Good day, ladies and gentlemen, and welcome to the Apollo Commercial Real Estate Finance, Inc. Q1 2017 Earnings Conference Call. I would like to remind everyone that today’s call and webcast are being recorded. Please note that they are property of Apollo Commercial Real Estate Finance, Inc.

and their 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 disclosures in our press release regarding forward-looking statements.

Today’s conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.

In addition, we will be discussing certain non-GAAP measures on this call which management believes are relevant for assessing the Company’s financial performance and 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..

Thank you, operator. Good morning and thank you for all for joining us on the ARI first quarter 2017 earnings call. As usual, joining me this morning are Scott Weaver, the Chief Investment Officer of our Manager; and Jai Agarwal, our CFO.

Following the successful common stock offering completed at the end of 2016, the first quarter of 2017 represented ARI’s most active quarter to-date in terms of capital deployment. The Company committed to over $450 million of new commercial real estate loans and funded an incremental $115 million for previously closed loans.

Notably, the capital invested was primarily deployed in floating rate first mortgage loans across a broad spectrum of property types and geographies.

As we indicated on last quarter’s call, first quarter operating earnings were always going to be impacted by the capital raise from both the sale of the remaining AMTG assets and the year-end stock offering. However, given the pipeline of opportunities available for ARI, we felt that it was appropriate to generate additional investable capital.

The robust pace of deployment during the first quarter speaks to the breadth of ARI’s origination platform, though from a timing perspective most of the investments closed during the latter half of the first quarter.

And as I have previously stated, each of ARI’s investments is a bespoke transaction and we frequently do not have control over the timing of closings. Therefore, our investment activity tends to be lumpy.

The ARI dividend policy has always taken into account operating earnings with a multi-quarter perspective and we continue to maintain our confidence in ARI’s ability to provide a well-covered, attractive dividend to our investors in 2017. Looking specifically at the Q1 investments.

ARI remains focused predominantly on floating rate first mortgage loans. At quarter-end, 88% of ARI’s loan portfolio was invested in floating rate loans and our pipeline remains weighted toward LIBOR floaters, which leaves ARI well-position for the anticipated rise in short-term rates.

It is worth noting that included in ARI’s robust Q1 deployment was the origination of four loans secured by hotels. Overall, ARI’s net exposure to hotels in light of some expected repayments should not change much.

However, it is worth using our recent hotel loan originations as an example of ARI’s ability to find attractive risk-adjusted opportunities and to utilize the broader Apollo platform in support of our efforts.

During much of 2016, there was pervasive negative sentiment around the hotel sector, and this was reflected in both the weak performance of the hotel stocks and more important for us many lenders pulled back from pursuing and providing hotel loans. While some of the concern was justified, we continued to actively pursue hotel transactions.

We were able to use the knowledge gained from the hotel investment efforts in our real estate private equity funds as well as the tremendous amount of experience within the broader Apollo platform to identify several attractive hotel loan investments.

The four loans which closed during the quarter are first mortgages on well-capitalized hotels at an attractive basis with lower loan to value ratios. The weighted average LTV across the loans is sub 60% and 58%.

While not critical to our underwritten thesis, since the election in November, the hospitality industry has seen uptick in performance and expectations, which has benefited the underlying properties we financed. Turning now to our investment portfolio at quarter-end.

ARI’s loan portfolio totaled $3.2 billion with a fully levered weighted average underwritten IRR of approximately 14% and a weighted average LTV of 63%. I want to take a minute to discuss ARI’s retail exposure as retail has been a very prominent topic in the news lately. Historically, ARI has generally avoided financing malls.

The collective view of our team based upon many years of experience is that the outcomes from mall lending and investing can be unpredictable and binary and we strategically sought to avoid that risk.

As such, ARI’s exposure to traditional retail is a limited to two loans totaling $195 million, one for the retail portion of a recently constructed lifestyle center in Cincinnati, Ohio; and the second, a street-level retail condo at a main in Maine location in South Beach at the base of Lincoln Road, which just closed this past quarter.

The remainder of what has typically been described as retail and ARI’s loan portfolio are predevelopment loans totaling approximately $500 million to sponsors who are aggregating properties currently occupied by urban, street-level retail with a view towards redeveloping the location.

In each of these instances, any changes to the properties cannot take place until our loan is repaid or we agree to finance the next phase of the project.

