Q3 2023 Apollo Commercial Real Estate Finance Inc Earnings Call

October 31, 2023

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.

<unk> press release.

Also like to call your attention to the customary.

Safe Harbor disclosure in our press release regarding forward looking statements in today's conference call and webcast may include forward looking statements and projections and we ask that you referred 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 we.

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 craft dot com or call us at 2125153200 at this time I'd like to turn the call over.

The company's Chief Executive Officer Stuart Roxanne.

Good morning, and thank you for joining us on the Apollo commercial real estate Finance, Inc. Third quarter 2023 earnings call I'm joined today by Chief Investment Officer, Scott Weiner and anesthesia by Ron <unk> Chief Financial Officer.

I had another quarter of distributable earnings in excess of the common stock dividend benefiting from elevated base rates in the company's 8 billion dollar floating rate loan portfolio.

For the first nine months of 2023 reported distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt of $1 33, resulting in a dividend per share coverage ratio of approximately one three times.

The higher rate environment continues to impact all aspects of the real estate market.

For most of the year. The dialogue has focused on the fed's use of short term rate hikes to reduce the rate of inflation.

However, more notable today is the recent sharp increase in five and 10 year treasury rates over the past several weeks the trade. The 10 year Treasury has neared, 5% and since <unk> Q1 earnings call the yield on five year and 10 year treasuries has risen 139%.

102006 basis points, respectively.

While the market is still adjusting to this quick move upwards in longer rates. The historical relationship between cap rates and long term interest rates would indicate that property values are biased towards adjusting downward in light of the elevated interest rate environment.

In addition to rates uncertainty with respect to the short and medium term trajectory of the economy is also weighing on valuation recent earnings reports from bellwether companies have been mixed the employment market remains robust and the Q3 GDP print was actually quite strong.

However, there have been multiple other measures of economic activity that indicate the economy is in fact slowing as such the narrative around commercial real estate remains focused on underlying property valuations borrower's ability to refinance and the potential impact on property.

Level operating performance if in fact, the economy is slowing and moving towards a potential recession.

While the debate within the industry on these topics continues the general sentiment around the industry remains bearish until such time that rates are perceived as somewhat stable and valuations adjust accordingly, we expect that transaction volumes will still stay well below prior.

<unk> levels.

In light of this backdrop ari's.

And focus have remained consistent throughout 2023 with an emphasis on active balance sheet and asset management.

Year to date.

As received $1 billion from loan repayments, including $286 million in the third quarter of the $1 billion.

Approximately $520 million was from the full repayment of eight loans in the portfolio $140 million came from asset sales and the remainder mostly reflects partial pay downs from borrowers in exchange for extensions and long term.

We continue to have a productive dialogue with our borrowers many of whom are some of the largest and most well capitalized real estate sponsors in the world their willingness and ability to support their properties has led to constructive conversations for loan modifications and extensions.

Accordingly, we have dealt with the near term maturities in our office loan portfolio with no significant office maturity until 2025, as a reminder, office loans make up only 19% of ari's portfolio with more than half the loans secured by properties in Europe.

Where we are seeing better operating fundamentals across the asset class beyond office exposure the credit quality of <unk> portfolio remained stable and during the quarter <unk> did not record any incremental asset specific seasonal reserves.

With respect to the Steinway project during the quarter <unk> received $45 million from condo sales at present, there are additional units under contract that we expect will close in the coming months more importantly, there is an active dialogue, including contract negotiation on <unk>.

Another handful of units and consistent foot track on a weekly basis, while there is still much to be done we are encouraged by the recent level of interest and activity.

Shifting to the right side of the company's balance sheet.

October <unk> utilized on hand liquidity to repay the remaining $176 million of principal of the convertible notes that matured at par.

<unk> ended the quarter with approximately $480 million of total liquidity, which we believe provides ample cushion to manage a range of economic outcomes in the broader macro landscape as well as have dry powder to capitalize on interesting or unique opportunities that <unk> has the benefit of seeing.

As part of the broader Apollo platform.

With that I will turn the call over to Anastasia to review our financial results. Thank.

Thank you Stuart and good morning, everyone.

Alright, great.

Another consistent quarter of financial results in Q3.

With distributable earnings of $52 7 million or <unk> 37 per share.

We declared a common stock dividend of <unk> 35 per share which translates.

Annualized dividend yield of approximately 15%.

Yesterdays closing price.

GAAP net income available to common stockholders was 43 million or 30 cents per diluted share of common stock.

Air rights portfolio ended the quarter with an amortized cost basis of $8 billion and a weighted average unlevered yield of eight 9%.

During the quarter, we funded 97 million of add on funding from previously closed loans.

We received 286 million in loan repayments, including $117 million of full repayments across four transactions.

There was no incremental specifics ECL allowance taken during the quarter.

Junior Oc still allowance declined by $5 8 million and stands at 40 basis points of the loan portfolio as amortized cost basis as of September.

Remember 30.

The decrease in the general seasonal allowance is primarily attributable to loan repayment activity outpaced in funding.

