Good day, ladies and gentlemen and welcome to the Apollo Commercial Real Estate Finance Incorporated Third Quarter 2016 Earnings Conference Call. At this time, all participants are on listen-only mode. Question-and-answer session and instructions will be given at that time.

[Operator Instructions] 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 Incorporated 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 like to also 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 believe are relevant to assessing the Company's financial performance and our reconciled to GAAP figures in our earnings press release which is available on the Investor Relations 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.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..

Good morning and thank you for joining us on the Apollo Commercial Real Estate Finance third quarter 2016 earnings call. As you all joining me this morning are Scott Weaver the Chief Investment Officer of our manager and Jai Agarwal our Chief Financial Officer who will ARI’s financial results after my remarks.

As it was highlighted in the ARI earnings release, I am extremely proud of ARI’s accomplishments over the past few months, specifically the acquisition of AMPG closed at the end of August and in September we successfully sold the bulk of the AMPG’s assets which generated approximately $400 million investable capital for ARI.

In connection with the acquisition, ARI issued 13.4 million shares of common stock at a valuation of 1675 per share which represents an approximately 8% premium to our June ’13 book value per common share and approximately 3% premium to ARI stock price on the transaction closing date.

Importantly, between the stock issuance and our effective execution on the sale of AMPG assets the acquisition was approximately 3.5% accretive to ARI’s pre-acquisition book value per share; just as importantly following the closing we have been busy deploying the capital into new commercial real estate debt transaction.

I want to highlight and commend our investment team for being able to officially manage our transaction pipeline, since ARI is in a position to quickly deploy the new capital raise.

Following we acquisition closing and prior to quarter end, ARI completed three floating rate first mortgage transactions totaling $245 million and subsequent to quarter end ARI closed an additional 236 million of new investments bringing our year to date capital commitment in deployment to $1.1 billion which includes funding of previously closed loans.

Consistent with prior quarters, the transactions closed during the third quarter were predominantly floating rate first mortgage loans and as Jay will detail later in his remarks we expanded our capacity to finance these loans with a new three $300 million credit facility from Deutsche Bank.

Beyond just the volume of capital deployed recently, it is worth noting several important metrics with respect to our investment activity. Since we close the AMTG transaction, we have directly originated 100% of our new investments and over 60% of our transactions were with repeat borrowers.

We have spoken often about the depth and quality of our originations platform and the benefit borrower see in our ability to structure and execute transactions and as we enter our assay of operations, we believe these metrics demonstrate the value of the platform we have built.

Our average investment size continues to increase and our new investments were diversified across property types and market. Turning to our portfolio, at quarter ARI’s commercial real estate debt portfolio totaled $2.7 billion representing 17% growth on a year over year basis and we were generating a levered weighted average IRR of 13.3%.

The weighted average loan to value of the portfolio was consistent at 64% and the portfolio remains diversified both geographically and across property sectors and for the third quarter in a row our asset mix has shifted to reflect an increase in first mortgage loans.

During the quarter, we took advantage of favorable market conditions and sold four of our legacy AJCMBS bonds at prices above where the bonds had previously been marked. Our investment in CMBS continues to wind down and as bonds continue to repay, we will continue to opportunistically pursue sales transactions if market conditions warrant.

Lastly, as we look forward to 2017, we believe ARI is well positioned to continue finding attractive investments and delivering solid financial performance. In addition to the $1.1 billion of capital commitment and deployment year to date, we have a robust pipeline driven by the continued healthy pace of commercial real estate transaction activity.

We are extremely confident in our ability to keep our $1.8 billion of capital efficiently deployed and we have leveraged capacity within the balance sheet, so we maintain the ability to add incremental debt to find new investments as warranted.

We believe our current size will allow us to stay active in the market keeping the company's capital invested and continue to adequately earn the dividend. We will look to grow opportunistically and as always we will seek to ensure a balance between the investment opportunity and our ability to access attractively priced capital.

