Apollo Commercial Real Estate Finance (NYSE:ARI) Q1 2024 Earnings Call Record April 30, 2024
Apollo Commercial Real Estate Finance Inc. wasn't among the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Please be advised that today's conference call and webcast are being recorded. They are the property of Apollo Commercial Real Estate Finance, Inc. and any unauthorized broadcast in any form is strictly prohibited. Information regarding an audio replay of the conference call will be available in our earnings press release. Please also refer to the safe harbor disclosures customary in our press releases regarding forward-looking statements. Today's conference call and webcast may contain forward-looking statements and projections. Please refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections.
Additionally, during the call, we will discuss certain non-GAAP measures that management believes are important in evaluating the company's financial performance. These measures, reconciled to the GAAP measures in our earnings presentation, are available in the shareholder section of our website. We undertake no obligation to update any forward-looking statements or expectations, except as required by law. To obtain copies of our most recent SEC filings, please visit our website at www.apollocref.com or call us at (212) 515-3200. I would now like to turn this conference call over to Stuart Rothstein, our Chief Executive Officer.
Stuart Rothstein: Thank you, operator. Good morning. Thank you everyone for joining us this morning for the Apollo Commercial Real Estate Finance Q1 2024 Earnings Call. As always, I'm joined by our Chief Investment Officer, Scott Weiner, and our Chief Financial Officer, Anastasia Mironova. We saw some life begin to return to the commercial real estate market in the first quarter, with a gradual increase in transaction volume. The increase in deal flow was supported by a combination of significant dry powder in existing funds that needed to be leveraged, an increase in borrowers having to address pending loan maturities, and an increase in consensus on property-level valuations. In addition to the increase in transaction activity, operating fundamentals remained stable to positive across most property types, supported by the continued strength of the economy, with the exception of office properties in certain markets.
The story continues
This operating environment continues to benefit ARI, with its floating rate loan portfolio producing another quarter in which ARI's distributable earnings covered its dividend. With the exception of the loan secured by the Steinway Building, which we discuss later, ARI's portfolio continues to perform well, particularly with increased actual and implied repayment activity. During the quarter, ARI received total repayments of $176 million and current forecast models project an additional $1.0 billion in repayments over the remainder of the year. Given the increased repayment activity, ARI is expected to allocate capital more aggressively over the course of the year and has an active pipeline of potential transactions.
As we determine how to allocate our available capital, we continue to evaluate both potential new investment transactions and opportunities to repurchase portions of ARI's capital structure. Moving on to Steinway, during the quarter, we recorded a specific CECL provision of $142 million against the subordinated loan secured by the property, reflecting the impact of both lower price expectations and delayed timing of the sale of the remaining units. As a result of the increased provision, ARI's net exposure to the asset, consisting of a portion of the senior loan and two mezzanine loans, decreased from approximately $594 million at year-end 2023 to $457 million at quarter end. Since the end of the quarter, as part of an effort to further reduce ARI's net exposure, the property has been refinanced with a new senior loan provided by a third party, reducing ARI's net exposure by $108 million.
An aerial view of a commercial building operated by the REIT.
After the refinancing, ARI's net exposure consists of approximately $357 million of mezzanine loans subordinated to $200 million of senior loans held by third parties.Before I hand over to Anastasia, I want to highlight that ARI has paid dividends of $0.35 per common share for 16 consecutive quarters and we believe ARI's floating rate portfolio will continue to generate sufficient distributable earnings to cover the remaining quarterly dividends in 2024.I will now hand over to Anastasia to review ARI's financial results for the quarter.
Anastasia Mironova: Thanks, Stuart. Good morning, everyone. For the first quarter, ARI reported distributable earnings per common share of $0.35. GAAP net loss attributable to common shareholders was $108 million, or $0.76 per diluted common share, reflecting a $142 million CECL provision recorded against the subordinated loan secured by 111 West 57th Street (aka the Steinway Building). As a reminder, this loan is already on nonaccrual status and the additional provision will not impact distributable earnings. The weighted average risk rating of the portfolio is 3.0 and, other than the provision for 111 West 57th Street, no additional specific CECL provisions were taken during the quarter. The general CECL provision was 42 basis points of the amortized cost of the loan portfolio as of March 31, an increase of 6 basis points compared to year-end 2023.
The change is primarily due to an increase in the historical loss rate obtained from the Trepp database for purposes of determining the portfolio's general CECL reserve. The increase is also due to an extension in expected loan maturities. The ARI portfolio ended the quarter with a book value of $8.3 billion and a weighted average and leveraged yield of 9.1%, 40 basis points higher than at the end of 2023. During the quarter, the company completed additional financing of $322 million from previously closed loans, including $213 million that was funded for a UK pub transaction that closed at the end of the fourth quarter. As Stuart mentioned, we received total repayments of $176 million during the quarter. Since the end of the quarter, the company has sold a first mortgage secured by a Honolulu hotel to a third party at 99.5% of face value, generating proceeds of $135 million.
With respect to owned real estate, high-grade work continues at the Brooklyn multifamily development with both hotels generating positive cash flow for ARI. The balance sheet classification of the Atlanta hotel was changed during the quarter from held for sale to held for investment as a sale by a prospective buyer was no longer anticipated. In conjunction with the reclassification, the Company recorded catch-up depreciation of $3.6 million, which represents the amount that would have been recorded if the asset had remained held for investment throughout the entire period to date. Please note that depreciation expense does not impact the Company's distributable earnings. Moving to the right side of the balance sheet, during the quarter, ARI entered into a new secured credit facility with Goldman Sachs in connection with the financing of its UK PubLone.
The total capacity of the facility is $159 million. The company also amended and increased the size of its secured credit facility with Atlas to provide $114 million of additional capacity and revised the term of the facility to two years with an optional one-year extension. The debt-to-equity ratio at quarter end was 3.3x with no corporate debt maturities through May 2026. ARI is in compliance with all covenants related to its borrowings. Book value per share, excluding general CECL provisions and amortization, was $13.59 compared to $14.73 at the end of the fourth quarter. $1 of the decrease was due to the specific CECL provision for 111 West 57th Street, with the remainder being $0.12 due to restricted stock unit vesting and offerings and $0.07 due to changes in general CECL provision and amortization.
Now we'll take questions. Operator, please.
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