Apollo Commercial Real Estate Finance, Inc. Price & Performance (ARI)

Fourth quarter and full year 2024 earnings call. As usual, I am joined today by Scott Weiner, our Chief Investment Officer and Anastasia Maranava, our Chief Financial Officer. Consistent with the return of liquidity to the real estate capital markets and the steady increase in transaction volume, ARI experienced a robust level of Repayment activity and was very active in deploying capital in 2024. While the market was expecting more aggressive action from the Fed than actually took place during 2024. The continued strength of the overall economy and the modest Fed cuts was enough to generate a notable pickup in real estate investment activity. As we move into the New Year, with the benefit of hindsight, it appears that property valuations troughed in the early part of twenty twenty four. And during 2025, we expect increasing capital deployment and transaction activity across the real estate market as the significant dry powder within real estate funds is deployed. And many of the participants who have been on the sidelines for the past eighteen months reenter the market. ARI finished 2024 originating $72,000,000 worth of new loans in the fourth quarter, bringing total origination volume for the year to $1,900,000,000 As of year end, approximately 30 twenty four months correlating with the rise in interest rates and the resulting reset of property values.

ARI's newly originated loans were underwritten to generate very attractive risk adjusted returns benefiting from wider spreads and higher base rates and interest rate floors. The strength of Apollo's Apollo The strength of Apollo's broad based real estate credit originations efforts is the key to ARI's active deployment. As Apollo's Apollo originated over $616,000,000,000 worth of new loans during 2024. As Apollo's team is consistently active in the market, ARI can seamlessly tap into the pipeline when capital to invest is available. ARI's originations in 2024 were across a broad spectrum of property types and geographies, with more than half in The UK. Apollo's dominant market position in Europe continues to be a differentiator for ARI as we are able to invest in transactions with similar risk profiles and comparable credit quality to transactions in The U. S. While further diversifying the company's portfolio. Turning now to the loan portfolio. At year end, ARI's portfolio was comprised of 46 loans totaling $7.1 No additional asset specific CECL allowances were Shifting to 111 West 50 Seventh Street, there are currently four units under contract and several others in various stages of contract negotiated negotiations, including several with agreed upon offers. Upon closing of the four units, and assuming one other unit closes, the net proceeds received will repay the senior mortgage in full and all proceeds thereafter will go to ARI and can be redeployed into new loans.

We remain highly focused on proactive asset management and targeting resolutions on our focused loans as we seek to maximize value recovery and convert underperforming capital into higher return on invested equity opportunities. We have defined pathways for our remaining non performing REO assets and we are actively pursuing resolutions. As we mentioned on last quarter's call, there is meaningful upside earnings potential for ARI as we recap and redeploy capital. For example, ARI has approximately $300,000,000 of net equity invested in the Brooklyn multifamily development. Upon completion, upon completion, and sale or refinancing of that asset, it is expected that ARI will be able to convert that non income produced capital to invested capital generating an ROE Across ARI, we estimate that if we were able to reinvest 100% of the equity tied to non performing loans in ROE into newly originated loans we believe there is an additional approximately $40.00 dollars per share of annual earnings uplift. 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 $45,000,000 dollars or $0.32 per share of common stock for the fourth quarter. With GAAP net income of $38,000,000 or $0.27 per diluted share of common stock.

For the full year, we reported distributable earnings of $190,000,000 dollars or $1.33 per share of common stock. GAAP net loss available to stockholders of negative $132,000,000 or negative $0.97 per share. Our dividend was well covered with 128% coverage for the quarter and 111% for the full year.

It is worth noting that our fourth quarter distributable earnings included $0.07 of non recurring items. Such as prepayment fees, accelerated fee amortization on early repayments, and other similar one time items. Coupled with the impact of freight cuts, executed by the Fed over the course of the fourth quarter of twenty twenty four, we expect that our quarterly earnings in 2025 would be lower when compared to Q4 twenty twenty four. While still providing sufficient coverage for our dividend. Our loan portfolio ended the year with a carrying value of $7,100,000,000 and the weighted average unlevered yield of 8.1%. As Stuart mentioned, closing three new commitments two upsizes and one refinancing transaction. ARI funded about $300,000,000 associated with these commitments at close.