And overall portfolio season, Inc.

Our total CCL allowance as of September 30 is 274 basis points of the loan portfolio amortized cost basis.

Four basis points increase compared to June 30.

<unk> book value per share, excluding <unk> reserves and depreciation was $14 74.

Relatively flat to last quarter end.

With respect to Ari's borrowings, we are in compliance with all covenants and continue to maintain strong liquidity.

As Stuart mentioned.

I repeat the $176 million of convertible notes that came due in October with cash on hand.

Was this repayment our next corporate debt maturity is not until 2026.

At the end of the quarter, we had $805 million of unencumbered real estate assets and.

And $480 million of total liquidity.

Total liquidity comprised of cash on hand.

Cash proceeds held by the servicer and Undrawn credit capacity on existing facilities.

Our debt to equity ratio at quarter end was <unk> eight times.

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

Thank you as a 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, one moment for questions.

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

Hey, everyone. Thanks for taking the question.

I was hoping you could talk about the opportunity set that's out there.

To put money to work given liquidity is looking good there werent meaningful risk migration during the quarter.

There may be opportunities in your own capital structure or in the new loan origination markets.

Yes look I would say is there has to be fair over the last.

Four weeks plus or minus I would say we've been Ernest started.

Looking at opportunities that might work.

For IRI and are actually.

Sort of actively thinking about things for <unk> I would say at a high level.

As we think about opportunities for <unk> today.

I think there are things broadly speaking in the U S that would be sort of in the sofa plus.

All it for to mid fours range.

In property types.

There is industrial Theres hotel.

Some construction, maybe though not likely and certainly no office exposure I would say similar type of opportunities potentially in Europe.

As a firm.

Broadly speaking year to date, we've probably done close to six 5% to $7 billion worth of commitments. So we are in the market.

On a daily basis, and certainly have a sense of where things.

Are available to us and I would say the change over the last four weeks or so have been less about what's taking place in terms of opportunities and us.

Getting a little bit more comfortable in terms of where we are both in terms of the existing portfolio and the liquidity profile on a go forward basis.

Okay. Thank you.

And then we will see what happens at the fed meeting this week, but.

Currently the forward curves, calling for a bit of a pivot in the first half of next year I'm just curious how your outlook for those 1% to three rated assets the stronger credit senior portfolio, how does your outlook for those change if.

If we are in the higher for longer camp and we see so far stay at these at these levels for longer next year.

Yes, I mean, I think I think as we think about the world.

It's almost in some respects less about the shorter end of the curve and more about some stability at the longer end of the curve. If you think about this year during the first half of this year.

There was a pretty robust fixed rate financing market around 6% when the five year was lower than it is today and people felt like things had sort of were range bound in some respects that shifted a bit.

Given the move upward in the call it.

In the medium to long end of the curve I think from our perspective.

As I think about transaction activity.

Capital coming back into the market.

People are getting more confident around what cap rates or valuations may be.

It's more about.

Some level of confidence that the five to 10 year is somewhat.

The range bound and then people can start underwriting.

<unk> around those levels and think about what financings are at those levels. So.

Not to dismiss what the.

Impact of a fed move may or may not be on the sort of the short term volatility in the market I think what the market is actually looking for from a real estate perspective.

Is some sense that that rates are sort of.

On the five to 10 year level range bound and then people can start looking to your historical relationships between the cap rates in five and 10 year treasuries as they think about value.

Thanks for the comments.

Sure.

Thank you.

A moment for our questions.

Our next question comes from Stephen Laws with Raymond James You May proceed.

Hi, good morning.

I appreciate the breakout on the the office metrics and sort of your comments about you know over half your exposures in Europe can you spend some time talking about the difference in the two markets kind of at a higher level.

But also maybe the difference within your portfolio is it lower attachment points in Europe is that something different.

Inside the loan outside of just slowed the larger macro environment around.

Better working office trends in Europe.

Yes look I think the high level comment or are the obviously the biggest factor from our perspective is obviously just the use case for office space in Europe versus the U S. Right. There is no.

There's not the same debate in Europe in terms of return to office that we've experienced here in certain markets in the U S. I think the other thing I would say about Europe is that.

Operator: I'd like to remind everyone that today's call and webcast are being recorded. Please note that they're 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.

Unlike the us where there is clearly a transition going on between what we traditionally call. The legacy Gateway city markets to other markets that may be more in favor of long term due to cost of living tax policy et cetera.

Operator: I'd also like to call your attention to the customary Safe Harbor disclosure and 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 be discussing certain non-gab measures on this call, which management believes are relevant to assessing the company's financial performance.

Operator: These measures are reconciled to gap 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.

The markets in Europe are still the markets in Europe that were sort of are the bellwether markets, we've tended to stick to the major.

Markets.

In Western Europe.

And then I think the other thing that is relevant in Europe that really impacts the viability of an asset.

And further as the need for more modern assets is the much more serious impact of ESG around leasing concerns financing concerns equity concerns in Europe and exists here in the U S.

Operator: To obtain copies of our latest SEC filings, please visit our website at www.apolocraft.com or call us at 212-515-3200.