You will note in our supplemental financial information package this quarter we’ve reclassified our retail exposure into two categories, retail and urban retail/predevelopment to clarify what we believe is a meaningful difference in ARI’s retail exposure. Away from the loan portfolio, we continue to trim our CMBS holdings.

During the quarter, we again took advantage of favorable market conditions and sold $69 million of CMBS bonds at prices above where the bonds had previously been marked.

At quarter-end, CMBS represented just 5% of ARI’s net equity and we expect the Company’s investment in CMBS will continue to wind down both as bonds repay and we pursue sales when wanted. As we look ahead, we believe the current economic climate remains very favorable for our business model.

While recent data indicated commercially real estate transaction volume was down in the first quarter, there is still a healthy level of acquisition refinancing and recapitalization activity, which continues to create a strong pipeline of opportunities for ARI.

As always, the market remains competitive but given what has been accomplished in ARI seven plus years as a public company and the strength of Apollo’s real estate credit platform, we remain confident in our ability to find investments that meet ARI’s target investment criteria.

As always, we will seek to ensure a balance between the investment opportunity and our ability to access attractively priced capital. And with that, I’ll turn the call over to Jai to review our financial results..

Thank you, Stuart, and good morning, everyone. For the first quarter of 2017, our operating earnings were $38.6 million or $0.41 per share compared to $29.8 million or $0.44 per share in 2016. GAAP net income for the same period in 2017 was $37.8 million or $0.41 per share, as compared to $12.8 million or $0.18 per share in 2016.

A reconciliation of operating earnings to GAAP net income is available in our earnings release in the Investor Relations section of our website. Turning to leverage. We ended the quarter with a 1.2 times debt-to-common equity ratio.

During the quarter, we upsized our facility with JPMorgan, increasing our borrowing capacity to $1.1 billion and extended the maturity date to March of 2020. At quarter-end, we had just under $900 million outstanding on this facility.

Also in April, ARI upsized the Deutsche Bank facility to $450 million, plus our asset-specific financing of £45 million. We have significant capacity available under both credit lines. While our capital base continues to grow our G&A expense ratio essentially remains flat.

Annualized G&A for Q1 as a percentage of equity was 41 basis points, which continues to be one of the lower percentages amongst our peer group. I also want to comment on the recent announcement. Last week S&P added ARI to the S&P SmallCap 600 Index.

You may have noticed an elevated trading volume in our stock over the past several days which we believe is correlated to ARI’s inclusion in the index. Finally, I wanted to highlight our dividend. Based on Monday’s closing price, our stock offers an attractive 9.5% yield.

Our Board will meet again in mid-June to discuss the Q2 dividend and we will make an announcement shortly thereafter. And with that, we’d like to open the line for questions. Operator, please go ahead..

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

Stuart, I had myself all prepared to ask about hotel lending and you kind of just wiped out my line of questioning there with your opening remarks. I think that was timely that is certainly retail and hotels is all we hear about at year-end in terms of the commercial mortgage REITs when the buy side is looking at exposures.

Actually there was a follow-up to your comments. You obviously find some things that you do like. Could you comment on which type of hotel properties you would definitely avoid? And the second part of that is I noticed you’re not making hotel loans in New York City or at least not the two that you highlighted in the April 4th release.

So, could you comment in addition to what you don’t like, how you view the New York City hotel market?.

Yes. Steve, I will let Scott comment..

Sure. We do have exposure in the New York hotel market, we actually have a first mortgage on a hotel that is pretty much finishing up a renovation. So, again, there is no redlining. We like the New York market similar to Miami and other markets. They all have their individual underwriting needs, if you will.

Clearly, in New York, there’s been a lot of overbuilding, lots of construction, so we take that into account. As we’ve talked about before, it’s always a deal by deal underwriting for us. We very much look at our basis as well as kind of the in place debt yield to our hotels that we’ve done that maybe coming off of renovation.

So, we’re comfortable on underwriting and improvement in cash flow. And we look at all types. I would say, generally, still major market but then generally, full service. But that’s really....

I think the point Scott is trying to make, Steve, again, it’s deal by deal. Right? There are things that come in that we literally after a quick read of an offering memorandum or a quick conversation with the borrower, you completely eliminate for whatever the reason might be and there are other transactions where you dig in and roll up your sleeves.

Some get to the finish line, some do not. But let’s make no -- I don’t want anybody to equivocate. This is a bottoms up sort of deep dive underwriting on every transaction that we do..

Got it.

