Scott Weiner - CIO Stuart Rothstein - CEO Megan Gaul - CFO.

Steve DeLaney - JMP Securities Dan Altshcer - FBR Capital Markets Jade Rahmani - KBW Rick Shane - J.P. Morgan Joel Houck - Wells Fargo.

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. and 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.

We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of the latest SEC filings, please visit our website at www.apolloreit.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.

Sir, you may begin..

Thank you, operator. Good morning and thank you all for joining us on the Apollo Commercial Real Estate Finance second quarter 2015 earnings call. As usual, joining me this morning are Scott Weiner, our Chief Investment Officer; and Megan Gaul, our Chief Financial Officer, who will review ARI's financial results after my remarks.

By all measures, ARI has had a very successful start to 2015. Consistent with the Board’s decision to increase the dividend by 10% in the first quarter, operating earnings per share for the first six months of the year increased 11% as compared to the first six months of 2014.

We believe the growth in earnings and the dividend continues to be driven by the strength of ARI’s origination efforts and the Company’s ability to underwrite and structure transactions that provide attractive risk adjusted returns while maintaining our stringent credit standards.

The Company is committed to invest in approximately $550 million of transactions year-to-date across multiple markets and property types, further evidencing the strength and breadth of our platform. Specifically, during the second quarter, we completed a total of nine transactions totaling $446 million in commitments.

Notably, 94% of the new transactions have floating interest rates and approximately one-third of the transactions were completed with repeat borrowers. To-date, our origination efforts continue to be primarily focused on the U.S., where transaction velocity remains robust and underlying property fundamentals continue to show strength.

The recently completed transactions include loans in attractive markets such as New York, Miami and Washington DC, and varied property types including retail, hotel, industrial, multi-family, and for-sale condo.

The final deal we completed during the quarter was the origination of $325 million mezzanine loan to finance the construction of a new residential condominium tower on West 57th Street in New York City. The floating rate mezzanine loan is part of a $725 million financing consisting of $400 million first mortgage and $325 million mezzanine loan.

As disclosed when we announced the transaction, ARI funded $41 million at closing alongside $50 million that was funded by another vehicle managed by an affiliate of Apollo. The loan has a four-year term and we anticipate that the future fundings will occur over the next several years.

It is our expectation that ARI will syndicate additional participations of the mezzanine loan and we anticipate that at any given time, our maximum exposure to this loan will be around $75 million to $100 million. ARI has been an active financing participant in the New York City condo markets since 2012.

Consistent with prior transactions, we ultimately were attracted to this transactions based upon the loan being well structured, the development team being highly experienced and our comfortable level with ARI’s loan basis and LTV based on our estimate of net sellout value.

We view our last dollar of exposure at less than $2,500 a square foot and the loans appraised loan-to-net-sellout value is less than 50%. We have underwritten this transaction to generate an IRR of approximately 16%. Given our activity in the condo market.

I wanted to give you a quick update on our strategy in this space and talk a little bit about ARI’s current condo exposure.

As we have previously stated on prior calls, ARI identified the opportunity to provide financing for condo projects early in the cycle and as a result, we have been able to capitalize on the opportunity to invest capital at very attractive returns.

Since making our first investment, ARI has taken a very selective approach to transactions and markets, and investments completed to-date have only been in New York City, and Metropolitan Washington DC. At all times, we carefully monitor our exposure to this strategy and we are very hands-on in the asset management over side of each project.

At quarter-end, we had approximately $330 million in net condo exposure spread across five investments. Based upon appraisals, the weighted average loan-to-net-sellout value on the condo representing the net exposure is approximately 58%.

In addition, in those projects that are actually in the process of currently selling units, we have been pleased with both the pace of sales to-date and the price per square foot achieved on sales relative to our underwritten expectations. Before turning the call over to Megan, let me comment briefly on the balance sheet and capital availability.

