Apollo Commercial Real Estate Finance, Inc

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 Maranova, 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 in loan originations increased as we committed to $1.4 billion of new loans during the quarter, quickly redeploying capital we have received back from both repayments and ARI's focus assets. Year to date, ARI has committed $2 billion 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 redeploy this 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 access transaction flow that matches capital received from repayments, eliminating cash drag and enabling ARI to build the diversified loan portfolio. Three of the loans closed in the second quarter were secured by residential properties, continuing ARI'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 two thirds 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 leashed 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 ARI's international diversification remains a strategic advantage. Turning now to the loan portfolio and a progress update on our focus assets, at 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. No additional asset-specific Cecil allowances were recorded during the quarter. We saw continued sales momentum at 111 West 57th Street with nine units closed during the quarter, generating $170 million in proceeds, 141 million of which reduced ARI's basis following the full repayment of the senior loan in April. ARI is now senior in the capital stack and all future proceeds will go directly to repaying its exposure. At the Brook, ARI's multifamily development in Brooklyn, the leasing office opened in June and tenant move-ins began this month, marking an important milestone in the asset's 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 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. Before I turn the call over to Anastasia, I want to highlight the strong execution we had in connection with the refinancing of our outstanding term loan B facilities in the past quarter. In June, we completed a new five-year floating rate, $750 million term loan B, which repaid our existing two term loan Bs, which had pending maturities in 2026 and 2028 respectively. The new loan bears interest at SOFR plus 3 1⁄4% 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 ARI's financial results for the year.

Thank you, Stuart, and good morning, everyone. ARI reported distributable earnings of $36 million or $0.26 per share of common stock for the first quarter with gap net income of 18 million or 12 cents per diluted share of common stock. Distributable earnings for the second quarter of 2025 represent an 8% increase over the first quarter and provide dividend coverage of about 104 times. Our loan portfolio ended the quarter with a carrying value of 8.6 billion up from 7.7 billion at the end of Q1. The weighted average unleveraged 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. Year to date, ARI has originated over 2 billion of new commitments and completed a total of 467 million of add-on funding for previously closed loans. Repayments and sales totaled 631 million during the quarter. Importantly, with the continuous redeployment, 41% of our loan portfolio at the quarter end was originated post the 2022 rapid rise in interest rates and subsequent reset in property valuation. 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. There were no asset specific CISL allowances recorded during the quarter and no downgrades in risk ratings across the portfolio. Our general CISL allowance increased this quarter by 3.1 million, reflecting growth of the loan portfolio from the previous quarter end. Total CISL allowance and percentage points of the loan portfolio amortized cost basis is down slightly quarter over quarter, from 475 basis points to 429 basis points. Subsequent to quarter end, Apollo and the Commonwealth of Massachusetts reached a settlement agreement in which the Commonwealth agreed to pay us and other Apollo co-lenders an additional 44 million as compensation for the previous taking of the hospital by eminent domain. ARI's 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 of pickup for ARI in the following quarter and will be recycled into new loan origination leading to further upside to earnings. Moving on to the right hand side of the balance sheet. During the quarter, we were 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 in many instances prefer them over directly lending to properties. The company entered the quarter with 208 million of total liquidity comprised of cash on hand, committed on drawn credit capacity on existing facilities and loan proceeds held by the services. Our book value per share excluding general Cecil allowance and depreciation was $12.59, a slight decrease from last quarter. With that, I would like to turn the call back to Stuart Rosting.

Thank you, Anastasia. Before we turn the call back to the operators to start with questions, I just wanna highlight that from 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. 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 one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Doug Harder with UBS. You may proceed.

Thanks.

Hey, how are you guys today? Just hoping we could get a little bit into more of the theme of being able to recycle your capital. It seems like 111.57 is progressing. How do you think about the brook now that you're starting to lease? What could be a timeframe of A, I guess, starting to get some cashflow from that asset and B, being able to kind of move on from that 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 roughly 500 plus units of which 70% are market rate, 30% are affordable. We have started leasing on the market rate side of things as the affordable needs to go through a process -a-vis a lottery and qualifications, et cetera. I think the hope for us, Doug, is that we make meaningful progress on the leasing side between now and the end of the year. I think at this point in just the first month, we're sort of approaching 15% lease on the market, market rate side of things. I think with progress made on the leasing side, the asset will turn modestly cashflow positive in the early part of next year. And then the real capital event is whether we decide to bring in a partner or sell the asset outright sometime, probably between first and second quarter of next year. And as a reminder, it's roughly just shy of $300 million worth of capital today that is effectively earning zero from our perspective.