It is worth noting that due to the funding schedules of some of the investments closed over the past two months, I do expect ARI’s Q4 operating earnings per share will be lower than Q3.

As I've stated previously, when we think about ARI’s quarterly dividend per share of common stock and management's recommendations to the board each quarter, our focus is on an annual run rate dividend coverage.

ARI’s operating earnings per share for the first nine months of 2016 including any one time merger related expenses totaled the $1.64 which is $0.16 per share above our year to date dividends of a $1.38. And with that I'll turn the call over to Jay to review our financial results..

Thank you, Stuart and good morning, everyone. For the third quarter of 2016, our operating earnings with 32.7 million or $0.45 per share, excluding onetime merger expenses of 4.9 million operating earnings were $0.52 per share compared to $0.53 for the September 2013 quarter.

GAAP net income for the same period in 2016 was 60.6 million or $0.83 per share as compared to 23.5 million or $0.39 per share in 2015. Including the net income and operating earnings and the $4 million onetime pre-payment penalty received from a $9 million fixed rate loan that had a maturity date of June 2020.

Reconciliation of operating earnings to GAAP net income is available in our earnings release in the Investor Relations section of our website. As Stuart mentioned, GAAP booked value increased $0.43 per share from last quarter to $1.94 a share at quarter end.

The increase was driven primarily by the merger were we issued 13.4 million shares at $16.75 per share and acquired AMTG at a discount to book value. With respect to leverage, we ended the quarter with a 1.0 times debt to equity ratio. With the cash proceeds from the AMTG transaction, we have paid down JPMorgan facility.

During the quarter, we also closed a three year 300 million financing with Deutsche Bank that advanced us against those mortgage loans. At quarter end, in addition to 255 million of cash, we had a very good capacity on our facilities. At September 30th, 88% of the loans in our portfolio has floating interest rates.

We anticipate that a 50 basis point increase in LIBOR would generate an additional $0.07 per share in annual operating earnings. Finally I wanted to highlight our dividend yield. Based on Monday’s closing price, ARI stock offers an attractive 11.1% yield.

Given the strength of our results to-date and our previously stated goals we established a consistent quarterly dividend that is covered by operating earnings and meet the redistribution requirements we have confidence in our ability to earn the quarterly dividend in 2016.

Our Board will meet again in mid-September to discuss the Q4 dividend and we will make an announcement shortly thereafter. And with that, we like to open the line for questions. `, please go ahead..

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

Good morning and congratulations on AMTG and another strong quarter. Jay, I really appreciated your comment about this prepayment penalty.

I heard you say 4 million, I apologize but I missed the loan as that that was related to, could you fill me in on that?.

Sure. It was 4 million against a $9 million fixed rate loan, that had a original maturity of June 2020. That was prepaid in July of this past year..

It was related to one of the first deals we ever did out of the box, Steve. It was a ten year deal back in 2010 that one of those situations where the markets moved and that the properties performing well enough so that it made sense for the borrower to deal with the payment penalty..

So I actually before Jay mentioned that one of my questions was going to be $0.52 in the quarter be consensus of $0.47 and I look back to last three or four quarters, you guys have consistently beaten our estimate and the consensus and I was focusing on fees, fees related to payoffs yield maintenance that type of thing and as the portfolio starts to season, is this something that we're going to see from time to time and maybe as analysts we need to start building, while it's unpredictable we need to start building something into our model for revenue at the time of payoff?.

Let me answer that a couple is yes as the portfolio gets bigger, I would say there are always opportunities for us to either create a incremental economics because you might extend a transaction, restructure a deal or you get surprised with a prepayment and you end up with unexpected prepayment penalty.

So I do you think as the portfolio grows the opportunities for those unforeseen economic events certainly increases.

It is awfully hard to model to get a mind of a borrower and my preference would always be for you guys not to get ahead of yourselves in terms of modeling those unexpected events and can just give us an opportunity to surprise you on the upside on a quarterly basis..