ARI ended the quarter with a debt-to-equity ratio of approximately 1.2 times, which reflects the expansion of our JPMorgan facility. As stated previously, we believe ARI can operate comfortably with a debt to equity ratio of 1.3 to 1.5 times and therefore we have the ability to add some incremental leverage to the balance sheet.

In addition, we also expect several loans within our current portfolio to partially or fully pay off, providing us with capital that will need to be redeployed.

As always, we are consistently reviewing and discussing our pipeline of opportunities as compared to our capital availability and we will continue to be thoughtful and prudent around balancing growth opportunities with the cost of available capital. And with that, I’ll turn the call over to Megan..

Thank you, Stuart. Good morning everyone. ARI had a strong quarter of financial results across all operating metrics.

For the second quarter of 2015, the Company announced operating earnings of $26.4 million or $0.45 per share, representing a per share increase of 7.1% as compared to operating earnings of $18 million or $0.42 per share for the second quarter of 2014.

Net income available to common stockholders for the same period was $22.8 million in 2015 or $0.39 per share as compared to $22.1 million or $0.51 per share for 2014.

The Company reported operating earnings of $48.6 million or $0.89 per share for the six months ended June 30, 2015, representing a per share increase of 11.3% as compared to operating earnings of $32 million or $0.80 per share for 2014.

Net income available to common stockholders for the six months ended June 30, 2015 was $46.4 million or $0.85 per share as compared to net income available to common stockholders of $37.8 million or $0.94 per share for 2014.

A reconciliation of operating earnings to GAAP net income can be found in our earnings release contained in the investor relations section of our website, apolloreit.com. GAAP book value per share at June 30 was $16.41.

As a reminder, we do not mark our loans to market for financial statement purposes and currently estimate that the fair value of our loan portfolio at June 30 was approximately $12 million greater than the carrying value as of that date.

We continue to focus on expanding ARI’s floating rate loan exposure and at quarter end, 69% of our loan portfolio had interest rate that floated over LIBOR. We estimate that 50 basis point increase in LIBOR would increase ARI’s operating earnings by approximately $0.05 per common share on an annual basis.

With respect to ARI’s capital sources, during the quarter, we expanded the capacity of our credit facility with JPMorgan from $300 million to $400 million. In addition, we announced that through subsidiary, ARI became a member of the Federal Home Loan Bank of Indianapolis, providing us with additional diversity for funding.

We began the process of joining FHLBI prior to the FHFA imposed moratorium, put in place for captive insurers in 2014, at which point the process was halted. While the moratorium was lifted and ARI was invited to join, there is still not clarity as to the final ruling for captive insurers remaining members.

Therefore, at the end of the quarter, we had not used FHLBI facility yet and anticipate remaining cautious with pledging collateral until there is additional guidance from the FHFA. As I did last quarter, I also want to highlight that our G&A expense has essentially remained confident.

Annualized G&A as a percentage of common book value was 52 basis points at the end of the second quarter, which continues to be one of the lowest percentages among ARI’s peer group. Finally, as indicated in our press release, the Board of Directors announced a common stock dividend for the third quarter of 2015 of $0.44 per share.

This is a third consecutive quarter of $0.44 per common share dividend and we are confident ARI will earn the dividend in 2015. Based on Monday’s closing stock price, ARI’s stock offers an attractive 10.7% yield. And with that, I’d like to open the line for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Steve DeLaney from JMP Securities. Your line is now open..

Good morning everyone and thanks for taking the question. Stuart, first for the comments about the new New York Tower and also your exposure to condos generally. Just curious, they’re advertising this as the tallest building in the city I guess.

Is this really kind of -- they’re looking at 432 Park and success there? It feels a little bit like the developers just trying to one up that project that’s being instill up now.

Any thoughts there as to how – is this going to be positioned sort of the same kind of upscale, very, very high end type of property as 432 Park?.

It’s a mix. I mean, if you think about the actual project, Steve, there is actually a retail condo on the base. There are sort of lower priced condos in the middle and I say lower priced in quotes because we are still talking about New York City condo prices. And then there is, I would say, the highest end units at the top of the tower.

