Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) Q4 2023 Earnings Report Call Transcript February 7, 2024
Apollo Commercial Real Estate Finance Inc. isn't among the 30 most popular stocks among hedge funds at the end of the third quarter (Please see here for the detail).
operator: I want to let everyone know that today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc. and any unauthorized broadcast in any form is strictly prohibited. Information regarding the audio playback of this call is available in the financial results press release. We also draw your attention to customary safe harbor disclosures regarding forward-looking statements in our press releases. Today's conference call and webcast may contain forward-looking statements and predictions. Please refer to our most recent filings with the SEC for a discussion of important factors that could cause actual results to differ materially from these statements and projections.
In addition, this conference call will also discuss certain non-GAAP measures that management believes are relevant in evaluating the Company's financial performance. These measures are reconciled with his GAAP numbers in our earnings presentation, which is available from the “Shareholders” section of our website. We undertake no obligation to update any forward-looking statements or predictions, except as required by law. To obtain a copy of our latest SEC filings, please visit our website www.apollocref.com or call 212-515-3200. At this time, I would like to turn the call over to our CEO, Stuart Rothstein.
Stuart Rothstein: Thank you, operator. good morning. Thank you to everyone who attended the Apollo Commercial Real Estate Finance Q4 2023 Financial Results Conference. Today, as always, I'm joined by Scott Weiner, our Chief Investment Officer. and Anastasia Mironova, our Chief Financial Officer. In many ways, the start of 2024 looks a lot like his start of 2023 for the commercial real estate sector. Recall that as we enter 2023, there is significant negative sentiment regarding commercial real estate due to the impact of rising interest rates on valuations and outstanding debt maturities, uncertainty regarding the long-term use of office real estate, and many consensus concerns. was increasing. both in terms of the trajectory of the economy and the future trajectory of interest rates.
The Fed continues to raise interest rates in the first half of 2023, and significant fluctuations in 10-year Treasury yields further heighten market concerns and uncertainty. Additionally, the failures of several prominent local banks and negative comments from money center banks regarding reserve growth and real estate portfolios added to the general pessimism. In 2023, there were several notable transactions where the higher interest rate environment initiated the real estate revaluation process, but market participants such as owners, lenders, potential buyers, and sellers all As a result of the choice to re-evaluate, the overall trading volume has decreased significantly compared to recent years. Please take your time and tread carefully in the face of an uncertain economic and interest rate environment.
Going into 2024, there is growing confidence in the Fed's ability to engineer some kind of soft landing, with expectations that the Fed will cut rates by 100 to 150 bps over the course of the year. In the long term, 10-year rates are essentially exactly where they were at the beginning of 2023. And now fears that those rates will rise further, as they rose rapidly last year, are waning. But while there may be increasing optimism regarding the economy and interest rates, the narrative around commercial real estate continues to focus on further declines in asset values. In addition to remaining uncertainties regarding the long-term use of certain assets, there is still much work to be done to address loan maturities and asset-level capital structure in a high interest rate environment.
Apart from the value discussion, operating results for many commercial real estate properties have remained stable to positive. Notable exceptions include certain office markets and parts of the multifamily sector, where rent growth has begun to decline in the face of increased supply. Over the longer term, we expect property-level operating performance to be closely linked to broader macroeconomic conditions, with many property sectors benefiting from the marked decline in new supply over the past few years. For ARI, 2023 was a year focused on proactive asset management and maintaining excess liquidity while expanding and diversifying funding sources. With tailwinds from rising base rates, ARI achieved strong distributable income, comfortably covering dividends and demonstrating the profitability of its floating rate loan portfolio.
During the fourth quarter, ARI identified attractive opportunities to originate loans at attractive pricing due to recent valuations, strong credit structures, and low LTVs, resulting in two new loan transactions and Strategically focused deployment of $536 million in loan growth. All three of these loans were secured by real estate in Europe. Move to portfolio. At year-end, ARI had 50 loans totaling $8.4 billion. ARI said he received $1.2 billion in loan repayments and sales in 2023, including his $270 million from office loans. Throughout the year, our team continued to actively engage with his ARI borrowers, negotiating and completing repayments and extensions as needed. Among ARI's focus assets, his two REO hotels generated stable cash flow throughout the year, and his Washington, D.C., assets generated his NOI from hotel operations above pre-pandemic levels.
