Apollo Commercial Real Estate Finance, Inc

Good day and welcome to the Q4 2022 Apollo Commercial Real Estate Finance, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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. 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 GAAP figures in our earnings presentation, which is available in the Stockholders section of our website. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.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. Please go ahead, sir.

Thank you, operator, and good morning and thank you to those of us joining us on the Apollo Commercial Real Estate Finance fourth quarter 2022 earnings call. I am joined today by Scott Wiener, our chief investment officer, and Anastasia Maranova, our chief financial officer. The consistent credit performance of ARI's floating rate portfolio of loans produced strong operating results in 2022 as evidenced by substantial earnings growth and a well-covered common stock dividend. Our team originated over $3.7 billion of loans and grew the portfolio to $8.7 billion at year end. Notably, despite some lingering misperception, 93% of ARI's portfolio now consists of first mortgage positions. Beyond originations, ARI achieved significant milestones with respect to several focus assets, freeing up underperforming capital and redeploying it into newly originated loans underwritten to generate attractive risk-adjusted returns. Proactive steps also were taken to strengthen ARI's balance sheet, expanding and diversifying financing sources and extending the term on several facilities. As a result of these efforts, ARI continued to demonstrate the resilience and earnings power of the company's business model. 2023 begins with the real estate markets continuing to face headwinds from elevated interest rates and concern over both additional Fed rate increases and the potential for an economic recession. While historically, inflation has been a positive for in-place real estate, in the short term, the rise in rates is leading to a repricing of assets. Sellers and buyers, as well as lenders, continue to reconcile their views on value, and as a result, transaction volume has slowed. Importantly for ARI, given the robust level of loans originated over the past two years, ARI's portfolio remains well positioned to continue generating distributable earnings in excess of the common stock dividend, while taking a measured and opportunistic approach with respect to new capital deployment. As always, ARI is fortunate to benefit from Apollo's broader commercial real estate debt platform, which originated over $13 billion of loan transactions last year. Apollo remains active originating and closing transactions in the marketplace, which enables ARI to access real-time market data and information as we assess the use of the company's investable capital. While transaction velocity has slowed, the market remains open for assets to be refinanced, as evidenced by the $2.2 billion of repayments received in ARI's loan portfolio over the past year. ARI's repayments were across varied property types and geographies. In most instances, properties were refinanced as they achieved business plans. However, there were also situations in which other capital sources were willing to provide financing in order to put capital to work at attractive attachment points and yield, and ARI was the beneficiary of a full or partial pay down. Notably, ARI had several office loans either fully or partially repay totaling approximately $650 million during 2022. And as of year end, office exposure had decreased from a high of nearly 30% at the end of 2020 to just 19% of the current portfolio. That exposure was further reduced after quarter end as ARI received full repayment of a loan on a London office building and partial repayment on loans secured by office buildings in Chicago. What we have seen with respect to repayments is the importance of working with both well-capitalized, high-quality institutional sponsors and subordinate lenders. In many instances, borrowers recognize the long-term value inherent in their underlying properties and have the patience and capital to support properties until business plans are achieved and markets normalized. Shifting to the portfolio, at year end, ARI had 61 loans totaling $8.7 billion. Near quarter end, we sold the properties underlying ARI's Miami Design District loan to a sponsorship group with significant experience in the neighborhood, which freed up approximately $180 million of capital. As part of the transaction, ARI provided 60% loan-to-cost seller financing. There has also been positive operating performance at ARI's hotel in Washington, D.C. While we are still considering selling the asset, the hotel produced positive cash flow in 2022 and is rapidly approaching pre-pandemic performance levels. Work remains on the other focus assets. However, we are extremely pleased with the positive outcomes achieved this past year, which we believe highlights the strength of Apollo's asset management capabilities in addition to the ongoing focus and commitment to the preservation of capital. Turning to the right side of the balance sheet, as we look ahead to 2023, ARI's only corporate maturity is the $230 million of convertible notes coming due during the fourth quarter of the year. Similar to the convertible notes that matured in 2022, ARI will closely monitor the credit capital markets as the year progresses, and consider a capital markets transaction to repay the notes, while also at all times being prepared to repay the notes using existing liquidity if needed. Before I turn the call over to Anastasia, it is worth highlighting that ARI's current quarterly dividend run rate of $0.35 per share, the company is paying common stockholders roughly a 12% annualized yield coming off a quarter in which ARI earned 48 cents per share while trading at approximately 75% of book value with earnings supported by a portfolio consisting of 98% floating rate, predominantly senior loans. With that, I will turn the call over to Anastasia to review ARI's financial results for the quarter.

