Q2 2025 Apollo Commercial Real Estate Finance Inc Earnings Call

Projections, unless required by law to obtain copies of our latest SEC. Filings, please visit our website at www.apolloretailportal.com.

Thank you, operator. Good morning, and thank you for joining us on the Apollo commercial real estate. Finance, second quarter, 2025 earnings call. I'm joined today as usual by Scott weiner, our chief investment officer and Anastasia. Mironova, our Chief Financial Officer

Ari delivered strong performance in the second quarter of 2025 marked by significant progress, across originations portfolio, management and balance sheet optimization

Velocity and Loan, originations increased as we committed to 1.4 billion dollars of new loans. During the quarter quickly redeploying Capital. We have we have received back from both repayments and Eris Focus assets.

Year to date arri is committed. 2 billion dollars to new loans. Repayments in the portfolio, continue to track expectations with borrowers. Making progress on their business loans, having multiple options for refinancing as evidenced. By the second quarter activity, we are confident in our ability to re redeploy this cash.

Capital into newly originated loans and continue to identify attractive opportunities, across both the United States and Western Europe.

Ari continues to benefit from the breadth of Apollo's, real estate credit platform and the team's robust originations pipeline to to access transaction flow that matches Capital received from repayments eliminating cash drag and enabling arri to build the Diversified loan portfolio.

3 of the loans closed in the second quarter were secured by Residential Properties. Continuing heiress's thematic overweight to a sector benefiting from strong, secular Tailwinds,

loans on Residential Properties. Now comprise approximately 25% of Ari's portfolio. Representing Ari's largest property. Type concentration importantly, approximately 2/3 of the residential loans in Ari's portfolio. Have originated over the past 24 months benefiting from evaluation reset and enhanced credit quality.

In Europe, which represents approximately 50% of Ari's portfolio and 18% of originations year to date. The market is gaining momentum, benefiting from recent interest rate cuts that have re-energized acquisition activity.

Our local team is capitalizing on this resurgence with a healthy pipeline across property types, and we continue to believe Eros, international diversification remains a strategic advantage.

Turning now to the loan portfolio and a progress update on our Focus assets as quarter end the carrying value of Ari's portfolio, had increased 12% from the prior quarter and was comprised of 53 loans, totaling approximately 8.6 billion dollars, no additional assets, specific Cecil allowances were recorded during the quarter.

We saw continued sales momentum, at 111 West 57th Street with 9 units closed during the quarter generating. A 170 million in proceeds, 141 million of which reduced ai's basis. Following the full repayment of the senior Loan in April

Is now senior in the capital stack and all future proceeds will go directly to repaying its exposure.

At the brook, Ari's multi family development in Brooklyn, the leasing office opened in June and tenant move in began this month. Marking an important milestone in the assets progress. Lastly, in Cincinnati, the marketing process for Liberty Center has commenced. As we pursue exiting the asset we remain intensely focused on executing our value.

The maximization plans for our Focus assets, which is integral to our strategy of converting underperforming Capital into higher yielding reinvestment opportunities.

Excuse me.

We expect this Capital rotation will continue to have a positive impact on Ari's earnings in the latter half of 2025 and throughout 2026.

Execution we had in connection with our with the refinancing of our outstanding Term Loan B facilities in the past quarter in June, we completed a new 5-year floating rate, 750 million Term Loan B, which repaid, our existing 2-term loan BS, which had pending maturities in 2026 and 2028 respectively, the new loan Bears interest at Silver, plus 3, and a quarter percent and enabled. Ari to term out liabilities, at attractive, pricing with a well, Diversified roster of high quality investors highlighting the Market's confidence in Ari.

Following the refinancing Ari's next corporate. Debt, maturity is now not until June of 2029.

With that, I will turn the call over to Anastasia to review ai's Financial results for the year.

Thank you, Stuart and good morning, everyone.

A right reported, distributable earnings of 36 million for 26 cents per share of common stock. For the first quarter was gaap. Net income of 18 million or 12 cents per diluted share of common stock.

