Apollo Commercial Real Estate Finance, Inc

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'll 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 joining us on the Apollo Commercial Real Estate Finance second quarter 2023 earnings call. As usual, I am joined today by Chief Investment Officer Scott Wiener and Anastasia Maranova, ARI's Chief Financial Officer. ARI had another consistent quarter of distributable earnings prior to net realized losses on investments comfortably above the common stock dividend driven by higher base rate tailwinds in ARI's $8.3 billion floating rate loan portfolio. Over the past 12 months, the weighted average yield of the company's loan portfolio has increased approximately 350 basis points. Despite ARI's solid performance, the real estate market continues to go through a period of recalibration highlighted by the prevailing negative sentiment around the asset class. Notwithstanding the sentiment, property-level fundamentals across most property types remain stable. However, concerns with respect to refinancing risk and the impact of a potential economic slowdown persist, creating differences of opinion on valuations between buyers, sellers, owners, and lenders. As a result, transaction volumes continue to be muted amidst ongoing price discoveries. Within ARI's loan portfolio, there were several positive events that occurred during the quarter. The borrower on ARI's largest office construction loan commitment signed a letter of intent with a global financial institution for a 20-year lease for the entire building, significantly de-risking the transaction. As a reminder, only 18% of ARI's portfolio is comprised of loans secured by office properties. with approximately 60% secured by properties in Western Europe. Beyond the transaction referenced above, which represents 13% of ARI's office exposure, partial repayments totaling approximately $125 million have been received or are in process across another five office loans, encompassing situations whereby the borrowers are paying down between 15 and 20% of the outstanding loan balance and renewing guarantees for carry costs and future leasing costs in exchange for a short period of extended maturity. Year to date, ARI has received $595 million of full or partial loan repayments, and there is an additional $300 million that has or expected to occur during Q3. Elsewhere in the portfolio, the Mayflower Hotel continued to have strong operating performance with net cash flow up significantly since ARI took ownership and now exceeding pre-pandemic levels. ARI also received a $104 million partial pay down on the loan secured by a portfolio of parking garage in connection with the sale and release of certain collateral. And subsequent to quarter end, ARI received full repayment from the $20 million mezzanine loan secured by the Las Vegas Renaissance Hotel, which had been a risk-rated for loan. In general, ARI's borrowers remain engaged on asset management issues. An ongoing dialogue is constructive and focused on borrowers injecting additional equity into transactions in exchange for extension of term. Turning to the Steinway project, this quarter the decision was made to put all of ARI's loans secured by the asset on non-accrual status. Year to date, through the end of the second quarter, unit sales reduced ARI's exposure by approximately $64 million, with a further reduction of $9 million occurring from a unit sale early in the third quarter. There is an additional unit under contract that is expected to close in the third quarter, which will further reduce ARI's exposure by approximately $40 million. While there has been a modest pickup in foot traffic and buyer interest resulting in some active negotiations on a handful of units, the velocity of unit sales remains behind expectations. Shifting to the right side of our balance sheet, ARI continues to maintain robust liquidity and has access to additional capital from the company's various secured financing facilities. ARI's lenders remain actively engaged in the sector with ongoing dialogue around in-place or potential new financing. ARI's continues to diversify the company's lender base and expand sources of capital, having entered into a new secured borrowing facility during the quarter with a new counterparty. Lastly, in the second quarter, ARI repurchased an additional $37 million of the coming due convertible notes and an additional $10 million post-quarter end, reducing the outstanding balance to $176 million. As we look to the remainder of 2023, ARI is well positioned with a portfolio that continues to generate stable distributable earnings while maintaining excess liquidity. We continue to see bright spots across the portfolio and, importantly, meaningful borrower engagement. 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 another consistent quarter of financial results in Q2. With distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt, of $65.8 million, or $0.46 per share. We declared a common stock dividend of $0.35 per share, the level consistently maintained over the course of the last 13 quarters. This translates to a dividend coverage ratio of 131% and a dividend yield of 12.4% as of June 30. Gap net loss was $86.5 million, or $0.62 per diluted share of common stock. ARI's portfolio ended the quarter with an outstanding principal balance of $8.6 billion, with a weighted average unlevered yield of 8.6%. During the quarter, ARI funded $131 million of add-on fundings from previously closed loans, and received $243 million in loan repayments, including a $60 million full repayment from a loan secured by a hotel in Phoenix, Arizona. During the quarter, there was an increase in the general CECL allowance of $2.1 million, bringing it to 46 basis points of the loan portfolio's amortized cost basis as of June 30. The increase is attributable to a more conservative macroeconomic outlook and changes in remaining expected term for some of our loans. This increase was partially offset by the impact of portfolio seasoning as well as loan prepayments. With respect to the Steinway building, during the quarter, we recorded a $126 million specific CECL allowance on the junior mezzanine A loan and downgraded the risk rating to a five. We also increased the previously recorded specific CECL allowance on the junior mezzanine B loan by $15.5 million, resulting in the full allowance against this position. We therefore rolled off the junior mezzanine B loan, realizing a loss of $82 million, which was beneficial to us from a tax planning perspective. ARI's book value per share excluding general CECL reserves and depreciation, was $14.80, representing a 6% decrease from previous quarter end. With respect to our borrowings, ARI is in compliance with all covenants and continues to maintain strong liquidity. As Stuart mentioned, during the quarter, ARI entered into a new $130 million secured credit facility, with a counterparty that is new to us, further expanding our capital sources. ARI ended the quarter with 407 million of total liquidity, which was a combination of cash and undrawn credit capacity on existing facilities. Our debt-to-equity ratio at quarter end was 2.9 times, and the company had 857 million of unencumbered real estate assets. And with that, we would like to open the line to questions. Operator, please go ahead.