Apollo Commercial Real Estate Finance - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 beat consensus on both EPS and revenue: Distributable EPS of $0.26 vs $0.25* and revenue of $67.8M vs $48.4M*; GAAP diluted EPS was $0.12 and total net revenue per company reporting was $70.9M, down year over year on lower other income and FX hedge marks. Bold beat reflected strong origination ($1.4B commitments) and rapid redeployment with minimal cash drag, while GAAP remained pressured YoY by lower total net revenue and hedge mark-to-markets.
• Portfolio scaled 12% sequentially to $8.6B across 53 loans with 98% first mortgages, 96% floating, 7.8% w/a unlevered all-in yield; w/a risk rating held at 3.0; no new asset-specific CECL allowances.
• Balance sheet extended: refinanced 2026/2028 term loans with a new $750M Term Loan B due 2030 at SOFR + 3.25%; added ~$1.4B of incremental secured borrowing capacity; next corporate maturity now June 2029.
• Dividend intact and covered: $0.25 declared for the quarter; DE coverage ~104% this quarter vs ~96% in Q1; subsequent $18M legal settlement expected to lift next-quarter BVPS and provide additional redeployment fuel—both supportive of dividend trajectory and estimate revisions.

What Went Well and What Went Wrong

• What Went Well
  • Capital deployment and scaling: $1.4B of Q2 commitments (100% first-lien, 8.0% w/a unlevered all-in yield) with $916M funded at close; YTD $2.0B commitments with $1.4B funded; portfolio up 12% QoQ to $8.6B.
  • Funding and liquidity: New $750M TLB due 2030 at SOFR + 3.25% extended maturities; three new/upsized secured facilities added ~$1.4B of capacity; $208M liquidity at quarter end.
  • Focus assets progress: 111 W. 57th saw nine closings ($170M proceeds; $141M basis reduction) with 11 units remaining; The Brook began leasing (target modest cash flow positive early next year), monetization targeted in 1H26; Liberty Center marketing commenced.
• What Went Wrong
  • YoY GAAP contraction: Total net revenue fell to $70.9M from $81.1M and GAAP diluted EPS declined to $0.12 from $0.23 on YoY factors including hedging impacts; net income to common fell to $17.7M from $32.7M.
  • Margin compression: Net income margin % down YoY and sequentially (Q2’24: 50.5%, Q1’25: 42.1%, Q2’25: 30.6%) amid revenue mix/hedge effects, despite resilient net interest income.
  • Under-earning capital headwind persists near-term: ~$300M net equity tied in Brooklyn REO and remaining exposure at 111 W. 57th continue to earn below target until monetized (management still expects material uplift as redeployment continues).

Transcript

Stuart Rothstein (Director, CEO, and President)

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. Volatility 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 focused 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 re-energized 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 focused 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 nine 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 focused 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 the refinancing of our outstanding term loan B facilities in the past quarter.

In June, we completed a new five-year floating rate $750 million term loan B, which repaid our existing two 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.

Anastasia Mironova (CFO)

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 a 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 104%. 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 unleveraged 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 funding 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 funding for previously closed loans. Repayments and sales totaled $631 million during the quarter. Importantly, with the continued redeployment, 41% of our loan portfolio at 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 in 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 bridges taken off 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 three 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 and drawn credit capacity on existing facilities, and loan proceeds held by the services. 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.

Stuart Rothstein (Director, CEO, and President)

Thank you, Anastasia. Before we turn the call back to the operator to start with questions, I just want to highlight that for 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 (participant)

Thank you. As a reminder, to ask a question, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Doug Harter with UBS. You may proceed.

Doug Harter (Equity Research Analyst)

Thanks. Hey, how are you guys today? 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 West 57th Street is progressing. How do you think about The Brook now that you're starting to lease? What could be a timeframe 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?

Stuart Rothstein (Director, CEO, and President)

Yeah, look, I think at a high level, and I'll just sort of refresh for everybody's memory, The Brook is, you know, 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, B2B, a lottery, and qualifications, etc. 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, you know, approaching 15% leased on the market rate side of things. I think with progress made on the leasing side, the asset will turn, you know, modestly cash flow positive in the early part of next year.

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. As a reminder, it's roughly, you know, just shy of $300 million worth of capital today that is effectively earning zero from our perspective.

Doug Harter (Equity Research Analyst)

Got it. 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 long, long duration cash flows, or is the ultimate plan to kind of monetize and move on?

Stuart Rothstein (Director, CEO, and President)

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.

Doug Harter (Equity Research Analyst)

Okay. Appreciate the answer. Thank you, Stuart.

Operator (participant)

Thank you. Our next question comes from Jade Rahmani with KBW. You may proceed.

Jade Rahmani (Managing Director)

Thank you very much. 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, you know, material upside for shareholders?

Stuart Rothstein (Director, CEO, and President)

Yeah, there is one small parcel that we refer to for now as the Western parcel, if I've got my geography correctly. In between The Brook and the Western parcel, there's actually a building that we don't own in between us that sits on two 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 would potentially greatly increase the density of what can be done on the Western parcel. If we're able to figure it out, I think there's definitely, you know, upside to the ARI shareholders, but I would say too early to predict the likelihood of that right now, but discussions are ongoing.

Jade Rahmani (Managing Director)

Thanks very much. On 111 West 57th Street, where do you expect the basis amortized cost in the loans to be at year end or maybe early, say, 1Q of next year?

Stuart Rothstein (Director, CEO, and President)

Look, I think it's a bit of a timing question as you think about when, you know, units get sold. At this point, there's 11 units left. 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.

Jade Rahmani (Managing Director)

Okay. One overarching question has to do with the capital structure and leverage of the company. Your leverage is around four times today, but that includes significant non-earning assets. 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?

