Q4 2024 Apollo Commercial Real Estate Finance Inc Earnings Call
Automatically transcribed by EO.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: These measures are reconciled to gap figures in our earnings presentation, which is available in our stockholders section of our website. We do not undertake any obligation to update our forward-looking statements or projections unless required by law.
Speaker Change: To obtain copies of our latest SEC filings, please visit our website at www.ApolloCraft.com or call us at 212-515-3200. At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein.
Stuart Rothstein: Thank you, Operator, and thank you to those of us joining us this morning on the Apollo Commercial Real Estate Financing fourth quarter and full year 2024 earnings call.
Speaker Change: As usual, I am joined today by Scott Wiener, our Chief Investment Officer, and Anastasia Mironova, our Chief Financial Officer.
Speaker Change: Consistent with the return of liquidity to the real estate capital markets and the steady increase in transaction volume, ARI experienced a robust level of repayment activity and was very active in deploying capital in 2024.
Speaker Change: While the market was expecting more aggressive action from the Fed than actually took place during 2024, the continued strength of the overall economy and the modest Fed cuts was enough to generate a notable pickup in real estate investment activity.
As we move into the new year.
Speaker Change: With the benefit of hindsight, it appears that property valuations troughed in the early part of 2024.
Speaker Change: as the significant dry powder within real estate funds is deployed and many of the participants who have been on the sidelines for the past 18 months re-enter the market.
Speaker Change: ARI finished 2024 originating $782 million worth of new loans in the fourth quarter, bringing total origination volume for the year to $1.9 billion.
Speaker Change: As of year-end, approximately 30% of the loans in ARI's portfolio were originated in the past 24 months, correlating with the rise in interest rates and the resulting reset of property values.
Speaker Change: ARI's newly originated loans were underwritten to generate very attracted risk-adjusted returns benefiting from wider spreads and higher base rates and interest rate floors.
Speaker Change: The strength of Apollo's broad-based real estate credit originations efforts is the key to ARI's active deployment. Apollo's team originated over $16 billion worth of new loans during 2024.
Speaker Change: As Apollo's team is consistently active in the market, ARI can seamlessly tap into the pipeline when capital to invest is available.
Speaker Change: ARI's originations in 2024 were across a broad spectrum of property types and geographies with more than half in the UK.
Speaker Change: Apollo's dominant market position in Europe continues to be a differentiator for ARI as we are able to invest in transactions with similar risk profiles and comparable credit quality to transactions in the U.S. while further diversifying the company's portfolio.
Speaker Change: Turning now to the loan portfolio, at year-end, ARI's portfolio was comprised of 46 loans totaling $7.1 billion. No additional asset-specific CECL allowances were recorded in the fourth quarter.
Speaker Change: shifting to 111 West 57th Street. There are currently four units under contract and several others in various stages of contract negotiated negotiations including several with agreed-upon offers.
Speaker Change: Upon closing of the four units and assuming one other unit closes, the net proceeds received will repay the senior mortgage in full and all proceeds thereafter will go to ARI and can be redeployed into new loans.
Speaker Change: We remain highly focused on proactive asset management and targeting resolutions on our focus loans as we seek to maximize value recovery and convert underperforming capital into higher return on invested equity opportunities.
Speaker Change: We have defined pathways for our remaining non-performing loans and REO assets, and we are actively pursuing resolutions.
Speaker Change: As we mentioned on last quarter's call, there is meaningful upside earnings potential for ARI as we recapture and redeploy capital.
Speaker Change: For example, ARI has approximately $300 million of net equity invested in the Brooklyn Multifamily Development.
Speaker Change: Upon completion and sale or refinancing of that asset, it is expected that ARI will be able to convert that non-income producing capital.
Speaker Change: who invested capital generating an ROE consistent with recently originated loans.
Speaker Change: Across ARI we estimate that if we were able to reinvest a hundred percent of the equity tied to non-performing loans in ROE into newly originated loans, we believe there is an additional approximately 40 to 60 cents per share of annual earnings uplift.
