Apollo Commercial Real Estate Finance, Inc

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 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.apollocreft.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.

Thank you, operator, and good morning, and thank you to those of us for joining us on the Apollo Commercial Real Estate Finance first quarter 2023 earnings call. As usual, I am joined by Scott Wiener, our chief investment officer, and Anastasia Maranova, our chief financial officer. Despite the steady stream of negative headlines concerning commercial real estate, ARI's predominantly senior floating rate loan portfolio produced another quarter of distributable earnings comfortably in excess of the common stock dividend with generally stable credit performance across the portfolio. ARI continues to benefit from higher base rates as 99% of the $8.5 billion portfolio consists of floating rate loans, which has resulted in a 360 basis point increase in weighted average yield on the portfolio over the past 12 months. Higher base rates combined with ARI's robust pace of loan origination in 2021 and the first half of 2022 has put ARI in a position to take a conservative approach to additional capital deployment while still comfortably covering the quarterly dividends to our stockholders. Before I get into more details on ARI's quarterly performance, I want to take a minute to discuss the current market environment. Throughout the first quarter, interest rates have remained elevated and uncertainty around both the trajectory of the economy and future Fed action has persisted. As a result, overall real estate transaction activity was limited. The regional banking crisis only exacerbated market fears with respect to commercial real estate liquidity, availability of financing, and asset value. While there will be pockets of distress, particularly in certain subsectors of the office market. And it will take time for there to be clarity on the trough and then ultimate recovery of real estate values through this cycle. We believe the CRE market is much better positioned today than it was leading up to the GFC. There is far less leverage in the overall commercial real estate financing ecosystem than there was in 2007. Since 2009, leverage levels generally have remained within the 60 to 70% loan to value range, and key market participants, notably the large money center banks, are much better capitalized. In addition, while still relevant, the overall size and the relative market share of the securitization market have declined, and a larger share of real estate financing has been provided by balance sheet lenders. There is also a record level of dry powder in a variety of real estate equity and credit vehicles that views the current market opportunistically, and that dry powder will ultimately be deployed. Lastly, two quick points to note. First, apart from office assets, underlying operating performance for commercial real estate generally remains positive. While the rate of occupancy or net cash flow increase may be slowing, rents continue to trend higher and occupancy levels remain stable. Also, the combination of elevated inflation and tighter financing markets clearly is impacting the supply of new real estate products, which over time should benefit both the performance and value of in-place assets. With that somewhat lengthy backdrop in mind, we continue to take a cautious approach to capital deployment on behalf of ARI, and are focused on increasing liquidity through expanding existing financing relationships, putting new facilities in place, and selectively selling loans. As I previously mentioned, higher floating rate base rates position ARI to comfortably cover its quarterly dividend while building more financial flexibility into the balance sheet. During the quarter, ARI finalized a new $300 million asset-backed facility with Banco Santander, as well as $170 million revolving credit facility led by Bank of America. Despite elevated attention to the pullback in real estate lending by regional banks, ARI's key secured lending counterparties very much remain open for business and are continuing to provide additional financing for ARI's assets. These financial institutions have been the beneficiaries of an inflow of deposits over the last month, and remain committed to commercial real estate lending. Furthermore, ARI has not had any margin calls or requests for deleveraging from any of its counterparties since the failure of Silicon Valley Bank. Another avenue for both generating liquidity and reducing certain exposures for ARI has been to opportunistically sell loans. During the quarter, ARI sold three loans and a portion of another loan, all secured by European properties with aggregate commitments of approximately $237 million, $141 million of which was previously, was already funded to another Apollo managed entity at 99% of PAR. In addition to reducing ARI's European exposure, these sales also reduced future funding obligations of approximately $100 million. Shifting to the portfolio, ARI remains focused on proactive asset management and working with borrowers on pay downs and extensions where appropriate. As a reminder, ARI's borrowers are generally comprised of sophisticated, well-capitalized real estate operators who typically have significant equity invested in the underlying properties. ARI had several office loans either partially or fully repaid during the quarter, and overall office exposure stood at only 18% of the loan portfolio at quarter end. More than half of ARI's current loan exposure is in Europe, where there are higher rates of office occupancy, and work from home is having less of an impact on office usage. The two largest US office loans in the portfolio have capital subordinate to ARI. And in the case of the Long Island City office loan, ARI received a partial pay down from the subordinate capital provider during the quarter in exchange for an extension in term. With respect to the balance