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

The ultimate plan is to monetize and move on. I think the halfway step of bringing in a partner would only be relevant to the 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,

Stuart.

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

Thank you very much. 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 material upside for shareholders?

Yeah, there is one small parcel that we refer to for now as the Western parcel, if I've got my geography correctly. And in between the brook and the Western parcel, there's actually a building that we don't know in between us that sits on two parcels. We are in discussion too early to know what will happen with the ownership of those parcels, Jade, around either acquiring air rights or the assets outright that would potentially greatly increase the density of what can be done on the Western parcel. And if we're able to figure it out, I think there's definitely upside to the ARI shareholders, but I would say too early to predict the likelihood of that right now, but discussions are ongoing.

Thanks very much. On 111 West 57th, where do you expect the basis, amortized costs in the loan to be at year end or maybe early, say one queue of next year?

Look, I think it's a bit of a timing question as you think about when units get sold. At this point, there's 11 units left. So there's definitely activity going on with various potential buyers. Our net basis today from a carrying value perspective is about $270 million. We think we will chip away at that between now and the end of the year, given dialogue taking place, but I don't wanna sort of give you a specific number.

Okay, and one overarching question has to do with the capital structure and leverage of the company. Your leverage is around four times today, but that includes significant non-earning assets. So 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 think, look, I think where we're running leverage is in the ballpark of where we'd expect to run it in the future. Keep in mind that even though the brook is a non-earning asset, it does have a construction loan against it. So that is an asset that we can get capital back and put to work pretty meaningfully without dramatically changing leverage levels. But I think our view is there's enough capacity in the company to get back the capital. We get back and we deploy it all at leveraged ROEs that are very consistent with where we've been deploying capital to date and drive as you've seen, seen various estimates from us of meaningful earnings growth, somewhere in the neighborhood of 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 Mnani with Green Street, you may proceed.

Thank you. Maybe one on portfolio size, of course it's grown, can we expect it to continue to grow? How are you thinking through that in the near to medium term?

I looked, we never predict the actual size, but I think if you assume we are able to continue to work on focus assets, pull capital back, which effectively is equity and then redeploy the equity at three to four terms of leverage, you're gonna see continued growth in the portfolio size, right? Just for reference at one point, with effectively the same capital base, the portfolio is north of $10 billion. I'm not saying that's the number, but for each dollar of capital I'm able to bring back from a focus asset or under earning asset, I could put it into a new loan that headline wise will be three to four terms leverage when we get it done.

Got it, that's helpful. 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, but it seems like a lot of the equity that is coming back to your point is already somewhat levered even from the REO assets. So is it probably fair to assume that incremental growth from here will continue to be driven by leverage?

Look, I think it'll be, not all of the assets are levered today, certainly 111 West 57th is not levered today, Liberty Center is under levered relative to what a 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 even get repayments back.

Got it, thank you. Sure.

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 CRE transaction market 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.

Let me look, we agree with the premise of your question whereas activity is definitely picked up and we are seeing it both on the credit side of our real estate business as well as the areas where we're active on the equity side of our real estate business. Good news is there's more capital, more deal flow, more things to look at, like the challenge like anything is, there's no dearth of capital. In the world right now, a lot of confidence in our team, both here in the US and in Europe to continuing to find things that work for ARI and what ARI is attempting to achieve from a levered ROE perspective. I think we are confident that the market will continue to offer us enough to look at that we will be able to find things that fit nicely with both return as well as other considerations for ARI, whether it be geography, property type, et cetera. But we expect the market to be pretty robust between now and the end of the year just given what we're seeing in terms of deal flow, pipeline and level of activity to date.

Great, really appreciate that Stuart. And the other one for me, I'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 securities to their portfolio. I'm just curious if that's something that your team at ARI is monitoring or looking to add in the near to medium term. Thank you.

