Q4 2023 Apollo Commercial Real Estate Finance Inc Earnings Call
Yeah.
Operator: I'd like to remind everyone that today's call and webcasts 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 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. 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 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. To obtain copies of our latest SEC filings, please visit our website at www. ApolloCraft.com or call us at 212-515-3200.
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 press release.
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 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 do not undertake any obligation to update our forward looking.
And so our projections unless required by law to obtain copies of our latest SEC filings. Please visit our website at www Dot Apollo crafts 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 Rothenberg: At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothenberg. Thank you, operator. Good morning.
Stuart Rothstein.
Thank you operator, good morning, and thank you to those of you joining us on the Apollo commercial real estate finance fourth quarter 2023 earnings call.
Stuart Rothenberg: And thank you to those of you joining us on the Apollo Commercial Real Estate Finance fourth quarter 2023 earnings call. I am joined as usual today by Scott Wiener, our Chief Investment Officer, and Anastasia Maranova, our Chief Financial Officer. In many ways, the start of 2024 feels very much like where we were at the start of 2023 for the commercial real estate sector. If you recall, entering 2023, there was significant negative sentiment concerning commercial real estate fueled by concerns over the impact of elevated interest rates on valuations and pending debt maturities, uncertainty about the long-term use case for office properties, and a lack of consensus with respect to both the path of the economy and the future trajectory of interest The Fed continuing to raise rates in the first half of 2023 and the notable volatility in the 10-year Treasury rates further added to the concern and uncertainty in Lamarck. In addition, the failure of several notable regional banks, coupled with increased reserves and negative commentary from money center banks regarding their real estate portfolios, further added to the generally pessimistic perspective.
I am joined as usual today by Scott Weiner, our Chief investment Officer, and anesthesia Myron over our Chief Financial Officer.
In many ways. The start of 2024 feels very much like where we were at the start of 2023 for the commercial real estate sector.
If you recall entering 2023, there was significant negative sentiment concerning commercial real estate fueled by concerns over the impact of elevated interest rates on valuations and pending debt maturities.
Uncertainty on the long term use case for office properties and a lack of consensus with respect to both the path of the economy and the future trajectory of interest rates.
The fed continuing to raise rates in the first half of 2023.
The notable volatility in the 10 year Treasury rates further added to the concern and uncertainty in the market.
In addition, the failure of several notable regional banks, coupled with increased reserves and negative commentary from money center banks regarding their real estate portfolios further added to the generally pessimistic perspective.
Stuart Rothenberg: While there were some notable transactions throughout 2023, which started the process of revaluing real estate in a higher interest rate environment, overall transaction volume was significantly lower than in recent years, as market participants, including owners, lenders, potential buyers, and sellers, all chose to play for time and remain cautious in the face of an uncertain economic and interest rate environment. As we enter 2024, there is increasing confidence in the Fed's ability to engineer some type of soft landing and expectations of 100 to 150 bps of Fed rate cuts throughout the year. On the long end, the 10-year is essentially exactly where it was at the beginning of 2023, and at present, fears of that rate moving higher, as it quickly did last year, are muted.
While there were some notable transactions throughout 2023, which started the process of reevaluating real estate in a higher interest rate environment, but overall transaction volume was significantly lower than recent years as market participants, including owners lenders potential buyers and sellers.
All chose to play for time and remain cautious in the face of an uncertain economic and interest rate environment.
As we enter 2024.
There is increasing confidence in the feds ability to engineer some type of soft landing and expectations of 100 to 150 bps of fed rate cuts throughout the year.
On the long and the 10 year is essentially exactly where it was at the beginning of 2023 and at present fears of that rate moving higher as it quickly did last year are muted. However, while there may be more optimism with respect to the economy and rates than that.
Stuart Rothenberg: However, while there may be more optimism with respect to the economy and rates, the narrative around commercial real estate continues to focus on further asset value degradation. There is still much to be done to address loan maturities and asset-level capital structures in a higher rate environment, in addition to the lingering uncertainty over the long-term use case for certain assets. Pivoting away from the value debate, operating performance across much of commercial real estate has remained stable to positive. Notable exceptions include certain office markets, as well as pockets of the multifamily sector that have begun to experience declining rent growth in the face of elevated supply.
Narrative around commercial real estate continues to focus on further asset value degradation.
There is still much to be done to address loan maturities and asset level capital structures in a higher rate environment. In addition to the lingering uncertainty over the long term use case for certain assets.
Pivoting away from the value debate operating performance across much of commercial real estate has remained stable to positive. Notable exceptions includes certain office markets as well as pockets of the multifamily sector that have begun to experience declining rent growth in the face of elevated some.
Stuart Rothenberg: Over the long term, we expect that property-level operating performance will be closely aligned with the broader macroeconomic climate, and many property sectors will benefit from a notable decrease in new supply over the last few years. With respect to ARI, 2023 was a year focused on proactive asset management and maintaining excess liquidity while expanding and diversifying financing sources. Given the tailwinds from higher base rates, ARI achieved strong distributable earnings which comfortably covered the dividend and demonstrated the earnings power of the company's floating rate loan portfolio. During the fourth quarter, ARI strategically pivoted and deployed $536 million into two new loan transactions and the upsizing of an existing loan as it identified compelling opportunities to originate loans at attractive pricing with reset valuation, strong credit structures, and lower LTVs. All three of these loans secured properties in Europe.
Fly over.
Over the long term, we expect that property level operating performance will be closely aligned with the broader macroeconomic climate and many property sectors will benefit from a notable decrease in new supply over the last few years.
With respect to Ari's 2023 was a year focused on proactive asset management, and maintaining excess liquidity, while expanding and diversifying financing sources, given the tailwind from higher base rates.
