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. 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 Shareholders section of our website. We do not undertake any obligation to update our 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 to those of us for joining us on the Apollo Commercial Real Estate Finance 1st quarter 2023 earnings call. As usual, I am joined by Scott Weiner, our Chief Investment Officer, and Anastasia Mironova, our Chief Financial Officer. Despite the steady stream of negative headlines concerning commercial real estate, ARI's predominantly senior floating rate loan portfolio produced another quarter of distributable earnings comfortably in excess of the common stock dividend, with generally stable credit performance across the portfolio. ARI continues to benefit from higher base rates as 99% of the $8.5 billion portfolio consists of floating rate loans, which has resulted in a 360 basis point increase in weighted average yield on the portfolio over the past 12 months.
Higher base rates, combined with ARI's robust pace of loan origination in 2021 and the first half of 2022, has put ARI in a position to take a conservative approach to additional capital deployment while still comfortably covering the quarterly dividend to our stockholders. Before I get into more details on ARI's quarterly performance, I want to take a minute to discuss the current market environment. Throughout the first quarter, interest rates have remained elevated and uncertainty around both the trajectory of the economy and future Fed action has persisted. As a result, overall commercial real estate transaction activity was limited. The regional banking crisis only exacerbated market fears with respect to commercial real estate liquidity, availability of financing, and asset value.
While there will be pockets of distress, particularly in certain subsectors of the office market, and it will take time for there to be clarity on the trough and then ultimate recovery of real estate values through this cycle, we believe the CRE market is much better positioned today than it was leading up to the GFC. There is far less leverage in the overall commercial real estate financing ecosystem than there was in 2007. Since 2009, leverage levels generally have remained within the 60%-70% loan-to-value range, and key market participants, notably the large money center banks, are much better capitalized. In addition, while still relevant, the overall size and the relative market share of the securitization market have declined, and a larger share of real estate financing has been provided by balance sheet lenders.
There is also a record level of dry powder in a variety of real estate equity and credit vehicles that view the current market opportunistically. That dry powder will ultimately be deployed. Lastly, 2 quick points to note. First, apart from office assets, underlying operating performance for commercial real estate generally remains positive. While the rate of occupancy or net cash flow increase may be slowing, rents continue to trend higher and occupancy levels remain stable. The combination of elevated inflation and tighter financing markets clearly is impacting the supply of new real estate product, which over time should benefit both the performance and value of in-place assets.
With that somewhat lengthy backdrop in mind, we continue to take a cautious approach to capital deployment on behalf of ARI and are focused on increasing liquidity through expanding existing financing relationships, putting new facilities in place, and selectively selling loans. As I previously mentioned, higher floating rate base rates position ARI to comfortably cover its quarterly dividend while building more financial flexibility into the balance sheet. During the quarter, ARI finalized a new $300 million asset-backed facility with Banco Santander, as well as a $170 million revolving credit facility led by Bank of America. Despite elevated attention to the pullback in real estate lending by regional banks, ARI's key secured lending counterparties very much remain open for business and are continuing to provide additional financing for ARI's assets.
These financial institutions have been the beneficiaries of an inflow of deposits over the last month and remain committed to commercial real estate lending. ARI has not had any margin calls or requests for deleveraging from any of its counterparties since the failure of Silicon Valley Bank. Another avenue for both generating liquidity and reducing certain exposures for ARI has been to opportunistically sell loans. During the quarter, ARI sold three loans and a portion of another loan, all secured by European properties with aggregate commitments of approximately $237 million, $141 million of which was already funded to another Apollo managed entity at 99% of par. In addition to reducing ARI's European exposure, these sales also reduced future funding obligations of approximately $100 million.
Shifting to the portfolio, ARI remains focused on proactive asset management and working with borrowers on pay downs and extensions where appropriate. As a reminder, ARI's borrowers are generally comprised of sophisticated, well-capitalized real estate operators who typically have significant equity invested in the underlying properties. ARI had several office loans either partially or fully repaid during the quarter, and overall office exposure stood at only 18% of the loan portfolio at quarter end. More than half of ARI's current loan exposure is in Europe, where there are higher rates of office occupancy and work from home is having less of an impact on office usage.