I appreciate those comments.

Follow up owner to switch over to the Oreo assets can you talk about the.

Stuart Rothstein: At this time, I'd like to turn the call over to the company's executive officer, Stuart Rothstein. Good morning, and thank you for joining us on the Apollo commercial real estate financing third quarter 2023 earnings call. I am joined today by Chief Investment Officer Scott Weiner and Anastasia Maranova ARI's Chief Financial Officer. ARI had another quarter of distributable earnings in excess of the common stock dividend, benefiting from elevated base rates in the company's $8 billion floating rate loan portfolio.

Outlook for those from both the timing of potential resolutions, but also seasonality and how we should expect to see.

Any seasonal impacts in the coming quarters.

Yeah. So.

Start with the DC hotel as you've heard me say on prior earnings calls the performance of the hotel.

For this year has.

Well exceeded expectations and the hotel is performing at levels in excess of where it was performing pre pandemic.

We continue to remain.

Stuart Rothstein: For the first nine months of 2023, ARI reported distributable earnings prior to net realize loss on investments and realize gain on extinguishment of debt of $1.33, resulting in a dividend per share coverage ratio of approximately 1.3 times. The higher rate environment continues to impact all aspects of the real estate market. For most of the year, the dialogue is focused on the fed's use of short-term rate hikes to reduce the rate of inflation.

Optimistic about the performance of that hotel looking out to next year as we start to go through the budgeting cycle and forecasting cycle for next year that being said.

Yes, there are certainly some seasonality component around the hotel.

Right now we're at a.

One of the slower periods the hotel there'll obviously be a pickup around holiday to holiday time.

Then youll get a slowdown in the early part of next year and then it will ramp through the.

Stuart Rothstein: However, more notable today is the recent sharp increase in 5 and 10 year treasury rates. Over the past several weeks, the 10 year treasury has neared 5% and since ARI's Q1 earnings call, the yield on 5 year and 10 year treasuries has risen 139 and 126 basis points respectively. While the market is still adjusting to this quick move upwards in longer rates, the historical relationship between cap rates and long-term interest rates would indicate that property values are biased towards adjusting downward in light of the elevated interest rate environment.

Spring and summer tourist season, but very encouraged by the performance of the D. C hotels, I would say the Atlanta Hotel.

<unk> performance has improved but it is not not improved at the same rate as we're seeing in the DC Hotel I think as you all know from my past comments that as a hotel there historically it was a little bit more based on business as well as convention.

Traffic flow.

That being said.

We have continued to remain in dialogue with a couple of potential parties around.

Stuart Rothstein: In addition to rates, uncertainty with respect to the short and medium term trajectory of the economy is also weighing on valuations. Recent earnings reports from Bellweather companies have been mixed. The employment market remains robust and the Q3 GDP print was actually quite strong. However, there have been multiple other measures of economic activity that indicate the economy is in fact slowing. As such, the narrative around commercial real estate remains focused on underlying property valuations, borrowers' ability to refinance, and the potential impact on property level operating performance, if in fact the economy is slowing and moving towards a potential recession.

The sale of the hotel certainly no guarantees.

That a sale of the hotel occurs but I would say the dialogue, we're having around the hotels certainly.

It gives us confidence with respect to where the hotel is marked in our portfolio at this point and then obviously only other Oreo asset as the.

Development in Brooklyn, which continues to pace, but that will be a.

A multi year process to get that hotel built and then leased up but it is.

Moving along nicely at this point.

Great I appreciate the comments this morning Stuart.

Thank you.

One moment for questions.

Stuart Rothstein: While the debate within the industry on these topics continues, the general sentiment around the industry remains bearish. Until such time that rates are perceived as somewhat stable and valuations adjust accordingly, we expect that transaction volumes will stay well below prior levels. In light of this backdrop, AI strategy and focus have remained consistent throughout 2023 with an emphasis on active balance sheet and asset management. Year-to-date, AI has received $1 billion from loan repayments, including $286 million in the third quarter.

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

Thanks for taking my questions. This morning, everybody.

A couple of things obviously, good progress on the liquidity side paid down the converts repayments.

All of this quarter.

Okay.

<unk> first question was regarding the opportunity to deploy capital.

Into new assets.

When I look at the discount to book value and the.

Yields that youre, describing in terms of new opportunities sofa plus 4%.

Stuart Rothstein: Of the $1 billion, approximately $520 million was from the full repayment of 8 loans in the portfolio, $140 million came from asset sales, and the remainder mostly reflects partial paydowns from borrowers in exchange for extensions and loan term. We continue to have a productive dialogue with our borrowers, many of whom are some of the largest and most well-capitalized real estate sponsors in the world. Their willingness and ability to support their properties has led to constructive conversations for loan modifications and extensions.

I am curious does it make more sense to buy back stock.

Given the economic return on that both from a dividend perspective, and also from a book value accretion perspective.

Yes.

Thank you and I have talked about this several quarters back.

He is on our radar screen.

I mean, it's always something we think about I think we do have.