During the quarter, we also funded an additional $97,000,000 for previously closed loans bringing the year to date total add on fundings to $627,000,000 We had another quarter of elevated loan repayments which totaled $830,000,000 and therefore outpaced new loan closings and add on fundings. As a result, our loan portfolio balance decreased quarter over quarter. However, with an origination pipeline of over $1,000,000,000 for the first half of the year, we expect our loan per toner to grow in 2025. As we are recirculating capital from repayments into new deals. We closed one loan commitment for 114,000,000 post quarter end so far. With respect to risk ratings, the weighted average risk rating of our portfolio at quarter end was three point zero unchanged from the previous quarter end.

There were no asset specific CECL allowances recorded during the quarter and no material movements in readings across the portfolio. Our total CECL allowance was relatively flat quarter over quarter. As of December 31, it equated to $379,000,000 which represents $2.74 per share of book value. Moving on to the right hand side of the balance sheet. During the quarter, we continued to see spread tightening across repo facilities being on average 45 basis points lower compared to the weighted average cost of borrowings across our secured facilities. Our debt to equity ratio at quarter end was 3.2 times down from 3.5 times at September 30. The company ended the quarter with over $380,000,000 of total liquidity comprised of cash on hand undrawn credit capacity on existing facilities, and loan proceeds held by the servicer. Our book value per share excluding general CECL allowance and depreciation, was $12.77 a slight increase from last quarter. And with that, we would like to ask the operator to open the line for questions.

Our first question comes from Rick Shane with JPMorgan. You may proceed. Thanks for taking my questions this morning. Look, you guys still have a substantial specific reserve and it appears that [indiscernible] you are now really in a position where you've dimensionalized what you see as the big risks within the portfolio. As we think about that specific reserve and how it might translate into realized losses or transactions this year and realized losses over the next year or two. Can you just give us some sense of what the cadence of that might look like? So we can dial in our distributable earnings estimates?

Yes. Look, I think think as you think about the big components of the specific reserve rate, I think obviously, as I mentioned in my comments, If all continues at the pace it's going, we think we'll start clawing back some of the capital excuse me, that is tied up in the 111 West 50 Seventh project.

That doesn't impact the reserve per se because what we're carrying it at is sort of our net post reserve balance at this point, but it is certainly capital that we envision being able to redeploy into performing. Assets So I think we're optimistic that we'll be part of our $375,000,000 or so of net outstanding will start coming back to us this year and we can put that to work. The Cincinnati asset known as Liberty Center. It's up over 90% leased at this point. I think there's potential opportunities to try and move that into the market this year and get that capital back I think it's a later half of the year.

Sort of event, but those are probably the two Nearest term opportunities to start putting capital to work, which is sort of second half of this year. And then as I mentioned in my comments, there's a lot of equity tied up in the Brooklyn REO, which realistically that asset will be Always start taking tenants latter part of this year, which means assuming things go as well, we'll have proof of concept on the asset and we could start thinking early part of next year about sale or refinancing to pull out a fair bit of our equity in that transaction. So it's really, I would say, latter part of this year heading into next year is when we should really start seeing underperforming capitalREO start being put to work more productively?

Hey, I really appreciate you swinging at that pitch and the specificity of answer. So thank you very much. Thank you. Our next question comes from Jade Rahmani with KBW. You may proceed.

Thank you very much. Just a high level question, if you could put some paint some thematics around where you're seeing interesting opportunities geographically, seems like you're still active in Europe, Multifamily has been picking up, but if you could just talk to Maybe a bit of property type and geography, but then also like the kinds of situations you're stepping into? Are these capital structure challenged, deals? Are they new acquisitions? What kinds of situations are these? Scott, do you want to take that one?

Sure. Yes, Jade, look, I think we're seeing really increased activity really across all sectors and geographies. Multifamily is something that we're very constructive on. I would say the type of deals that we're doing are generally newly built multi family, so not not at all distressed situations, but newly constructed where we're refinancing a construction Apollo. And so the transition is really just leasing up We're seeing similar type deals within senior housing or care homes both in The UK and The United States. That's certainly one area we've been spending a lot of time on. As well as in certain markets condo inventory. Loans, hotels continue to be an area of focus. But really nothing is distressed. It's both acquisitions as well as refinancings, data centers, is an area where we've been as a platform active And I think that's something that ARI in the future will be participating in, really on the hyperscale area, long term leases to major investment grade credits, either stable assets or ones that are in the mid of construction. And as you mentioned, U. K. And Europe, we continue to find really good interesting opportunities there as well.

And I was wondering if you could give an update on the REO hotels and the outlook [indiscernible] Since you didn't mention that those two D. C. And Atlanta hotels as potential twenty twenty five monetizations? [indiscernible] ahead, Scott.

