Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) Q3 2023 Earnings Call Transcript
Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) Q3 2023 Earnings Call Transcript October 31, 2023
Operator: I would 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.apollocref.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.
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Stuart A. Rothstein: Good morning, and thank you for joining us on the Apollo Commercial Real Estate Finance, Inc. third quarter 2023 earnings call. I am joined today by Chief Investment Officer, Scott Weiner; and Anastasia Mironova, ARI's Chief Financial Officer. ARI had another quarter of distributable earnings in excess of the common stock dividend, benefiting from elevated base rates in the company's $8 billion floating rate loan portfolio. For the first nine months of 2023, ARI reported distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt of $1.33 resulting in a dividend per share covered ratio of approximately 1.3 times. The higher rate environment continues to impact all aspects of the real estate market.
For most of the year, the dialogue has focused on the Fed's use of short-term rate hikes to reduce the rate of inflation. However, more notable today is the recent sharp increase in five and ten year treasury rates. Over the past several weeks, the ten year treasury has neared 5%, and since ARI's Q1 earnings call, the yield on five year and ten year treasuries has risen 139 and 126 basis points, respectively. While the market is still adjusting to this quick move upwards in longer rates, the historical relationship between cap rate and long-term interest rates would indicate that property values are biased towards adjusting downward in light of the elevated interest rate environment. In addition to rates, uncertainty with respect to the short and medium term trajectory of the economy is also weighing on valuations.
Recent earnings reports from bellwether companies have been mixed. The employment market remains robust and the Q3 GDP print was actually quite strong. However, there have been multiple other measures of economic activity that indicate the economy is in fact slowing. As such, the narrative around commercial real estate remains focused on underlying property valuations, borrower's ability to refinance and the potential impact on property level operating performance, if in fact, the economy is slowing and moving towards a potential recession. While the debate within the industry on these topics continues, the general sentiment around the industry remains bearish. Until such time that rates are perceived as somewhat stable, and valuations adjust accordingly, we expect that transaction volumes will stay well below prior levels.
In light of this backdrop, ARI strategy and focus have remained consistent throughout 2023 with an emphasis on active balance sheet and asset management. Year-to-date ARI has received $1 billion from loan repayments, including $286 million in the third quarter. Of the $1 billion approximately $520 million was from the full repayment of eight loans in the portfolio, a $140 million came from asset sales and the remainder mostly reflects partial pay downs from borrowers in exchange for extensions in loan term. We continue to have a productive dialogue with our borrowers many of whom are some of the largest and most well capitalized real estate sponsors in the world. Their willingness and ability to support their properties has led to constructive conversations for loan modifications and extensions.
Importantly, we have dealt with the near-term maturities in our office loan portfolio with no significant office maturity until 2025. As a reminder, office loans make up only 19% of ARI's portfolio with more than half the loans secured by properties in Europe, where we are seeing better operating fundamentals across the asset class. Beyond office exposures, the credit quality of ARI's portfolio remained stable and during the quarter ARI did not record any incremental asset specific CECL reserves. With respect to the Steinway project, during the quarter, ARI received $45 million from condo sales. At present, there are additional units under contract that we expect will close in the coming months. More importantly, there is an active dialogue, including contract negotiation on another handful of units, and consistent foot track on a weekly basis.
While there is still much to be done, we are encouraged by the recent level of interest and activity. Shifting to the right side of the company's balance sheet, in October, ARI utilized on hand liquidity to repay the remaining $176 million of principle of the convertible notes that matured at par. ARI ended the quarter with approximately $480 million of total liquidity, which we believe provides ample cushion to manage a range of economic outcomes in the broader macro landscape as well as have dry powder to capitalize on interesting or unique opportunities that ARI has the benefit of seeing as part of the broader Apollo platform. With that, I will turn the call over to Anastasia to review our financial results.
Anastasia Mironova: Thank you, Stuart, and good morning, everyone. ARI produced another consistent quarter of financial results in Q3, with distributable earnings of $52.7 million or $0.37 per share. We declared a common stock dividend of $0.35 per share, which translates to an annualized dividend yield of approximately 15% used in yesterday's closing price. GAAP net income available to common stockholders was $43 million or $0.30 per diluted share of common stock. ARI's portfolio ended the quarter with an amortized cost basis of $8 billion and the weighted average unlevered yield of 8.9%. During the quarter, we funded $97 million of add-on fundings from previously closed loans and received $286 million in loan repayments, including $170 million of full repayments across four transactions.
There was no incremental specific CECL allowance taken during the quarter. General CECL allowance declined by $5.8 million and stands at 40 basis points of the loan portfolio's amortized cost basis, as of September 30. The decrease in the general CECL allowance is primarily attributable to loan repayment activity outpacing fundings and overall portfolio seasoning. Our total CECL allowance as of September 30 is a 274 basis points of the loan portfolio's amortized cost basis, four basis points increase compared to June 30. ARI's book value per share excluding general CECL reserves and depreciation was $14.74, relatively flat to last quarter end. With respect to ARI’s borrowings, we are in compliance with all covenants, and continue to maintain strong liquidity.
As Stuart mentioned, ARI repaid the $176 million of convertible notes that came due in October with cash on hand. With this repayment, our next corporate debt maturity is not until 2026. At the end of the quarter, we had $805 million of unencumbered real estate assets and $480 million of total liquidity. Total liquidity comprised of cash on hand, cash proceeds held by the servicer and undrawn credit capacity on existing facilities. Our debt to equity ratio at quarter end was 2.8 times. And with that, we would like to open the line for questions. Operator, please go ahead.
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