan Altscher – FBR Vic Agarwal – Wells Fargo Securities Rick Shane – JPMorgan
Operator
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, Incorporated 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. 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.apolloreit.com or call us at 212-515-3200. At this time, I’d like to turn the call over to the Company’s Chief Executive Officer, Stuart Rothstein.
Please go ahead sir.
Stuart Rothstein
Thank you, operator. Good morning and thank you for joining us on the Apollo Commercial Real Estate Finance, Inc.
first quarter 2013 earnings call. Joining me this morning in New York are Scott Weiner, our Chief Investment Officer; and Megan Gaul, our Chief Financial Officer, who will review ARI’s financial results after my remarks.
The commercial real estate debt market had an extremely active first quarter in 2013 fueled by increased real estate transaction activity, the further refinancing and recapitalization of maturing loans and the benefits of the continued low interest rate environment. U.S.
commercial real estate transaction volume totaled $94 billion in the first quarter of 2013, an 8% increase over transaction volumes in Q1, 2012. According to a report released by (TARP) last week for the first time since the downturn loan originations by the nation’s largest banks exceeded the outflow of maturing and liquidated mortgages last year marking an important turning point for the industry.
CMBS transaction volume has continued to accelerate with over $31 billon of issuance year to-date as compared to just $9.3 billion of issuance for the same period last year. There is also been a resurgence in the construction lending market driven mostly by residential construction.
In March, homebuilders broke ground on the most multifamily homes including condominiums and rental apartment in over seven years. This increased activity bodes well for ARI as more potential investments through our preliminary screening process and our pipeline of potentially actionable deals has grown.
However I would caution that the abundance of capital looking for attractive fixed income returns with asset protection has made the market for deals more competitive. As we have stated previously, we have noted significant spread compression in certain parts of the real estate’s debt market most notably in first mortgages for either conduit eligible or core properties, which are well bid by the insurance companies.
In addition, we have witnessed increased competition for what we would call senior mezzanine loans from lenders, who historically have been more conservative and are now stretching LTVs to find deals. Since going public in 2009, ARI has remained focused on identifying compelling investment opportunities in our target real estate debt asset classes.
The challenges presented by the current environment have clearly increased the importance of having a well defined investment philosophy and a strong operating platform to effectively deploy capital. It is important to note that between ARI and the other real estate debt funds and separate accounts managed by Apollo, the real estate debt business at Apollo today oversees approximately $5.5 billion of investment representing the deployment of over $3 billion of equity throughout the entire real estate debt spectrum from AAA rated legacy CMBS and highly rated newly issued CMBS through junior mezzanine loans and preferred equity.
This level of activity has enabled our manger to develop deep relationships with multiple counterparties and deal sourcing relationships and has enhanced our reputation as a lender, who thinks creatively and works quickly to close transactions. At present, we are finding compelling investment opportunities in properties that are outside of the conduit box due to property type or transitional activity whether it is renovation, releasing or change of use of the property.
Often times these investments are the (spoke) financing transactions, which require a very thorough underwritings. ARI’s infrastructure and expertise enables the company to perform deep dive analysis resulting in highly structured transactions in which ARI is well protected and appropriately compensated for taking the underwritten credit risks.
This was evidenced by a three transactions completed in the first quarter comprised of a construction financing for a New York City Condominium Development a subordinated financing for a New York City multifamily conversion project and a subordinated financing for a Hotel Portfolio located in Rochester Minnesota. In total, these transactions represented a $103 million of invested capital and had an underwritten weighted average expected internal rate of return of 14.2%.
As we continue to execute more transactions our reputation has a flexible, knowledgeable, reliable source of capital continues to grow and as a result our transaction pipeline continues to build. In order to fund our pipeline in March, the company completed an underwritten public offering of 8.8 million common shares resulting in net proceeds of just over a $148 million.