Countervailing concerns around at some point with respect to shrinking the company and what that affords us in terms of the right capital structure on a go forward basis is always part of the.

Part of the analysis, but yes, we would.

Stuart Rothstein: Importantly, we have dealt with the near-term maturities in our office loan portfolio with no significant office maturity until 2025. As a reminder, office loans make up only 19% of AI's portfolio with more than half the loans secured by properties in Europe, where we are seeing better operating fundamentals across the asset class. Beyond office exposure, the credit quality of AI's portfolio remains stable, and during the quarter, AI did not record any incremental asset-specific seasonal reserves.

And I should have responded to share his comments in addition to looking at new opportunities for IRI.

We certainly also follow closely what's going on with the common stock and where it's trading et cetera.

We're not likely to do anything in the other parts of the capital structure to be honest with you because we think we've got very attractive long term.

Liabilities in place, but it's on the radar screen. There is a constant debate that we have both internally and with our.

Board around momentary buybacks versus long term viability and investment in the business.

Stuart Rothstein: With respect to the Steinway project, during the quarter, AI received $45 million from condo sales. At present, there are additional units under contract that we expectable close in the coming months. More importantly, there is an active dialogue, including contract negotiation on another handful of units, and consistent foottrack on a weekly basis. While there is still much to be done, we are encouraged by the recent level of interest and activity. Shifting to the right side of the liquidity to repay the remaining $176 million of principal of the convertible notes that matured at part, AI ended the quarter with approximately $480 million of total liquidity, which we believe provides ample cushion to manage a range of economic outcomes in the broader macro landscape, as well as have dry powder to capitalize on interesting or unique opportunities that AI has the benefit of seeing as part of the broader Apollo platform.

And as a company that has.

But a significant amount of stock back.

In prior years, and we're probably the most active buyer of our stock during the pandemic.

It certainly could be the right moment in time.

Trade, but.

Past experience would indicate.

It doesn't really do much for the business long term and whatever effects. It may or may not have on the stock.

Our somewhat fleeting, but we certainly think about it vis vis putting new dollars out is a way to protect book value.

And also as the right economic decision. So it's definitely on the radar screen.

I would also add to clarify when we're talking about Stuart referenced the sofa or the plus 400.

Unlevered basis, the loan level financing is readily available today. So as we're looking at deals we're solving for I would say a mid teen Levered IRR.

So it's not just doing unlevered loans, plus 400, good point Scott.

Understood.

Thank you.

Anastasia Mironova: With that, I will turn the call over to Anastasia to review our financial results. ARI produced another consistent quarter of financial results in Q3, with distributable earnings of 52.7 million or 37 cents per share. We declared a common stock dividend of 35 cents per share, which translates to an annualized dividend yield of approximately 15% using yesterday's closing price. Gap net income available to common stockholders was 43 million or 30 cents per diluted share of common stock.

I guess.

When you <unk> when you start buying back stock I'll have to think of as a second question.

So I don't know if that will enter into your calculus at all or not.

Second thing I did want to ask this quarter was were there any repurchases from the CLO that we should be aware of.

We don't have the CLO so.

For the.

For the secured financing I apologize.

Not on our partner.

Okay. Thank you.

Sure.

Thank you and as a reminder to ask a question. Please press star one on your telephone.

Anastasia Mironova: ARI's portfolio ended the quarter with an amortized cost basis of 8 billion and a weighted average unlevered yield of 8.9%. During the quarter, we funded 97 million of add on funding from previously closed loans and received 286 million in loan repayments, including 107 million or full repayment across four transactions. There was no incremental specific CISIL allowance taken during the quarter. General CISIL allowance declined by 5.8 million and stands at 40 basis points of the loan portfolio's amortized cost basis as of September 30.

Our next question comes from Jade Rahmani with K VW you May proceed.

Thank you very much I wanted to ask about your broader credit view.

Across all the pools of capital that you oversee and manage.

Would you characterize the third quarter as stable.

Or.

Did you see pockets of pressure and more importantly, what would be your outlook.

In the fourth quarter and for next year.

Are you talking Jay just to clarify are you talking about appetite to continue to put dollars out across the portfolio are more about credit performance of what we've got outstanding already.

Credit performance of what's outstanding already.

Anastasia Mironova: The decrease in the General CISIL allowance is primarily attributable to loan repayment activity outtaste in funding and overall portfolio seasonings. Our total CISIL allowance as of September 30 is at 274 basis points of the loan portfolio's amortized cost basis, a four basis points increase compared to June 30. ARI's book value per share, excluding General CISIL reserves and depreciation, was 14 dollars and 74 cents, relatively flat to last quarter ended. With respect to ARI's borrowings, we are in compliance with all covenants and continue to maintain strong liquidity.

And if you could talk to.

<unk> portfolio as well as more broadly across all of the pools of capital that you oversee.

Yes, Hi, Jay it's Scott.

Look I would say is obviously it depends on property type and geography, but I would say we would continue to see the fundamentals.

Being strong again.