Speaker Change: With that, I will turn the call over to Anastasia to review ARI's financial results for the year.
Thank you, Stuart, and good morning, everyone.
Anastasia Mironova: ARI reported distributable earnings of $45 million or $0.32 per share of common stock for the fourth quarter, with gap net income of $38 million or $0.27 per diluted share of common stock.
Anastasia Mironova: For the full year, we reported distributable earnings of $190 million or $1.33 per share of common stock, with gap-net loss available to stockholders of negative $132 million or negative $0.97 per share.
Anastasia Mironova: Our dividend was well covered with 128% coverage for the quarter and 111% for the full year.
Anastasia Mironova: It is worth noting that our fourth quarter distributable earnings included 7 cents of non-recurrent items, such as prepayment fees, accelerated fee amortization on early repayments, and other similar one-time items.
Anastasia Mironova: Coupled with the impact of rate cuts executed by the Fed over the course of the fourth quarter of 24, we expect that our quarterly earnings in 25 would be lower when compared to Q4 24 while still providing sufficient coverage for our dividend.
Anastasia Mironova: Our loan portfolio ended the year with a carrying value of $7.1 billion and the weighted average and leveraged yield of 8.1%.
Stuart Rothstein: As Stuart mentioned, we had a strong quarter of loan origination, closing three new commitments, two upsizes, and one refinancing transaction.
Stuart Rothstein: ARI funded about $300 million associated with these commitments at close.
Stuart Rothstein: We had another quarter of elevated loan repayments which totaled 830 million and therefore outpaced new loan closings and add-on funding.
Stuart Rothstein: As a result, our loan portfolio balance decreased quarter over quarter.
Stuart Rothstein: However, with an origination pipeline of over $1 billion for the first half of the year, we expect our loan portfolio to grow in 2025 as we are recirculating capital from repayments into new yields.
Stuart Rothstein: We closed one loan commitment for $114 million post quarter and so far.
Stuart Rothstein: With respect to risk ratings, the weighted average risk rating of our portfolio at quarter end was 3.0 unchanged from the previous quarter end.
Stuart Rothstein: There were no asset-specific CFIL allowances recorded during the quarter and no material movements and ratings across the portfolio.
Stuart Rothstein: Our total CECL allowance was relatively flat quarter over quarter. As of December 31, it equated to $379 million which represents $2.74 per share of book value.
Moving on to the right-hand side of the balance sheet.
Stuart Rothstein: During the quarter we continued to see spread tightening across repo facilities with average spread on new repo draws in Q4 being on average 45 basis points lower compared to the weighted average cost of borrowings across our secured facilities.
Stuart Rothstein: Our debt-to-equity ratio at quarter end was 3.2 times, down from 3.5 times at September 30.
Stuart Rothstein: The company ended the quarter with over $380 million of total liquidity comprised of cash on hand, undrawn credit capacity on existing facilities and loan proceeds held by the servicer.
Stuart Rothstein: Our book value per share excluding general CECO allowance and depreciation was $12.77, a slight increase from last quarter.
Stuart Rothstein: And with that, we would like to ask the operator to open the line for questions.
Speaker Change: 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.
Speaker Change: Our first question comes from Rick Shane with J.P. Morgan. You may proceed.
Rick Shane: You are now really in a position where you've dimensionalized what you see as the big risks within the portfolio. As we think about that specific reserve and how it might translate into realized losses or transactions this year and realized losses over the next year or two, can you just give us some sense of what the cadence of that might look like so we can dial in our distributed earnings estimates?
Rick Shane: yeah look I think I think as you think about the big components of the specific reserve brick I think obviously as I mentioned in my comments
Rick Shane: If all continues at the pace it's going, we think we'll start clawing back.
Rick Shane: So I'm at a capital, excuse me, that is tied up in the 111 West 57th.