I was going to say DC, I think we've referenced before, continues to perform very well. It's exceeding pre COVID levels clearly with the inauguration this year and all the activity in DC off to a very good start. So I think that is an asset. I can see assuming the capital markets continue to be constructive. That we would potentially test the market later this year. And then Atlanta, is really an asset we continue to evaluate. The the right business model in terms of balancing putting CapEx into it, what's the return on investment on that, what's the highest and best use of the asset, in terms of what we're targeting and things like that. And again, also just trying to raise the cash flow. So I would say we continue to evaluate both assets. In terms of an exit. We think our mark are appropriate in terms of where we have it. On the DC asset, we did put on asset level financing. And so that is not debt capital for us. That's generating a nice levered return. The Atlanta asset is also generating generating cash flow, although, below the type of return that we'd like to see in our capital.

But both of them are at least contributing to income. So we're not We're not going to be a hurry up to sell. So if we can get the right price on either one, we would sell later this year.

Thanks a lot.

Thank you. Our next question comes from Steve Delaney with Citizens JMP Securities.

You may proceed. Good morning, everyone. Happy New Year. Good to be on with you this morning.

Wanted to talk about the portfolio. $7,100,000,000 at the end of the year. It sounds like I know you have some non earning assets in the REO, other things that you've got to But it sounds like you might be slightly under levered in your core portfolio. Given what you're seeing in terms of new attractive bridge loans, could For that, portfolio grow over the next six to twelve months to $7,580,000,000 Is that Feasible.

With your Yes, absolutely. I mean, it's really just a matter of timing. We had some large repayments come in at the end of the year. And we have, as Stuart mentioned, a large pipe line of deals, so, that are in closing, one of which did already close this quarter and a few will be coming. So if you just think of it, as we take that cap it'll be senior mortgages that we lever easily could see the portfolio growing by $500,000,000 Yes. And Steve, just to put a finer point on that, like there is an abundant supply of capital available for back leverage for us as we seek to do new deals and use leverage to get to ROEs. So to Scott's point, as we find things that are interesting, there's a chance for us [indiscernible] lever that equity and grow the portfolio a bit.

Yes. So the banks start so much competing with you for bridge loans, but they're more than happy to lend you to finance your bridge loans. Is that the way we should think about it?

Yes, there's plenty. Yes, I think whatever they like to be saying about their headline sort of on balance sheet activities. They're very active behind the scenes looking to provide [indiscernible] There seem to be some green shoots We heard it from you, Stuart. And in addition, let's just talk domestic, but It sounds like The UK has been something really nice for you guys to tap in. But the nature of the bridge loans today versus maybe nine to twelve months I think since for a while there that the market commercial real estate market was kind of stuck And everybody was refinancing properties but there didn't seem to necessarily be fresh new projects with new equity coming in through real estate investors tackling new projects. Are you seeing in your bridge loans now more new business plans and new properties? Or are we still in this mode of we're moving money around loans around from bank to bank?

There's There's not as much financing on bridge loans of new projects as it is just the old stuff. Just curious if there's if the animal spirits have been aroused within the real estate development equity investor community.

Look, as I mentioned in the opening remarks, and Scott could add some color as well, we're definitely seeing people coming off the sidelines for lack of a better phrase, and starting to look for reasons to put capital to work. So there's definitely I'd say look, absent the office space where it's generally sort of people playing for time, for lack of a better phrase, I think you are starting to see as Scott mentioned in his remarks, whether it's data center, multi family, industrial, people looking for ways to put capital into assets that they think work from a long term perspective. So Not fully back, but definitely, I would say people getting off the sidelines and recognizing that if they've got capital that they've raised for investment, they need to deploy that capital? I don't know, Scott, feel free to add. Add some commentary.

No, I think that is. I mean, I think just looking at our overall platform, I think Vale last year about a quarter of it was for acquisitions. And as Stuart mentioned, we deployed $16,000,000,000 globally in loans.

So certainly a lot of acquisitions, but a lot of the stuff could be recently built, new construction stuff. I mean, sometimes people are bringing in new investors and recapping. So the markets are certainly fully functioning and I think that there's a bid ask between buyers and sellers has shrunk. And so you're certainly seeing a lot of activity. But at the same time, a lot of people don't need or want to sell They think there's upside in cash flows and certainly they think at some point interest rates will go down which will lower cap rates even further.

Very helpful. Thank you both for your comments.

Thank you. Our next question comes from John Nicodemus with BTIG.

Hi, good morning, everyone.