The company is actively engaged in deploying this capital however I would again like to remind everyone that each of our investments is effectively a privately negotiated transaction that tends to take several months from when we win an investment mandate until closing therefore we would expect that our operating earnings in the second quarter will be impacted by this investment ramp-up period but we are highly confident in our ability to get the capital raise deployed quickly. Before I turn the call over to Megan, I would like to mention that ARI recently filed a new Shelf Registration Statement as the company had utilized most of the cap capacity under the previous shelf filing.
In addition to using the shelf for future capital raises we expect to use the shelf to establish in at the market for ATM program which we believe will offer ARI flexibility in raising capital with lower execution cost and minimal destruction to the market. We also believe the ATM program will enable us to balance the timing of future capital raises with our need to fund transactions well at all times remaining cognizant of protecting our book value per share.
At this point I would like to turn the call over to Megan to review our financial performance.
Megan Gaul
Thank you, Stuart. Before I discuss our financial results I want to remind everyone that we have posted our supplemental financial information package on our website which contains detailed information about the portfolio as well as ARI’s financial performance.
Turning to our financial results, for the quarter ended March 31, 2013 we announced operating earnings of $12 million or $0.39 per share as compared to operating earnings of $8.8 million or $0.42 per share for the three months ended March 31, 2012. As we indicated in our press release operating earnings this quarter reflects the $2.5 million yield maintenance payment the company received in connection with the prepayment of two mezzanine loans totaling $50 million.
Net income available to common stockholders for the quarter ended March 31, 2013 was $10.1 million or $0.33 per share as compared to net income available to common stockholders of $9.1 million or $0.43 per share for the quarter ended March 31, 2012. The difference between operating earnings and net income available to common stockholders this quarter was related to the mark-to-market on our CMBS as well as equity compensation expense.
A reconciliation of operating earnings and operating earnings per share to GAAP net income and GAAP net income per share can be found in our earnings release contained in the Investor Relations section of our website www.apolloreit.com. GAAP book value per share at March 31st was $16.41 million as a reminder we did not mark our loans to market for financial statement purposes and currently estimate if there is another $0.30 per share value in our loans are mark-to-market.
As such we estimate our market value per share to be $16.71 at March 31, 2013. Based upon our closing price per share on May 1st of $17.52 we are trading at a 7% premium to GAAP book value.
Our investment portfolio as of March 31, had an amortize cost basis of $688 million with a weighted average underwritten IRR 14.2% and a weighted average duration of three years. The credit quality of our loan portfolio remains stable and the company has determined that an allowance for loan losses was not necessary at March 31, 2013.
Shifting over to the other side of our balance sheet ARI made considerable changes to our financing facilities for the quarter. In February, the company amended our JPMorgan Facility to extend the term for two years and pricing on the facility will remain at LIBOR+2.5%.
The company primarily uses the JPMorgan Facility to finance ARI’s first mortgage loan. In addition, the company completed an amendment to our Wells Facility which resulted in a reduction of our interest rate to LIBOR+1.05% for outstanding borrowings used to finance AAA CMBS and LIBOR+1.75% for borrowings used to finance Hilton CMBS.
In addition, the term for the outstanding borrowings used to finance the AAA CMBS was extended to March 2014. Finally, as noted in our earnings release our Board of Directors declared a $0.40 per common share dividend for the second quarter of 2013.
This is the 12th consecutive quarter of this consistent dividend level and based on the closing price of $17.52 on May 1st our common stock stays at attractive 9.1% dividend yield. And with that we’d like to open up the line for the questions.
Operator?
Operator
(Operator Instructions) Our first question comes from Joshua Barber of Stifel.
Joshua Barber – Stifel
I’m wondering if you could talk a little bit about your Hilton CMBS loan, what’s your expectation with that as the year continues to go on obviously the REIT market has done quite well and there has been some various new supports that being considered as an IPO but obviously there is some structural issues with that particular piece of paper. Do you have any expectation with that in the next 12 months?