Exclude office or whether you are looking at multifamily retail self storage industrial you continue to see.

I would say, even improving NOI has it slowed down absolutely.

In particular certain multifamily markets.

Sunbelt, which I think is well publicized in the portfolio, but I would say the fundamentals.

We continue to be continue to be strong I would also say.

Anastasia Mironova: As Stuart mentioned, ARI repeated the 176 million of convertible notes that came due in October with cash on hand. With this repayment, our next corporate debt maturity is not until 2026. At the end of the quarter, we had 805 million of unencumbered real estate assets and 408 million of total liquidity. Total liquidity comprised of cash on hand, cash proceeds held by the servicer and undrawn credit capacity on existing facilities. Our debt to equity ratio at quarter end was 2.8 times.

Given our the office portfolio that we have across our different vehicles tends to be more class a ESG we have seen some positive.

We've also seen leasing getting done we're spec suites are built out and tenants want that so I would say overall.

Generally positive on the fundamentals.

Clearly the rise in the long term interest rate and the tenure.

<unk> is not necessarily helping peoples.

Long term view.

<unk> so.

I'd say investors and borrowers continue to kind of make decisions on where to allocate where to allocate their capital, but we do continue to see sponsors putting capital into their deals paying down debt.

Operator: And with that, we would like to open the line for questions.

Operator: Operator, please go ahead. Thank you.

Got off the phone call in the deal were not an idea where the sponsors looking for an extension and willing to commit capital.

Operator: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions.

On a property so I would say overall not much has changed over the past.

Over the past quarter.

This continues to be.

A lot of blocking and tackling I.

I would say the one change on interest rates is that there was definitely a lot of people looking to do a five year fixed rate borrowing just given the delta between fixed rate borrowings and floating as that five year fixed rate has gone up it's less of a.

Sarah Barcomb: Our first question comes from Sarah Barcomb with BTIG. You may proceed Hey, everyone. Thanks for taking the question. I was hoping you could talk about the opportunity set that's out there, you know, to put money to work, given liquidity is looking good. There weren't meaningful risk migrations during the quarter. You know, maybe opportunities in your own capital structure or in the new loan origination market. Yeah, look, I would say Sarah, to be fair over the last four weeks, plus or minus, I would say we've been earnest, started looking at opportunities that might work for AI and are actually sort of actively thinking about things for AI.

Delta So I think youre starting to see people go back more to floating.

Fixed given the hope by bars that rates come down in the near term as opposed to lock in for that five year fixed rate.

But.

Continues to be a robust pipeline.

On financings.

<unk> acquisitions, I mean, there continues to be.

So way down, but the market there are still acquisitions across property types.

Yes.

Thank you very much.

Sarah Barcomb: AI, I would say at a high level, as we think about opportunities for AI today, I think there are things broadly speaking in the US that would be sort of in the sofa plus call it for the mid fours range in property types. You know, there's industrial, there's hotel, some construction maybe, though not likely, and certainly no office exposure. I would say similar type of opportunities potentially in Europe, you know, as a firm, broadly speaking year to date, we've probably done close to six and a half to $7 billion worth of commitment.

Just to focus on Europe for a second I think some of the banks and.

Funds that take valuation marks in Europe, because of the accounting standard there for us accounting.

It's been more of a mark to market and more of a willingness to.

Take write downs or evaluation adjustments do you think that is merely an accounting phenomenon, reflecting the impact of rates or are you starting to see pockets of weakness in Europe as well.

I mean, it's.

I mean look values are down right, whether in the U S or Europe, I mean, I think thats indisputable.

Thank you obviously wrote on U S banks, who I think U S. Banks insurance companies are taking marks theres obviously.

Sarah Barcomb: So we're in the market on a daily basis and certainly have a sense of where things are available to us. And I would say the change over the last four weeks or so have been less about what's taking place in terms of opportunities and us getting a little bit more comfortable in terms of where we are both in terms of the existing portfolio and liquidity profile on a go forward basis.

Difference, if we made a 50% levered loan and values down 20%, 30%, we're still not impaired.

But clearly values are down from I'm not sure.

The accounting is driving any of that I'm not sure.

But I would say Stuart's earlier point, we do see more office in particular, we do see more liquidity in the office market in Europe in terms of buying and selling theres been a bunch of trade in London headway I think theres some stockpiling in Milan, So I would say again is way down from here.

Stuart Rothstein: Okay, thank you. And then we'll, you know, we'll see what happens at the Fed meeting this week, but, you know, currently the forward curve is calling for a bit of a pivot in the first half of next year. I'm just curious how your outlook for those one to three rated assets, you know, the stronger credits in your portfolio, how does your outlook for those change if we are in the higher for longer camp and we see so for stay at these levels for longer next year.

Storage, but there is more activity in the European office market, which again is kind of converging values being down.

Turning to MRI.

Something I've been tracking closely with cash flow from operations in IRI had very strong results both in the quarter as well as year to date relative to the dividend. There's significant coverage do you think that has implications for 2024 and the sustainability of the dividend or would you hold off on.

