Apollo Commercial Real Estate Finance(ARI) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported distributable earnings prior to net realized losses of $65.8 million or $0.46 per share, with a common stock dividend maintained at $0.35 per share, resulting in a dividend coverage ratio of 131% and a dividend yield of 12.4% as of June 30 [11] - GAAP net loss was $86.5 million or $0.62 per diluted share, with the portfolio ending the quarter at an outstanding principal balance of $8.6 billion and a weighted average unlevered yield of 8.6% [11][12] - The company recorded a $126 million Specific CECL Allowance on the junior mezzanine A loan and increased the allowance on the junior mezzanine B loan by $15.5 million, resulting in a total write-off of $82 million [12][13] Business Line Data and Key Metrics Changes - The loan portfolio saw positive events, including a significant lease agreement for a major office construction loan, which de-risked the transaction [6] - Year-to-date, the company received $595 million in full or partial loan repayments, with an additional $300 million expected in Q3 [7] - The Mayflower Hotel's net cash flow has exceeded pre-pandemic levels, indicating strong operating performance [7] Market Data and Key Metrics Changes - The real estate market is experiencing a recalibration phase, with negative sentiment affecting transaction volumes and valuations [5] - Concerns regarding refinancing risks and potential economic slowdown persist, impacting buyer-seller dynamics [5] Company Strategy and Development Direction - The company is focused on maintaining robust liquidity and diversifying its lender base, having entered into a new secured borrowing facility [9] - The strategy includes active engagement with borrowers to inject additional equity into transactions in exchange for extended loan terms [7] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the pricing perspective for the Steinway project, despite dialing back expectations on timing [15] - The company remains optimistic about covering dividends through the end of the year, despite challenges posed by the Steinway project and the expired interest rate cap [23][29] Other Important Information - The company repurchased $37 million of convertible notes during the quarter, reducing the outstanding balance to $176 million [9] - The debt-to-equity ratio at quarter-end was 2.9x, with $857 million of unencumbered real estate assets [13] Q&A Session Summary Question: Concerns about Steinway Tower and loss potential - Management indicated that they have ring-fenced loss potential and are confident in pricing despite reduced expectations on timing [15] Question: Remaining units and potential write-downs - Management acknowledged better interest at the penthouse level but emphasized the need to sell units regardless of their location in the building [19] Question: Dividend implications and earnings projections - Management projected that the dividend will be comfortably covered through the end of the year, despite the impact of the interest rate cap and non-accrual status of Steinway [23][29] Question: Update on REO assets and hotel performance - The Atlanta Hotel has been rebranded and is under active dialogue for sale, while the Mayflower Hotel is performing better than pre-COVID levels [25][26] Question: Liquidity plans and sources - The company plans to maintain excess liquidity, with unencumbered assets and repayment activity as potential sources of liquidity [40] Question: Appetite for new lending - Management indicated that while there are attractive deals available, the focus remains on maintaining liquidity for existing operations [44]