Scott Weiner
I mean yeah hi Joshua this is Scott. I mean I think the company itself is performing well as I think Gladstone has stated and I think Gladstone has talked about what they’re doing with their overall portfolio obviously Hilton and ELP are two of the larger ones I mean we’re not produced any kind of information whether it were an IPO or anything like that is eminent so we would expect to just to continue yeah it’s obviously overall very low cost of funds for Gladstone and they’re continuing to execute their business plans in terms of expanding the management business.
We’ve been very pleased with the investments depreciated the dollar price of our loan has depreciated considerably since we bought it and we were very happy with the level of return.
Stuart Rothstein
And any – look any level of return we’ve disclosed related to the investment Josh was predicated on holding it to maturity and we financed and such to the extent anything happens sooner would beneficial to the return as we presented it but that’s not well certainly wasn’t part of our pieces at the time we bought the piece of paper.
Joshua Barber – Stifel
Okay, that’s helpful. Thanks.
And also I guess with your balance sheet growing today and you certainly have a bit more scale, what would – what would you think be the upper limits of deal size that you could actually take down today not just something that you could actually potentially carve up but something that you’d actually hold the majority of $60 million about the upper limit of what you’d be willing to do.
Stuart Rothstein
I mean, if you look at our pipeline today Josh, you know there is things that I would say are above 60 and there are some things between call to $75 million and $100 million range, I’d say upper limit today I won’t say a hard and fast one but it’s probably around a $100 million depending on funding components as there are future funding component when does the capitals allow, when do we think the capital will come back. But we look they’re getting 50.
Joshua Barber – Stifel
First mortgage or these are first mortgage or mezz what is the difference.
Stuart Rothstein
Right. I think we – we’ve looked at things in a north of 60 and I’d say 75 to 100 is probably the upper band of what we would look at.
Joshua Barber – Stifel
Alright, great. Thanks very much.
Operator
Thank you. Our next question comes from Dan Altscher of FBR.
Dan Altscher – FBR
Hey, thanks. Good morning.
Stuart Rothstein
Good morning Dan.
Dan Altscher – FBR
Just had a question Stuart I think you mentioned how the environment became a bit more competitive particularly on the mezz side. Can you just give us a sense of what maybe the yield, the actual like loan yields do you think you are repeating on some of these newer deals and some stuff you see in the pipeline?
Stuart Rothstein
Yeah, I mean just to be very clear we draw distinction between what I would call our senior mezzanine loans versus junior mezzanine loans and ARI is consistently been focused on I’ll call it that bottom dollar piece of risk where junior mezzanine loans or pref equity regardless of structure, we’ve continued to find opportunities in call it the 11% to 14% range to keep it a broad range but there is certainly variability depending on market property type structure. I think, where we’re actually seeing yields compressed and this was more a comment on the market as supposed to ARI’s opportunity set is what we’ll describe is a senior mezzanine loan, which is call it a piece of paper between a first mortgage that is somewhere between zero to 50%, 55% LTV and you got a senior mezzanine loan let us call it 55% to 65% LTVs, where you are getting returns in the call it 8% to 9% range through 2011, 2012 and that stuff today is more like a 6.5% to 7.5% market.
So, it’s not something that ARI has particularly play it over time but I think it is indicative of just capital looking for yield and various parts of the capital structure getting squeezed.
Scott Weiner
And I would think that, that senior mezzanine is really on cash flowing, stabilized properties, where maybe a bank or street firm takes it down and then sells that to someone, who don’t necessarily have or need the real estate expertise or doesn’t think they need the real estate expertise. So, I think that is – market is trading in tandem with the high yield market, which as you know that all time types.
So, I think people are coming into that senior mezzanine as an alternative to high yield I’m just saying, I’m getting a little bit of a pickup in yield given – given illiquidity and stuff.
Dan Altscher – FBR
Got it. Okay.