Stuart Rothstein: Yeah, I mean, I think I think that as we think about the world, it's almost in some respects less about the shorter end of the curve and more about some stability at the longer end of the curve. If you think about this year during the first half of this year, you know, there was a pretty robust fixed rate financing market around 6% when the five year was lower than it is today.

Making that conclusion.

I mean I think at this point as we've indicated we're obviously very comfortable with the dividend for this year I would say given our.

Stuart Rothstein: And people felt like things had sort of were range bound in some respects that shifted a bit given the move upward in the, you know, call it the medium to long end of the curve. I think from our perspective. As I think about transaction activity, capital coming back into the market, people getting more confident around what cap rates or valuations may be. It's more about some level of confidence that the 5 to 10 year is somewhat range bound and then people can start underwriting valuations around those levels and think about what the finances are at those levels.

Initial forecasting for next year.

The goal is to always to keep the dividend at a level that is consistent.

From quarter to quarter and covered by earnings.

We will continue to forecast for next year, but sitting here today.

We're certainly expecting the general level of consistency for the dividend.

Thank you for taking the questions.

Thank you I'd now like to turn the call back over to Stuart Rothstein for any closing remarks.

Thank you operator, and thanks to those of you that participated this morning.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Stuart Rothstein: So, not to dismiss what the impact of a Fed move may or may not be on the short term volatility in the market. I think what the market is actually looking for from a real estate perspective, it's some sense that rates are sort of on the 5 to 10 year level range bound and then people can start looking to historical relationships between cap rates and 5 and 10 year treasuries as they think about value. Thanks for the comments. Sure. Thank you. One moment for questions.

Okay.

Sure.

Yes.

Okay.

Stephen Laws: Our next question comes from Stephen Laws with Raymond James, you may proceed.

Okay.

Yes.

Stuart Rothstein: Good morning. I appreciate the breakout on the office metrics and short your comments about the over half their exposures in Europe. Can you spend some time talking about the difference in the two markets, kind of at a higher level, but also maybe the difference within your portfolio? Is it lower attachment points in Europe? Is it something different? You know, inside the loan, outside of just the larger macro environment around better work and office trends in Europe.

Okay.

Yeah.

Okay.

Yes.

Okay.

[music].

Stuart Rothstein: Yeah, look, I think the high level comment or the obviously the biggest factor from our perspective is obviously just the use case for office space in Europe versus the US, right? There's no, there's not the same debate in Europe in terms of return to office that we've experienced here in certain markets in the US. I think the other thing I would say about Europe is that unlike the US where there is clearly a transition going on between what we would traditionally call the legacy gateway city markets to other markets that may be more in singular long term due to cost of living tax policy, etc.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Yeah.

Yes.

Hum.

Okay.

[music].

<unk>.

[music].

<unk>.

Okay.

Yes.

Okay.

Stuart Rothstein: I think, you know, the markets in Europe are still the markets in Europe that we are sort of are the bell weather markets. We've tended to stick to the major markets in Western Europe. And then I think the other thing that is relevant in Europe that really impacts the viability of an asset and furthers the need for more modern assets is the much more serious impact of ESG around leasing concerns, financing concerns, equity concerns in Europe that exists here in the US.

Okay.

Yes.

Okay.

Sure.

Okay.

Stuart Rothstein: Appreciate this comment and as a follow-up owner to switch over to the RIO asset, can you talk about the outlook for those from both of the timing of potential resolutions, but also seasonality and how we should expect to see any seasonal impacts in the coming quarter. Yes, so start with the DC Hotel. As you've heard me say on prior earnings calls, the performance of the hotel for this year has well exceeded expectations and the hotel is performing at levels in excess of where it was performing pre-pandemic.

Okay.

Thanks.

Okay.

[music].

Okay.

Yes.

Dan.

[music].

Okay.

[music].

Okay.

Yes.

[music].

Yes.

Okay.

Stuart Rothstein: We continue to remain optimistic about the performance of the hotel looking out to next year as we start to go through the budgeting cycle and forecasting cycle for next year. That being said, there's certainly some seasonality component around the hotel. Obviously right now we're at one of the slower periods of the hotel. They'll obviously be a pickup around holiday time. Then you'll get a slowdown in the early part of next year and then it will ramp through the spring and summer tourist season, but very encouraged by the performance of the DC Hotel.

[music].

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Stuart Rothstein: I would say the Atlanta Hotel performance has improved, but it is not improved at the same rate as we're seeing in the DC Hotel. I think as you all know from my past comments, that is a hotel that historically was a little bit more based on business as well as convention traffic flow. That being said, we have continued to remain in dialogue with a couple of potential parties around the sale of the hotel.

Okay.

<unk>.

Okay.

Stuart Rothstein: Certainly no guarantees that a sale of the hotel occurs, but I would say the dialogue we're having around the hotel certainly gives us confidence with respect to where the hotel is marked in our portfolio at this point. Then obviously the only other REO asset is the development in Brooklyn which continues to pace, but that will be a multi-year process to get that hotel built and then leased up, but it is moving along nicely at this point.