<unk> achieved strong distributable earnings, which comfortably covered the dividend and demonstrated the earnings power of the company's floating rate loan portfolio.
During the fourth quarter, Ari's strategically pivoted and deployed $536 million into two new loan transactions and the upsizing of existing loan as we identify compelling opportunities to originate loans at attractive pricing with reset valuation strong.
Credit structures and lower Ltvs.
All three of these loans secured properties in Europe.
Stuart Rothenberg: Shifting to the portfolio, at year end, ARI had 50 loans totaling $8.4 billion. ARI received $1.2 billion in loan repayments and sales during 2023, including $270 million from office loans. Throughout the year, our team remained actively engaged with ARI's borrowers, negotiating and completing paydowns and extensions where appropriate. For ARI's focus assets, the two REO hotels produced stable cash flow throughout the year, with the Washington, D.C., asset generating NOI from hotel operations above pre-pandemic levels. With respect to Steinway, we closed on the sale of one unit in the fourth quarter, and there are two more units under contract.
Shifting to the portfolio at year end <unk> had 50 loans totaling $8 4 billion.
<unk> received $1 $2 billion in loan repayments and sales during 2023, including $270 million from office loans.
Throughout the year, our team remains actively engaged with ari's borrowers negotiating and completing paydowns and extensions where appropriate.
For our eyes focused assets the two Oreo hotels produced stable cash flow throughout the year with the Washington D C asset generating NOI from hotel operations above pre pandemic levels.
With respect to Steinway, we closed on the sale of one you did in the fourth quarter and there are two more units under contract there.
Stuart Rothenberg: There are also active negotiations on a handful of additional units, but nothing is done until it is done. Based on recent activity at the building, our views have not changed with respect to the nominal achievable value on sellout, but as a reminder, accounting does require a present value assessment of the achievable value. Recent activity was generally consistent with previous estimates, and as such, no additional reserve was recorded during the fourth quarter.
There are also active negotiations on a handful of additional units. However, nothing is done until it is done.
Based on recent activity at the building our views have not changed with respect to the nominal achievable value on sell out but as a reminder, accounting does require a present value assessment of achievable value recent activity was generally consistent with previous estimates and as such no additional reserve.
<unk> was recorded during the fourth quarter.
Stuart Rothenberg: Any future change to the reserve level will be based on an assessment of both the potential nominal value of remaining units as well as the expected timing of realization. Before I turn the call over to Anastasia, let me make a few comments on ARI's quarterly dividend. As a reminder, our quarterly dividend run rate is 35 cents per share, and it has been at that level since we proactively reduced the dividend right at the beginning of the flu pandemic in 2020. As I have stated many times previously, the dividend is ultimately dependent on board action, and it is reviewed and discussed and ultimately declared by the board on a quarterly basis.
Any future change to the reserve level will be based upon an assessment of both the potential nominal value of remaining units as well as the expected timing of realization.
Before I turn the call over to Anastasia, Let me make a few comments on <unk> quarterly dividend as a reminder, our quarterly dividend run rate is 35 per share and it has been at that level since we proactively reduced the dividend right at the beginning of the pandemic in 2020.
As I have stated many times previously that dividend is ultimately dependent on board action and it is reviewed and discussed and ultimately declared by the board on a quarterly basis, while it is subject to that board approval at present, our current modeling for the.
Adam: While it is subject to that board approval, at present, our current modeling for the future indicates that we remain comfortable with the current dividend level of $0.35 per share. We will obviously review it with the board on a go-forward basis, but in light of questions that we anticipated, I wanted to provide that context at this time. With that, I will turn the question over to Adam. Thank you, Stuart. And good morning, everyone.
<unk> indicates that we remain comfortable with the current dividend level of 35 per share. We will obviously review it with the board on a go forward basis.
But in light of questions that we anticipated I wanted to provide that context at this time with that I will turn the question over to anesthesia.
Okay.
Thank you Stuart and good morning, everyone.
Anastasia Maranova: ARI had a strong year of operating results in 2023, reporting distributable earnings of $244 million or $1.69 per share, which resulted in dividend coverage of 1.21 times. Gap net income available to common stockholders was $46 million or $0.29 per diluted share of common stock. ARI Portfolio ended the year with a carrying value of $8.4 billion, with a weighted average and leveraged yield of 8.7%, 110 basis points higher than at the end of 2020, and notably 380 basis points higher than at the end of 2021. As Stuart mentioned, during the quarter, we closed $536 million of new commitments across three. $275 million of these commitments were funded during the quarter.
And Ray had a strong year of operating results in 2023 reported distributable earnings of $244 million or $1 69 per share, which resulted in dividend coverage of 121 times.
GAAP net income available to common stockholders was 46 million or 29 cents per diluted share of common stock.
Am I portfolio ended the year with a carrying value of $8 4 billion with a weighted average unlevered yield of eight 7%.
110 basis points higher than at the end of 2022.
And notably 380 basis points higher than at the end of 2021.
As Stuart mentioned during the quarter, we closed 536 million of new commitments across three years.
$275 million of these commitments with funded during the quarter.
Anastasia Maranova: $212 million was funded subsequent to quarter end, and the rest will be funded in the future. We also completed $131 million of add-on funding from previously closed loans and received $205 million in loan repayment. As of year-end, approximately 81% of the principal balance of our portfolio was covered by interest rate caps. It is important to note that most cap expirations are tied to either the initial or final maturity of the loan, where part of the extension conditions for the loans include putting a new cap in place.
212 million was funded subsequent to quarter end and the rest will be funded in the future.
We also completed 131 million of add on funding from previously closed loans and received <unk> hundred 5 million in loan repayments.