And then just quick a follow-up also on the new at-the-money shelf I mean it seems like from the cash on hand there is still significant capacity out of it you raises that actually executing on the shelf more actually executing on the ATM may not it really be necessary in the near term. It’s just kind of just a caution or like that opportunistic thing to do several quarters down the road as opposed to immediately?
Stuart Rothstein
Yeah. I mean I think it falls under the category if there is no reason not to put it up to give ourselves flexibility in the future.
There is no near term plans to use it but it’s relatively cheap to get one established and its one of those things, where you should get through the SEC while you can as opposed to when you may really need to use it. But I think we still got work to do through the capital that we’ve raised previously before we think about raising any other additional capital in any form.
Dan Altscher – FBR
Yeah that makes sense. Okay, great.
Thanks.
Operator
Thank you. Our next question comes from Vic Agarwal of Wells Fargo Securities.
Vic Agarwal – Wells Fargo Securities
I’m just curious are you going to deploy the capital or do you envision deploying the capital roughly at the same type of equity allocation between subs and first mortgages that you currently have?
Scott Weiner
Yeah. I would say those were definitely the two assets classes.
As we said before, we’re not really seeing any opportunities on the securities side levered or un-levered. So, what we’re seeing is, I would really break into three categories senior loans or maybe there is some transition or conversion component and then mezzanine loans and again the mezzanine loans might be on that type of conversion, construction type element or something that we’ve always done is kind of the mezz behind long-term fixed rate or cash flowing assets.
So, I would say that is really the pipeline and what we’ve in closing.
Vic Agarwal – Wells Fargo Securities
Okay. And can you remind us how much is remaining of equities yet to be deployed?
Stuart Rothstein
Yeah. We basically following the offering out of couple of hundred million dollars were to deploy, which was after sort of what we announced in Q1.
So, if you just look at March 31, you could say we had a roughly a couple of hundred million dollars of equity to deploy. And I think, I indicated in my comments a lot of that is sort of been spoken for vis-à-vis mandate but it will take time to close and as we’ve done historically when either an individual closing is material or we aggregate a few, we’ll certainly attempt to update the market as the capital is being used.
Vic Agarwal – Wells Fargo Securities
Okay. Well, thanks.
Operator
Thank you. Our next question comes from Rick Shane of JPMorgan.
Rick Shane – JPMorgan
Thanks for taking my question. You had a – you were clear upfront about the level of competition heating up and you have got a couple of questions on that.
I love this sort of here if that drives you to either sort of different property classes; different geographies are there markets or niches beside structure where you think there is less competition as everybody is sort of fighting over the same A class properties in the obvious cities?
Scott Weiner
Hi, it’s Scott. I’ll take that.
I would say, where we compete, the best and then where we focus on is the more the (support) product is there anything that’s (bloombergable) or it’s the expression that’s not really where we’re adding value. Where we’re adding value is certainly the execution, reliability.
So, if someone is buying a property and has hard money deposit needs to close, he knows that we’ll figure out and work with them that could be directly with the borrower or we’ve plenty of relationships with senior lenders, who her looking to layoff something and they want to have a partner and that includes both people looking at securitization as well as balance sheet lenders. So, I mean, I would not say it’s kind of pushing at them.
I think we’ve been very focused and sticking to what we’ve done here. We haven’t done any of this equity like strategies or nonperforming strategies.
We always continue to do outperform and get investments. We’ve been able to actually do a lot in New York, which is obviously a large market of all different types of properties, cash flowing assets, conversion assets and some are static.
We find relative value basis some of the floor sell properties or deals in New York to be more attractive than say a low debt yield on a suburban office asset for instance. So, we’re not redlining any markets or focused specifically on any markets other than the performing debt that we’ve been doing historically.
Rick Shane – JPMorgan
Scott, thank you that’s very helpful.
Operator
(Operator Instructions)
Stuart Rothstein
Thank you, operator. I think we are good at this time.
Operator
Thank you. This concludes today’s conference call.
You may now disconnect.