Okay.

[music].

Okay.

Yes.

Dan.

[music].

Yes.

Okay.

[music].

Yeah.

[music].

Okay.

Yes.

[music].

Yes.

[music].

Yes.

Stuart Rothstein: Great. Appreciate the comments this morning, Stuart. Stuart. Thank you.

Okay.

Operator: One moment for questions. Our next question comes from Rick Shane with JP Morgan. You may proceed. Thanks for taking my questions this morning, everybody. A couple of things. Obviously, good progress on the liquidity side, paid down the converts, repayments, sold this quarter.

Okay.

Rick Shane: Sarah's first question was regarding the opportunity to deploy capital into new assets. When I look at the discount to book value and the yields that you're describing in terms of new opportunities, so for plus 4%. I'm curious, doesn't it make more sense to buy back stock, given the economic return on that both from a dividend perspective and also from a book value accretion perspective? Yeah, look, and I think you and I have talked about this several quarters back.

Okay.

Yes.

Okay.

Sure.

Yeah.

Sure.

Okay.

[music].

Sure.

Yes.

Rick Shane: It's always on our radar screen. It's always something we think about. I think we do have countervailing concerns around at some point with respect to shrinking the company and what that affords us in terms of the right capital structure on a go-forward basis is always part of the analysis, but yes, we, you know, and I should have responded to Sarah's comment. In addition to looking at new opportunities for AI, we certainly also follow closely what's going on with the common stock and where it's trading, etc.

Okay.

[music].

Okay.

[music].

Okay.

Yeah.

[music].

Okay.

Yes.

[music].

Andrew.

[music].

Yes.

Okay.

Yes.

Rick Shane: We're not likely to do anything in the other parts of the capital structure to be honest with you, because we think we've got very attractive long-term liabilities in place, but it's on the radar screen. There's a constant debate that we have both internally and with our board around, you know, momentary buybacks versus long-term viability and investment in the business, and as a company that has, you know, bought a significant amount of stock back in prior years, and we're probably the most active buyer of our stock during the pandemic.

Okay.

Rick Shane: It certainly could be the right moment in time trade, but you know, past experience would indicate it doesn't really do much for the business long-term and whatever effects it may or may not have on the stock are somewhat fleeting, but we certainly think about it vis-a-vis putting new dollars out as a way to protect book value, and also as a right economic decision. So it's definitely on the radar screen. But it, this guy, it also has to clarify, you know, when we're talking about, you know, sewer reference, the, the, so for the plus 400, that, that's on an unlever basis.

Okay.

Yes.

Okay.

Yes.

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Okay.

Yes.

Yeah.

Sure.

Rick Shane: The, the, the, the, the loan level financing is readily available today, so as we're looking at deals, we're, we're solving for, I would say, a mid-teen, levered IRR, so not just, you know, doing unlevered loans at plus 400. Good point. Oh, understood. Thank you and I guess when you start buying back stock, I'll have to think of a second question. So I don't know if that'll enter into your calculus or all or not.

[music].

Okay.

[music].

Okay.

[music].

Okay.

<unk>.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Stuart Rothstein: Second thing I did want to ask this quarter was were there any repurchases from the CLO that we should be aware of? We don't have a CLO for the for the for the secured financing. I apologize. Not on our part. No. Okay. Thank you.

Okay.

Yes.

Okay.

Operator: And as a reminder to ask a question, please press star 11 on your telephone.

Okay.

Yeah.

Jade Rahmani: Our next question comes from Jade Rahmani with KVW, you may proceed. Thank you very much. I wanted to ask about your broader credit view across all the pools of capital that you oversee and manage. Would you characterize the third quarter as stable? Or did you see pockets of pressure? And more importantly, what would be your outlook in the fourth quarter and for next year?

Okay.

Thanks.

[music].

Yes.

Okay.

Yes.

[music].

Okay.

Stuart Rothstein: Are you talking, Jade, just to clarify, are you talking about appetite to continue to put dollars out across the portfolio or more about credit performance of what we've got outstanding already? Credit performance of what's outstanding already. And if you could talk to a rise portfolio as well as more broadly across all the pools of capital that you oversee. Yeah, Jade, it's got, look, I would say, you know, it obviously depends on on property type and geography, but I would say we would continue to see that the fundamentals, you know, being strong.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Stuart Rothstein: Again, I'll exclude office, but whether you're looking at multifamily retail, self storage, industrial, you continue to see, you know, I would say even improving NOI has it slowed down. Absolutely. In particular, certain multifamily markets, you know, like Sun Belt, which I think is well publicized in the report portfolio. But I would say the fundamentals continue to be strong. I would also say, you know, given the office portfolio that we have across our different vehicles tends to be more class A, ESG.

Yes.

Okay.

Yes.

Okay.

Yes.

Yeah.

Okay.

Yes.

Okay.

Stuart Rothstein: You know, we have seen some positive on. We've also seen Leith and getting done, you know, we're specced sweeter or built out and tenants want that. So I would say, you know, overall, you know, generally positive on the fundamentals, you know, clearly that the rise in the long-term interest rate in the 10 year, you know, is not necessarily helping people's long-term view of value. So, you know, I would say, you know, investors and borrowers continue to kind of make decisions on where to allocate their capital.