As for Steinway, we sold one unit in the fourth quarter and have two more units under contract. A small number of additional units are also in active negotiations. However, nothing will be done until that is complete. Based on recent activity in the building, our view regarding the notional achievable value at the time of sale remains unchanged. However, remember that accounting requires a present value assessment of the achievable value. Recent activity has been generally consistent with prior expectations, and therefore no additional provisions were recorded during the fourth quarter. Changes in future reserve levels will be based on an assessment of both the potential nominal value of the remaining units and the expected timing of realization.
Before I hand the phone to Anastasia, let me make a few comments about ARI's quarterly dividend. Our quarterly dividend payout rate is $0.35 per share, which has remained the same since we aggressively reduced our dividend at the beginning of the pandemic in 2020. As we've said many times before, dividends ultimately depend on the bottom line. It is reviewed and discussed by the Board of Directors on a quarterly basis and finally declared. Subject to board approval, our current forward-looking model currently indicates that we remain satisfied with our current dividend level of $0.35 per share. We will obviously discuss that with the board on a future basis, but in light of the anticipated questions, we wanted to provide some context at this time.
I will now turn the question to Anastasia.
Anastasia Mironova: Thank you, Stuart, and good morning everyone. His 2023 performance at ARI was strong. Dividendable earnings were reported at $244 million, or $1.69 per share, resulting in a dividend coverage ratio of 1.21x. GAAP net income available to common stockholders was $46 million, or $0.29 per diluted common share. The ARI portfolio ended the year with a book value of $8.4 billion and a weighted average unlevered yield of 8.7%, 110 basis points higher than at the end of 2022 and, specifically, 380 basis points higher than at the end of 2021. As mentioned earlier, during the quarter, we closed on three new deals totaling $536 million. $275 million of these initiatives were funded during the quarter.
$212 million has been raised since the end of the quarter, with the remainder expected to be raised in the future. He also completed $131 million in additional financing from previously completed loans and received $205 million in loan repayments. At year-end, approximately 81% of the principal balance of our portfolio was covered by interest rate caps. It is important to note that most cap dates are tied to the first day of the loan's final maturity, and part of the loan extension terms include establishing a new cap. We closely monitor pending expirations and work with borrowers to ensure new limits are set upon expiration. There are currently no loans in our portfolio where borrowers are concerned about their ability to replace expiring caps.
In addition to interest rate caps, other structural protections on loans in our portfolio include interest reserves and interest and carry guarantees. At year-end, the portfolio's weighted average risk rating was 3.0. There were no specific CECL benefit increments during the quarter. General CECL loans were 38 basis points at amortized cost of the loan portfolio as of December 31, an increase of 2 basis points from a year ago. The increase in the general CECL provision was primarily due to the deterioration in the macroeconomic outlook, particularly related to certain asset classes. The negative impact of the macroeconomic outlook was partially offset by overall portfolio adjustments and loan repayment activity exceeding loan funding.
Specifically, the principal balance of our loan portfolio decreased from $8.9 billion to $8.6 billion during the year. As of December 31, our total CECL reserve was 261 basis points on an amortized cost basis for our loan portfolio. His book value per share for ARI, excluding his CECL reserve and depreciation and amortization in general, was $14.73, relatively flat compared to the prior quarter. Regarding borrowings, the Company is in compliance with all covenants and continues to maintain strong liquidity. ARI used cash on hand to repay $176 million of the principal balance of its convertible notes due in October. As a result of this repayment, the Company's next bond maturity will be in 2026. In light of Mr. Stewart's comments regarding our Washington DC hotel, we continue to monitor the market to determine the best time to sell the asset, and the hotel recently made the following commitments: Our revolving credit facility increases ARI's leveraged returns.
ARI ended the quarter with total liquidity of $278 million, consisting of cash on hand from existing facility drawdowns and loan proceeds held by the servicer. ARI's debt-to-equity ratio at the end of the quarter was 3.0x. Now, I would like to start accepting questions. Operator, please.
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