Yeah, I would describe it as best as monitoring or it's a constant source of dialogue. As a firm, we've got capabilities both in the net lease space and in the securities side. I think this is now a 16 year debate between Scott and I. 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 one-off deal. 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, given existing capabilities inside of Apollo, definitely something that we talk about episodically, 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 one one 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 is redundant. We're bouncing around between a lot of calls this morning. From a detailed perspective, the way we look at the provision expense this quarter is it appears to be entirely growth driven related to the increase in earning assets and it looks like it's probably, the general reserve was probably put on in the mid 30s to low 40s in terms of basis points on a reserve rate. Is that correct and is that the way we should be modeling any further expansion of earnings? In terms of earning assets in terms of growth going forward?

Hey Rick, this is Anastasia. Yes, this is correct. So you're correct in saying that the growth in general CISO quarter over quarter is largely driven by the growth in the loan first volume.

And no changes to your macro assumptions? No. Great, okay. And then just a broader question, which is being more exploring with everybody this quarter. The market is, the commercial real estate market is kind of at cross currents right now. And it's probably, there are, excuse me, geographies. There are loan types that are improving. There are some that remain challenged. I'm curious as you sort of approach, the same cross currents of moving from being purely defensive to 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 wanna wade back into? Where do you see the best opportunities?

Yeah, it's Scott. Look, I'll say, look, we continue to be very constructive on all forms of housing. And so for us, that would include senior housing, private pay, where we've been active in the UK and also have a few deals in the US we're working on. Student housing, hotels, 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 are finding interesting. On the office front, certainly transaction activity has picked up and we're starting to see stuff. I think for now, not really looking to do that in ARI. We're doing that elsewhere in the platform. I think there still continues to be a very large focus on the percentage of office in our portfolio and based on our long-term lease deal in London, doesn't seem that people differentiate different quality of office deals. So I think for that, we'll probably not be doing, won't be seeing ARI doing office deals. And then we continue to find deals in both UK, Europe and US of interest. So it's really just continuing, continue what we've been doing. I don't see us really doing ground up development, ex long-term lease data centers. I think the construction, there are interesting deals, but it's challenging to leverage and also you don't put the money out. Whereas I think some of the hyper scale deals that we've done are interesting and we're able to 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 construction in ARI.

Hey, Scott, thank you for the insight and for really 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.

Would

prevent the dividend from

being increased and do you also expect any change to the longstanding dividend policy of the company to generally pay out the lion's share of earnings as dividend?

I mean, look, the short answer, Jade, is there's nothing material from an NOL perspective that would quote unquote give us tax protection to rising earnings. And I think the short answer to the second part of your question is that yes, the expectation is, the goal continues to be to give our investors as much of earnings as possible in the form of a dividend. Like always, we'll look at things on a quarter by quarter basis. We'll also try and take a somewhat forward looking approach as I think our desire is to avoid paying special dividends, try and keep things somewhat stable from a quarterly perspective, not lose a lot of sleep if things bounce around a penny or two higher, a penny too low in any given quarter. And we'll always review policy with the board on a quarterly basis. So yeah, I think your question is a good one and I think we expect to handle things going forward the way we've handled them in the past.

Thanks, and lastly, I wanted to ask about seniors housing. It seems to be an area of focus of the company and is there a broader thesis you can talk to in that space? I know the demographic trends are particularly favorable in that asset class.

Yeah, I think that's exactly it. I think certainly not every market, but most markets in certainly in the US and UK, I think have a supply demand imbalance. Clearly the demographic as you said continues to grow. We're very much focused on private pay. So these are people who can afford and are choosing to live here. I would say it's also from an acuity basis, much more focused on the independent living, maybe a little bit of assisted living, but really not, this is not skilled nursing or memory care. These are just older people who wanna enjoy their golden years if you will and be with other people. And we're doing it generally more newer developed properties and stuff that have all the amenities and things. So again, we think it's an extension of our housing thesis.

Thanks very much.

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

Thank you all for participating today. As always, myself, Anastasia, Hillary are available if people have follow-up questions after the call. And hope everybody enjoys the rest of the summit. Thank you.

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