Good day, ladies and gentlemen and welcome to the Apollo Commercial Real Estate Finance's Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. 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 Incorporation 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 those 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 our latest SEC filings, please visit our Web site 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..

Thank you, operator. Good morning and thank you for joining us on the Apollo Commercial Real Estate Finance Fourth Quarter 2015 Earnings Call. Joining me this morning as always are, Scott Weiner, Chief Investment Officer of our manager and Megan Gaul, our Chief Financial Officer who will review ARI's financial results after my remarks.

Before I comment on the current state of the market, I want to spend few minutes recapping 2015 which was an exceptional year for ARI on many fronts. The Company committed to approximately 1.1 billion of real estate debt transactions and grew our investment portfolio to approximately 2.5 billion.

To fund our growth we strengthened and expanded ARI's balance sheet having upsized our main credit facility, in addition to completing two attractively priced capital raises which increased ARI's equity market capitalization to over $1.4 billion.

Our success in effectively managing capital raising and deployment in 2015 was evidenced by an investment portfolio that generated record operating earnings for the Company.

ARI's strong earnings coupled with our continued confidence in what the Company's investment portfolio will generate going forward resulted in our Board of Directors increasing the quarterly dividend per share of common stock twice during the year for a total per share increase in the quarterly dividend of 15%.

We are extremely proud in ARI's performance and we're pleased to be able to pass on the benefits of the Company's success to our shareholders. Beyond just the volume of capital deployed in 2015, it is worth noting several important metrics with respect to our investment activity.

During the year we directly originated approximately 87% of our loans and over 56% of our transactions were with repeat borrowers.

We have spoken often about the depth and quality of our originations platform and the benefit borrowers see in our ability to structure and execute transaction and we believe these metrics demonstrate the value of the platform we have built.

Our average investment size grew to approximately $50 million and we completed transactions for several new property types and in several new markets.

We also completed a few larger deals during the year in which ARI’s syndicated portions of loans to other fronts managed by Apollo, demonstrating the continued benefit of being a part of the broader Apollo platform.

Our mix of first mortgage and subordinated debt was approximately 40% and 60% respectively and the weighted average loan-to-value for all 2015 transactions totaled 63%.

At year-end ARI's commercial real estate portfolio totaled $2.5 billion, representing 52% growth on a year-over-year basis and was underwritten to generate a leveraged weighted average IRR of 13.8%. The portfolio remains diversified both geographically and across property sectors.

At quarter-end, we had approximately $330 million in net condo exposures spread across six investments.

Based upon appraisals the weighted average loans and its value on the condos is approximately 58% and sales at our condominium projects in both New York and Bethesda, Maryland are tracking well and we are very comfortable with ARI's loan bases and the structures we have in place for each of these loans.

At this point I would like to take a few minutes to discuss the current state of the market. As many of you listening to this call are aware 2016 has started with tremendous volatility in the capital markets.

In commercial real estate this volatility is most evident in the CMBS market where spreads have continued to gap that out, as well as at the RMZ index which is down approximately 9% since the beginning of the year.

As a reminder, we do not participate in the conduit lending market and therefore the volatility in the CMBS market has minimal impact on our core lending business. If anything we believe the challenges faced by conduit lenders and the general uncertainty around value and pricing could create effective risk adjusted investment opportunities for ARI.

Away from the capital markets, to-date real estate fundamentals across most markets and property types have remained strong and there continues to be a robust transaction volume, two factors that bode well for our business.

While the volatility with the CMBS market has resulted in a slight decline to ARI's book value in Q4 due to lower marks on our holdings, we remain comfortable with our existing position and we anticipate our CMBS portfolio will continue to deliver levered returns consistent with our underwriting at the time of investment.

As we look to 2016 we believe ARI is well positioned for another solid year. As always our focus remains on keeping our capital efficiently deployed, being very thoughtful around credit and risk adjusted returns and continuing to earn our dividend.

In terms of investing we have already closed $300 million of new transactions to-date and we have approximately $90 million of future fundings from previously closed investments scheduled to occur throughout the year. In addition, we expect approximately 230 million of loans will be repaid during 2016.

We remain active in the market looking for new transactions and we will look to grow opportunistically, as always we will seek to ensure a balance between the investment opportunity and our ability to access attractively priced capital.

However, I want to emphasize that our ability to be active in the market and earn the dividend is not predicated on growing the company or raising additional capital. Before I turn the call over to Megan I wanted to comment on our recent announcement that Megan will be leaving her position as CFO in June to pursue other opportunity.

