Apollo Commercial Real Estate Finance, Inc. Q3 FY2024 earnings call

Market Update

• The real estate market is showing signs of renewal with Fed interest rate cut leading to increased transaction volume and strong economy boosting investor confidence.

ARI's Business

• ARI has seen a notable uptick in financing opportunities, been on offense with $1.7 billion loan repayments year-to-date, committed over $1.1 billion of new vintage loans in past nine months and deployed over $500 million into fundings of previously closed loans.
• Highly focused on proactive asset management and seeking resolutions on focus loans to maximize recovery value.

Massachusetts Hospital Portfolio

• Operator of hospitals filed for Chapter 11 bankruptcy in May 2024, loan remained current in third quarter, debt service payments used to reduce carrying value, received guaranteed payment from borrowers to partially reduce loan balance, five hospitals sold, two closed, largest hospital taken by eminent domain with ARI and co-lenders working through legal remedies to challenge it.

111 West 57th Street

• Continued sales momentum with four additional units under contract, few additional contracts out for signature, expecting net proceeds of approximately $55 million in next few months to reduce senior loan balance, retail component leased to Bonhams to open in second half of 2025.

Brooklyn Multifamily Tower

• 51-story multifamily tower topped out during the quarter with good construction progress.

Dividend

• Q3 dividend set at $0.25 per share of common stock considering impact from remaining watch-list loans and anticipated declines in floating interest rate benchmarks, and expects to redeploy capital from resolution of focus loans to increase operating earnings potential, estimating additional ~$0.40 to $0.60 per share of annual operating earnings uplift if reinvesting equity tied to non-performing loans and REO into newly originated loans.

ARI's portfolio at quarter-end was comprised of 45 loans totaling $7.8 billion. The weighted average and leveraged yield of the portfolio was 8.5%. Year-to-date, ARI has received $1.7 billion of loan repayments. Over the past nine months, it has committed to over $1.1 billion of new vintage loans and deployed over $500 million of capital into fundings of previously closed loans. In the third quarter, ARI received $953 million of proceeds from full and partial loan repayments, which exceeded the combined repayments of the first and second quarters by over $190 million. The weighted average risk rating of the portfolio at quarter end was 3.0, unchanged from the previous quarter end and year end.

• Anticipates being able to redeploy capital into investments from resolution on focus loans, resulting in upside in operating earnings potential.
• Estimates that reinvesting equity tied to non-performing loans and REO into newly originated loans could bring an additional approximately $0.40 to $0.60 per share of annual operating earnings uplift.

• For the Massachusetts hospital portfolio, the outcome of challenging the eminent domain action in the court system is uncertain, and if not successful, there could be risks related to value disputes over the real estate.
• For the €200 million loan secured by a portfolio of office assets in Germany, the leasing of the assets took longer than anticipated, although the loan remains current on interest payments, there is a risk that the slower progress may impact recovery value in the long run.

Q: Doug Harter asked about the Massachusetts loan, including details of the remaining assets and the guarantor payment, and about the German office downgrade.

A: Stuart Rothstein and Scott Weiner responded, stating details about the remaining assets and the nature of the guarantor payment, and elaborating on the German office loan's situation with slower leasing progress but still accruing interest.

Q: Rick Shane asked about challenges in converting Massachusetts properties and about deal flow opportunities.

A: Stuart Rothstein and Scott Weiner answered, discussing confidence in converting Massachusetts properties and the improving deal flow in both US and Europe across various property types.

Q: Stephen Laws asked about reconciling numbers related to the Massachusetts mezz loan and about the court process timeline for the eminent domain action.

A: Stuart Rothstein responded, reconciling the numbers and providing insights into the court process timeline and steps involved.

Q: Jade Rahmani asked about interest expense, updates on 111 West 57th Street sales and retail lease, and about Apollo and Atlas' securitization business.

A: Stuart Rothstein and Scott Weiner answered, discussing interest expense, updates on 111 West 57th Street's sales and retail lease, and the benefit of Atlas in deal flow and financing.

Q: John Nickodemus asked about UK business and broad speaking on asset impairment recovery.

A: Scott Weiner responded, talking about UK business activity across various property types and the view that wider market value recovery could benefit impaired assets