Stuart Rothstein (Director, CEO, and President)

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. That is an asset that we can get capital back and put to work pretty meaningfully without dramatically changing leverage levels. 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.

Jade Rahmani (Managing Director)

Thank you very much.

Operator (participant)

Thank you. Our next question comes from Harsh Hemnani with Green Street. You may proceed.

Harsh Hemnani (Senior Analyst)

Thank you. 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?

Stuart Rothstein (Director, CEO, and President)

We never predict the actual size, but I think if you assume we are able to continue to work on focused assets, pull capital back, which effectively is equity, and then redeploy the equity at three to four 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 focused asset or under-earning asset, I could put it into a new loan that, headline-wise, will be three to four turns levered when we get it done.

Harsh Hemnani (Senior Analyst)

Got it. That's helpful. 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. Is it probably fair to assume that incremental growth from here will continue to be driven by leverage?

Stuart Rothstein (Director, CEO, and President)

I think it'll be, you know, not all of the assets are levered today. Certainly, 111 West 57th Street is not levered today. Liberty Center is, you know, under-levered relative to what a loan asset would be. 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.

Harsh Hemnani (Senior Analyst)

Got it. Thank you.

Stuart Rothstein (Director, CEO, and President)

Sure.

Operator (participant)

Thank you. Our next question comes from John Nicodemus with BTIG. You may proceed.

John Nicodemus (VP of Equity Research)

Hello, and good morning. We've seen more activity in the CRE transaction market in recent weeks, something I'm sure your team's 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? Thanks.

Stuart Rothstein (Director, CEO, and President)

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. 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, etc. 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 today.

John Nicodemus (VP of Equity Research)

Great. Really appreciate that, Stuart. 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'm just curious if that's something that your team at ARI is monitoring or looking to add in the near to medium term. Thank you.

Stuart Rothstein (Director, CEO, and President)

Yeah, I would describe it as best as monitoring or as 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, quote, unquote, "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. On the radar screen, given existing capabilities inside of Apollo, definitely something that we talk about episodically. I would say sitting here today, no meaningful shift in strategy expected.

John Nicodemus (VP of Equity Research)

Thanks so much. Appreciate the time.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Our next question comes from Rick Shane with JPMorgan. You may proceed.

Rick Shane (Financial Consultant)

Hey, Stuart. Thanks for taking my questions this morning. I apologize if 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. It looks like it's probably the Federal Reserve was probably put on in the mid-30s - low 40s in terms of basis points on a reserve rate. Is that correct? Is that the way we should be modeling any further expansion of earning assets in terms of growth going forward?

Anastasia Mironova (CFO)

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

Rick Shane (Financial Consultant)

No changes to your macro assumptions?

Anastasia Mironova (CFO)

No.

Rick Shane (Financial Consultant)

Great. Okay. 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. It's probably, you know, 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?

Scott Weiner (Chief Investment Officer)

Yeah, it's Scott. Look, we continue to be very constructive on all forms of housing. 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 and not. I think this is a time that certain types of hotels we're finding interesting. On the office front, certainly, transaction activity has picked up, and we're starting to see stuff. For now, not really looking to do that in ARI. We're doing that elsewhere on the platform. There still continues to be a very large focus on the % of office in our portfolio. Based on our long-term lease deal in London, it doesn't seem that people differentiate different quality of office deals.

For that, we'll probably not be doing, we won't be seeing ARI doing office deals. We continue to find deals in both U.K, Europe, and U.S. of interest. It's really just continuing what we've been doing. I don't see us really doing ground-up development, 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 a creative financing. I think that's the only area where you'll see us doing construction in ARI.

Rick Shane (Financial Consultant)

Hey, Scott, thank you for the insight and for really, you know, sort of swinging at that pitch for us. We appreciate it.

Operator (participant)

Thank you. Our next question comes from Jade Rahmani with KBW. You may proceed.

Jade Rahmani (Managing Director)

Thank you. Would prevent the dividend from being increased, and do you also expect any change to the longstanding policy of the company to generally pay out the lion's share of earnings as dividend?

Stuart Rothstein (Director, CEO, and President)

I mean, look, the short answer, Jade, is there's nothing material from an NOL perspective that would, quote, unquote, "give us tax protection" to rising earnings. 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, you know, give our investors, you know, 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, you know, 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 a penny or two high or a penny too low in any given quarter. We'll always, you know, review policy with the board on a quarterly basis.

I think your question is a good one, and I think, you know, we expect to handle things going forward the way we've handled them in the past.

Jade Rahmani (Managing Director)

Thanks. Lastly, I wanted to ask about seniors' housing. It seems to be an area of focus of the company. Is there a broader thesis you can talk to in that space? I know the demographic trends are particularly favorable in that asset class.

Scott Weiner (Chief Investment Officer)

Yeah, no, I think that's exactly it. I think it's certainly not every market, but most markets, certainly in the U.S. and U.K., have a supply-demand imbalance. Clearly, the demographic, as you said, continues to grow. We're very much focused on private pay. These are people who can afford and are choosing to live here. I would say it's also, on 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. We're doing it generally in more newly developed properties and stuff that have all the amenities and things. We think it's an extension of our housing thesis.

Jade Rahmani (Managing Director)

Thanks very much.

Stuart Rothstein (Director, CEO, and President)

Thanks, Jade.

Operator (participant)

Thank you. I would now like to turn the call back over to Stuart Rothstein for any closing remarks.

Stuart Rothstein (Director, CEO, and President)

Thank you all for participating today. As always, myself, Anastasia, and Hillary are available if people have follow-up questions after the call. I hope everybody enjoys the rest of the summer. Thank you.

Operator (participant)

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.