of ARI's near-term maturity, we are in dialogue with all borrowers and expect full or partial repayment on these loans. Many of the loans coming due this year are secured by hotel assets that have performed their underwritten expectations. ARI recently received full repayment on one such hotel totaling $60 million. Let me also clarify something I just said, which is in any instance where we expect to get a partial pay down, we expect it to be a negotiated transaction where someone is partially paying us down and further committing to the asset in exchange for additional time on their loan. As we look ahead to the remainder of 2023, ARI is well positioned on multiple fronts. The portfolio continues to distribute stable, distributable earnings, even while maintaining excess liquidity on the balance sheet. While ARI's transaction volume is expected to slow this year, Apollo remains active in the commercial real estate lending market on behalf of other managed capital, providing ARI insight into market transaction activity and pricing. Continued proactive steps have been taken to strengthen the balance sheet and diversify funding sources. And ARI's only near-term corporate maturity is the $223 million of convertible notes coming due during the fourth quarter of this year, which we have already indicated we are prepared to pay off in cash as part of our overall forecast model for the year. Before I turn the call over to Anastasia, it is worth highlighting that at ARI's current quarterly dividend run rate of 35 cents per share, the company is paying common stockholders a 15-plus percent annualized dividend yield, coming off a quarter in which ARI earned 51 cents per share while trading at approximately 60% of book value, with earnings supported by a portfolio consisting of 99% 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 Q1, with distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt of $74 million, or $0.51 per share. Gap net income available to common stockholders was $46 million, or $0.32 per diluted share of common stock. The drivers for the delta that were net income and distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt include said realized events, the increase in our general CECL reserve, equity-based compensation expense, unrealized loss on the interest rate cap, and depreciation on real estate owned, all of which represent add-backs for distributable earnings, and each contributing about $0.03 per share. It is worth noting that depreciation expense for this quarter includes catch-up depreciation on our DC hotel. For the period in which the hotel was classified as real estate owned held for sale, up to the point when it was reclassified back to real estate-owned helpful investments. Additionally, distributable earnings include the forward points benefit from our foreign currency contracts. As a reminder, we hedge our exposure to foreign currency risk on a net equity basis by entering into forward currency contracts for all foreign currency-nominated transactions at closing. Forward point impact during the quarter represented 5.6 million or additional 4 cents per share benefit for our distributable earnings. Outside of the 2 cents per share or forward points associated with the unwinded of the hedges related to the European loan sales that Stuart discussed, there were no one-time events included in our distributable earnings this quarter. However, I want to highlight that ARI currently has an interest rate cap in place for our 2026 term loan B, which is set to expire in the second quarter of this year. The CAP had flatlined the rate of the term loan B at 3.5%, fixing the base rate at three quarters of a percent. Upon expiration in June of this year, it is anticipated that ARI's interest expense will increase by approximately 20 million on an annualized basis, based upon the forward curve through the end of the year. Even with the expiration of the cap, ARI still will comfortably cover the common stock dividend this year. Portfolio credit was stable this quarter, with no additional asset-specific CECL reserves taken. ARI recognized a $4.8 million loss in connection with the foreclosure on a loan secured by a hotel asset located in Atlanta, Georgia. The hotel is now carried on our balance sheet under real estate owned at a basis of $75 million. We currently are exploring several options for the hotel, including a potential sale. I would also like to point out that our two hotel properties, which are now both classified as real estate owned health for investment, are projected to generate meaningful positive cash flow for the remainder of the year, which would further benefit our distributable earnings. During the quarter, there was an increase in the general CECL allowance of $4.4 million, bringing it to 42 basis points of the loan portfolio's amortized cost basis as of March 31. The increase is attributable to a more conservative macroeconomic outlook, partially offset by the impact of portfolio seasoning, as well as loan prepayments and sales. ARI's book value per share, excluding general CECL reserves and depreciation, was $15.72 at quarter end. an increase of about 5% as compared to March 31, 2022. Book value continues to benefit from the company's earnings in excess of the common stock dividend. With respect to our borrowings, ARI is in compliance with all covenants and continues to maintain strong liquidity, bolstered both by proceeds generated from the loan sales as well as the new facilities Stuart previously mentioned. ARI ended the quarter with $357 million of total liquidity, which was a combination of cash and undrawn capacity on existing facilities. ARI's debt-to-equity ratio at quarter end remained constant compared to the previous quarter end at 2.8. During the quarter, ARI opportunistically repurchased $7 million of our October 2023 convertible notes at 97% of par, generating return on equity of about 11%. And with that, we'd like to open the line for questions. Operator, please go ahead.