I think 432 Park Avenue, I don’t want to comment on anybody’s project, it’s just a different location.

I think being – the location of this project, the views of the park, I think they are probably more looking at the success of 157 and Vornado’s project on Central Park South in terms of where units are selling there and seeing continued demand for units and not location with views of the park.

But I think from our perspective, we were able to create a basis that we are comfortable with. They are obviously expecting to sell units significantly higher than what our basis is. But at least based on the data in the market today, there seems to be plenty of comp to support those levels..

Okay, great. That’s helpful. And as far as, interesting the way you structured it in terms of, obviously this is a build out and you are looking to be putting money out, I guess over the next couple of years.

Just to be clear, so you’ve funded 41 another Apollo fund took down 50, but I was reading footnotes, it sounds like that ARI commitment is for the full 275 that it’s ARI’s job to get this syndicated not Apollo corporately or the other Apollo fund, am I correct there?.

You are correct in that [indiscernible] and you should expect that we will have further announcements on the syndication of it between now and the next time we are speaking sort of make pretty good progress in that front..

Alright, great. And those would be like pari passu type of participations and should we think that the 16% modeled IRR will hold up regardless of how you are – what you are offering out in terms of participations.

Is that accurate?.

Yes, that’s the right way to think about it..

Okay, fantastic. And, Megan, I got your comments on Home Loan Bank of the Indi, I understand the obvious, you don’t want to walk away from existing facilities and then have the Home Loan Bank pulled away from you.

But I am just curious, I am looking at your whole loan facilities at Deutsche and Goldman and those are about 3.7%, it looks like all-in cost of borrowing.

Just curious from your modeling and your talking to Indi, if in fact the captive insurers’ ROL to remain in, do you anticipate a fairly significant cost of funds benefit if you were able to put senior first mortgages on the line there?.

Yes, it is a much less expense of corporate funds and you can choose the term to match the asset you are financing. So it is definitely very attractive, but until those rules are clear, it doesn’t make sense to go in that direction..

I get that, but maybe something we should think about as this plays out and we think about our modeling for 2016, it’s just something I guess to circle back with you there and we’ll obviously all be monitoring the progress. And just one last little quick thing.

Dan pointed out to me that you’ve got a new line item in the income statement, 384,000 from a joint venture.

Is that related to the German bank?.

Yes, that is related to the German bank..

Okay, very good.

And you are just accounting for that as earnings come through on sort of the equity method approach?.

Yes, that’s just an equity pickup. We haven’t received any cash distribution and that’s why we’ve – yes, and that’s why we’ve backed it out of the operating earnings definition as well..

Okay, well, thanks everyone. Good quarter..

Thanks, Steve..

Our next question comes from the line of Dan Altshcer from FBR Capital Markets. Your line is now open..

Thanks, and good morning everyone. I just wanted to try and triangulate one of your comments, Stuart, around the potential for incremental debt financing or debt leverage.

It looked like in the presentation, the current weighted average IRRs are equal to the fully levered IRR, so I just want to make, A, that’s correct and around that statement also that it seems like somewhat [indiscernible] balance sheet today everything is kind of running at full steam in terms of the potential, so it would seem as if additional leverage capacity would be maybe not at the asset level, but more at the corporate level?.

I think it is, I think you’re correct in your initial assumption in terms of the way the leverage are running and sort of how we finance things today.

I think, yes, we think about it at the corporate level, but I think you also need to think in terms of to the extent we are deploying new capital in terms of assets that might be leverageable, the equity commitment for those deals would be lower to the extent we just finance them sort of real time is we are actually completing the transactions.

So I think it sort of depends on asset mix in terms of what we add assets specifically. But then we are also obviously spending time speaking about things at the corporate level. .

Got it. Okay, thanks, Stuart, that’s helpful..

And then – it’s Scott, I would actually add one more thing is that as some of our projects transition from construction to completion, we would then be able to lever them, so a perfect example is our retail projects in Ohio where it’s completely levered out, it’s going to have its grand opening in October, which we would be able to delever, but we are not modeling any kind of higher IRR, but once we are let’s say, able to leverage on it, the IRR would go up.