Distributable earnings for the second quarter of 2025 representing 8% increase over the first quarter and provide dividend coverage of about 104 times.

Our loan portfolio, ended the quarter with a caring value of 8.6 billion up from 7.7 billion at the end of q1.

The weighted average on average yield of our portfolio was 7.8%.

As Stuart mentioned, we had a strong quarter of loan origination

Totaling 1.4 billion in commitments.

We also completed an additional $394 million in add-on funding for previously closed loans.

Here to date. AI has originated over 2 billion of new commitments and completed the total of 467 million of fed on fundings for previously closed loans.

Repayments and sales totaled, 631 million during the quarter.

Importantly, the continued redeployment of 41% of our loan portfolio at quarter end was originated post-2022. This followed the rapid rise in interest rates and the subsequent reset in property valuations.

With respect to risk ratings, the weighted average risk rating of the portfolio at quarter end is 3.0, unchanged from the previous quarter end.

There were no efforts specific, Cecil allowances recorded during the quarter and no, downgrades in Risk creating across the portfolio.

I will generally still allowance increase this quarter by 3.1 million reflecting growth of the loan portfolio from the previous quarter end.

Total allowance and percentage points of the loan portfolio advertised cost. Basis is down slightly quarter of a quarter from 475 basis points to 2 to 40029 days points.

Subsequent quarter ends.

Apollo and the Commonwealth of Massachusetts reached a settlement agreement in which the Commonwealth agreed to pay us and other Apollo call lenders, and additional 444 million as compensation for the previous taken of the hospital by eminent domain.

A r share of these proceeds is approximately 18 million.

The payment is expected to be received before the end of August.

And the lawsuit will be dismissed with prejudice.

With all related claims released.

These proceeds will result in book value per share pickup for AI in the following quarter and will be recycled into new loan originations, leading to further upside in earnings.

Moving on to the right hand side of the balance sheet.

During the quarter, we will very active with optimizing our liabilities.

In addition to the refinancing of our term loans that Stuart mentioned, we closed three new secured credit facilities and upsized an existing credit facility, which provided an additional $1.4 billion of aggregate borrowing capacity.

Liquidity in the secured borrowing market continues to be plentiful as lenders get favorable capital treatment for this facility, and the main instances prefer them over directly oriented properties.

The company entered the quarter with 2008 million of total liquidity.

comprised of cash on hand, committed and drawn, credit capacity, on existing facilities and Loan proceeds held by the services,

General Cecil allowance and depreciation was $12.69.

A slide decreased from last quarter.

With that, I would like to turn the call back to sewer trusting. Thank you Anastasia, before we turn the call back to the operator, to start with questions. I just want to highlight that those of us at Apollo, our thoughts and prayers are with our friends and colleagues. At Blackstone after the senseless tragedy that took place there, this past Monday.

Um, we have heavy hearts, and I'm sure many of you on the call do as well. With that, I will turn the call over to the operator.

Thank you as a reminder, to ask a question. Please press star, 1, 1 1 on your telephone and wait for your name, to be announced to withdraw your question. Please press star, 1 1 1 again.

Our first question comes from Doug Harter with UBS. You may proceed.

Uh thanks. Um. Hey, how are you guys today? Um,

Just hoping we could get a little bit um, into more of the kind of the the theme of being able to to kind of recycle your, your Capital. You know, it seems like 1 11157 is, is progressing. Um, you know, how do you think about the Brooke now that you're starting to lease, you know what, it could be a time frame of

Um, you know, a I guess starting to get some cash flow from that asset and and be being able to to kind of move on from that and and and and and move it into targeted assets.

Yeah. Look, I think at a high level and I'll just sort of refresh for everybody's memory. The brook is, you know, roughly 500 plus units of which 70% are market rate, 30% are affordable. Um, we have started Leasing

on the market rate side of things is the affordable needs to go through a, um, process Visa v. Um, a lottery and qualifications, Etc. I think the hope for us Doug is that we make, uh, meaningful progress on the leasing side between now and the end of the year. I think at this point in, in just the first month where sort of, you know, approaching 50% 15% least on the market rate side of things. Um, I think with progress made on the leasing side. Uh, the asset will turn, you know, modestly, cash flow positive, um, in the early part of next year and then the real Capital, um, event is whether we decide to bring it a partner or sell the asset outright sometime, probably between first and second quarter of next year.

