Apollo Commercial Real Estate Finance(ARI) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q2 2020, operating earnings excluding realized losses were $59 million, equating to $0.38 per share, while GAAP net income available to common stockholders was $56.8 million or $0.36 per share [14] - The realized losses included losses from the sale of three construction loans and the unwinding of a $500 million notional interest rate swap, which is expected to save approximately $10 million in annual interest expense [14] - GAAP book value per share increased to $15.12 from $14.94 at the end of Q1 2020, primarily due to accretive share repurchases [15] Business Line Data and Key Metrics Changes - The company ended the quarter with 71 loans totaling approximately $6.4 billion in amortized cost, with a weighted average unlevered yield of 6.7% and a fully extended term of just over three years [9][15] - ARI received 99.8% of the expected interest from outstanding loans, with hospitality and retail assets being the most impacted by the pandemic [9] Market Data and Key Metrics Changes - The company maintained over $518 million in cash and undrawn credit capacity at the end of the quarter, with over $1 billion in unencumbered loan assets [7][15] - Deal activity is slowly returning, with ARI benefiting from being part of the broader commercial real estate debt platform at Apollo [11] Company Strategy and Development Direction - The company is focused on maintaining excess liquidity and a cautious approach to new investment opportunities, while also exploring both additions to the portfolio and the use of capital within the existing capital structure [12] - ARI has proactively sold certain loans to generate liquidity and eliminate over $250 million of future funding obligations [7][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the ongoing market volatility and uncertainty, citing strong borrower and lender relationships [13] - The company is maintaining a defensive bias and is focused on keeping elevated cash levels on the balance sheet [21] Other Important Information - The company has successfully negotiated a six-month holiday for evaluation requirements with its secured credit facility counterparties [8][55] - Construction has resumed across all ARI's construction loans, with delays not being a primary concern [52] Q&A Session Summary Question: Comments on buyback activity and cash allocation - Management acknowledged the importance of cash and indicated a focus on maintaining elevated cash levels on the balance sheet [19][21] Question: Overall cost of capital for the mortgage REIT business - Management estimated a low double-digit weighted average cost of capital across the sector [28] Question: Sustainability of the current dividend - Management indicated that the current dividend is covered with a 92% payout ratio and will be reviewed in September [32][33] Question: Future funding commitments and cash coverage - Management provided details on future funding commitments, indicating that some are dependent on specific hurdles [39] Question: Transaction activity and structures - Management noted that while transaction activity is slow, they are looking at regular business with good sponsors [44] Question: Construction site operations and timelines - Management stated that construction sites are generally operating at full capacity with minor delays [52] Question: Status of specific loans and projects - Management provided updates on the status of loans and projects, indicating ongoing discussions with potential buyers [60][62]