The two largest U.S. office loans in the portfolio have capital subordinate to ARI, and in the case of the Long Island City office loan, ARI received a partial pay down from the subordinate capital provider during the quarter in exchange for an extension in term. With respect to the balance of ARI's near-term maturities, we are in dialogue with all borrowers and expect full or partial repayment on these loans. Many of the loans coming due this year are secured by hotel assets that have performed their underwritten expectations. ARI recently received full repayment on one such hotel totaling $60 million.
Let me also clarify something I just said, which is in any instance where we expect to get a partial pay down, we expect it to be a negotiated transaction where someone is partially paying us down and further committing to the asset in exchange for additional time on their loan. As we look ahead to the remainder of 2023, ARI is well positioned on multiple fronts. The portfolio continues to distribute stable distributable earnings, even while maintaining excess liquidity on the balance sheet. While ARI's transaction volume is expected to slow this year, Apollo remains active in the commercial real estate lending market on behalf of other managed capital, providing ARI insight into market transaction activity and pricing.
Continued proactive steps have been taken to strengthen the balance sheet and diversify funding sources. ARI's only near-term corporate maturity is the $223 million of convertible notes coming due during the fourth quarter of this year, which we have already indicated we are prepared to pay off in cash as part of our overall forecast model for the year. Before I turn the call over to Anastasia, it is worth highlighting that at ARI's current quarterly dividend run rate of $0.35 per share, the company is paying common stockholders a 15%+ annualized dividend yield, coming off a quarter in which ARI earned $0.51 per share while trading at approximately 60% of book value, with earnings supported by a portfolio consisting of 99% floating rate predominantly senior loans.
With that, I will turn the call over to Anastasia to review ARI's financial results for the quarter.
Thank you, Stuart, and good morning, everyone. ARI produced strong financial results in Q1, with Distributable Earnings prior to net realized loss on investments and realized gain on extinguishment of debt of $74 million, or $0.51 per share. GAAP net income available to common stockholders was $46 million, or $0.32 per diluted share of common stock. The drivers for the delta between net income and distributable Earnings prior to net realized loss on investments and realized gain on extinguishment of debt includes Fed realized events, the increase in our general CECL reserve, equity-based compensation expense, unrealized loss on the interest rate cap, and depreciation on real estate owned, all of which represent add backs for distributable earnings and each contributing about $0.03 per share.
It is worth noting that depreciation expense for this quarter includes catch-up depreciation on our D.C. hotel for the period in which the hotel was classified as real estate owned, held for sale up to the point when it was reclassified back to real estate owned, held for investment. Additionally, distributable earnings include the forward point benefit from our foreign currency contracts. As a reminder, we hedge our exposure to foreign currency risk on a net equity basis by entering into forward currency contracts for all foreign currency nominated transactions at closing. Forward point impact during the quarter represented $5.6 million or additional $0.04 per share benefit to our distributable earnings. Outside of the $0.02 per share of forward points associated with the unwinding of the hedges related to the European loan sales that Stuart discussed. There were no one-time events included in our distributable earnings this quarter.
I want to highlight that ARI currently has an interest rate cap in place for our 2026 Term Loan B, which is set to expire in the second quarter of this year. The cap had flatlined the rate of the Term Loan B at 3.5%, fixing the base rate at 0.75%. Upon expiration in June of this year, it is anticipated that ARI's interest expense will increase by approximately $20 million on an annualized basis based upon the forward curve through the end of the year. Even with the expiration of the cap, ARI still will comfortably cover the common stock dividend this year. Portfolio credit was stable this quarter, with no additional asset-specific CECL reserves taken. ARI recognized a $4.8 million loss in connection with the foreclosure on a loan secured by a hotel asset located in Atlanta, Georgia.