As of year end, approximately 81% of the principal balance of outbreak folio with covered by interest rate caps in <unk>.
Note that most caps exploration at tied to either initial a final maturity of loans.
We're part of the extension conditions for the alone.
We've put in a new cap in place.
Anastasia Maranova: We closely monitor pending expirations and engage with our borrowers to ensure new caps are put in place upon expiration. Currently, there are not any loans in our portfolio where we are concerned with the borrower's ability to replace an expiring debt. In addition to interest rate caps, other structural protections for the loans in our portfolio include interest reserves and interest and carry guarantees. As of year-end, the weighted average risk rating of the portfolio was 3.0. There was no incremental specific CECL allowance taken during the quarter.
We closely monitor our pans and exploration and engage with our borrowers to ensure new caps upward and placed upon exploration.
Currently there are not annual loan in our portfolio in which we are concerned with the borrower has the ability to replace an expiring Kathryn.
In addition to interest rate caps are there structural protection from the loans are now portfolio include interest reserve and interest in carry guarantee.
As of yearend the weighted average risk rating of the portfolio was a three point al.
There was no incremental specifics ECL allowance taken during the quarter.
Anastasia Maranova: The general CECL allowance stood at 38 basis points of the loan portfolio's amortized cost basis at December 31, 2018, a two basis points increase as compared to a year ago. The increase in the general CECL allowance was primarily attributable to a more adverse macroeconomic outlook, particularly in relation to certain assets. The negative impact from the macroeconomic outlook was partially offset by overall portfolio seasoning and loan repayment activity outpacing loan funding. Notably, the outstanding principal balance of the loan portfolio decreased from $8.9 billion to $8.6 billion over the course of the year. As of December 31st, our total CECL allowance was 261 basis points of the Loan Portfolio's amortized cost. ARI book value per share, excluding general CECL reserves and depreciation, was $14.73, relatively flat compared to the last quarter.
The junior Oc still allowance stood at 38 basis points of the loan portfolio amortized cost basis at December 31st at two basis points increase as compared to a year ago.
The increase in junior Oc still allowance was primarily attributable to a more adverse macroeconomic outlook, particularly in relation to certain asset classes.
The negative impact from the macroeconomic outlook was partially offset by overall portfolio seasoning and loan repayment activity outpaced in loan fundings.
Notably the outstanding principal balance of the loan portfolio decreased from $8 9 billion to $8 6 billion over the course of the year.
As of December 31, our total Ciseaux allowance.
<unk> hundred 61 basis points of the loan portfolios amortized cost basis.
<unk> book value per share, excluding <unk> reserves and depreciation was $14 73.
Relatively flat to last quarter.
With respect all borrowings.
We are in compliance with all covenants and continue to maintain strong liquidity.
Anastasia Maranova: With respect to borrowing, we are in compliance with all covenants and continue to maintain strong liquidity. ARI repaid $176 million of the remaining outstanding principal balance of convertible notes that came due in October with cash on hand.
Right <unk> 176 million of the remaining outstanding principal balance of convertible notes.
You can view in October with cash on hand.
With this repayment our next corporate debt maturity is not until 2026.
They can add on Steward's remarks, with regards to our Washington DC Hotel.
Anastasia Maranova: With this repayment, our next corporate debt maturity is not until 2026. Picking up on Stuart's remarks with regard to our Washington, D.C., hotel, as we continue to monitor the market to determine the optimal time to sell the asset. The hotel was recently pledged to our revolving credit facility, generating an incremental leveraged return for ARI. ARI ended the quarter with $278 million of total liquidity, comprised of cash on hand, undrawn credit capacity on existing facilities, and loan proceeds held by the service. ARI's debt-to-equity ratio at quarter end was 3.0 times.
As we continue to monitor the market to determine the optimal time to sell the asset.
<unk> was recently pledged to our revolving credit facility generated an incremental leverage return for AI.
<unk> ended the quarter with $278 million of total liquidity comprised of cash on hand, undrawn credit capacity in existing facilities and loan proceeds held by the servicer.
<unk> debt to equity ratio at quarter end was at three point of time.
And with that we'd like to open the line for questions.
<unk>. 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.
Operator: And with that, we'd like to open the line for questions. Operator, please go ahead. Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
One moment for questions.
Our first question comes from Doug Harter with UBS you May proceed.
Thanks, and good morning.
And you could talk a little bit about the potential timing of resolution of your your existing problem assets.
Doug Harder: One moment for questions. Our first question comes from Doug Harder with UBS. Thanks and good morning.
Yes.
Stuart Rothenberg: Hoping you could talk a little bit about the potential timing of resolution of your existing problem. Yeah, I think, in no particular order, Doug, I think, as we've indicated previously, with respect to the Atlanta hotel, there has been some dialogue with potential buyers. Don't know whether we'll get to the finish line or not. But I think it's possible that it gets resolved in the first half of this year in terms of there being a sale. I would say if the dialogues we're in now don't result in a sale, we will probably sort of reassess whether it makes sense to continue to create more value through operations before bringing it back to market or sort of thinking about relaunching a more formal sales effort.
No particular order Doug.
I think as we've indicated previously with respect to the Atlanta Hotel there has been some.
Dialogue with potential buyers.
Don't know that we'll get to the finish line or not but I think it's possible that it gets resolved in the first half of this year from in terms of there being a sales.
I would say of the dialogues. We're in now don't result in a sale.
We will probably sort of reassess and whether it makes sense too.
Continue to create more value through operations before bringing it back to market or sort of thinking about re launching.
On a more formal sales effort, what we're working on now have been sort of.