Megan has been an integral part of the ARI team and we are sad to see her go. She has agreed to stay through the filing of the Q1 2016 10-Q and we have commenced a search to find her replacement. We are confident we will find a new candidate before Megan leaves in June and with that I will turn the call over to Megan..

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

For the fourth quarter of 2015 the company announced operating earnings of 32.4 million or $0.48 per share, representing a per share increase of 6.7% as compared to operating earnings of 21.2 million or $0.45 per share for the fourth quarter of 2014.

Net income available to common stockholders for the same period was 21.4 million in 2015 or $0.32 per share as compared to 20.2 million or $0.43 per share for 2014.

The company reported operating earnings of 112.7 million or a $1.90 per share for the year ended December 31, 2015, representing a 12.4% per share increase as compared to operating earnings of 74 million or a $1.69 per share for 2014.

Net income available to common stockholders for the year ended December 31, 2015 was 91.4 million or a $1.54 per share as compared to net income available to common stockholders of 75.3 million or a $1.72 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 Web site apolloreit.com. GAAP book value per share at December 31st was 16.21. The slight decline from last quarter was primarily driven by unrealized mark-to-market losses on our CMBS portfolio.

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 December 31st was approximately $13.4 million greater than the carrying value as of that date.

At December 31st, 81% of the loans in our portfolio had floating interest rates and we continue to position the portfolio to benefit from an increase in short-term rates. We anticipate that if LIBOR were to increase 50 basis points our portfolio would generate an additional $0.09 per share in annual operating earnings.

With respect to ARI's leverage, ARI ended the quarter with a 1.1 times debt to equity ratio. During the quarter we increased the capacity on our JPMorgan facility to 600 million from 400 million and extended the maturity date for another year with a one year extension option.

I also wanted to highlight that while ARI was a member of the Indianapolis FHLB we never used the facility and have no outstanding balances. Therefore we are not impacted by the recent decision by the FHFA to discontinue membership for capital insurance.

Our G&A expenses continue to remain low, G&A as a percentage of common book value was 47 basis points for 2015 which continues to be one of the lowest percentages among ARI's peer group. As Stuart mentioned the credit quality of our portfolio remains stable and ARI has not locked any principle today.

Additionally, we review each loan in our portfolio from permit individually each quarter and have determined that no loan loss reserves are needed at this time. The one loan, I would like to highlight is our first mortgage loan on a multifamily property located in Williston, North Dakota.

You will note on Page 10 of the supplemental that the LTV of the loan is now approximately 90%. Given the ongoing instability in the oil and gas market rents and occupancy of this property continued to be lower than we originally underwrote. However the loan is performing and the property continues to cover debt service.

We believe the loan is well structured and the borrowers are committed to ensure that the property performance remains on track. Finally I would like to highlight ARI's attractive dividend yields. Based on Monday's closing price ARI's stock offered an attractive 11.8% yield.

Given the strength of our results to-date and our previously stated goals to establish a consistent quarterly dividend that is covered by operating earnings and NAREIT distribution requirement, we are confident in ARI's ability to earn the quarterly dividend in 2015.

The Board will meet in mid-March to discuss the Q1 dividend and we will make an announcement shortly thereafter.

And with that I would like to open the line for questions, operator?.

Thank you. [Operator Instructions] Our first question is from Steve DeLaney with JMP Securities. Your line is open..

Stuart it appears that you guys have found another opportunity in Tribeca in terms of a conduit conversion, can you remind me is this your second or third kind of project there in that sub market?.

This has been our second -- sorry second, the first one actually was repaid it was [Multiple Speakers] in fact we have seen return and that was a ground of construction that we had done, where we paid middle or end of last year, this is a conversion of district building.

I would say not as high end as that deal but a conversion in distinct building that has been underway for a while. So, we partnered -- we declined and we partnered with a commercial bank that we know well to do the deal..

Can you comment on sort of what the as far as the price point with the like square footage -- cost per square foot here versus the one that was recently paid off?.

I would say now that the one that was paid off was kind of targeting stuff or sales in kind of straight to probably 3,000 of foot..

It finished out a little about 3,000 a foot..

Right, this one I think is targeting less particularly your sense -- our last dollar is around 1,400 a foot for stuff that the sponsor and brokers and we think it's going to sell well in excess of that..

And you had I guess it is for Megan you had a nice revenue pick up in the fourth quarter it appeared from your joint venture about $3 million which was most of the revenue of 3.5 for the year, could you comment on that as to whether that was just sort of a routine equity accrual in earnings or was there a one-time an item that was more of a one-time [Multiple Speakers]..