The hotel is now carried on our balance sheet under real estate owned at a basis of $75 million. We currently are exploring several options for the hotel, including a potential sale. I would also like to point out that our two hotel properties, which are now both classified as real estate owned, held for investment, are projected to generate meaningful positive cash flow for the remainder of the year, which would further benefit our distributable earnings. During the quarter, there was an increase in the general CECL allowance of $4.4 million, bringing it to 42 basis points of the loan portfolio's amortized cost basis as of March 31. The increase is attributable to a more conservative macroeconomic outlook, partially offset by the impact of portfolio seasoning as well as loan prepayments and sales.
ARI's book value per share, excluding general CECL reserves and depreciation, was $16.72 at quarter end, an increase of about 5% as compared to March 31, 2022. Book value continues to benefit from the company's earnings in excess of the common stock dividend. With respect to our borrowings, ARI is in compliance with all covenants and continues to maintain strong liquidity, bolstered both by proceeds generated from the loan sales as well as the new facilities Stuart previously mentioned. ARI ended the quarter with $357 million of total liquidity, which was a combination of cash and undrawn capacity on existing facilities. ARI's debt-to-equity ratio at quarter end remained constant compared to the previous quarter end at 2.8.
During the quarter, ARI opportunistically repurchased $7 million of our October 2023 convertible notes at 97% of par, generating return on equity of about 11%. With that, we'd like to open the line for questions. Operator, please go ahead.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Sarah Barcomb with BTIG. You may proceed.
Hi, everyone. Thanks for taking the question. Just taking a look at the watch list, we have several of those maturing over the next few months. Was hoping you could give an update on what it would take for us to see specific reserves there next quarter and how those sponsors have progressed on their business plans as we approach the maturity dates, specifically the retail asset in Ohio and the recently added Chicago office asset, as well as the hotel in Vegas. Any updates, any specific updates there you can speak to?
I'll probably take them in reverse order, Sarah. The retail asset in Las Vegas, where we've got a $20 million position outstanding, the asset is actually in the market to be refinanced at this point in time. As I think you've heard me and others on their earnings call say, hospitality is performing quite well today. We've spoken to both the borrower as well as received a fair bit of information from the brokerage firm handling the refinancing. Sitting here today, the expectation is that we'll be paid off with a refinancing. With respect to the Chicago office building, the asset is approximately 85% leased today. It's a sort of a mid to high single-digit debt yield on our basis.
The sponsor has been feeding the property to date, either through cash injections or guarantees. We expect, though it's not done yet, that they will continue to support the asset, and we'll probably play for time. There's also $20 million of preferred equity in between our loan and the equity holder. We think between both the sponsorship and the pref position, we expect there'll be some sort of negotiated extension of that loan that gets us comfortable with respect to the asset continuing to be supported. In Ohio, which is the asset commonly referred to as Liberty Center, the good news is performance continues to improve. Movie theater is doing better, continuing to recover from the pandemic impact on movie theaters. Occupancy is trending up overall.
There's a couple things on the margin in terms of creating more density, vis-à-vis a potential additional hotel parcel as well as additional multi-family density at the asset that we continue to work through the planning process on. I would say overall the asset is trending positively. We feel very comfortable with where we've got our loan position marked after allowance. And I would say if positive performance continues, there'll be an extension this year, but would hope to seek some sort of an exit for the asset potentially as early as the early part of next year.
Great. Thank you.
Sure.
One more from me. This morning, on the equity REIT side, we saw one company cut their dividend, and it's something that's come up a lot on calls so far this quarter. You know, from the seat of a mortgage REIT, can you sort of talk about, can you clarify for investors how you guys think about, you know, 15% yields right now, how you think about, you know, where you stand with the dividend at those yields and maybe, you know, talk about, you know, buying back stock or, you know, how do you balance that sort of return profile given you're still putting out strong dividend coverage? You know, maybe just clarify how that's different for a mortgage REIT versus, you know, an equity REIT in terms of the dividend yield.
You know, it's a great question. You know, I think your question sort of alludes to the fact that obviously as a mortgage REIT versus an equity REIT, there's a lot less tax benefit that we get, most notably from depreciation 'cause, you know, rarely, if ever, do we own assets, but we actually own a couple now. As my colleagues on the phone with me know, it pains me that we're at a 15% dividend yield this year. That being said, you know, as we think about the dividend, I would say we are at a point now just given how much higher floating rates have contributed to earnings, that I would say, you know, the dividend at this point is really about making sure we distribute all of our taxable income.