And your big -- your Atlanta, large Atlanta hotel down in my neighborhood, is that driven primarily by the convention business, sports arenas et cetera in the adjacent area? What was kind of the key driver there?.

It’s a big box hotel. So, clearly, it will benefit from all you mentioned. Obviously, Atlanta is a dynamic market. That was an acquisition financing for us. So, fresh capital behind us, very high debt yield and then coincidentally within our Apollo real estate private equity, we actually own an asset in the market.

So, we were very familiar with operations there and things like that. So, in addition to our borrower buying the property that gave us even more comfort in terms of what’s going on down there..

Okay, great. Thanks, Scott that’s helpful. And just a final thing, Stuart, on the North Dakota multi-family loan.

Can you comment as to whether you’re still accruing or receiving interest on that loan? I know you classified at a 100% LTV? But, what is the revenue status of that loan at this time?.

Yes. It’s effectively a cash flow mortgage at this point for all practical purposes. And I would say, given performance of the asset at this point, it is a low to mid-single-digits return on sort of the recast balance..

Got it.

Are you in conversations with the borrower group? I guess, that’s the KKR group, then trying to work something out with them currently? How does that -- is there a strategic plan or…?.

Yes. I mean, we are infrequent dialogue. In some respects, we are playing for time. It’s an unlevered asset on our behalf. So, we can hold it on balance sheet for as long as we need.

I think the asset I would describe as stable, which is somewhere in the mid to high 70s, low 80s from an occupancy perspective, rents have not moved much, I would say anecdotally, the commentary around Williston and the Bakken in general has been somewhat more favorable over the last few months just in terms of rig counts, employment expectations, barrels coming out of the ground.

Beyond what’s physically constructed, there are some incremental both entitled and un-entitled land that serves as collateral as well.

And I would say there is regular weekly dialogue amongst us, the borrower as well as the on-site property manager in terms of leasing progress, leasing strategies and also maybe, abilities at some point, call it in the short to mid-term to maybe monetize some of the excess collateral. But it’s a regular dialogue.

We have fully protected all our contractual rights as a lender. But I would say at this point, we still view it as a sort of beneficial to working this out to keeping the borrower engaged and working with us and trying to get to a solution. But to be perfectly candid, this is going to take time..

Understood. Appreciate that through review with that particular asset. Thank you both for your comments and the time this morning..

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

While we are on the subject of credit performance, can you comment on sequential trends? Was there any loans that experienced deterioration and are there any loans on some kind of proprietary watch list that you’ve maintained?.

Look, the one that’s on the watch list, so to speak, is the one that we just referenced. I would say, generally speaking, sequentially, no notable trends across the portfolio that sort of in any way materially changes credit performance.

I think, at any given point in time, there are always transactions where we are more or less involved with borrowers, just sort of an understanding what’s going on. But I would say, generally, across the board I would describe credit performance as stable..

Okay.

And are there -- would you say the majority of loans are experiencing improvement in performance, in terms of lease-up strategies, in terms of the CapEx plans going in as expected and the value-add strategies materializing?.

I would say generally speaking, things are performing modestly better than our underwriting, maybe not as strong as what the borrowers would have hoped in terms of their most-optimistic operating plans but our underwritings are always somewhat more conservative to the borrowers’ expectations.

So, I would say, we are very comfortable with what our underwritten expectations for this strategies were. I think, depending on the asset type or asset class, I think, there has been more or less outperformance relative to underwriting. But I would say, we are pretty comfortable with the credit profile at this point of what’s in the book..

And are there any trends in terms of the performance coming in not as optimistically or not as strong as borrowers expected, are there any trends by property type or geography that you could identify?.

I don’t know that I couch it by anything along geography.

I think, what we have generally found on our predevelopment loans at a high level is that it typically takes borrowers longer than they initially anticipate to get plans in place, entitlements in place and typically along the way things change, which has ended up being a good thing for us as a borrower, because as long as we are comfortable with the asset protection, we are perfectly happy with the borrower who has longer, significant amount of equity taking somewhat longer to finalized their plans and then move forward quite possibly to take us out of a transaction.

And I think we’ve found that to be on the predevelopment side an opportunity in terms of us being able to work with borrowers to maybe, extend maturity dates, add new collateral to the extent they acquire additional properties and just keeps the economics going for ARI.

I would say, at a high-level, no secret that we’ve tended to have meaningful exposure to the New York condo market pretty consistently for the last three or four years, putting aside the one project that everybody always wants to discuss, which is the Steinway building.