Stuart Rothenberg: What we're working on now have been sort of dialogues with local players who knew we might be selling with respect to the Mayflower Hotel in D.C. It's actually generating a pretty attractive levered return, as Anastasia mentioned in her comments, and I would say at this point, probably want to see where rates and the overall financing market go before we do anything, for more in terms of trying to sell that asset, but from a return You know, selling that asset is really about just removing ROE from our balance sheet; it doesn't change the nature of what we could earn on that by a large amount. I think pivoting to the retail asset in Ohio. We've made a lot of progress from a leasing perspective. We are in the low 90s for an overall occupancy percentage.
Sure does.
Dialogues with local players who knew we might be interested in selling.
With respect to.
They may flower hotel in DC.
It's actually generating.
A pretty attractive Levered return is Anastasia mentioned in her comments and I would say at this point.
Probably want to see.
Where rates and the overall financing market goes before we do anything.
Formal in terms of trying to sell that asset.
From a return perspective.
Selling that asset is really about just removing aro <unk> from our.
Balance sheet adjustment change the nature of them.
What we could earn on that capital by a large amount.
I think pivoting to.
The retail asset in Ohio.
We've made a lot of progress from a leasing perspective, we.
Or in the low nineties from an overall occupancy percentage.
Stuart Rothenberg: The asset management team has also done some interesting things to lower our basis a little bit or create more value through some out parcel ideas and getting entitlements for some additional density at the site. We've got a little bit of work to be done with some significant tenants from a renewal perspective over the next, I'll say, six to 12 months. But if successful on that front, again not knowing where the world will be, but assuming that, a good environment overall, I think we would look to exit possible sometime, early part of next year. And then on the Steinway building, you know, it's really unit by unit. There's no way to force anything in terms of anything from a bulk perspective.
The asset management team has also done some <unk>.
Interesting things to lower our basis, a little bit or create more value through.
[noise] some out parcel ideas.
Getting entitlements or some additional density.
At this site.
Got a little bit of work to be done.
With some significant tenants from a renewal perspective over the next.
I'll say six to 12 months, but if successful on that front.
Again, not knowing where the world will be but assuming.
Good environment overall, I think we would look to exit if possible sometime in the early part of next year.
And then on the on the Steinway building.
It's really unit by unit there is no.
Theres no way to force anything in terms of anything from our perspective. So it is literally just trying to.
Stuart Rothenberg: So it is literally just trying to, Ryan threw it over, you know, unit by unit over the coming quarters for several years. And then obviously, the Brook, which is, excuse me, the multifamily development in Brooklyn, Yeah, that'll be built through 2425, and lease up, you know, call it late 2526. And that's when we would JV ideas along the way as a way to potentially lower some of our equity commitment, but I would not plan on anything. Great. True
Brian threw it over unit by unit over.
The coming quarters.
Four years.
And then obviously the Brook, which is excuse me.
The multifamily development in.
Brooklyn.
Yeah that'll be built through 'twenty four 'twenty five lease up call. It late 'twenty five 'twenty six and that's when we would.
Envision a chance to exit that asset we have.
Explored some.
JV ideas, along the way as a way to potentially lower some of our equity commitment, but I would not.
On anything at that time at this time.
Great. Thank you Stuart.
Steven Cole DeLaney: Thank you. One moment for questions. Our next question comes from Steven Laws with Raymond James. Hi, good morning.
Sure.
Thank you.
One moment for questions.
Our next question comes from Stephen Laws with Raymond James You May proceed.
Hi, Good morning, I appreciate the comments around Doug's question Stuart.
Stuart Rothenberg: Appreciate the comments around Doug's question, Stuart. Certainly helpful as I think about those different assets. I think there's also the Chicago office loan, maybe you've talked about in the past, any update on that? We have two office loans in Chicago. Both are well supported by their sponsors.
Sure.
Certainly helpful as I think about those different assets.
I think theres lots of Chicago office loan.
Maybe you've talked about in the past I mean any update on that.
We have two.
Two office loans.
In Chicago.
Both are well supported by their sponsors one was a complete.
Stuart Rothenberg: One was a complete redo and lease up. And I'd say at this point, we are pretty encouraged by the amount of leasing activity taking place at the asset. That's a hundred million dollars of commitment that we've got outstanding. We originated late in 2022.
Call It redo.
Lisa and I would say at this point, we are pretty encouraged by the amount of leasing activity.
Taking place at the asset.
That's a $100 million.
Uh huh.
The commitment that we've got outstanding.
We originated late in 2022.
Stuart Rothenberg: And I would say, based on our basis and based on what we're seeing from the initial indication of lease activity, we feel pretty good about that. And then we've got another asset, Chicago, that's an older asset, and we've had it in our portfolio since 2018, I believe.
I would say.
Based on our basis and based on what we're seeing from initial indication of lease activity we feel.
I'm pretty good about that and then we've got another asset.
In Chicago, that's an older asset we've had it in our portfolio since.
2018, I believe.
Stuart Rothenberg: We recently received a modest pay down from the sponsorship. We negotiated an additional pay down, plus additional guarantee, and would expect the sponsor to continue to support the asset based on dialogue. Right now, the building itself is about... Thanks. A couple of questions around origination.
We recently received.
Modest paydown from the sponsorship.
We negotiated an additional pay down.
Plus additional guarantees.
And would expect this sponsor to continue to support the asset based on dialogue right now the building itself is about.
Plus or minus.
75% occupied.
At this point, but.
Sponsorship is given every indication they continue they will continue to support the asset.
Thanks, a couple of questions around origination certainly work you new investments were above what I was expecting I think you mentioned the somewhat of a pivot.