.

Okay, that’s a good clarification. So those projects are not really the potential leverage, is not really being captured in the displayed IRRs. .

Correct..

Correct..

Same thing with the condo project, we are not financing our condo projects generally, but once something was completed and it effectively became an inventory loan, we then would also be able to put leverage on that like our projects down in suburban DC..

Yeah. Okay, cool. That’s good clarification. Thank you.

Kind of in that same vein, at least in the condo, Stuart, you mentioned that the projects that are currently in the process of being sold out or having some good results, can you maybe help quantify, maybe how much of those are actually now in process of being sold out and what maybe you’re seeing on the sales front versus what your basis is?.

You know what, I mean, the first project that we sort of did in this phase that I think everybody recalls was 56 Leonard, which is down in TriBeCa, which we underwrote that at a last dollar of exposure, call it, 1,500 to 1,600 a foot sort of assuming they would sell at roughly 3,000 a foot on average.

So that project is effectively sold out, call it, comfortably north of 3,000 a foot, and basically our loan will be outstanding either until the building is finished being completed and they wait to pass off at the end or they decide to sort of refinance this out, but as of right now, we are assuming the loan is going to be outstanding for a while.

I would say the newest projects in which we’ve started to see good sales activity or the actually the two in Bethesda, Maryland that Scott referred to, where we have now started to see sales activity and I would say the numbers have been slightly above what our per square foot assumptions were.

And then the 12 East 13 Street in New York, easy for me to say, which is really a sort of a jewel box building with a small number of condos, but large condos. We have had three executed contracts during the first half of the year and good discussions on a few others as well.

So across the board, we are seeing good sales activity, obviously way too early to know about 111 West 57 Street, which was our large commitment during the second quarter, but that will obviously be one that we will update on a go forward basis.

But for all the deals we are in and I try to get it across in the comments, we are literally getting weekly updates on what’s going on, we are seeing the projects on a regular basis and tracking what’s going on with respect to both completion of development as well as sales contracts on a real time basis to know where we stand vis-à-vis our underwriter.

.

Great. That’s a really good color. Just one quick one for me, final one is, the first half of the year has been nothing short of very strong in terms of getting capital out the door and racking up a huge amount of future funding commitments to lock in some earnings into next couple of years.

But we approach third quarter in the kind of summer period, are you stuck in kind of a little bit of a seasonal slowdown now from maybe of the new activity and maybe just letting some of those future funding commitments just roll on as opposed to trying to remain really, really active like the first half of the year was, at least for third quarter?.

Look, we're active in the market and there is a lot to look at. I think it is one of those things where given the broader Apollo footprint, we’re always trying to stay active in the market and find ways to play at different price points.

I would say from ARI’s perspective, what we’re trying to balance right now is capital availability, both in terms of what we expect from repayments as well as costs of putting new financings in place versus remaining active and trying to take down deals that we think fit with the overall ARI strategy and portfolio. There is a lot to look at.

I think you’re correct in that we will certainly go into a summer slowdown period where not a lot will get closed, so to speak, but there is still a lot to look at, underwrite and potentially commit to and I think for us right now, the challenge is just balancing sort of pace of growth with cost of capital and I think what we've done over the first six months of the year actually puts us in a very good position for the remaining six months of this year and the early part of next year, such that I think we can be fairly selective in what we choose to do and make sure we’re appropriately balancing growth with deployment and make sure we don't get out over our SKUs..

Okay, that's perfect. I'll drop back into the queue. Thanks so much..

Our next question comes from the line of Jade Rahmani from KBW. Your line is now open..

Hi, Jade..

Thank you. Hey, how are you? Thanks for taking the question.

Wanted to see if you could provide any sense of where the market is, the plan of seeing a lot of borrowers [indiscernible] regarding the state of the market, potential floppiness, concerns about where we are in the cycle?.