I would say, for the rest of the stuff, we’ve done in New York, I would generally say that pace of sales and pricing of sales has been as good or slightly better than we would have hoped for the stuff that is selling somewhere between the mid-teens to the call it at the high twos in terms of price per square foot.

Though I would also say, on par, it’s taken slightly longer than for the developer or redeveloper to get there CO or their temporary certificate of occupancy and deliver units so our loans might have been outstanding slightly longer. So that’s sort of good news on the sales side.

Maybe little longer to develop or redevelop the assets but certainly within a range of underwritten possible outcomes. So, nothing sort of surprising there.

And then, I would say we’ve tended on the margin not to do an overabundance of, I call traditional office lease-up place, but I would say where we’ve taken lease-up risk on our office assets, I would say, the performance has been within the range of expectations, call it as expected..

Thanks. Since you brought it up and I did not, I wasn’t planning to. But I may as well ask. Can you give an update on 111 West 57th..

Yes. Look, I think the most current update is they are building, it continues to go up. They’ve actually cleared height wise, the originals Steinway building and now they’re going with what we call the tower units. So, development continues at pace.

I would say, the marketing office is open but there is really not an aggressive marketing effort at this point. And depending on estimates, you got another 18 months, plus or minus of construction to go. But construction is continuing as expected..

And with the pullback in construction lending from banks, do you feel like in New York City in particular, are you starting to be able to see beyond peak supply and getting comfort with maybe making -- increasing your exposure to that market..

Scott, do you want to comment..

Look, I mean, for the right projects, there is still construction financing available. It all comes back to kind of the capital structure and pricing. So, I would say, we’ve never redlined New York. We continue to look at deals and it’s really price point, market developer driven.

So, we still think that there is areas of the market where we think it would make sense. And we continue to look at other markets. We historically had DC exposure; we obviously avoided Miami, which has obviously worked out well. But we continue to look at LA, San Fran, as well as other parts of Manhattan..

[Operator Instructions] And our next question comes from the line of Charles Nabhan from Wells Fargo. Your line is now open..

Just one quick one for me. On slide -- looking at the maturity schedule on slide eight, it looks like relative to last quarter about $300 million in maturities were shifted into 2018 from partly from 2017, partly from 2019. I just wanted to get a sense for the drivers behind that shift.

And understanding that things could always change with business plans. Also, I wanted to get some color on any impact that could have on your capital plan over the next year or so..

Yes. I think the primary diver of that was probably one of our larger predevelopment loans that we pushed out from 2017 to 2018.

And again, I’d put that in the category of a good thing for the Company, good borrower; we’re comfortable with the business plan, collateral and certainly had an opportunity to not extend maturity but it was I think an easy economic decision, an underwriting decision to do that.

I think from a capital plan and the way we think about it, I think our experience over the last five or six years has been more often than not, some amount of the stated maturities end up getting extended for various reasons.

Given the cycle we’ve been in over the last six years, they’ve tended to be pretty positive reasons, which is borrower wants to add some additional collateral and expand their business plan, borrower wants to rethink through their business plan and is willing to pay up for the ability to extend, and there is still strong asset protection.

So, we’ve always sort of somewhat weighted our maturities. I think, in terms of capital plan, as we think about it from a high level, we still look at the balance sheet today.

And I’d argue, we’re still modestly under-levered relative to what the Company could handle from a leverage perspective, certainly given the bigger size of our portfolio today and certainly a first step in that process was expanding the lines with JPMorgan and DB as Jai mentioned to give us more flexibly.

And then obviously, we’ve certainly been paying close attention to what’s going on in the capital markets, particularly, some of the recent senior secured notes and convertible offerings that have taken place in our space that have been pretty attractive.

That being said, our desire has always been and we will continue to be to try and pair up capital as closely as possible to the pipeline. So, we will let the pipeline sort of drive the capital decisions and at least at this point, the pipeline feels pretty strong..

Got it. And just as a quick follow-up. I know, over the past year or so, you’ve had some opportunistic sales of CMBS.

I just wanted to get a sense for -- I know there’s not a lot of liquidity in your specific positions, but I wanted to get a sense for your outlook and whether you expect to potentially have any more opportunistic sales over the next year or so?.

Look, I think, it’s certainly on our radar screen. I agree with you. The bids are spotty. But I think, we’ve got a platform that’s beyond just ARI’s continually in the market, which I think increases our chances to find bespoke one-off opportunities to sell pieces. I think we’re very happy with the execution in the first quarter.