Stuart Rothenberg: Certainly, the new investments in 4Q were above what I was expecting. I think you mentioned somewhat of a pivot in your prepared remarks as far as deploying that capital. Kind of on the whole, you know, can you talk about your expectations around new originations and repayments this year? Do you expect the portfolio to grow and increase over 24? Or do you think, kind of over, you know, not looking at an isolated quarter, maybe over the year, you're going to see originations and repays more in line? Um, look, I think we're trying to match them up.
In your prepared remarks, as far as deploying that capital kind of on the whole.
Can you talk about your expectations around new originations and repayments. This year do you expect the portfolio to net grow and increase over 24 or do you think kind of over not looking at it isolated one quarter, maybe over the year, you're going to see originations and repaid more in line with each other.
Look I think we're trying to match them up I think what you saw at the end of last year was the fact that we had taken a fairly cautious approach.
Stuart Rothenberg: I think what you saw at the end of last year was the fact that we had taken a fairly cautious approach through much of 2023 and had built up some,,, felt good about. I think for the rest of this year, you know, I certainly wouldn't, in any way, be assuming we multiply our deployment by four. If anything, I think we got ahead of our deployment needs by doing some things at the end of the year and early this year. And I think, you know, pacing for the rest of the year is really sort of dependent on and in some way tied to the question Doug asked, which is, you know, when do we free up capital? you know, somebody with underperforming assets per se.
Through much of 2023 and had built up some.
Liquidity and sort of felt like we had the opportunity to deploy it into transactions we.
Felt good about I think for the rest of this year.
I certainly wouldn't in any way.
B, assuming we multiply our deployment by four if anything I think we got.
Head of our deployment needs by doing some things at the end of the year early in this year.
Pacing for the rest of the year is really sort of dependent and in some way tied to.
The question, Doug asked which is when do we free up capital from.
Some of the underperforming assets per se.
Stuart Rothenberg: And then, you know, I think with respect to expected repayments, Yeah, we're still going to be a little bit cautious making sure that repayments actually happen before we get too far out of this. And then lastly, you know, looks like a little over half the portfolio is now in Europe. And again, try not to read too much into one quarter, but that's where the new investment activity occurred. Can you talk about what you like in the European market versus opportunities you're seeing in the U.S., or were these just kind of unique deals that presented themselves that were attractive? I mean, certainly if you look at the asset types, right, which, you know, one was a hostile transaction, i.e. as in hostiles, they, and then one was a portfolio of pubs, obviously, a little bit off the beaten track in terms of traditional asset classes, larger deals where ARI was able to participate with other parts of Apollo broadly, where we have, I think it's important to get the knowledge of the sectors from a business perspective, not just a real estate perspective, and I also think the size of their transactions afforded us the ability to And much of that was in the US.
And I think with respect to expected repayments.
Yeah, we're still going to be a little bit cautious, making sure that repayments actually happened before we get too far out over our skis.
Great and then lastly, it looks like a little over half the portfolio is now in Europe, and again try not to read too much into one quarter, but thats, where the new investment activity occurred.
Can you talk about what you like and the European market versus opportunities Youre seeing in the U S.
Or are these just kind of unique deals that presented themselves.
Were attractive.
I mean, certainly if you look at the asset types right, which one was a hostile transaction I E as in hostels vacation not hostile.
And then one was.
Our portfolio of pubs, obviously, a little bit off the run in terms of traditional asset classes.
Larger deals, where I was able to participate with other parts of Apollo broadly.
Where we had knowledge of the sectors from a business perspective, not just a real estate perspective, and I also think the size of their transactions.
Afforded us the ability to create some structure and economics that were interesting.
We are still.
Active in the U S as a business overall real estate credit team.
Again at Apollo did over $10 billion worth of transactions in 2023 and much of that was in the U S. So.
Stuart Rothenberg: The US continues to be on the radar screen for the business overall, we continue to think about it for from ARI's perspective, but in this particular case, as we made the decision to put some of our capital to work. I would say the two things, the two new transactions in Europe, certainly were two of the more interesting things we were seeing as we thought about achievable, risk adjusted returns and then obviously the upside, action in Europe where and others. Thank you. Thank you. Great.
The U S continues to be on the radar screen for the business overall, we continue to think about it or from Ari's perspective, but in this particular case as.
As we made the decision to put some of our capital to work.
I'd say the two things.
Two new transactions in Europe.
Certainly were two of the more interesting things we were seeing as we thought about achievable.
Risk adjusted returns and that obviously the upsizing.
Was just on an existing transaction in Europe, where our sponsorship.
Sponsorship and succeed in from a lease up perspective.
Steven Cole DeLaney: Thanks for the comments this morning, Stuart. Sure. Thank you. One moment for a question. Our next question comes from Jade Rahmani with KBW. Thank you very much.
Great. Thanks for the comments this morning Stuart sure.
Thank you.
One moment for questions.
Our next question comes from Jade Rahmani with VW you May proceed.
Thank you very much just a follow up too.
Jade Rahmani: Just to follow up to Steve's question about Chicago, on the other office, could you comment on Manhattan and Long Island City? Since Manhattan is a clearly bifurcated market, but Long Island City is a market where we've seen some pressure there. Yeah, um, you know, I think we did a restructuring on the Long Island City asset. In 2023, significant capital came in behind us. It came in from someone that was already junior to us in the capital structure and certainly is a strong institution in the space overall. I would say since that happened.
Steve's question around Chicago.
On the other office could you comment on Manhattan.
And long Island city since.
Manhattan, clearly bifurcated market, but long island city market, where we've seen some pressure there.
Yeah.
I think we did a restructuring.
On the long Island city asset.
In 2023.
Significant capital came in.
Behind us it came in from <unk>.
Someone that was already.