Rick Shane: project. That doesn't impact the reserve per se because what we're carrying it at is sort of our net
Rick Shane: post-preserve balance at this point but it is certainly capital that we envision being able to redeploy into performing.
Rick Shane: So I think we're optimistic that we'll be part of our 375 million or so of net outstanding. We'll start coming back to us this year and we can put that to work.
the Cincinnati.
Rick Shane: known as Liberty Center. It's up over 90% leased at this point.
Rick Shane: I think, you know, I think there's potential opportunities to try and move that forward.
Rick Shane: into the market this year and get that capital back. I think it's a later half of the year.
Rick Shane: sort of event, but those are probably the two nearest term opportunities to start putting capital to work, which is sort of second half.
Rick Shane: of this year. And then, as I mentioned in my comments, there's a lot of equity tied up in the Brooklyn REO, which realistically that asset will be
uh
and probably start taking tenants.
latter part of this year which means
Rick Shane: Assuming things go as well we'll have proof of concept on the asset and we could start thinking early part of next year about
Rick Shane: sale or refinancing to pull out a fair bit of our equity in that transaction. So it's really, you know, I would say latter part of this year heading into next year is when we should really start seeing
Rick Shane: underperforming capital slash REO start being to put start being put to work more productively.
Speaker Change: Hey, I really appreciate you swinging at that pitch and the specificity of the answer, so thank you very much.
Thank you.
Thank you.
Speaker Change: Our next question comes from Jade Romani with KVW. You may proceed.
Anastasia Mironova
Jade Romani: Thank you very much. Just a high-level question, if you could put some, you know, paint some thematics around where you're seeing interesting opportunities geographically. Seems like you're still active in Europe. Multifamily has been picking up, but if you could just talk to
Speaker Change: Maybe a bit of property type and geography, but then also like the kinds of situations you're stepping into. Are these, you know, capital structure challenged deals? Are they new acquisitions? You know, what kinds of situations are these? Thank you.
Scott, do you want to take that one?
Speaker Change: where we're refinancing a construction loan and so the transition is really just leasing up.
Speaker Change: We're seeing similar type deals within senior housing or care homes, both in the UK.
Speaker Change: and the United States. That's certainly one area we've been spending a lot of time on. You know, continuing the residential theme, you're certainly seeing interesting stuff in both student housing, as well as in certain markets, condo inventory, loans, hotels continue to be an area of focus, but really nothing is distressed. It's both acquisitions.
as well as refinancings.
Speaker Change: Stable assets or ones that are in the midst of construction And as you mentioned, you know your UK and Europe we continue to find really good interesting opportunities there as well
Anastasia Mironova
Speaker Change: And I was wondering if you could give an update on the REO hotels and the outlook there, since you didn't mention that those two D.C. and Atlanta hotels as potential 2025 monetizations.
Yeah, I think on these... Go ahead, Scott.
Scott Wiener: I was going to say DC, I think we've referenced before, continues to perform very well. It's exceeding pre-COVID levels clearly with the inauguration this year and all the activity in DC off to a very good start.
Scott Wiener: that we would potentially test the market later this year. And then Atlanta is really an asset we continue to evaluate the right business model in terms of balancing.
Speaker Change: Gary Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show!
Speaker Change: in terms of what we're targeting and things like that. And again, also just trying to raise the cash flow. So.
Speaker Change: I would say we continue to evaluate both assets in terms of an exit. We think our marks are appropriate in terms of where we have it.
Speaker Change: On the D.C. asset, we did put on asset-level financing, and so that is not debt capital for us. That's generating a nice, you know, levered return. The Atlanta asset is also generating cash flow, although below, you know, the type of return that we'd like to see on our capital.
Speaker Change: but both of them are at least contributing to income, so we're not We're not going to be a hurry up to sell so if we can get the right price on either one We would sell later this year
Thanks a lot.
Thank you.