We’ve maintained an active dialogue with the Street vis-à-vis what we own and what that bids might be. I think, if you look at CMBS over the history of the investment, it’s been a fine investment.

I think if you look at the expected return going forward, I still think it makes sense for us to be opportunistic to sell when we can and redeploy that capital as needed. Again, I think it creates some noise in our operating earnings, which is to be quite honest with you, really just noise and annoyance factors.

If you look at the loss we took in the first quarter, there was no impact from that sale vis-à-vis book value because we sold it at the mark or slightly above the mark that we were carrying it at.

But we do show a $1 million realized loss, which is at the end of the day, a complete non-cash realized loss, because all that is matching up historical cost basis versus realized proceeds for an asset that is already mark-to-market in our book value. But it is what it is.

I think even with that sort of potential noise and operating earnings, I think we are still biased when we can opportunistically sell..

But I would add a good chunk of the portfolio will just run off from repayments of the underlying loans. So, whether we opportunistically sell or not, we do expect that portfolio to continue to shrink dramatically over the coming quarters..

And our next question comes from the line of Daniel Occhionero from Barclays. Your line is now open..

So, with one of your competitors set the list tomorrow, just wanted to see if you could comment on the competitive landscape in general, and whether you’re seeing increased competition from entities similar to yourself?.

I think, at a high level, and this is -- meant there is no disrespect to the company that’s going public tomorrow. I would say, one additional company or several going public, will not dramatically change the competitive landscape.

I think, we have felt it has been a competitive landscape for the last six years, seven years that we’ve been in business. I think there is clearly proven to be a need for those of us that provide the type of capital, we provide in the form of transitional senior mortgages, as well as bridge loans.

And I think, we’ve always described the marketplace as competitive for the last five or six years. And I would say, we would expect it to remain competitive. We feel confident in our ability to get capital deployed. We feel confident in our ability to find transactions that make sense.

We’ve always expected there would be additional competition in the companies that are hopefully going public tomorrow or in the future are not surprises.

And in some respects, arguably having more companies public in the space might actually be a good thing in terms of equity investor focus and coverage of the space and giving investors more reason to track what’s going on in the commercial mortgage REIT public space, which has become a small group of companies and we will probably benefit from having more names in the space..

But also to be clear that they are already -- from a lending perspective, they are already in the business. They already have a portfolio, they are already making loans. So, they are just changing from being private investors to public investors. So again, it’s not a new entrant into the lending market; it’s just changing their form of ownership..

Thank you. And our next question comes from the line of Jade Rahmani from KBW. Your line is now open..

Thank you.

Just to follow up on competition, are you seeing pressure on loan spreads?.

I think, it’s going to be very deal dependent. I think, there are some, so to speak, green shoots with people arrogating floating rate loans or CMBS again. So to the extent something works for the CMBS model, which would be more on the cash flowing side, I think, you’ve seen spreads go down there. On the construction side, again, very barbell.

There are some deals that will get unbelievable execution from the banks, and there are other deals for obvious reasons that won’t.

So again, it’s going to vary I would say, and kind of -- and I think not really a product we do as much for ARI, but say on the senior management [ph] side, we’ve now seen an increase interest from some foreign investors. So, very low leverage deals that are maybe being structured as for a variety of reasons.

As Stuart mentioned before, there is competition. So, I would say, thankfully, we’re not seeing credit really be a source of competition. I would say, if anything, it could be spreads and things like that. So, I would say, the good news is the CLO, CDO market is still not back. You’re not seeing leverage on leverage.

You’re still seeing people taking a balance sheet approach to the business. So, we don’t look at deals and shake our heads, say, I can’t believe that person is doing that. We may disagree and think they are pricing the risk appropriately.

But we’re not seeing anything that that’s crazy in terms of leverage or lack of covenants in terms of things like that..

And in terms of your pipeline and recent deal flow, is there any geographic mix shift taking place? For example, the New York City, I think investment sales market has been down sharply year-to-date..

I would say again, as we think of major markets, continues to be active in New York, Los Angeles. We did a deal we announced in London. We are seeing more opportunity in the UK potentially with prices. Obviously, we’re being very selective what we do there. But we’re still looking at transactions there.

So, I think, more of the same across property types and geographies..

Thank you. And I’m showing no further questions over the phone lines at this time. I would like to turn the call back over to Stuart Rothstein for closing remarks..

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

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