ARI - NYSE

I'd 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 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.

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 Mironova, 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. [indiscernible] 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 a 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 2/3 of the residential loans in ARI's portfolio have originated over the past 24 months, benefiting from a valuation 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 recent interest rate cuts that have reenergized 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 CECL allowances were recorded during the quarter. We saw continued sales momentum at 111 West 57th Street with 9 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. 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 our -- with the refinancing of our outstanding Term Loan B facilities in the past quarter. In June, we completed a new 5-year floating rate $750 million Term Loan B, which repaid our existing 2 Term Loan Bs, which had pending maturities in 2026 and 2028, respectively. The new loan bears interest at SOFR plus 3.25% 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 GAAP net income of $18 million or $0.12 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 1.04x. 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 unlevered yield of our portfolio was 7.8%. As Stuart mentioned, we had a strong quarter of loan originations totaling $1.4 billion in commitments. We also completed an additional $394 million in add-on fundings 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 fundings for previously closed loans. Repayments and sales totaled $631 million during the quarter. Importantly, with the continued redeployment, 41% of our loan portfolio as of quarter end was originated post the 2022 rapid rise in interest rates and subsequent reset in property valuations. 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 CECL allowances recorded during the quarter and no downgrades in risk ratings across the portfolio. Our general CECL allowance increased this quarter by $3.1 million, reflecting growth of the loan portfolio from the previous quarter end. Total CECL 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 taken 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 pickup for ARI in the following quarter and will be recycled into new loan originations, 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 3 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 these facilities and in many instances, prefer them over directly lending to properties. The company ended the quarter with $208 million of total liquidity comprised of cash on hand, committed 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 $12.59, a slight decrease from last quarter. With that, I would like to turn the call back to Stuart Rothstein.

Thank you, Anastasia. Before we turn the call back to the operator to start with questions, I just want to 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.

[Operator Instructions] Our first question comes from Doug Harter with UBS.

Just hoping we could get a little bit into more of the kind of the theme of being able to kind of recycle your capital. It seems like 111 57th is progressing. How do you think about the Brook now that you're starting to lease? What could be a time frame of, a, I guess, starting to get some cash flow from that asset and b, being able to kind of move on from that and move it into targeted assets?

Yes. 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 vis-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% leased on the market rate side of things. I think with progress made on the leasing side, the asset will turn modestly cash flow 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 0 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 cash flows? 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.

Our next question comes from Jade Rahmani with KBW.

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?

Yes. 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 2 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 we could 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.

On 111 West 57th, where do you expect the basis amortized cost in the loan to be at year-end or maybe early, say, 1Q 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 want to sort of give you a specific number per se.

Okay. And one overarching question has to do with the capital structure and leverage of the company. Your leverage is around 4x 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 redeploy it all at leveraged ROEs that are very consistent with where we've been deploying capital to date and drive, as you've 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.

Our next question comes from Harsh Hemnani with Green Street.

Maybe one on portfolio size, right? 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?

Look, 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 3 to 4 turns of leverage, you're going to see continued growth in the portfolio size, right? Just for reference, at one point, with effectively the same capital base, the portfolio was 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 3 to 4 turns levered 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 will be -- not all of the assets are levered today. Certainly, 111 West 57th is not levered today. Liberty Center is underlevered 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.

Our next question comes from John Nickodemus with BTIG.

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 the commercial real estate transaction market through the end of this year? And how is that affecting your plans for ARI looking forward?

I mean, look, we agree with the premise of your question, whereas activity has 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. I think a lot of confidence in our team, both here in the U.S. 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. We'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 was just curious if that's something that your team at ARI is monitoring or looking to add in the near to medium term.

Yes. 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 "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.

Our next question comes from Rick Shane with JPMorgan.

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 earning assets in terms of growth going forward?

Rick, this is Anastasia. Yes, this is correct. So you're correct in saying that the growth in general CECL quarter-over-quarter is largely driven by the growth in the loan portfolio.

And no changes to your macro assumptions?

No.

Great. Okay. And then just a broader question, which is a theme we're 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 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 want to wade back into? Where do you see the best opportunities?

Yes, 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 U.K. and also have a few deals in the U.S. 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 than not. And I think this is a time that certain types of hotels we 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, it doesn't seem that people differentiate different quality of office deals. So I think for that, we'll probably not be -- we won't be seeing ARI doing office deals. And then look, we continue to find deals in both U.K., Europe and U.S. 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 put the money out, whereas I think some of the hyperscale deals that we've done are interesting, and we're able to work with our bank partners and put on accretive financing. So I think that's the only area where you'll see us doing construction in ARI.

Thank you for the insights and really sort of swinging that pitch for us, we appreciate it.

Our next question comes from Jade Rahmani with KBW.

Would prevent the dividend from being increased? And do you also expect any change to the long-standing policy -- 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 "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 $0.01 or $0.02 higher or $0.01 or $0.02 low in any given quarter. And we'll always review policy with the Board on a quarterly basis. So 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.

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.

Yes. No, I think that's exactly it. I mean I think certainly not every market, but most markets and certainly in the U.S. and U.K., 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 want to 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.

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, Hilary are available if people have follow-up questions after the call. And I hope everybody enjoys the rest of the summer. Thank you.