Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Apollo Commercial Real Estate Finance Inc (ARI, Financial) reported distributable earnings of $0.35 per share of common stock for the second quarter.
- The company redeployed approximately $505 million of capital into four new transactions during the quarter.
- ARI completed two additional transactions in the United Kingdom totaling approximately GBP270 million following the quarter end.
- The portfolio ended the quarter with a carrying value of $8.3 billion and a weighted average unlevered yield of 8.9%.
- ARI repurchased $38 million of common stock during the quarter at a weighted average price of $10.16 per share, which was $0.11 accretive to book value and generated a 15.3% ROE.
Negative Points
- Steward Health Care, the operator of eight hospitals secured by a loan from ARI, filed for Chapter 11 bankruptcy in May 2024.
- ARI's portion of the loan to Steward Health Care was downgraded from risk rating three to four during the second quarter.
- The company anticipates recording a specific CECL allowance of approximately $90 million in the subsequent quarter due to the Steward Health Care bankruptcy.
- ARI recorded a $7.5 million specific CECL allowance for a subordinate loan secured by an office building in Troy, Michigan, which was downgraded to risk rating five.
- The general CECL allowance increased to 47 basis points of the loan at amortized cost at June 30th, reflecting a more adverse outlook for certain property types.
Q & A Highlights
Highlights of Apollo Commercial Real Estate Finance Inc (ARI) Q2 2024 Earnings Call
Q: On the hospital loan, do you have any recourse or obligations to the ultimate borrower and operator of the hospitals?
A: No, it is a real estate loan from our perspective. We will do what we can to protect our rights as a lender. (Stuart Rothstein, CEO)
Q: How do you think about recovery values if some of the hospitals are ultimately closed?
A: We look at each hospital as an individual asset and will consider each piece of collateral individually to recover as much value as possible. (Anastasia Mironova, CFO)
Q: Given the recent changes in interest rate outlook, do you feel like you have a good idea of where the risk is within the portfolio?
A: Yes, we have a good sense of our focus list and are working towards resolution. The market activity provides enhanced clarity around values and resolutions. (Stuart Rothstein, CEO)
Q: How quickly do you see the rate outlook impacting sentiment and behavior among borrowers?
A: Anecdotally, there is renewed interest on the equity side of the real estate business, with people feeling they might end up in an attractive financing market sooner than expected. (Stuart Rothstein, CEO)
Q: Any thoughts on the timing of the hospital loan and whether it will go nonperforming?
A: It is tough to give more clarity right now due to the many moving pieces and constituents involved. (Stuart Rothstein, CEO)
Q: Can you talk about your investment pipeline and expectations for portfolio turnover in the back half of the year?
A: The market is active, and we are optimistic about getting capital redeployed into new transactions as we receive repayments. (Stuart Rothstein, CEO)
Q: Do you view the current dividend rate as sustainable given your outlook for portfolio returns?
A: We are generating ROEs consistent with historical levels and will continue to monitor earnings trajectory and market conditions. (Stuart Rothstein, CEO)
Q: Can you maintain the portfolio size for the rest of the year, and what are your expectations for 2025?
A: We expect the portfolio to remain relatively flat for 2024, with potential growth in 2025 as we resolve challenging asset management situations and redeploy capital. (Stuart Rothstein, CEO)
Q: Can you summarize the deal and ARI's position on 111 West 57th Street?
A: We ended Q1 with a $200 million senior loan in front of ARI's position, which has been paid down to about $140 million. We expect further paydowns soon. (Stuart Rothstein, CEO)
Q: Can you talk about the opportunity in Europe and office trends there?
A: London remains a strong market with demand for environmentally friendly offices. We see opportunities in larger deals and Pan-European transactions, leveraging Apollo's capital and financing capabilities. (Anastasia Mironova, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