It's a mark-to-market valuation adjustment, so..

It was, okay..

Yes, so that's why we back it out of the operating earnings because of unrealized that is not distributable income..

So, that was fair value and kind of offset some of which you had on your CMBS, okay great [Multiple Speakers]..

Steve actually I correct myself, Steve I am sorry it was actually our third -- it was our third deal, we'd actually done a conversion of an office building in Tribeca that was paid off through sales and we did a ground up construction in Tribeca so this would be actually our third deal..

Okay well thanks I was thinking it was that you had -- this would have been the third but I guess I didn't trust my old memory there, but I knew that is a market that -- is an emerging market that you guys have weaved in and have found the opportunities. Thanks for clarifying that Scott.

And then I guess lastly Stuart this just kind of ties into your comment obviously the equity markets here recently seemed to be telling us that the equity markets are calling the top of the CRE market cycle and the only question that seems to remain in stock market’s mind is whether that ends with a bang or whether it ends with a whimper.

It doesn't sound like from your comments that fundamentally that you're seeing any deterioration either in fundamentals and importantly you commented on transaction activity and I guess specifically a high profile project that you're involved with like the Steinway building on West 57, I mean is it your understanding that despite all the volatility in CMBS and market disruptions that the developers there are -- it's their plan to continue to march forward and at this point nobody's pulling back and saying okay I am putting my project on mothballs till the market settles down you could -- any color there would be helpful..

First a few comments, first of all obviously what's going on, on the screen with respect to commercial real estate, it's not just about commercial real estate.

Obviously if we look at the broader indices, so I don't want to make it just about commercial real estate, I think it's also important to remember about commercial real estate that despite growth of the REIT sector over the last 15 years, there is still much more private market activity in real estate than public market activity in real estate.

And then lastly, real estate tends to be a lagging indication, right, it is not a leading indicator, generally.

So I think this really in respect Steve it hinges on the debate around are we -- is what's going on a risk off mentality and a lack of liquidity or it is a fundamental shift in the underlying economy and are we heading towards a recession, I'd say I'm not smart enough to know the answer to that, that we certainly debated frequently in here within Apollo, we certainly have the benefit broadly of seeing what's going on across Apollo's range of activities and at least as we sit here today, if you looked across most markets, real estate fundamentals are still okay, occupancies are up, space is getting leased, assets are transactioning whether to be sold, refinanced, yes, there has been the announcement recently that some projects will probably go at a slower pace but to the specific project you referenced in your question, it is actively under construction everyday and at this point, the project is capitalized and it will continue to move forward..

Thank you. Our next question is from Jade Rahmani with KBW. Your line is open..

Can you comment on available investment capacity and I guess in the current environment with the volatility we're seeing play out and where the stock is just how you think about proceeding with what's been a pretty robust pace of originations or if you are looking to moderate that somewhat and just be more prudent and finally if you could comment on whether stock buybacks could factor into your thinking?.

Yes, so, I'll try and cover all parts of that. We ended the year at roughly 1.1 turns of leverage so we do have capacity to add to the balance sheet.

As always, I wouldn't look at our $300 million pace early in the year as something that we're going to be able to fund on an annual basis unless there was an ability to raise capital during the year but I think more importantly I will refer you back to my comments which is, in order to hit our earnings goals for the year, in order to continue to meet and exceed the dividend, we are in a pretty comfortable place right now given what we already have in the portfolio and what we know in terms of future funding.

So we are active in the market Jade, in the sense of we are constantly looking at deals, constantly looking for attractive investments and given our leveragability, we do have some additional capital to deploy, that being said, we do not get hung up on a specific space or target, we're comfortable meeting the earnings goal we've set already, given where we sit here today, we're comfortable with the dividend is going to look like for the year.

If we cannot raise capital at some point in the year attractively and it's still an attractive deal environment, we'll address that at that point in time but to your question certainly at this point in time, there is no notion of raising additional capital and we do have a share buyback plan in place.

I'd say, we've held in reasonably well today, it's something that comes up as part of our routine dialog internally and like others we have a plan in place and we'll consider it as appropriate..

In terms of actual available investment capacity today without having to negotiate new facilities or amend the existing facilities, could you quantify what that is?.

It's a bit of moving question because we obviously lever first mortgages, we don't lever mezzanine loan. So it really depends on the mix of business but I'd say at a high level there is a few hundred million dollars of capacity in the company..

And are you in active dialogs with lenders on new facilities or expanded facilities and has their appetite for that changed at all?.

I mean we recently increased the JPMorgan facility. We've got a very good relationship and dialog with them.

