Q1 2023 Apollo Commercial Real Estate Finance Inc. Earnings Call

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Elyse 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.

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 Cross 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 ROTC.

Thank you operator, and good morning, and thank you to those of us for joining us on the Apollo commercial real estate Finance first quarter 2023 earnings call as usual I am joined by Scott Weiner, Our Chief investment Officer and Ed.

Anastasia Myron about our Chief financial Officer.

Despite the steady stream of negative headlines concerning commercial real estate or is predominantly senior floating rate loan portfolio produced another quarter of distributable earnings comfortably in excess of the common stock dividend with generally stable credit performance across the portfolio.

<unk> continues to benefit from higher base rates as 99% of the eight and a half billion dollar portfolio consists of floating rate loans, which has resulted in a 360 basis point increase in weighted average yield on the portfolio over the past 12 months.

Higher base rates combined with Ari's robust pace of loan origination in 2021 in the first half of 2022 has put <unk> in a position to take a conservative approach to additional capital deployment, while still comfortably covering our quarterly dividend to our stockholders.

Before I get into more details on air is quarterly performance I want to take a minute to discuss the current market environment.

Throughout the first quarter interest rates have remained elevated and uncertainty around both the trajectory of the economy and future fed action has persisted.

As a result overall real estate transaction activity was limited.

Regional banking crisis, only exacerbated market fears with respect to commercial real estate liquidity availability of financing and asset values, while there will be pockets of distress, particularly in certain sub sub sectors of the office market and it will take time for there to be clarity on the trial.

And then ultimate recovery of real estate values through this cycle. We believe the CRE market is much better positioned today than it was leading up to the GFS C. There.

There is far less leverage than the overall commercial real estate financing ecosystem than there was in 2007 since 2009 leverage levels generally have remained within the 60% to 70% loan to value range and key market participants, notably the large money center banks are much better capitalized.

In addition, while still relevant the overall size and the relative market share of the securitization market have declined and a larger share of real estate financing has been provided by balance sheet lenders.

There was also a record level of dry powder and a variety of real estate equity and credit vehicles that we use the current market opportunistically and that dry powder will ultimately be deployed.

Lastly, two quick points to note.

First apart from office assets underlying operating performance for commercial real estate generally remains positive while the rate of occupancy or net cash flow increased maybe slowing rents continue to trend higher and occupancy levels remained stable.

Also the combination of elevated inflation and tighter financing market clearly is impacting the supply of new real estate product, which over time should benefit both the performance and value of in place assets.

With that somewhat lengthy backdrop in mind, we continue to take a cautious approach to capital deployment on behalf of <unk> and.

And are focused on increasing liquidity through expanding existing financing relationships, putting new facilities in place and selectively selling loans.

I previously mentioned higher floating rate base rates position <unk> to comfortably cover its quarterly dividend, while building more financial flexibility into the balance sheet.

During the quarter finals.

Finalized a new $300 million asset backed facility with Banco Santander as well as a $170 million revolving credit facility led by Bank of America.

Despite elevated attention to the pullback in real estate lending by regional banks Ari's key secured lending counterparties very much remain open for business and are continuing to provide additional financing for our EIS assets. These financial institutions have been the beneficiaries of an inflow of deposits.

<unk> over the last months and remain committed to commercial real estate lending. Furthermore, era has not had any margin calls or request for deleveraging from any of its counterparties since the failure of Silicon Valley Bank.

Another avenue for both generating liquidity and reducing certain exposures for AMRI has been to opportunistically sell loans during the quarter <unk> sold three loans and a portion of another alone all secured by European properties with aggregate commitments of approximately $237 million.

141 million of which was previously it was already funded to another Apollo managed entity at 99% of par in addition to reducing Ari's European exposure. These sales also reduced future funding obligations of approximately $100 million.

Shifting to the portfolio.

<unk> remains focused on proactive asset management, and working with borrowers on pay downs and extensions where appropriate.

As a reminder, ari's borrowers are generally comprised of sophisticated well capitalized real estate operators, who typically have significant equity invested in the underlying properties.

I had several office loans, either partially or fully repaid during the quarter.

Overall office exposure stood at only 18% of the loan portfolio at quarter end more than half of Ari's current loan exposure is in Europe , where there are higher rates of orchid office occupancy and work from home is having less of an impact on office usage, the two largest U S.

Office loans in the portfolio have capital subordinate to our eye and in the case of the long Island City office loan.

I received a partial pay down from the subordinate capital provider during the quarter in exchange for an extension in term.

With respect to the balance of Ari's near term maturities, we are in dialogue with all borrowers and expect full or partial repayment on these loans.

Many of the loans coming due this year are secured by hotel assets that have performed their underwritten expectations.

<unk> recently received full repayment on one such hotel totaling $60 million. Let me also clarify something I, just said, which is in any instance, where we expect to get a partial pay down we expect it to be a negotiated transaction, where someone is partially paying us down and further.