And as a reminder, it's roughly, you know, just shy of $300 million worth of capital today, that is effectively earning Zero from our perspective.

Got it. And, and in your answer, you know, when you kind of said the decision of selling it outright or bringing in a partner, you know, is is it a consideration to kind of retain the asset, you know, and have, you know, kind of a long, long duration, cash flows or, you know, is the ultimate plan to, to kind of monetize and move on.

The ultimate plan is to monetize and move on. I think the um halfway step of bringing in a partner would only be relevant to the you know extent. We thought the market fully wasn't

providing value to us while we continue to lease up and stabilize.

Okay, appreciate the answer. Thank you story.

Thank you.

Our next question comes from Jade, Romani with KBW. You may proceed.

Thank you very much. Um, a follow on to Doug's question on the brook. I believe that there's some land Parcels that are also

Either owned and controlled or there's some optionality around that. Can you give some color and if this could be, you know, material upside for shareholders

Yeah, there is one small parcel, um, that we refer to for now as the Western parcel. If I've got my geography correct, um, and in between the brook and the Western parcel, there's actually, um,

A building that we don't know in between us that sits on two parcels. Um,

We are in discussion too early to know what will happen with the uh ownership of those Parcels Jade around either.

Um acquiring are rights or the or the assets outright, um, that would could potentially greatly increase.

Uh, figure it out. I think there's definitely, you know.

Upside to the arri shareholders but I would say too early to predict the likelihood of that right now, but discussions are ongoing.

Um, thanks very much on 111 West 57th. Where do you expect the uh you know basis advertised cost in the loan to be at year end or maybe early uh say 1 cube of next year?

Uh, get sold at this point. There's

Um, 11 units left. Um, so you know there's definitely activity going on. Um,

with various, um,

Potential buyers, our net basis today, from the carrying value perspective to be about 270 million. Um, we think we will, um, chip away at that between now and the end of the year, given dialogue taking place. But I don't want to sort of give you a specific number of percent.

Okay.

And one overarching question has to do with the capital structure and leverage of the company. You’re leveraging around 4 times today, but that includes significant non-earning assets. So, you know, do you plan to maintain leverage at the current level and therefore convert these assets into earning assets and drive dividend growth? Or in that process, do you anticipate reducing leverage?

I mean in the future, you know, keep in mind that even though um the brook is a non-earning asset, it does have a construction loan against it. So you know that is an asset that we can get Capital back and put to work.

Pretty meaningfully, without dramatically changing leverage levels. But um, I think our view is, um, there's enough capacity in the company to get back. The capital, we get back and we deploy it. All at leveraged roles that are very consistent with, where we've been deploying Capital to date.

And drive and drive, as you've seen it seen various estimates from us of of meaningful earnings growth, you know, someone in the neighborhood.

Uh you know, 30 to 40% on where we are. If you assume it, all comes back and we're able to redeploy it effectively.

Thank you very much.

Thank you.

Our next question comes from Harsh, MNI with Green Street. You may proceed.

Thank you. Uh, maybe 1 on portfolio size, right? Of course it's it's grown. Uh, can we expect it to continue to grow? How would you thinking through that? Uh,

In the new to medium tone.

I looked I we never predict the actual size, but I think if you assume we we are able to continue to work on Focus assets. Pull Capital back which effectively is equity and then lead deploy the equity at 3 to 4. Turns of Leverage you're going to see continued growth in the portfolio size, right? Just for reference at 1 point you know with effectively the same capital-based. The portfolio is north of 10 billion dollars. I'm not saying that's the number, but

Data.

For each dollar of capital, I'm able to bring back from a focus asset or under-earning asset. You know, I could put it into a new loan that, headline-wise, will be 3 to 4 turns levered when we get it done.