Junior to us in the capital structure and certainly is.
Our strong institution in this space overall I would say since that has happened there has been.
Stuart Rothenberg: There's been some leasing that's taken place today, and I would say there continues to be interest from tenants who look at Long Island City as a lower cost option to Manhattan. And I would say, you know, the transaction that was done last year from a restructuring perspective was certainly from our perspective set us up to have several years of runway available for lease up and TI expenses. So, generally moving in the right direction. Yeah, and Judith, Scott, I would add, and it's right above the subway stop.
Some leasing thats taken place today.
I would say there continues to be.
Interest from tenants, who look at long Island city is a lower cost option to Manhattan.
I would say.
The transaction that was done last year from a restructuring perspective was certainly.
From our perspective set us up to have.
Several years of runway and capital available for lease up and Ti expenses as they occur.
So.
Generally moving in the right direction.
Scott I would add.
It's right above the subway stops so it's really centrally located in terms of access all over the city and historically the city has a whole bunch of incentives on the tax side. So for people to relocate there. So in addition to being kind of essentially located low cost alter.
Scott Wiener: So it's really centrally located in terms of access all over the city. And historically, the city has a whole bunch of incentives on the tax side for people to relocate there. So in addition to being kind of centrally located, it's a low cost alternative.
Scott Wiener: And we're really benefiting from a very long lease term. We have 15, 20 year leases on the three major tenants, as well as 100% let retail, which is anchored by Target, if you're familiar with the center. So, as Stuart mentioned, I think us and the sponsorship group are very pleased. A lot of touring, a lot of activities, both by government tenants, which was actually the most recent lease was a large government New York City tenant. So you have credit there, and then a lot of other folks are looking for this really class A building in Long Island City. And then in Manhattan, Jade, we've got one exposure.
Alternative in and we're really benefiting from a very long lease term.
We have like 15 20 year leases on the three major tenants as well as 100% retail which is anchored by target if you're familiar with the center. So as Stuart mentioned I think us and the sponsorship group is very pleased.
A lot of touring a lot of activities both by Gov.
Government tenants, which was actually the most recently she was a large government New York City tenant.
So we have credit there and then a lot of other folks looking for Australia, a class a building.
City.
And then in Manhattan, Jade, we've got one exposure it was alone we put in place.
Stuart Rothenberg: It was a loan we put in place. In the first half of 2022, we're the senior mortgage, our last dollar basis is $400 a square foot. There are three levels of Mez Benita, or Subdebt Beneath Us. I would say at this point we're sort of at a stage in that transaction where, I think sponsorship on the equity side is running out of appetite, and those, Supporting it, sort of restructure, injection of capital, et cetera, to give at least some, maybe not all of them, seems like a productive dialogue. We should have had more.
In the first half of 2022.
Where the senior mortgage our last dollar.
Basis is.
$400 a square foot.
There are three levels of Mezz.
Beneath us.
Or sub debt beneath us.
I would say at this point, we're sort of at a stage in that transaction, where I think sponsorship on the equity side.
As running out of appetite.
We're already in dialogue with.
Those subordinate to us in the capital structure.
Around <unk>.
Some sort of restructure injection of capital et cetera to give.
At least some maybe not all of the sub debt a chance to play for time, so it seems like a productive dialogue.
We should have more in the next probably the next time around the filing in terms of specifically what's likely to happen.
Stuart Rothenberg: So a challenging asset, but there's enough subordination where you feel adequately covered, sitting here today. Okay. And then just a bigger picture question, but if you can give a sense, you know, we get tons of questions about credit performance and people look at, for example, CLOs, and they see delinquency issues, they see a lot of modifications, but ultimately, in your mind, what is the driver of whether a loan stays current or goes into default? In other words, what percentage of interest is funded out of a reserve versus Does most of it come from an interest reserve that is initially established and later replenished? Um, it depends, right?
So it challenging asset, but there's enough subordination, where you feel adequately covered.
Here today yet.
Okay.
And then just a bigger picture.
Thanks for your question, but if you can give US then we get tons of questions about credit performance and people look at for example, CLO then they see delinquency issues. They see a lot of modifications, but ultimately in your mind.
It is the driver of whether alone stays current or goes into default in other words, what percentage of interest it's funded out of a reserve versus property level cash flows.
Does most of it come from an interest reserve that is initially established in later replenished.
It depends right.
Stuart Rothenberg: Like, so to be clear, right, if you look at our portfolio and you look at our interest, but you also factor in the fact that a lot of what we do are assets in transition, whether it is ground-up development or heavy redevelopment. You know, I think when last we looked, and Hillary could probably get you a more current number after the fact, I think, you know, Approximately 20% of our interest income, maybe slightly higher, is paid out of reserves, but it's the ordinary way of structuring when you're doing a construction deal or a pre-development loan or a Significant Redevelopment Loan that you are, baking in the interest cost into the loan. Um, you know, And obviously, particularly when you're doing things that are development or redevelopment in nature, there are no cash flows to cover interest.
To be clear right. If you look at our portfolio and you look at our interest but you also factor in the fact that a lot of what we do.
Our assets in transition, whether it is ground up development or heavily redevelopment.
Yes, I think when last week and Hillary could probably get you a more current number after the fact I think.
Okay.
Approximately 20% of our interest income may be slightly higher as.
Paid out of reserves, but its ordinary way structuring when youre doing a construction deal or a pre development loan or a <unk>.
Significant redevelopment loan that you are.
Baking in the interest cost into the alone.
I think.
I think it's as expected for lack of a better phrase and obviously, particularly when youre doing things that are.
Development or redevelopment in nature, there are no cash flows to cover interest.
Stuart Rothenberg: So you're effectively banking. Thanks. Share for Everyone.