Getting to the asset in exchange for additional time on their loan.

As we look ahead to the remainder of 2023.

Our eye is well positioned on multiple fronts.

Portfolio continues to distribute stable distributable earnings even while maintaining excess liquidity on the balance sheet.

While our eyes transaction volume is expected to slow this year.

Paulo remains active in the commercial real estate lending market on behalf of other managed capital providing.

Insight into market transaction activity and pricing continued proactive steps have been taken to strengthen the balance sheet and diversified funding sources and our eyes only near term cortlandt with corporate maturity is the $223 million of convertible notes coming due during the fourth quarter of this year.

<unk>, which we have already indicated we are prepared to pay off in cash as part of our overall forecast model for the year.

Before I turn the call over to Anastasia. It is worth highlighting that our current quarterly dividend run rate of 35 per share. The company is paying common stockholders of 15 plus percent annualized dividend yield.

Coming off a quarter in which <unk> earned <unk> 51 per share while trading at approximately 60% 60% of book value with earnings supported by a portfolio consisting of 99% floating rate predominantly senior alone.

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.

Alright produced strong financial results in Q1 with distributable earnings to net realized loss on investments and realized gain on extinguishment of debt of 74 million or 51 cents per share gap.

GAAP net income available to common stockholders was $46 million or 32 cents per diluted share of common stock.

The drivers for the Delta between net income and distributable earnings try to net realized losses on investments unrealized gain on extinguishment of debt include fed realized events.

Increase in our junior Oc salaries or equity based compensation expense unrealized loss on the interest rate cap and depreciation on the real estate owned all of which represent add backs for distributable earnings and each contributing about <unk> <unk> per share.

It is worth noting the depreciation expense for this quarter includes catch up depreciation when our D C hotel for.

For the period in which the hotel was classified as real estate owned held for sale up to the point when it was reclassified back to real estate owned held for investment.

Additionally, distributable earnings include the forward points benefit from a foreign currency contract.

As a reminder, we hedge our exposure to foreign currency risk on a net equity basis by entering into forward currency contracts for all foreign currency denominated transactions at closing.

Or what point impact during the quarter represented $5 6 million or additional four cents per share benefit so our distributable earnings.

Outside of the two cents per share before it points associated with then why is it of the hedges related to the European loan sale.

<unk> discussed.

There were no one time events included another distributable earnings this quarter.

However, I want to highlight is that <unk> currently has an interest rate cap in place. So our 26 term loan b.

Which is set to expire in the second quarter of this year.

<unk> had flipped lightened the rate over the term loan b at three 5% fixed into base rate at three quarters of a percent.

Upon expiration in June of this year. It is anticipated that air is interest expense.

Crazed by approximately 20 million on an annualized basis based upon the forward curve through the end of the year.

Even with the exploration of the cap.

I still will comfortably cover the common stock dividend this year.

Portfolio credit was stable this quarter with no additional asset specifics diesel reserves taken.

<unk> recognized the $4 8 million loss in connection with the full closure in a loan secured by a hotel asset located in Atlanta, Georgia.

Hotel is now carried on our balance sheet under real estate owned at a basis of $75 million.

We are currently exploring several options for the hotel, including a potential sale.

I would also like to point out that our two hotel properties, which are now both classified as real estate owned held for investment are projected to generate meaningful positive cash flow for the remainder of the year, which would further benefit our distributable earnings.

During the quarter there was an increase in the junior Oc fill an allowance of $4 4 million, bringing us to 42 basis points of the loan portfolios amortized cost basis as of March 31.

The increase is attributable to a more conservative macroeconomic outlook, partially offset by the impact of portfolio seasoning as well as slowing prepayments in sales.

<unk> book value per share, excluding general seasonal reserves and depreciation was $15 and 70% at quarter end, an increase of about 5% as compared to March 31 2022.

Book value continues to benefit from the Companys earnings in excess of the common stock dividend.

With respect to borrowing.

<unk> is in compliance with all covenants and continues to maintain strong liquidity.

Bolstered by proceeds generated from the loan sales as well as the new facilities, two or three to three minutes.

<unk> ended the quarter with $357 million of total liquidity, which was a combination of cash and undrawn capacity on existing facilities.

<unk> debt to equity ratio at quarter end remained constant compared to the previous quarter and a two eight.

During the quarter and REIT Opportunistically repurchased 7 million of our October 2023 convertible note at 97% of par generating return on equity of about 11%.

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

Thank you as there are.

Reminder, to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from Sarah <unk> with BTG you May proceed.

Hi, everyone. Thanks for taking the question.

Just taking a look at the watch list.

We have several of those maturing over the next few months.

Hoping you could give an update on what it would take for us to see specific reserves there next quarter and how those sponsors have progressed on their business plans as we approached the maturity date, specifically the retail asset in Ohio, and the recently added Chicago office asset as well.