Thank you, Stuart, and good morning, everyone. ARI produced strong financial results in Q4. with distributable earnings prior to the realized losses in impairment and investment of $69.3 million, or $0.48 per share. Gap net loss available to common stockholders was $7 million, or $0.06 per diluted share of common stock. ARISE portfolio remains well-positioned for rising interest rates, as 98% of our loans are floating rate. And as of quarter end, all our U.S. and European floating rate loans were in excess of their respective floors. An additional increase of 50 basis points in the global floating rate interest benchmarks would lead to approximately a $0.09 per share increase in net interest income. Portfolio credit also remains strong, with no additions to the list of focus assets during the quarter, and a resolution of one of the largest focus assets, the Miami Design District loan, as mentioned by Stewart. The resolution of this asset freed up non-performing capital, a portion of which was immediately redeployed into seller financing. As of December 31, the weighted average risk rating of REI's loan portfolio was 3, with less than 3% of the loans in the portfolio based on principal outstanding. Risk rated 4 or 5. During the quarter, there was an increase in the general CECL allowance of $5.7 million, bringing it to 36 basis points of the loan portfolio's amortized cost basis as of December 31. The increase is attributable to a more conservative macro outlook with respect to the economy, partially offset by the impact of portfolio seasoning. Also, during the quarter, REI reported 36.5 million increase in the specific CECL allowance for the mezzanine loan secured by the for sale residential project located at 111 West 57th Street. In accordance with ARI methodology for loans that are individually assessed for specific CECL allowance, we compare the fair value of the underlying collateral to the carrying value of the loan. The value of the underlying collateral is typically determined using a cash flow forecast model. In the instance of 111 West 57th Street, cash outflows in the model comprise the expected remaining costs to complete the project, including carry costs and borings. Capital inflows are based upon net sales proceeds, driven by assumptions around the timing and pricing of future unit sales, which take into account a number of factors, including prior sales activity, recent and expected closings, overall market activity, and current buyer interest, as indicated by food traffic and broker inquiry. For accounting purposes, we then calculate the net present value, or NPV, of expected cash flows and compare the NPV to the current carrying value of RRI's outstanding loans. In our most recent analysis, the forecast model still shows that the nominal projected cash flows, free any NPV discounting, exceed RRI's fully funded basis, net of the prior $30 million reserves. However, given the more conservative view on timing and net sales proceeds on an NPV basis, we took the additional 36.5 million reserves. It is worth noting that to the extent our forecast is realized and ARI's current basis proves to be covered by nominal proceeds, any incremental reserves taken based upon the discounted cash flow analysis will be reversed over time. We will continue to provide updates on the project as there may be future differences in the nominal and discounted NPV view of the asset value, which may potentially result in further adjustments to the specific CECL reserve in the future. It is worth noting that since the refinancing of the Steinway capital structure in August of 2022, net proceeds from the sale of seven units have reduced the balance of ARI senior loan by $111 million. and the principal balance of the senior loan as of year-end was $277 million. From this point, proceeds from the future unit sales will be used to pay down the senior loan and the MSB loan on a pro rata basis, until both are fully repaid. Currently, there are two penthouse units in the tower and one unit in the historical Steinway building, expected to close within the next few months. Proceeds from the sale of these three units will further decrease the outstanding principal balance of REI's senior loan and mezzanine B loan by approximately $75 million. With respect to realized events, during the fourth quarter, REI recorded a $24.9 million realized loss in connection with the Miami Design District loan and the loan secured by a hotel property in Atlanta, Georgia. There was no impact to the book value for the year, as the realized loss represented the write-off of previous allowances. With respect to the Atlanta loan, we opted to realize the loss in the current quarter due to certain tax structure and considerations. Despite the additional reserves and realized losses taken during the quarter, area as book value per share, excluding general CISO reserves and depreciation, was $15.78 at year end. an increase of two percent over last year book value in 2022 benefited from the company's earnings in excess of the common stock dividend and the gain realized on the acquisition of the multi-family development in brooklyn known as the brook with respect to ari's borings arise in compliance with all covenants and continue to maintain strong liquidity ari ended the quarter with 232 million of total liquidity which was a combination of cash and undrawn credit capacity on existing facilities, and $1 billion of unencumbered loan assets. ERA's debt-to-equity ratio at year-end remained constant compared to the previous quarter end at 2.8. We're currently in discussions with several financial institutions to further expand and diversify our borrowing relationships. And with that, we would like to open the line for questions. Operator, please go ahead.