At this point, I would say, there's not a lot of wiggle room vis-à-vis taxable income to do anything with the dividend. If anything, if things broke correctly, we might even be faced the opposite situation where taxable income requires a little bit more from a dividend perspective. I'm not ready to commit to that yet. I think vis-à-vis capital structure, we have a $170 million share repurchase plan in place. We were an active repurchaser of our shares during the pandemic. You heard Anastasia refer to the fact that we did buy back some convertible notes when they got to a price that we thought they made sense for us.
We also, coming out of our most recent board meeting, have authority to do some other things in the other public parts of our capital structure to buy back if we think it makes economic sense. You should certainly infer that given my comments on building up liquidity within the ARI balance sheet, I would say one of the things we are certainly thinking about discussing and debating is the notion of how much of that liquidity we wanna use just for what we perceive to be very attractive ROE investments within our own capital structure versus doing the next marginal loan in the market. Very much top of mind right now.
Thank you.
Sure.
Thank you. Our next question comes from Richard Shane with JPMorgan. You may proceed.
Thanks guys for taking my questions this morning.
Sure.
There's a huge disconnect here. Your CECL reserves 42 basis points, I think is what you said. We calculate it slightly differently. Implicitly, the market is pricing in on a levered basis about a 10% cumulative loss rate. What's the difference? Ultimately, this really reverts to Sarah's question from before, if the market... If you guys saw an investment in the world where you thought the loss rate was gonna be 45 basis points, the market was pricing it at 10 points, and you could get a 15% yield on that investment, wouldn't you make it all day long? Which is a way of saying why not be even more aggressive on the buyback?
I think it's a great question, Rick. I think, you know, a couple comments on that. I think, you know, one thing we're always mindful of is our covenants and leverage, which means if we're shrinking the equity side of the book. We need to be mindful of what's happening on the liability side as well, because we can't put ourselves in a box vis-a-vis economic flexibility. It's something we debate often. I think, you know, in terms of what we typically trade on a daily basis, there are limitations in terms of how much we could actually buy back at a moment in time to be fair. As I said to Sarah, we've got the capacity to do it. It's certainly very much on our minds as we think about what to do with our capital.
Then there's also a timing component to it. While I actually, you know, think where things are trading across the sector, not just for ARI, doesn't make sense to what I'm seeing in the market, I'm not sure what actually causes that to change. I would say as a potential buyer of my stock, if I'm gonna buy it, I wanna make sure I'm an intelligent buyer of it, and buy it at the right price. You know, everything you say is very much a part of how we're thinking about things internally.
Stuart, thank you so much.
Sure.
Thank you. Our next question comes from Jade Rahmani with KBW. You may proceed.
Thank you. Well, I just thought I'd follow up on that last framework because I look at it a little bit differently. If we look at the historical spread at which the mortgage REITs trade relative to Treasuries, it tends to be around 650 to 750 basis points. Then you add in a little bit of cushion given an uncertainty premium right now. That would be 11%, 12%, maybe 13% dividend yields. Certainly, if these mortgage REITs issued preferreds, they could be in the 9%-10% range. The common stock dividends should be higher. Just extrapolating that versus ROEs in the 9%, you know, you're already at a discount to book value, 85% of book value, 90%.
The companies are leveraged, they also have liquidity needs if they are going to have non-performing loans. I think the implied losses are more like 4%, which might be extreme, considering, you know, 65%-70% LTVs. Do you disagree with any of that? Curious as to your thoughts.
I'm much more simple in my math, Jade. I basically look at something that's got a book value of $15.50 that's trading at $9.50. Somebody is assuming $6 worth of losses on 145 million shares, plus my TSO reserve. Somebody is assuming that my stock is, you know, worth $1 billion less than what its book value is. Again, we can debate whether there's something in the middle there, but the math doesn't make sense to me.