Yes.

Hotel in Vegas, and any update any specific update there you can speak to.

Yeah, I'll, probably take them in reverse order Sarah so the.

[noise] retail asset in Las Vegas, where we've got a 20 million dollar position.

Outstanding the asset is actually in the market.

To be refinanced at this point in time.

You've heard me and others on their earnings call say.

Hospitality is performing quite well today.

We've spoken to both the borrower as well as received.

Brokerage firm handling the refinancing and sitting here today, the expectation is that will be.

Paid off with the refinancing.

With respect to the Chicago Office building.

The asset.

Sort of a mid to high single digit debt yield on our basis.

Our sponsor has been.

Feeding the property to date, either through cash injections or guarantees.

We expect though it is not done yet that they will continue.

To support the asset and we'll probably play for time there is also.

$20 million of preferred equity in between.

Our loan and the.

The equity holder, so we think between both the sponsorship and the press position.

We expect there'll be some sort of.

Negotiated.

Tension of that loan that gets us comfortable.

With respect to the asset continuing to be supported.

Then in Ohio, which is the asset commonly referred to as Liberty Center.

The good news is performance continues to improve.

[noise] movie Theater is doing better continuing to recover from.

The pandemic impact on movie theaters occupancy is trending up.

Overall.

There is a couple of things on the margin in terms of creating more density vis vis potential additional hotel parcel as well as additional multifamily.

Density at the asset.

We continue to work through the planning process on.

So I would say overall the asset is trending positively.

We feel very comfortable with where we've got our loan position marked after allowance and I would say a positive.

Performance continues there'll be an extension this year, but we'd hope to seek some sort of an exit for the asset.

Potentially as early as the early part of next year.

Great. Thank you.

One more for me.

So this morning on the equity REIT side, we saw one company cut our dividend and it's something that's come up a lot.

On calls so far this quarter.

From the seat of a.

A mortgage REIT can you sort of talk about can you clarify for investors. How you guys think about.

15% yields right now how you think about.

Where do you stand with the dividend at those yields.

And maybe talk about.

Buying back stock or how do you balance that sort of return profile, given youre still putting out strong dividend coverage.

And maybe just clarify how that how thats different for a mortgage REIT versus an equity REIT in terms of.

The dividend yield.

That's a great question and I, you know I think.

To your question sort of alludes to the fact that obviously as a mortgage REIT versus an equity REIT.

A lot less tax benefit that we get.

Most notably from depreciation because rarely if ever do we owned assets that we actually owned a couple now.

As my colleagues on the phone with me now.

Pains me that that we're at a 15% dividend yield.

This year.

That being said.

As we think about the dividend I would say we are at a point now just given how much.

Higher floating rates have contributed to earnings.

I would say.

The dividend at this point is really about making sure we distribute all of our taxable income.

At this point.

I would say.

Theres not a lot of wiggle room vis vis taxable income to do anything with the dividend and if anything if if things broke correctly.

We might even.

The phase the opposite situation, where taxable income requires a little bit more from a dividend perspective, though not ready to.

Commit to that yet I think visa the capital structure.

We have a $170 million.

Share repurchase plan in place we were an active re purchaser of our shares during the pandemic you heard Anastasia.

Refer to the fact that we did buyback some convertible notes when they got to a price that we thought it made sense for us and we also coming out of our most recent board meeting.

Have authority to do some other things in the other public parts of our capital structure to buyback if we think it makes economic sense.

You should certainly you can certainly infer that given my comments on building up liquidity within the <unk>.

Hi.

Balance sheet I would say one of the things we are certainly thinking about discussing and debating is the notion.

How much of that liquidity, we want to use just for what we perceive to be very attractive Roe investments within our own capital structure versus doing the next marginal loan in the market so very much.

Thank you.

Sure.

Thank you.

Our next question comes from Richard Shane with Jpmorgan you May proceed.

Thanks, guys for taking my questions. This morning.

Your <unk> reserves 42 basis points I think is what you said, we calculate it slightly differently.

The market is pricing in an unlevered basis about a 10% cumulative loss rate.

Yes.

And you could get a 15% yield on that investment.

When you make it all day long, which is a way of saying why not be even more aggressive on the buyback.

All right.

I think it's a great question, Rick I think.

Couple couple of comments on that I'd say.

One thing we're always mindful of is our.

Covenants and leverage.

Which means if we're shrinking the equity.

Side of the book, we need to be mindful of what's happening on the liability side as well because we can put ourselves in a box vis vis economic flexibility. So it's something we debate.

Often.

Either.

In terms of what we typically trade on on a daily basis. There are limitations in terms of how much we could actually buy back.

At a moment in time.

On our minds as we think about what to do with our capital.

And then there is also a timing component to it and while I actually.

Sure.

No.

I think where things are trading across the sector not just for <unk> does it make sense to what I'm seeing in the market.