Actively baking it into the lung.
Yeah.
Rick Shane: Thank you. Thank you. One moment for questions. Our next question comes from Rick Shane with J.P. Morgan. Thanks for taking my questions this morning, everybody, and Anastasia, thank you for the additional detail on CAPS, etc. I'd love to talk a little bit about the dynamics in terms of your borrowers hedging now, given we are seemingly approaching an inflection in rates, is the cost of hedging actually starting to come down as the price of caps comes down? And the second part of this is, do borrowers have the alternative, instead of buying caps, of building up the interest reserve instead, sort of self-insurance, so that way, if rates come down, they haven't paid away, they haven't sort of wasted the payment, and they can recapture through the reserve?
Thanks very much.
Sure.
Thank you.
One moment for questions.
Our next question comes from Rick Shane with Jpmorgan you May proceed.
Thanks for taking my questions. This morning, everybody Anastasia. Thank you for the.
Additional detail on caps et cetera.
Uh huh.
Love to talk a little bit about the dynamics.
In terms of your borrowers hedging now.
Given we are seeing.
Seemingly approaching an inflection in rates.
Is the cost of hedging actually starting to come down as the price of caps coming down and the second part of this is.
Does it do borrowers have the alternative instead of buying caps.
Of building up the interest reserve instead.
Sort of self insurance, so that way if rates come down.
They havent pain away.
They haven't sort of wasted the payment and they can recapture through the reserve.
Scott Wiener: Scott, do you want to just sort of maybe give a holistic view of the dialogue with borrowers? Yeah, look, I do think, you know, cap costs have come down. I look, I think every borrower has a different philosophy, we have a general, and I'm speaking across the broader real estate platform. Obviously, as we mentioned, we haven't done many new originations, but across our platform, we have borrowers who are actually buying in the money caps, so effectively prepaying interest because they want to have more coverage and are willing to pay for it.
Scott do you want to just sort of maybe give like a holistic view of sort of the dialogue with borrowers yes.
Look I do think.
Cap cost have come down like I think everybody has a different philosophy, we have general and I'm seeing across the broader real estate platform. Obviously as we mentioned you know we haven't done many new originations, but across our platform. We have borrowers who are actually buying in the money caps. So effectively prepaying interest because they wanted to have more cover.
Scott Wiener: We have other borrowers who really want to buy a way out of the money cap, and it's kind of insurance and requiring it again. Part of it also depends on, you know, what the coverage is, and, you know, you know, what the type of leverage that we're doing. And from our underwriting perspective, you know, what kind of interest rate, you know, would we have? But I would say, generally, it's not so much building up an interest reserve, I would say, from a credit perspective, if someone wants to buy or spend less money on a cap, you know, generally, that would be on a deal where you feel very comfortable with the cash flows, and the coverage, and or you might have some sort of guarantee.
And we're willing to pay and we have other borrowers who really want to buy our way out of the money chop and its kind of insurance and requiring and again part of it also depends on what the coverage is.
The type of leverage that we're doing and from our underwriting perspective, what kind of interest rate would we have.
But I would say generally it's not so much building up an interest reserve I would say from a credit perspective, if someone wants to buy our spend less money on a cap generally that would be on a deal where you feel very comfortable with the cash flows.
And the coverage <unk> you might have some sort of guarantee.
Scott Wiener: So for example, like on construction loans, where you're, by definition, funding that, and you kind of look to the future, and you have a carry guarantee, oftentimes, a borrower will want to buy a less expensive cap out of the money or something with a shorter term. Clearly, if you're financing an asset that is a cash flowing asset and has, you know, a lower coverage, if you will, multifamily, you're going to be very focused on what that cap is, because you want to make sure that you cover it at www.realestate.com.
For example, like on construction loans, where you are by definition of funding that and you kind of look to the barge and you have a guess Carey guarantee oftentimes a borrower will want to buy.
Less expensive cap, the money or something with a shorter term.
Clearly if you are financing an asset that is a cash flowing asset and has.
A lower a lower coverage if you all multifamily.
Going to be very focused on what that cap is because you want to make sure that you thought you cover.
Got it Okay, and then obviously the rigor borrowing fixed now right I mean thats all.
Obviously, that's the other thing if borrowers can fill in the market borrow fixed rate loans.
Rick Shane: That's helpful. And then the follow-up to that is, and Anastasia, I apologize. I think you said that 83% of loans have caps at this point. And I don't recall hearing that metric in the past.
That's helpful and then the follow up to that is.
Yes.
I apologize I think you said that 83% of loans have caps at this point.
And I don't recall hearing that metric in the past.
Anastasia Maranova: Where is that in historical context? Yeah, and it was 81% of the principal balance. Yeah, I think that's Charlie again. If we have a strong sponsor, and they're willing to, you know, in some ways, we're better off having them guarantee interest, right? That's because the capital and gets you there, where if someone's willing to give us a full carry guarantee, that's certainly a trade that we can make. So, I would say on the deals where we don't have a cap, it's because we have some form of other supplemental credit.
Where is that in historical context.
Yes, and it was 81% of the principal balance.
Yes, I think Thats generally again, if we had a strong sponsor right and they are willing to in some ways. We are better off having them guarantee interest rate that's because the capital I guess, you there where if someone's willing to give us a full carry guarantee.
That's certainly a trade that we that we can make so so I would say on the deals where we don't have a cap is because we have some form of other.
Supplemental credit enhancement.
Scott Wiener: Thank you, guys. Thank you. And as a reminder, to ask a question, please press star 1 1 on your telephone.
Perfect. Thank you guys.
Thanks, Greg.
Thank you and as a reminder to ask a question. Please press star one on your telephone one moment for questions.