Okay.

Yes.

[music].

No.

Okay.

Yes.

[music].

Yes.

[music].

Okay.

[music].

Stuart Rothstein: But, you know, we do continue to see sponsors putting capital into their deals, paying down debt. We've just got off the phone call on a deal where not an air ideal, where the sponsor is looking for an extension and willing to commit capital, you know, on a property. So I would say overall not much has changed over the past, you know, over the past quarter. It just continues to be a lot of blocking tackling.

Andrew.

[music].

Okay.

[music].

Yes.

Okay.

Stuart Rothstein: I would say the one change on interest rates is that there was definitely a lot of people looking to do five-year fixed rate borrowing, just given the delta between fixed rate borrowing and floating, you know, as that five-year fixed rate has gone off. It's less of a delta, so I think you're starting to see people go back more to floating than fixed, given the hope by borrowers that rates come down in the near term, as opposed to locking in for that five-year fixed rate. But.., continues to be a robust pipeline on financing, including acquisitions. I mean, there continues to be, so, way down, but the market, there are still acquisitions across property types.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

[music].

Okay.

Stuart Rothstein: Thank you very much. Just to focus on Europe for a second, I think some of the banks and funds that take valuation marks in Europe because of the accounting standards there, I, for us accounting, there's been more of a market market and more of a willingness to take write downs or valuation adjustments. Do you think that is merely an accounting phenomenon reflecting the impact of rates or are you starting to see pockets of weakness in Europe as well?

No.

Okay.

[music].

Okay.

[music].

Okay.

[music].

Okay.

[music].

Stuart Rothstein: I mean, it's, I mean, like values are down, right? Well, in the U.S, or Europe, I mean, I think that's indisputable. I think, you obviously wrote on the U.S, banks, so I think U.S, banks in turn, some of these are taking marks. There's obviously, you know, a difference, right? If we made a 50% leverage loan and values down 20% or 30%, you know, we're still not impaired, but clearly, you know, values are down, so I'm not sure, you know, the accounting is driving, I'm not sure, but I would say, just a few, which earlier point, we do see more, look, in the office in particular, we do see more liquidity in the office market in Europe in terms of buying and selling.

Okay.

Stuart Rothstein: There's been a bunch of trades in London, up late, I think there's some stuff going on in Milan, so I would say, you know, again, it's way down from historical, but there is more activity in the European office market, which again, it's kind of confirming values being down.

Yeah.

Okay.

Yes.

Okay.

Sure.

Okay.

Yeah.

Okay.

[music].

Okay.

[music].

Stuart Rothstein: Turning to AI, something I've been tracking closely is cash flow from operations, and AI has very strong results, both in the quarter as well as your state relatives to dividend their significant coverage. Do you think that has implications for 2024 and the sustainability of the dividend, or would you hold off on making that conclusion? I mean, I think at this point, as we've indicated, we're obviously very comfortable with the dividend for this year, I would say, given our, you know, initial forecasting for next year, you know, the goal is to always to keep the dividend at a level that is consistent from quarter to quarter and covered by earnings. We will continue to forecast for next year, but sitting here today, we're certainly expecting a general level of consistency for the dividend.

Okay.

No.

Okay.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Yes.

Okay.

[music].

Okay.

Jade Rahmani: Thank you for taking the questions.

Okay.

Stuart Rothstein: Thank you.

Stuart Rothstein: I'd now like to turn the call back over to Stuart Rothstein for any closing remarks. Thank you, operator, and thanks to those of you that participated this morning. Thank you.

[music].

Okay.

Sure.

Operator: This concludes today's conference call. Thank you for participating. You may now Eric Dray, Apollo Commercial Real Estate Eric Dray, Apollo Commercial Real Estate Finance Inc Eric Dray, Apollo Commercial Real Estate Finance Inc Eric Dray, Apollo Commercial Real Estate Finance Inc Eric Dray, Apollo Commercial Real Estate Finance Inc Eric Dray, Apollo Commercial Real Estate Finance Inc Eric Dray, Apollo Commercial Real Estate Finance Inc Eric Dray, Apollo Commercial Real Estate[inaudible] you very much, thank you very much,[inaudible][inaudible][inaudible] and thank you very much[inaudible] your time, and thank you very much for your time[inaudible][inaudible][inaudible]

Okay.

[music].

Yes.

[music].

Yeah.

Okay.

[music].

No.

Dan.

[music].

Yes.

[music].

Okay.

[music].

Sure.

[music].

Sure.

Okay.

[music].

Okay.

[music].

Okay.

Sure.

[music].

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Sure.

Dan.

[music].

Sure.

[music].

Okay.

[music].

Okay.

[music].

Okay.

Q3 2023 Apollo Commercial Real Estate Finance Inc Earnings Call

Request a DemoDemo

ARI

Apollo Commercial Real Estate Finance

Earnings