That's helpful. Uh, and so then that sort of brings up the question of maybe funding some of this growth and you touched on it a little bit. Uh, but it seems like a lot of the equity that is coming back to your point is already somewhat levered, uh, even from the REO assets so is it probably fair to assume that um incremental growth from here will continue to be driven by Leverage?

Uh look I think it'll be um you know not all of the assets are um are levered today. Certainly 1 1 111 West 57th is not levered today. Liberty Center is um you know under levered relative to what a uh loan asset would be. So I think it will be both a redeployment of equity and then sort of typical leverage against that Equity relative to what we do when we

Got it. Thank you.

Thank you.

Our next question comes from John Nicodemus, with btig, you may proceed.

Hello, and good morning.

We've seen more activity in the CRA transaction Market uh in recent weeks. Something I'm sure your team has been pleased to see what are your expectations for commercial real estate transaction Market through the end of this year and how is that affecting your plans for Ari looking forward? Thanks.

How are you? Look we we agree with the premise of your question. Where is activity is definitely picked up and we are seeing it both on the credit side of our real estate business as well as, um, the areas where we're active on the equity side of our real estate business. Um, yeah. Good news is there's more Capital, more deals, uh, more more deal flow, more things to look at, like the challenge, like anything is, there's no dirt of capital in the world right now. Um, you know, I think, you know, a lot of confidence in our

Team both here in the US and in Europe to continue to find things that work for Ari. And what Ari is attempting to achieve from a leopard Roe perspective. I think we are

Um confident that the that the market will continue to offer us enough to look at that, we will be able to find things that fit nicely with.

Um, both returned as well as other considerations for Ari, whether it be geography, property type Etc. Um, but we expect the market to be pretty robust between now and the end of the year just given

You know what we're seeing in terms of deal flow pipeline and level of activity today.

Great, really appreciate that. Stuart

And the other one for me: we've seen some of your peers move to extend the duration of their portfolios, whether that's through investing in triple net real estate or adding security to their portfolio. I was just curious if that's something that your team at Apollo is monitoring or looking to add in the near to medium term. Thank you.

yeah, I would, I would, I would describe it as best as as monitoring, or as a constant source of dialogue as as a firm we've got

Capabilities both in the net lease space and in the securities side. I think the...

this is now a 16-year debate between Scott and I think the challenge we always face is if we are going to do something that quote unquote, broadens, the strategy, I think there's a desire to do it in a

Scale and size such that it's meaningful. And that we're not just talking about sort of a 1-off

Deal. Um, you know, obviously life would be.

Easier in some respects if you could extend duration but it needs to make sense from a credit and return perspective. So, on the radar screen, give an existing capabilities inside of Apollo. Definitely something that we talk about episodically. Um, but I would say sitting here today, no, meaningful shift in strategy expected.

Thanks so much. Appreciate the time.

Thank you, and as a reminder, to ask a question. Please press star, 1 1, 1 on your telephone. Our next question comes from Rick, Shane with JP Morgan. You may proceed

Hey Stuart, thanks for taking my questions. This morning and I apologize if I this redundant, um, we're bouncing around between a lot of calls this morning. Um, yeah, from from a detailed perspective, um, the way we look at the provision expense this quarter is it appears to be entirely growth driven, uh, related to

The uh increase in earning assets and it looks like it's probably uh the general Reserve was probably put on in the mid 30s to low 40s. In terms of basis points on a reserve rate, um is that correct? And is that the way we should be modeling? Uh, any further expansion of earning Assets in terms of growth going forward,

Hey, Ari. This is an

Yes, uh, this is correct. Uh, so you're correct in saying that the growth in general C. So quarter of a quarter is largely driven by the growth in the loan portfolio.

And no changes to your macro assumptions.

No.

Commercial real estate market is kind of at Cross currents right now. Um, and it's probably, you know,

There are.