That's probably not a bad thing to have happen for both of us.

Is there any difference in terms of those types of revenue opportunities? Is it different between first mortgages and subordinate loans or you more likely to get say enhanced economics on subordinate loans, or is it about the same?.

It's a deal by deal transaction by a transaction.

Obviously as you think about where our portfolio has gone, there was more prepayment protection built in for a longer period of time when doing fixed rate product and as we sifted more towards floating rate product, typically your prepayment restrictions are shorter because there are transitional loans and you're less likely to have a significant yield maintenance penalty that exist for a significant period of time.

That being said I think regardless of whether it's a first mortgage or a subordinate loan, when you are lending against assets that have some sort of transitional component to them things happen in deals that people can't foresee and I think as long as we're maintaining a productive dialogue with our borrowers, maybe not true prepayment penalty so to speak with the opportunities to blend and extend, restructure whatever it might be continue to exist in the portfolio..

That's helpful.

Thanks Stuart and my follow up question, I noticed you had some payoffs in the third quarter but the nature of two of the payoffs, you had pre-development condo loans in both New York and London payoff, so my question is sort of the read through there, there are these obviously been concerned about the condo market, I'm curious kind of the borrower circumstances and the take out, where these situations where you had funded sort of development cost and the loan is being flipped into a more traditional construction loan? Kind of help me understand what was going on with the borrower that allowed you to be taken out of those projects..

Scott Yes I would say both those loans were given to allow the borrower to work on their plans construction costs things like that both of them were secured by existing buildings were comfortable. So we are not underwriting to the condo, that's right.

Exit we are looking at existing kind of like we do our predevelopment and about those cases, the borrowers are ready for the next stage to get the development financing, they've already commenced pre-sales both cases were actually, we had the ability to do the construction financing and opted not to for variety of reasons and so both deals were taken out by others in the industry who don't want to do those deals..

I would just highlight the points Scott made Steve again. Typically if we're doing pre-development and entitlement loan whatever it is, we will more often does not give ourselves the opportunity to step up for the follow up loan.

It creates an option for us, we may choose that option, we may chose not to but certainly we created an ability for us to have a seat at the table to figure out what's going to go on there..

Great and you have one remaining $70 million predevelopment loan in London.

Can you comment on your comfort level with that property and relative to the loan?.

It's actually £100 million loan Steve..

My bad, okay..

So that one deal, it’s extremely loan with our basis, it’s one of the best site in London. We updated appraisal value in our statement, I mean that was just done substantial equity loan to cough is actually lower than that loan to value. So we are very comfortable, and by all measures it's one of the best sites in London..

There's been a dramatic increase in the amount of equity underneath our position since when we first made a load to date. So I would say our comfort level has only increased with the transaction..

Thanks so much for the comments guys..

Thanks Steve..

And our next question comes from Jade Rahmani with KBW. Your line is open..

Thank you very much.

Some of the commercial real estate brokers have been talking about property sales volumes waning and the number of bidders on large transactions declining, can you comment on what you're seeing in terms of your pipeline and deal flow, maybe in terms of volumes and also perhaps quality and how that compares with say year ago?.

Yes, I mean I would say it continues to be [revolving] I've seen some of those stats and transaction activities, we were just really more national and obviously deals with some smaller deals and obviously the bigger deals we are more focused on but I would say we're still seeing a lot of acquisition opportunities as well as refinancing.

So I would say we have not seen any noticeable change in either quality or volume. Obviously it's still a great time to be a borrower and we are still seeing enormous capital flows into commercial real estate, both foreign and domestic. So from our perspective, it's really been because you know..

And in terms of the mix between acquisitions and refinancing, how is that tracking, a year to date versus maybe a year ago?.

Again it is deal by deal, I mean the deal we did recently in Chicago which is our first deal in Chicago that was an acquisition. The healthcare deal we did what was the reply that we actually were involved in so I mean while we obviously love acquisitions and fresh equity there are still good opportunity in refinancing.