Okay. Well, I appreciate that comment. Wanted to ask about One Eleven West 57th, since it is such an outsized position. How are sales pace and pricing trending? I think there's been, you know, some decent comps in the market in terms of magnitude of transactions and what the outlook is there. Curious on that specific asset, if you could give any update.
Yeah. I think pricing is, I would say, consistent with where we thought pricing would come out when we took our most recent reserve last quarter. I would say there's about $60 million of sales expected to close in the next month or so, which will go towards paying down both the senior mortgage and the senior most mezz on a pro rata basis. Foot traffic is definitely increasing. I would say, you know, as you talk about pacing, the next 4 months are critical, right? The prime selling season is, you know, spring through fall. We'll know a lot more about pacing over the next 4 months. I would say what happened in the early part of the year from a pacing perspective was generally consistent with what we expected to happen.
Our underwriting assumed things would pick up during the prime selling season. The foot traffic has. We need to see how much of that converts to sales.
As to the $60 million of sales closing in the next month or so, when were those contracts signed?
one was signed very recently, and one, which was a bigger unit, was signed, last year, and there's just been a lot of work being done to the unit on a customized basis for the owner.
Thanks so much.
Sure.
Thank you. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from Steve DeLaney with JMP Securities. You may proceed.
Thanks. Good morning, everyone. Can you hear me?
Yes. Good morning, Steve.
Thank you. Yeah, the landline is down from San Francisco, so I'm dialing in on the cell phone, but glad it works. Stuart, hear you loud and clear on the 15% dividend yield. I would mention, you know, I'm looking at my sheet here, and I've got a couple of brand name sponsored commercial mortgage REITs at 17%. If that makes you feel better, you got some company. You got some company there. I think this will win a.
[crosstalk]Oh, we're-
Go ahead. I'm sorry. I didn't mean to cut you off.
Oh, we're happy for the company. We were just hoping over the year we all tighten, not all widen together. I got it.
Yeah, 100%. Well, you know, I do think, we'll see where the Fed goes. There's nothing that will help the group more than lower rates. Maybe.
Yeah
... 2024, there's some hope for that. This has been an interesting conversation both about capital allocation and targeted return on equity. Given where we are now, 24 company commercial mortgage REITs, I'm wondering if this is like a point of introspection for CEOs and boards as to, you know, the profile of our target portfolios, in terms of, you know, development stage lending or earlier stage, heavy transition versus more stabilized property types, that type of thing. And it, you know, it may, it may pencil out to 200 or 300 basis point lower yield. But, you know, we also have to you know, measure the downside risk.
Jay, you know, there's a lot of debate out there as to what the ultimate hit to book value could be, and obviously people are pricing in some 25%, 30% types of numbers. We'll see. I'm just curious if internally, like today, okay, you've got some incremental capital to lend. The property types that you're interested today, maybe share with us kind of what looks the most attractive. Are you know, is it possible to, in today's market, to go to, you know, maybe lower risk, whether it's industrial, whatever, to a different property profile that would still give you an attractive return versus office, versus condo, et cetera. Just curious your big picture thoughts there about investing the next dollar in actually in the portfolio. Thank you.
No, it's a great question, Steve, and it's one we debate on a regular basis. I think what, you know, the other thing I'd inject into the debate, and then I'll answer your question more specifically, is that what, you know, what we all perceive to your point as safer today might not be safer tomorrow. You know, just use the simple example of hotel assets, which looked to be arguably the riskiest assets during the pandemic and are performing amazingly well today, and there's limited supply, et cetera. I think the notion of what might be safe in the moment is something we wrestle with quite regularly. I think the other thing that is just a reality of the market right now is that capital has not gone away.
Yes, there's, you know, things are being valued differently and priced a little wider, but spreads have probably actually come in over the last three to six months or so. You know, I would say there's nothing from our perspective today, and to be very candid, that is just, you know, the deal of a lifetime. I would say the nice thing is with higher base rates and spreads where they are, you can certainly move more conservative from a risk perspective, but I would define that less about property type and more about what is or isn't being done to the asset, right?