I would say no and I’d actually commented not from what we see for ARI [indiscernible] perspective that we also run a real estate private equity fund here that is a borrower in the market for various deals that we're doing and I would say when we’re trying to finance things where we are the equity through one of our funds, I would say there has been plenty of capital availability in some respects.

I would say still very competitive amongst lenders on the front end of deals. So far stabilized cash flowing assets, there is still healthy competition amongst both banks and conduit shops for those types of deals, particularly on a fixed-rate basis.

And I would say there has been no notable widening, despite, call it, the volatility in the equity market and in the REIT market over the last months in terms of doing real estate deals, there has been no significant shift today from our perspective..

Okay, thanks for that.

Regarding the multifamily development in North Dakota, can you give an update on how that's performing? Are you seeing any issues there, we've heard about a couple of potential projects in North Dakota that could have issues?.

Look, I think from our perspective, the project is performing consistent with, I would say, the low-end of our expectations. So it is leasing up.

One of the key aspects of the deal from our perspective was that there is a lot of fresh equity in front of us in the deal and a well-capitalized equity investor and we also have a cash strap, up to 15% debt yield. So the project is performing as we would have expected.

We are trapping a fair bit of excess cash and actually got to the point where we actually, as the borrower -- as the lender, are able to pull out some of that excess cash for our benefit. So it's a challenging market, no denying that.

I think the deal is well structured and I think we're monitoring closely, but it’s performing as we would have expected it would be performing sort of in the environment we're in right now..

And from that perspective, we’re at a double-digit debt yields, that means we’re not at all considering the investor, imagine the property is leasing, it is on the lower end of rents as companies pull back with their packages that they’re giving employees and stuff, but still very pleased with the leasing momentum and between the cash flow suite and the scheduled amortizations, the loans amortized substantially already..

So the kind of LTV is 71%?.

Yes..

Okay, and what level of occupancy is the building at right now?.

I think the last I checked it was running in the 80s but we can get you a more specific number, I think it was high 80s, low 90s, we’ll get you a more specific number post call..

I think the last I checked it was running in the 80s but we can get you a more specific number, I think it was high 80s, low 90s, we’ll get you a more specific number post call..

Okay..

I think that to Scott’s point, the units are getting occupied at the lower end of the rent range vis-a-vis what was thought from the equity investors perspective at the time of underwriting but there is demand for real multi-family units relative to what many people have been living in during boom in North Dakota..

And how much more duration is there on this loan?.

Off the top of my head, I would say three -- three or four more years..

Okay.

Just on the 111 West 57 deal, I think previously you had made cautious or somewhat cautious remarks regarding that 57th Street ultra luxury corridor and this seems like it was a special situation, so just wanted to find out if you’re view has changed with respect to that area and what gives you confidence in projected demand given what’s happened with the currency market and also the pipeline of new projects projected to come on-line in that same area over say the next two plus years..

Certainly guilty as charged with respect to past comments on the super high-end corridor on 57th Street I think, overall we continue to remain cautious as I indicated in my comments, a lot of this from our perspective came down to being able to create a financing at a basis that we were very comfortable with, if you think about units in that corridor, depending on the deal probably being marketed at somewhere between $7,500 to $10,000 a foot for us to be able to create last dollar of exposure at roughly $2,500 a foot, gave us a lot of confidence but I think it’s safe to say this is our bet along that corridor and we like our basis but generally speaking remain cautious at anything that would led us to being a lender at a basis much higher than where we are in this deal..

Okay. And just lastly I guess, LTV I think some of your statistics for 2Q showed a weighted average 54%, yet the mix of subordinated mortgages was close to 90% and the weighted average IRR was 15%.

So I think that, it would be helpful if you can provide some color on either how loan to cost would be or a loan on current appraised value, how that would compare to that LTV of 54%..

I mean, I think the best way to look at it is, if you look in our supplemental, you see first mortgages are in an LTV of 61% and subordinated loans are at 64% if you’re talking specifically about what we did just during the quarter.

Again, 54% as I commented on some of the condo deals, loan-to-net-sellout value is specifically lower than that but we’re happy to talk about more details today..