So I would say it’s a good mix..

Yes, I mean I think as you looked at our pipelines today Jade, the comment we constantly made over the time we've consistently made over time is it's clearly more floating rate biased than fixed rate biased but I think in terms of acquisitions and refinancing, there's a healthy mix of both and I think just to reiterate Scott earlier point we are not at all feeling as if we are worried about our pipeline if anything.

Our standard comment these days is that there's far more demand for our type of capital than that type of capital actually exist today. So we're pretty excited about the pipeline..

I was just wondering, go ahead..

No, I was, just going back to the earlier point around passing on opportunities, we basically had last looks on deals and could have done those and just given availability of capital and how we're constructing the path we were seeing.

We have plenty of choices and we're trying to pick the best deal that we can have in portfolio because it's not, we're not a large bank if you will within limit capital trying to put up billions and billions of dollars a year. So we're very selective in the deals that we do..

On the pricing side, how spread tracking? Is there compression on spread or there enough players pulling back or being a little bit more cautious to allow spreads to hold constant?.

Again, I think it depends on what part of the market you are in, I mean clearly high quality cash flowing long term fixed rate, it's still very attractive whether you're borrowing from an insurance company or CMB acting in the area that we play in.

I would say it spreads and rates have held, pretty steady rates have gone up with LIBOR gone up, we haven’t adjust our spread down even though LIBOR has gone up.

So we are getting a better rate and maybe the LIBOR curve will materialize but again going back to the comments we have made in the past, the people we compete against have capital at a similar cost to us and so we're looking at similar returns there's no, this is not stuff done on a Bloomberg, someone just kind decided to have I want to get out of the corporate world and come into the commercial real estate world and drive down yields and so I would say we have been holding steady and if you look at our returns, I think you'll see that..

Just on the North Dakota loan, can you give an update was that loan evaluated term payment this quarter and I guess whatever your conversations been with the sponsor?.

It was evaluated as it will be every quarter forming pair and obviously we didn't change the level of impairment at the asset level, occupancy continues to tick up slightly.

And it used to take up slightly, so we're now north of 80% if the asset rents are still affectively where I've described them previously, so basically flat over the preceding months. We've had an ongoing dialogue with the borrower. There's nothing material that's coming out of those discussions but we've comfortable disclosing at this point in time..

And I think in the last quarter's call, you mentioned that the interest reserve could be exhausted by yearend, is actually your expectation and what do you think the implications are beyond that?.

Nothing has changed with respect to that view and I think the implications are that obviously gets factored into the discussions with the borrower and when there is something to comment further on we will..

Okay and then just on the commentary you made about 4Q, do you think it's reasonable based on capital deployment to date and the full impact of the AMTG transaction to expect earnings to say match the dividend in 4Q?.

It's possible. I think you can probably infer from my comments that we might be a penny or two below if things break one way we might earn and if things break the other way.

I think what I was trying to blunt with my comment was that if we happen to fall a penny or two short on a quarterly basis in the fourth quarter, we've way over earned it for the year. So that's the way we think about it. So you're sort of, that's generally the range we are in..

Thanks very much for taking my questions..

And our next question comes from Charles Nabhan with Wells Fargo. Your line is open..

Hi. Good morning and thank you for taking my question. I was wondering if you could talk about your expectations for cash flows within the CMBS portfolio and specifically touch on whether your expectations for principal repayment continue to exceed the marks on the book right now..

Yes, I mean the simple answer is yes.

Our view of what we were covered from the bonds is an excess of where the bonds are trading on a marked basis these days so that assumption remains, it's tough to be overly specific on cash flows but we tend to look at a couple different scenarios both in terms of loss assumptions as well as timing of when will get payments and obviously there are various scenarios where losses might pick up but you actually end up holding the bonds longer so you're receiving more interesting along the way what I would say at a high level is to your initial point we still have a more optimistic view based on our analysis that would be indicated by the marks but certainly if you look at the updated IRR disclosures in our supplemental, we have altered our view of cash flows in some respects that result in a lower go forward IRR at this point..