Speaker Change: Our next question comes from Steve Delaney with Citizens J&P Securities. You may proceed.
Steve DeLaney: Good morning, everyone. Happy New Year. Good to be on with you this morning.
I wanted to talk about the portfolio.
$7.1 billion at the end of the year.
It sounds like...
Steve DeLaney: I know you have some non-earning assets in the REO, other things that you've gathered about, but it sounds like you might be slightly under levered, you know, in your, your core portfolio.
Steve DeLaney: Given what you're seeing in terms of new attractive bridge loans, could that portfolio grow over the next...
Steve DeLaney: six to 12 months, to seven and a half, eight billion. Is that...
Billion Dollars pretty easily.
Speaker Change: Yeah and Steve just like just to put a finer point on that like yeah there is an abundant supply of capital available for back leverage for us as we seek to
Speaker Change: do new deals and use leverage to get to ROEs. So to Scott's point, as we find things that are interesting, there's a chance for us to lever that equity and grow the portfolio a bit.
Speaker Change: Yes, so the banks aren't so much competing with you for bridge loans, but they're more than happy to lend.
Speaker Change: you to finance your bridge loans. Is that the way we should think about it?
Speaker Change: Yeah, there's plenty. Yes, I think whatever they might be saying about their headline sort of on balance sheet activities, they're very active behind the scenes looking to provide leverage.
There seem to be some green shoots.
Speaker Change: We heard it from you, Stuart, and in addition, let's just talk domestic, but you know, it sounds like the UK has been something really nice for you guys to tap in, but the nature of the bridge loans today versus maybe 9 to 12 months.
I've been saying since for a while there that
Speaker Change: The market, the commercial real estate market was kind of stuck.
Speaker Change: And everybody was refinancing properties, but there didn't seem to necessarily be fresh new projects with new
Speaker Change: you know, equity coming in, true real estate investors tackling new projects. Are you seeing in your bridge loans now more new business plans and new properties, or are we still in this mode of where we're moving money around?
loans around from bank to bank, but there's
Speaker Change: There's not as much financing on bridge loans of new projects as it is just the old stuff. It's curious if the animal spirits have been aroused within the real estate development and equity investor community. Thank you.
Speaker Change: coming off the sidelines, for lack of a better phrase, and starting to look for reasons to put capital to work. So there's definitely, you know, I'd say, look, absent
Speaker Change: you know, the office space, where it's generally sort of people playing for time. For lack of a better phrase, I think you are starting to see
Scott Wiener: As Scott mentioned in his remarks, whether it's data center, multifamily, industrial, you know, people looking for ways to
Scott Wiener: put capital into assets that they think work from a long-term perspective. So, not fully backed, but definitely, I would say people getting off the sidelines and recognizing that if they've got
Scott Wiener: capital that they've raised for investment, they need to deploy that capital. Scott, feel free to add some commentary.
Scott Wiener: Certainly a lot of acquisitions, but you know a lot of stuff, you know could be you know recently built new construction stuff I mean sometimes people are bringing in new investors and recapping
Scott Wiener: you're certainly seeing a lot of activity but at the same time a lot of people don't
and outside investors fell over.
Very helpful. Thank you both for your comments.
Thank you.
Speaker Change: Our next question comes from John Nicodemus with BTIG. You may proceed.
John Nicodemus: Hi, good morning everyone. Yeah, just kind of an extension of what Steve was just asking. Obviously, I've heard the phrase extended pretend a ton in recent quarters.
John Nicodemus: But kind of with that rate uncertainty to start 2025, I'm just curious, you know, sort of the instances of borrowers looking to extend into what they believe could be a more favorable rate environment down the line, regardless of what's going on with the asset underlying the loans.
John Nicodemus: So just sort of, if you're seeing much of that or just any real changes you've noticed with borrowers and how they're proceeding to start 2025, given everything that's transpired in the past couple months, it'd be really helpful.
Scott, you want to take that?
Yeah, look, I mean...