We are not specifically talking about adding any new facility but certainly in running the business and as Scott is looking at new deals to the extent there are things that come up where our returns might be improved by adding some financing as part of the deal, that's just sort of regular way dialog and I would say there continues to be a desire to transact in the space and those dialogs continue..

The first mortgage that you guys refinanced, that was in your portfolio can you talk about that situation?.

Sure, you mean that those, that was a Miami retail loan with a repeat borrower where they were able to buy additional properties, that was always kind of the idea that we were, with a sponsor who was kind of looking at that market as a way to expand.

We felt very comfortable with our initial deal and when they were able to buy additional surrounding properties, we financed that as well. There are existing retail properties there that work and are occupied, we're very comfortable with our base bidding to sponsors. Business plan is to redevelop those retail properties.

So for example their one storey they might want to redevelop them to three storeys add some other stuff. It's part of the Miami design district. That's the part of Miami that that loan is in..

And at this point, surveying your portfolio are there any delinquencies or lost loans that you besides the North Dakota which you said is still performing, that you would care to call out. And just more broadly, one of the issues with commercial mortgage REITs is the lack of loan loss provisioning.

How do you think about potential loan loss provisioning and at least preparing the company for eventual increase in credit costs?.

Yes, I mean there is nothing else we would highlight at this point in time.

I think as Megan tried to address in her commentary given the size of the portfolio and the accounting rules we operate under everything is a loan-by-loan bottoms up analysis so we literally go through the entire portfolio each quarter and determine if a reserve is required on any specific loan, it is not a big enough portfolio nor do we have the flexibility under accounting guidelines just to take top level reserves or squirrel money away if we decided to do that..

[Operator Instructions] Our next question is from Charles Nabhan with Wells Fargo. Your line is open..

Most of my questions have been asked, but I wanted to get a little more color around the North Dakota loan.

Last quarter you gave some metrics including occupancy and you mentioned that the closing of the man camps might be a source of demand for that property, so I was just hoping to get a little more color on what's going on out there?.

Sure, so the local governmental authorities I think the town council did vote to close the man camps as of the summer, I think it's June-July, so I do think that is a positive thing that's coming, as we reference to the marks, you know there has been pressure on both occupancy and rents.

We're down to about, you know based on the latest rent rule about a 65% occupancy. If you think of kind of kind of the seasonality, the weather there, there've been some people that have been moving out and not many people move in, in North Dakota in the winter.

So we do think that the market's higher, so we do think with the thawing if you will, we believe that that occupancy should go up. I mean obviously with the group camps closing that so that should create additional demand..

Okay, and could you also give us an update on 111, 57th Street, I believe you said there's about, I want to say 40 units and they were scheduled to start selling sometime around now, so any update would be helpful as well?.

Yes, Stuart mentioned you know construction is underway, that there's a crane I the onsite, it's very close to our building so we walk by it every day so construction's underway, they opened a pretty magnificent sales office on Fifth Avenue near the property and that's commenced marketing.

I think that's -- and so things are well underway, I think they and we still feel very comfortable with the basis, there's obviously plenty of sales that are in the press and other that are well in excess of certainly our basis and also the sponsors basis, so I think they're proceeding along with their plan, given its construction it won't be completed for a few years so I can't speak to their strategy in terms of how they want to approach presales, but there's certainly no -- they don't have to sell anything right now, if they choose to sell that they can but they are marketing, I think there's been some nice advertizing in the Times and other magazines..

Great, and if I could sneak in one more high level question, could you comment on what you're seeing in terms of competition in the senior and the med space, from I guess across the competitive fronts be it banks, life cos, some of the non-bank financials you compete with?.

Sure, I mean I think this speaks to kind of Stuart's comments on the market, there obviously is the public market and private market, I mean CMBS clearly has gapped that as volatile but latest that I saw was of lending in the U.S.

CMBS is maybe 25% of that and a chunk of that is very large single asset transactions life insurance company they have actually put out 560 billion so it's really entering the equity side where you have the private and public it's really a tale of two markets and we don't really -- other than the legacy CMBS we don't play in the CMBS market, we're not originally for conduit.

That being said, people read the news and see it so I think from our perspective the volatility has been good, I would say borrowers are certainly looking to relationship lenders and balance sheet lenders in more certainty so I would say we're certainly getting more calls from repeat borrowers saying hi I would love to do a deal with you again, I trust you I know you're going to be there, a lot of borrowers obviously interact in different markets so they kind of see the changes might happen between filing a term sheet and closing on certain types of deals, so I would say repeat borrowers are great.