So the 54%, is that based on projected --.

Yes, I mean, if you think about the size of the 111 West 57 project and loan-to-net-sellout value which I implied was less than 50% in my comments that brings the average down significantly..

Okay. Great, well thanks very much for taking my questions, I appreciate it..

Our next question comes from the line of Rick Shane with J.P. Morgan. Your line is now open..

Thanks guys for taking my questions. Two, one on New York and one of Williston.

First in terms of the condo project in New York, what are your concentration limits as that is drawn down, will you continue to build the position or is the expectation that you’ll syndicate out most of the dollars coming in?.

In terms of the 111 West 57 project, the project is -- we’ve syndicated out $50 million of $325 million today. So, we’re down to $275 million. I think at any given point, we’ll end up holding $75 million to $100 million and we’ll syndicate out the rest..

Great. That’s very clear and helpful. Thank you. In terms of Williston, it’s a project that’s a combination of apartment buildings and single family homes. You talked about 80% occupancy.

Is there any meaningful difference between the units and the homes in terms of occupancy and you alluded to the fact that it’s sort of performing at the low end of your range with that 80% occupancy? Are the rent -- are you seeing rent concessions versus your expectations as well?.

Just to clarify, I think it’s leased in the high 80s. So, better than 80%. I think you’re seeing lower starting rents than would have been anticipated six months ago.

I would say, most of the economics, if you just think about the project, is predicated on what happens with the multifamily units and again to Scott’s point, even with a lower rental rates, we’re currently lending against a project that’s based on our basis is generating a double-digit debt yield and we get all the cash until they achieve 15% debt yield plus amortization.

So, I feel pretty well protected at this point and it’s sort of performing at the low-end of expectations, but still comfortably from a lender’s perspective, we feel fine is to where we are..

Got it.

And then just circling back on the first question, which is any meaningful difference between single families and the multis?.

Not at this point, no..

Okay. Thank you, Stuart..

Thanks, Rick..

Our next question comes from the line of Joel Houck with Wells Fargo. Your line is now open..

Thanks for taking the question. The proprietary origination strategy that you guys have now kind of fully developed is working quite well as evidenced by higher returns and earnings power of the Company.

I’m wondering given kind of where you are and I’m talking about ARI perspective, if we start to see volatility in CMBS spread widening against the spread tightening, is that something you would look at or is it something kind of in the past where you have better opportunities on the origination front and there is no need to introduce undue volatility and book value from higher exposure to CMBS?.

I think the bar is set pretty high for something big interesting enough in the CMBS space relative to what we see in either the first mortgage or mezzanine these days. Away from ARI, we’re in the CMBS market anyway, we have the CMBS trading group here at Apollo.

So, we will look at the market but I would say from a return perspective and also I think given some of the issues you highlighted in your question, I would say the bar is set pretty high at this point in terms of anything from a securities perspective that might be attractive to ARI..

Okay. That’s why I thought I just want to clarify.

The last one just really has to go with or deal with certain I guess exposure limits by property type, is there from ARI’s perspective, certain limits of how much you will invest in say condos or retailer specific property or geography?.

There is nothing formally stated but I would say as you think about our discussions with our investment committee and then ultimately in presenting our portfolio to obviously analyst investors, internally, we spend a lot of time thinking about exposures.

The two we probably focused on most today not surprisingly if you look at our portfolio are both exposure to for-sell condo, which I commented on earlier and then exposure to New York City in general.

There is no stated limits but we sort of review exposures on a real time basis and certainly as part of our investment committee process around any new deal consider where that puts us across the portfolio..

There was part of our industry guidelines with our board where we do have a limit of 15% of equity in anything or deal, so we did discuss at length the 57 Street here with our board and our syndication plan, given why we are making the large commitment, we are only funding smaller dollars, but so we feel we have a limit per deal..

Again, congratulations on a great quarter..

Thanks, Joel..

[Operator Instructions] At this time, I am showing no further questions. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone, have a great day..