Operator: One moment for questions. Our next question comes from Steve DeLaney with Citizens JMP. You may proceed. Thanks. Good morning, everyone. I'd like to go back to Steven Law's comment about your foreign market investment. You know, clearly, that's the most distinctive feature of Apollo ARI.
Our next question comes from Steve Delaney with citizens JMP you May proceed.
Thanks, Good morning, everyone.
I'd like to go back to Stephen laws comment about your your foreign market investment clearly that's the most distinctive feature.
Steve DeLaney: Just noting in your deck here, you have 32% of the portfolio in the UK and just 21% in New York City. I have a couple of questions around that. I'm just curious; I know, generally, you've had a good performance.
Paolo.
Hi.
Just noting in Europe.
In your deck here, you have 32% of the portfolio in the U K, and just 21% and New York City.
Just a couple of questions around that I'm just curious.
Generally you have had a good performance have you had any npls or foreclosures and the U K or any of the European markets based on your active lending activity there.
Stuart Rothenberg: Have you had any NPLs or foreclosures in the UK or any of the European markets based on your lending activity there? I appreciate you asking the question. You're like an announcer where a guy's like made 20 shots in a row.
I appreciate you asking that youre like an announcer who were our guys like made 20 shocks.
Stuart Rothenberg: No, to date, we've had very strong performance in Europe. You've heard me talk multiple times about why we like Europe, because in many ways, we think about Europe the way we think about the US in terms of quality of assets, quality of sponsorship, ability to protect ourselves through the legal system. It's not to say we haven't had assets where sponsorship did not achieve the business plan, but in those cases, the value of the underlying real estate relative to our loan was sufficient to make sure we were made whole on our. What's the... Everything is, every loan is unique, everything is a story, right? Every borrower has a different personality.
No to date, we've had.
Very good.
Strong performance in Europe.
<unk> heard me talked multiple times about why we like Europe, because in many ways, we think about Europe. The way, we do the U S in terms of <unk>.
Quality of asset quality of sponsorship ability to protect ourselves through the legal system.
Not to say we haven't had.
Assets were sponsorship did not.
<unk> achieved business plan, but in those cases the.
The value of the underlying real estate relative to our loan was sufficient to make sure. We were made whole on our transaction.
What's the.
Gosh everything is every loans unique everything's a story right every borrower has a person that different personality, but is there is there a one like.
Steve DeLaney: But is there one principle of doing business or custom that gives lenders more control over borrowers in the UK that gives lenders more control over borrowers? Is there anything just technical like that that helps make that a, maybe I'll use the word safer lending market than the US? I wouldn't say it's safer, this is Scott. I wouldn't say it's safer, because obviously, people can lose money on loans in the UK and London just as much as they can here.
Principal of doing business or custom.
<unk>.
Gibbs and the U K to Gibbs lenders more control over borrowers. This is there anything just technical like that.
It helps make that a.
Maybe I'll use the word safer lending market than the U S.
I wouldn't say that.
Scott I wouldn't say.
Because obviously people can lose money on those.
London, just as much as I can here I would say there are some norms over there around kind of ongoing covenants that you don't really see here so whereas in the U S. You generally obviously, we've always structured our deals with ongoing cash triggers and maybe extension tests in Europe, and the U K you would often.
Scott Wiener: I would say there are some norms over there around kind of ongoing covenants that you don't really see here. So whereas in the US, you generally, obviously, we've always structured our deals with ongoing cash triggers and maybe extension tests, in Europe and the UK, what you would often see is, in addition to those type of triggers, you actually have financial covenants that, if they're breached, bring everyone to the table. I would say, you know, the rule of law and enforcement is obviously very strong there. And I would just say London has historically just been a center for attracting capital. So even offices right now, I think I read somewhere there's like 2 billion pounds of office space under offer across our portfolio. We recently got refinanced on some office buildings that are outside the ARI portfolio in London.
C. As in addition to those type of triggers you actually have financial covenants that if they are breached bring everyone to the table.
I would say you know rule of law enforcements.
Obviously very strong there.
And I would just say London historically has just been a center of attracting capital so.
Even even office right now I think I read somewhere there was a 2 billion pounds of office under offer.
Across our portfolio, we recently got refinance on some office buildings that are outside of the <unk> portfolio in London. So I just think it's a liquid market that's attracting.
Scott Wiener: So I just think it's a liquid market that's attracting, you know, people from Asia, other parts of Europe, the US. And you know, we have a large team there. So we like it. But again, also, we look across Europe, you know, as well, and it's really the power of the platform for us. That's really how we look at it.
People from Asia, or other parts of Europe The U S.
And you know we have a large team there so somebody like it.
But again, so we look across Europe.
Well its really that for us the power of the platform.
<unk>.
That's really how we look at it well.
Scott Wiener: Well, congratulations on how you've taken advantage of that and, you know, a solid close to 2023. Thank you. Thank you. I would now like to turn the call back over to Mr. Rothstein for any closing remarks. Thank you all who participated on the call this morning. Obviously, to the extent there are follow-up questions, myself, Hillary, and Anastasia are always available to talk.
Well congrats on how you've taken advantage of that and a solid close to 2020. Thank you.
Thanks, Dave.
Thank you I would now like to turn the call back over to Mr. Rossi for any closing remarks.
Thank you all who participated on the call. This morning.
To the extent there are follow up questions myself Hillary Anastasia our earliest available.
Mr. Rothstein: Thanks, everybody. Thank you. Thank you for your participation. You may now disconnect. Title Microsoft Office Word Document MSWordDoc Word Document.8
Thanks, everybody.
Thank you. Thank you for your participation you may now disconnect.
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