Yes, just kind of extension of what Steve was just asking. Obviously, I've heard the phrase extended pretend a ton recent quarters. But kind of with that rate uncertainty to start 2025, just curious sort of the instances of borrowers looking to extend into what they believe could be a more favorable rate environment down the line, regardless of what's going on with the asset underlying the loans?

Just sort of if you're seeing much of that or just any real changes you've noticed with borrowers and how they're proceeding to start 2025 given Scott, you want to take that?

Yes. Look, I mean, certainly look, from our perspective, we've been never doing the extent for 10. We want to make sure that sponsor is the right sponsor at the right base to sign leases or do deals and has capital. But I think to my earlier point, people certainly have a lot more visibility and transparency in terms of where they think things are heading, whether that be office or multifamily and things like that in have worked through what's in their portfolio and kind of have decided what their winners are or not. So, not to say it's not going to continue. I think it's still there's a lot of challenges in particular in office in markets that still have this way to work through whether that be because something has a long term lease that hasn't expired yet or still people are trying to figure out what they're going to do with it. But I think people clearly have a good sense on things.

Great.

Really helpful. And that's all for me. Thank you.

Our next question comes from Harsham Nani with Green Street. You may proceed.

Thank you. So it seemed like a couple of the highlighted transactions in 4Q were somewhat stabilized, especially maybe the retail asset in UK Could you sort of touch on the spreads that you might see on these types of stabilized assets and how they My differ from the more transitional assets that you're typically doing?

Scott, you want to talk about spreads in the market these days?

Yes. Look, I mean, I think overall, you've heard from us and others. Certainly, spreads have over the past year eighteen months that have come in. But at the same time, the [indiscernible] put out warehouse and also in The U. S. The reemergence of the CRE CLO market. Where you can see those spreads have come in dramatically. So I would say even with tighter loan spreads, we're still able to generate our mid teen returns. As far as stable spreads versus kind of transitional spreads, again, it's very much dependent on deals. Generally, as you think of property types or location, a hotel deal, for example, is generally could be stable and still at a wider [indiscernible] than a multifamily or would be at a water spread than a multifamily. So I think there are some nuances there. But at the same time, if we're doing a tighter spread and a more stable asset, generally the financing that we then get on that asset ourselves is better either that be a higher advance rate and or a tighter spread. So generally, we're working towards the same levered return, whether it be a more stable that [indiscernible] But I would say generally spreads these days for what we're doing are kind of [indiscernible] low 4s over, right?

And then call an upfront Got it. That's super helpful. And so maybe against sort of the backdrop of improving capital markets liquidity transaction volumes picking up It seems like a good time to get into sort of the higher risk loans But on the other hand, you can meet your return hurdles with stabilized loans at this point in the cycle. So how do you sort of weigh those two and as you evaluate where you deploy new orders?

No, it's Scott. Yes.

I mean, look, we're obviously risk is in the eye of the beholder. We're very focused on downside protection and and being senior in the capital structure and right now, we don't feel we need to be pushing leverage or business plans to get to the returns that we want. We're very comfortable in doing the moderate leverage that we've been doing for the past few years. And with the sponsors and the deal types we like. So There are certainly others who may need to push leverage or do more or searching kind of for a higher return or kind of more coming at it from an equity then?

And there's lots of deals that we do in ARI, for example, where we're the senior lender and there will be mezz or preferred equity behind us.

And we're very happy at our basis and getting to our return.

Got it. And last one from me. [indiscernible] given sort of the less transitional assets in the new originations, could we expect ARI to be in the CLO market at some point in 2025, 2026?

No. I mean, look, we obviously always evaluate the mark market. We're an active participant both as Apollo Apollo kind of [indiscernible] So we're well versed in what's happening, what's going on. We thankfully have some very good financing partners that we work with well, who I think gives us a lot of the flex [indiscernible] that we'd like to have in our warehouse loans. I think our borrowers appreciate that their information is not out in the public domain when they do a loan with us. And so reality is we can get a similar cost of funds with more flexibility in something our borrowers refer. And also Things always come up on loans, not necessarily bad things, but things kind of change and we like having flexibility to do what we want and not have to go back to a bar and say, oh, have to go talk to a servicer and do this and that. So I don't anticipate us using the CRE solo market anytime soon.

Great. Thank you.

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

Thank you, operator. Thanks to those of you participating this morning. And as always, Hillary, Anastasia, myself, to the extent people have follow-up questions, modeling questions, we're always around. Thank you all.

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