I would also say from kind of partnering with senior banks up above of the condo deal we did in Tribeca the banks I think still see commercial real estate as a safe haven clearly their commercial real estate books have performed better than their energy or other corporate book, so they're very active and we've been a good partner with them.

So, I would say on that front, it's working well, the insurance companies are not really coming in, we do that much with and they're an important part of the market. So, I would say look overall transaction activity is really what creates deals for us and right now both foreign and domestic buyers think that U.S.

real estate is an attractive asset class, so there are still deals that are happening that we're able to participate in..

Thank you. And our last question is from Jim Young with West Family Investment. Your line is open..

So Stuart you had mentioned with an outlay of the financial market out spreads you gapped out for CMBS, but could you give us a sense as to how much wider is pricing for first mortgage loan did you see in the marketplace, is it like, is it by 5 basis points, 25 basis points and likewise for how much wider is pricing for a subordinate loan?.

I'll let Scott comment..

Yes, look I think it depends on the market, clearly if you're borrowing in a conduit market your spreads have gapped out but given that the spread market is over the swap rate and swaps are now down to 160 from a buyer's perspective your rate is probably pretty close to what it was.

We really haven't seen the portfolio lenders -- you could still borrow at 4% or sub 4% from an insurance company launch from fixed rate and there are still banks we're doing loan of 200 over a LIBOR, so I would say in our market given our competitors are either people who think like us and kind of have the same cost to capital we've never really tightened as March nor are we widening as much so I would say on the margin yes, we're probably seeing an ability to get a little wider spreads but I think the volatility is really letting us dictate maybe stricter terms because I think that someone is willing to pay you to do structure a little pricing but more certainty and they kind of have the balance sheet lender.

I would also say it's creating new opportunities for us to someone who might have gone through a securitized deal would rather now do a portfolio deal and either that's us doing it by ourselves or us partnering with a bank where we call them as need loan.

And then obviously some of our competitors we are relying on the CLO market which is clearly gapped out, we never relied on that. So, I think that the people who are doing so maybe some smaller transitional loans, you're probably seeing a widening there just because that that's really what people are using the CLO market to finance..

So look I think it's still -- and it's still a functioning market I think on the margin you've seen some moves but I go back to my initial commentary that real estate tends to be a lagging indicator and well I think you're seeing very small pockets of sort of price widening generally speaking the balance sheet lenders are still as active as they've been throughout this cycle and had a 10 year at 175 insurance companies and banks are still looking to put good real estate loans on their books..

Right, and obviously with our floating rate loan, LIBOR has moved up finally. So, even to the extent we're not widening the spreads our rate is still higher because of the underlying in that..

Operator, are there any more questions?.

We do have a follow-up from Jade Rahmani with KBW. Your line is open..

Yes, thanks, this is actually Ryan on for Jade thanks for taking the follow-up.

Can you say what drove the higher average LTVs in the portfolio in the quarter outside of the increase in the LTV for the North Dakota loan and secondly given the increase and certainly we're seeing the market overall have you been able to adjust your underwriting standards on new loans?.

I mean I wouldn't say adjust I mean clearly we've always kind of been a very focused on preservation of capital, sponsorship, we do a lot of acquisitions with fresh equity, always kind of looking at our basis so as I mentioned before even like the Miami loan we are very comfortable at our basis with the existing property clearly the sponsor’s intent is to redevelop or do something different but our loan is not dependent on that happening, and I think that's always kind of have been our approach as a balance sheet lender.

On the margin, I'd say the volatility of the market clearly is allowing us to be pushed back on kind of proceeds and structure and also again Stuart mentioned we are not trying to put out during the 5 years, so we can be very selective and really choose which loans do we want to do and so I'd say that's another way where it is reflective whether it is obviously a tremendous amount of deals that we just passed on because we don't need to do, we are not just a volume shop in that way, with respect to the LTV..

I think on the LTV side and I wouldn’t again, given our business, I wouldn’t describe our quarter to a trend.

I think it's a mix issue in terms of mix between first mortgage and mezz and I'd say as we look forward going forward I wouldn't describe what happened in the fourth quarter to a general trend in the way we're thinking about things of where LTVs are moving overall..

I think we've generally been in that kind of 60 to 65 and if you look at the deals we did subsequent to quarter end, they were within that range..

Thank you. I'm not showing any further questions at this time. So I'll now turn the call back over to management for closing remarks..

Thank you, operator and thanks to everybody for participating in the call today..

Ladies and gentlemen, this does conclude the program. You may all disconnect. Everyone, have a great day..