Uh, excuse me geographies. There are um loan types that are improving. There are some that remain challenged. Um, I'm curious as you sort of approach, you know, the same cross-currents of moving from being purely defensive to um, putting a foot forward. How you're looking at those opportunities where you're going to continue to be defensive, are there categories that have been out of favor? You want to weigh back into uh where do you see the best opportunities?

Yeah.

Continue to be very constructive on all forms of of housing. Um, and so for us, that would include, um, senior housing private pay where we've been active, uh, in the UK and also have a few deals in the US, we're working on student housing, you know, hotels. Um, you know, have kind of always been a part of our portfolio, but there's times we've been more active and not and I think this is a time that certain types of hotels, we're finding interesting.

You know, on the office Front, certainly transaction, activity, you know, has picked up, and we're starting to see stuff. Um, I think, you know, for now, not really looking to do that in AI, you know, we're doing that Elsewhere on the platform. I think they're still continues to be a very large focus on the percentage of office in our portfolio and and and, you know, based on our our long-term lease deal in London doesn't seem that people differentiate, you know, uh, different quality of office deals. I think for that, you know, we'll probably not be. Do you know, won't be seeing Ari doing office deals. Um, and then with, we we continue to find deals in both uh, UK Europe and US of Interest. So it's really just continuing, you know, continuing, you know what what what we what we've been uh, you know, we've been doing um, I don't see us really doing uh, you know, ground up development ex you know, uh, long-term lease data centers. Um, I think the construction, you know, there are interesting deals but it's it's challenging to leverage. Uh, and also, you know, put the money out whereas I think

Some of the hyperscale deals that we've done, uh, you know, are interesting, and we're able to, you know, work with our bank partners and put on a creative financing. So I think that's the only area where you'll see us doing, um, Construction in AI.

Um, hey Scott, thank you for the insight and for uh really you know, sort of swinging at that pitch for us, we appreciate it.

Thank you.

Our next question comes from Jade, Romani with KBW. You may proceed.

Thank you for.

With prevent the dividend from being increased and do you also expect any change to the longstanding policy, uh, dividend policy of the company to generally pay out. Uh, the lines share of earnings as dividend.

I mean, look, the short answer Jade is is there's nothing material from an nol perspective. That would

Quote, unquote, give us tax protection to Rising earnings. Um, and I think

Yeah. The short answer to the second part of your question is that, um, yes, the expectation is that the goal continues to be to give, you know,

Give our investors, you know, as much of earnings as possible in the form of a dividend. Um,

Like always, we'll look at things on a quarter-by-quarter basis. We'll also try to take a somewhat forward-looking approach.

Approach. As I think, you know, our desire is to avoid paying special dividends, try and keep things somewhat stable from a quarterly perspective.

Uh perspective not lose a lot of sleep. If things bounce around a penny or too high or a penny too low in any given quarter um and lower a you know, reviewed policy with the board on a quarterly uh basis. So um yeah I think your your question is is a good 1 and I think um, you know, we expect to to handle things going forward the way we handle them in the past.

The class.

Yeah, no, I think that's exactly. I mean, I think, you know, you know, certainly not every Market, but most markets, certainly in the US and UK, I, I think, you know, have a, a supply demand, you know, imbalance, clearly, uh, the the demographic as you said continues to grow. Um, you know, we're very much focused on on private pay. So, these are people who, who can afford and are choosing um, to, to live here. I would say it's also on from an Acuity basis, much more focused on the, on the independent living, maybe a little bit of Assisted Living. Um but really not this is not skilled nursing or you know, Memory Care. Um these are just older people who want to, you know, enjoy their their golden years if you will and be with other people, uh, and we're, you know, doing it, you know, generally, you know, more new newer developed, um, you know, properties and and stuff that have all the amenities and things. So, again, we think it's an extension of our of our housing, uh, thesis

Thanks very much.

Thanks, Jake.

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

Uh, thank you all for participating today. As always, it's myself, Anastasia Mironova. You're available if people have follow-up questions after the call, and I hope everybody enjoys the rest of the summer. Thank you.

Thank you, this concludes the conference. Thank you for your participation. You may now disconnect