John Nicodemus: Not to say it's not going to continue, I still think there's a lot of challenges in particular in office markets that still have this way to work through, whether that be
John Nicodemus: because somebody has a long-term lease that hasn't expired yet or still people are trying to figure out what they're going to do with it, but I think people pretty have a good sense on you know on things
Great, really helpful and that's all for me. Thank you.
Speaker Change: Thank you. And as a reminder, to ask a question, please press star 11 on your telephone. Our next question comes from Harsham Nani with Green Street. You may proceed.
Thank you.
Harsham Nani: So it seemed like a couple of the highlighted transactions in 4Q were somewhat stabilized, especially maybe the retail asset in UK. Could you sort of touch on the spreads that you might see on these types of stabilized assets and how they might differ from the more transitional assets that you're typically doing?
Speaker Change: Scott, you want to talk about spreads in the market these days?
Speaker Change: Yeah, look, I mean, I think, you know, overall, you've heard from, you'll hear from us and others, certainly, you know, spreads have over the past, you know, year, 18 months that have come in, but at the same time, you know, the financing spreads have come in a lot, driven by, you know, the bank's appetite to put out warehouse, and also in the U.S., the reemergence of the CRE CLO market, where you can see those spreads have come in dramatically.
Speaker Change: I would say even with tighter loan spreads, we're still able to generate our mid-teen returns.
Speaker Change: Generally, the financing that we then get on that asset ourselves is better, either that be a higher advance rate and or, you know, a tighter spread. So generally, you know, we're working toward the same, you know, levered return, whether it be a more stable asset or a more transitional asset.
Speaker Change: But I would say generally, you know, spreads these days for what we're doing are kind of, you know, high twos to, you know, low fours over, right? And then, you know, and then they call it an upfront fee.
Anastasia Mironova
you know, get into sort of the higher risk loans.
Speaker Change: But on the other hand, you can meet your return hurdles with stabilized loans at this point in the cycle. So, how do you sort of weigh those two as you evaluate where you deploy new dollars?
Bye, Scott.
Yeah, I mean, look, we're...
Speaker Change: Right now, we don't feel we need to be pushing leverage or business plans to get to the returns that we want. We're very comfortable.
Speaker Change: There are certainly others who may need to push leverage or do more or searching kind of for a higher return or kind of more coming at it from an equity event. And there's lots of deals that we do in ARI, for example, where the senior lender and there will be Mez or preferred equity behind us.
Speaker Change: and we're very, you know, happy, you know, at our basis and getting to our, you know, to our return.
Speaker Change: Got it. And last one for me, you mentioned briefly CLOs in there and...
Speaker Change: Given sort of the less transitional assets in the new originations, could we expect ARI to be in the CLO market at some point in 2025-2026?
Speaker Change: No, I mean look we obviously always evaluate the market, you know We're an active participant both as Apollo both kind of investing in the market and actually Underwriting and creating CRE CLOs. So we're well versed in what's happening. What's going on
Speaker Change: We thankfully have some very good financing partners that we work with well who I think gives us a lot of the flexibility that we'd like to have in our warehouse loans. I think our borrowers appreciate that their information is not out in the public domain when they do a loan with us.
Speaker Change: And so reality is, you know, we can get a similar cost of funds with more flexibility and something our borrowers prefer. And also, you know,
Speaker Change: Things always come up on loans. Not necessarily bad things, but things kind of change and we like having the flexibility to do what we want and not have to go back to a bar and say, oh, we have to go talk to a servicer and do this and that. So I don't anticipate us, you know, using the CRE solo market anytime soon.
Great, thank you.
Speaker Change: Thank you. I would now like to turn the call back over to Stuart Rothstein for any closing remarks.
Speaker Change: Thank you, Operator. Thanks to those of you who are participating this morning. And as always, Hilary, Anastasia, myself, to the extent people have follow-up questions, modeling questions, we're always around. Thank you all.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.