Great.

And as a follow up, could you talk about when you expect with the 400 million in capital from AMTG and the expected repayments and maturities over the next few quarters, when you expect to be fully deployed?.

I think realistically we'll get somewhere between first quarter, second quarter of next year right now based on what's in the pipeline and what we expect to get repaid on and sort of what we know we have and in terms of future funding, I think we always viewed AMTG is call at two to three quarters worth of capital and I would say that the basic assumptions still exist..

Okay great thanks for the color guys..

You got it..

Our next question comes from Ric Shane with JP Morgan Your line is open..

Thank you, guys. Thanks for taking my questions. Most have been asked and answered but I'm going to ask the last question in a slightly Charles question a slightly different way to so that we make sure we have right remodel.

When you think about the capital base of $1.8 billion capital base, now what do you think is the sort of sustainable level of assets against that, just so we make sure we scale the business properly..

Yes I mean it's tough to know because right we use leverage on part of our business we don't use leverage on another part of our business. I think depending on what you want to assume Ric for a gas between first mortgages and sub-debt and obviously on first mortgages we are typically levering cut two times to one.

I think you're going to end up somewhere in the neighborhood of plus or minus $3 billion worth of assets, it could be, could be a little less if we do more mess and less first mortgage, could be a little higher if it continues the trend of tilting towards first mortgages and we are using more leverage on the portfolio..

Got it. That's helpful. And I actually thought about asking the question in the context if you were 100% mix or under present first mortgage, so you can get out that way.

Second question and again, this has mostly remained because of the strange distortion we're seeing between one in three month LIBOR, when we think about your assets and liabilities, where is the sensitivity is it to one or three or is there any basis risk that we need to be considering?.

It's to one month LIBOR and anything we provide in the supplemental takes into account any LIBOR floors or anything baked into our loans when we give you that sort of what happens if there's a 25 or 50 basis point move, we're looking at one month's LIBOR and we're factoring in any LIBOR floors in our loans where we might have an increase on the borrowing side but not an increase in what we are receiving from one of our borrowers..

Got it and just so that we don't, we're not surprised by anything, there is no basis mismatch between one and three months LIBOR on the funding and on the liability and asset side that we need to think about?.

No..

Okay, great. That’s it from me guys. Thank you, guys..

Thanks, Ric..

[Operator Instructions] And our next question comes from Rick Murray with Midwest Advisors. Your line is open..

Good morning, thank you.

Could you just help us understand the change that was made to the operating earnings calculation and what any associated impact was in the quarter?.

Yes, you're talking about our modest change with respect to things that we've had for currency. The way we've always treated foreign currency movements in the past, so first of all when we make a loan in the foreign currency we attempt to fully hedge both principle as well periodic interest payments.

The way our definition was written previously, we were ignoring all gains or losses on those hedges whether they were just unrealized marked to market with respect to hedges that we wanted to keep outstanding for a while or if they were realized on hedges that were no longer required because they were related to a current quarter interest payment for example.

What we've basically done is change the definition such that to the extent we realize a gain on a hedge with respect to an interest payment that was received in the quarter thereby no longer needing, the hedge going forward and I should have said realized a gain or loss on interest payment that is received in a quarter and therefore we no longer need that hedge on a go forward basis.

We are taking that realized gain or loss into operating earnings. The effect is as long as our hedges are working properly, we are basically minimizing any fluctuation in the U.S. dollar interest received with respect to foreign dollar denominated loans..

Okay, that's helpful and what was the impact of that in the quarter?.

Jai, do you want to answer?.

Yes, it was about a $500,000..

Okay. Thank you..

Thanks, Rick..

And I am showing no further question. At this time, I would like to turn the call back over to Stuart Rothstein for closing remarks..

Thank you operator and thanks for everybody participating this morning..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day..