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.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.

Thank you, Operator, and good morning, and thank you to those of you joining us on the Apollo Commercial Real Estate Finance third quarter 2024 earnings call. I am joined today by Scott Wiener, our Chief Investment Officer, and Anastasia Maranova, our Chief Financial Officer. Before I speak about ARI's results this quarter, I wanted to provide a brief market update and reiterate where we have been focusing our efforts with respect to ARI. Overall, the real estate market is showing signs of renewal with the benefit of the recent Fed interest rate cut leading to increased transaction volume and the continued strength of the economy providing additional confidence to investors, which is being reflected in the marketplace. As such, we have seen a notable uptick in financing opportunities. While spreads have tightened from the wider level seen in 2023, the lending environment remains favorable with opportunities to deploy capital into loans secured by properties at reset valuations with lower detachment points generating attractive risk-adjusted returns. This has enabled ARI to be on offense. With the $1.7 billion of loan repayments we have received year-to-date, we have committed to over $1.1 billion of new vintage loans over the past nine months in addition to deploying over $500 million of capital into fundings of previously closed loans. Beyond investing capital into new transactions, we remain highly focused on proactive asset management and seeking resolutions on our focus loans with the ultimate goal of maximizing recovery value and converting underperforming capital into higher return on invested equity opportunities. While we still have work to do, We have defined pathways for our remaining non-performing loans and our REO assets, and we are actively pursuing resolutions. Shifting to the senior loans secured by a portfolio of hospitals, as we indicated on our prior earnings call, the operator of the hospitals filed for Chapter 11 bankruptcy in May 2024. The loan remained current through the end of the third quarter. However, since ARI had placed the loan on non-accrual status, debt service payments received in the third quarter were used to reduce the carrying value. Before seeking to recover value from the real estate, ARI and the additional Apollo affiliated co-lenders received a guaranteed payment from the borrowers, which was used to partially reduce the outstanding balance of the loan. Subsequently, five of the eight hospitals were sold to new operators with ARI and the Apollo co-lenders receiving the proceeds from the sale. Two of the eight hospitals were closed, a decision made by the Commonwealth of Massachusetts, and ARI and the Apollo co-lenders are working through plans to maximize the recovery value on the underlying real estate. Lastly, the largest hospital in the portfolio was taken by the Commonwealth of Massachusetts through eminent domains. ARI and the Apollo co-lenders are in process of using available legal remedies to challenge the eminent domain action in the Massachusetts court system. Pending the outcome of that legal process, the lenders have reserved all rights available to challenge the eminent domain valuation if needed, and if successful, ARI anticipates it could recover additional value. Turning now to the portfolio, at quarter end, ARI's portfolio was comprised of 45 loans totaling $7.8 billion. During the quarter, there was continued sales momentum at 111 West 57th Street with four additional units going under contract and a few additional contracts out for signature. Assuming all of these contracts under contract close, We expect net proceeds of approximately $55 million in the next few months, which would reduce the outstanding balance on the senior loan to approximately $60 million. In addition, during the quarter, the retail component at the building was leased to the British auction house Bonhams, which is expected to open in the second half of 2025. Another achievement to note in the REO portfolio is at the 51-story multifamily tower we are developing in Brooklyn, which topped out during the quarter, and we continue to make good progress on construction. Before I turn the call over to Anastasia, I want to address ARI's dividend. As I have stated previously, when the Board sets dividend policy, a number of factors are taken into consideration, including the sustainable level of operating earnings, the current loan portfolio is expected to produce, the achievable risk-adjusted returns on equity ARI can generate when reinvesting capital, and the appropriate level of leverage utilized in achieving underwritten ROEs. The Board's decision to set the Q3 dividend at 25 cents per share of common stock reflected the impact to operating earnings from ARI's remaining watch list loans, as well as anticipated declines in floating interest rate benchmarks as indicated by the forward curve. As we continue to get capital back from resolution on the focus loans, ARI will be able to redeploy capital into investments resulting in upside in operating earnings potential. We estimate that if we were able to reinvest equity tied to non-performing loans and REO into newly originated loans, there is an additional approximately 40 to 60 cents per share of annual operating earnings uplift. 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 reported distributable earnings prior to realized loss of $44 million, or $0.31 per share of common stock for the third quarter. GAAP net loss attributable to common stockholders was $95 million, negative 69 cents per diluted share of common stock. This net loss amount includes 128 million realized loss incurred in connection with the resolution of the loan secured by the portfolio of hospitals in Massachusetts. As we just closed in our Q2 filing, the amortized cost basis of this loan as of June 30 was 342 million. Following up on Stuart's remarks, about the developments with the loan during the quarter, we received about $55 million of proceeds from the guarantee payment, the sale of other collateral, and interest cost recovery proceeds, all of which were applied against the amortized cost basis of the loan. The loan was extinguished as of the end of the quarter and we reflected retained assets of $160 million comprised of a receivable from the Commonwealth of Massachusetts for the eminent domain taken of one of the hospitals, and deeds in escrow for the remaining seven hospitals. The proceeds from sale of five hospitals were then distributed on October 1st. Subsequent to the sale of five hospitals, ARI is retaining the deeds to the two closed hospitals and a promissory note from a BBB-plus rated company for the total amount of approximately $60 million. Our portfolio ended the quarter with a carrying value of $7.8 billion and a weighted average and levered yield of 8.5%. During the quarter, we committed $597 million across two new loans and one refinancing transaction. We also funded an additional $93 million for previously closed loans. It was an incredibly robust quarter for loan repayment. We received $953 million of proceeds from full and partial loan repayments, the amount which exceeds first and second quarter combined repayments by over $190 million. With respect to risk ratings, the weighted average risk rating of the portfolio at quarter end was 3.0, unchanged from the previous quarter end and year end. During the quarter, a 200 million euro loan secured by a portfolio of office assets in Germany was moved to a risk rating of four. The loan remains current on interest payments. However, the sponsor has indicated that the leasing of the assets was taken longer than anticipated. We are in the process of working with the sponsor to extend the loan and make some additional changes to the structure. which includes the sponsor investing additional equity into the transaction. Our total CECL allowance was relatively flat quarter over quarter. As of September 30, it's equated to $381 million, which represents $2.74 per share of book value. The general CECL allowance decreased by $1 million quarter over quarter primarily due to repayment activity outpacing loan originations during the quarter. As a result, our general CECL allowance was at 49 basis points, and our total CECL allowance stood at 464 basis points of the loan portfolio's amortized cost basis as of September 30th. Moving on to the right-hand side of the balance sheet. During the quarter, we upsized our secured credit facility with Goldman Sachs providing an additional $315 million of capacity. We continue to see ample liquidity for our secured borings, as banks show a continued preference to lend to counterparties such as ARI as opposed to directly to the real estate, given the better capital treatment. Our debt-to-equity ratio at quarter-end was 3.5 times And as a reminder, we have no corporate debt maturities until May 2026. The company ended the quarter with over $300 million of total liquidity comprised of cash on hand, undrawn credit capacity on existing facilities, and loan proceeds held by the servicer. ARI's book value per share, excluding general CECL allowance and depreciation, was $12.73, which reflected 93 cents from the realized loss on Massachusetts health care loans. And with that, we would like to ask the operator to open the line for questions.