To your, you know, as your question was, you know, whether it's development or conversion risk versus more traditional asset classes in what are perceived to be better markets, you know, I would say we're certainly thinking about it from that perspective. I think we're also spending a lot of time, as is always the case, thinking about it both in terms of ultimate sponsorship, as well as we've moved more and more senior from our positions, it's been, I would say it's fair to say we've been generally pretty happy in most situations where there's been either pref equity or sub-debt behind us as we look to get paid off or work through certain assets that might not have hit business plan.
It's proven remarkably valuable to our franchise to have others behind us, as we work through solutions. You know, not a specific comment on particular asset types, but more a little bit of the flavor of how we're thinking about it, putting out the next margin of all.
Yeah, that's helpful. You mentioned debt capital is not going away. You know, as painful as it's been, this is obviously not the GFC. I'm just curious if there's enough, quote, blood on the water out there that you're seeing any sovereign wealth or mega money starting to nibble around, not so much on the, on the debt side, but on the actual equity, you know, actually coming in and buying distressed properties. Is there any sign of that happening or are we unfortunately not quite cheap enough yet for that to.
There's capital and there is a lot of chatter. I would say we've yet to see any meaningful transaction activity.
Got it. Well, thank you for the comments and all the best.
Thank you.
Thank you. Our next question comes from Stephen Laws with Raymond James. You may proceed.
Good morning.
Morning.
Stuart. Actually, I wanna follow up on Stephen's question, you know, and others have asked about buybacks. I mean, you know, the comment about a lot of peers being at very similar multiples that I think you're very familiar with and other parts of Apollo probably, you know, borrow and do investments with those. You know, have you ever looked at buying a basket of common stocks of your peers? I mean, it gives you similar exposure, valuation, yields. It doesn't permanently retire your capital. You don't have to pay a fee to raise it later. It doesn't change your leverage metrics. You know, we saw a couple of mortgage REITs do that in 2009 after, you know, the, the valuations were in 2008. It, you know, good REIT income, good REIT assets.
It might trigger a taxable gain when you sell it, but that'd be a good problem to have. Just curious about your thoughts on possibly buying some of your peers' stocks.
That's a fascinating question. If you actually look back at the pandemic experience, while not, you know, not in the realm of ARI, there were certainly other parts of Apollo that took a opportunistic view with respect to the mortgage REIT space, more on the resi side than on the commercial side. The premise of your question is accurate. I would say to an extent myself or Scott are involved in those conversations broadly inside Apollo. It's more being a resource for other potential capital where those sorts of strategies are more mandate as opposed to how we perceive ARI as sort of sticking to its meeting as a lending vehicle. I think your question's an interesting one.
Well, very welcome, and we can discuss it further sometime.
Sure.
You know, along those lines, you know, when you think about the tailwind of earnings, the dividend coverage, higher rates, you know, strong portfolio performance, you know, some of which is benefiting from any money caps or continue and those type things. But you look at the forward curve, you know, rates could significantly go up quickly, you know, before, you know, given low repayments before a lot of your capital resets to higher LIBOR floors embedded in new originations. You know, you guys have been more active than most of your peers with regards to using swaps and caps and things to lock in returns.
Have you looked at buying your own floors, just to put those in place since they're not a lot of capital and then turn it over in a 5% LIBOR world and maybe protect spreads as you look out to where the forward curve may be in 18 months?
We'd say, it's a constant dialogue internally. Obviously, there's a lot of expertise in the firm around various hedging and swap strategies and either myself or Scott is constantly sort of pressing on that notion about how we should be positioning the book. Haven't acted yet, but it's very much on the radar, Steve.
Great. Appreciate the comments this morning, Stuart.
Sure. Thanks for your time.
Thank you. This concludes the Q&A session. I'd now like to turn the call back over to Mr. Rothstein for any closing remarks.
Thank you all for participating this morning. Obviously, you know, as things ebb and flow, myself, Hillary, if we could provide perspective or answer questions going forward, always happy to do it. Thanks for the time.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.