Good day ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 2021 Apollo Commercial Real Estate Finance Earning Conference Call. 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 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 filing with the SEC for important factors that could cause actual results to differ materially from these statements and projections..

Thank you, operator, and good morning and thank you to those of us joining us on the Apollo Commercial Real Estate Finance Second Quarter 2021 Earnings Call. Joining me this morning as usual is Jai Agarwal, our CFO. The second quarter was a busy and productive one for ARI resulting in strong earnings and a continued well-covered dividend.

The company originated five first mortgage loans totaling $825 million bringing year-to-date total originations to $1.4 billion. More importantly, the commercial real estate transaction market remains robust with Real Capital Analytics reporting 167% increase in second quarter volume versus last year.

For ARI, we continue to see a high volume of interesting opportunities as our pipeline continues to build. The diversity of the transactions closed to-date once again demonstrates the depth and talents of our origination team and highlights the benefits Apollo's platform brings to ARI.

Notably, the transactions secured by the German portfolio of properties and the U.S. portfolio of parking facilities were won due to our team's ability to seek for the entire loan and to be thoughtful, flexible and efficient in underwriting and structuring.

Our European lending platform continues to fire on all cylinders winning many transactions that will otherwise historically have gone to banks. Year-to-date approximately 70% of our transactions completed were loans secured by properties throughout Europe.

As our platform in Europe grows and continues to expand its market presence, we have established a reputation as a reliable innovative capital provider. Our ability to provide borrowers with a one-stop shop for large financings, as well as our responsiveness and creativity around structuring has allowed us to compete very effectively in Europe.

With respect to loan repayments, ARI continue to benefit from improving real estate fundamentals and the robust level of liquidity in the real estate capital markets.

Three loans totaling approximately $260 million repaid during the quarter including one hospitality loan and two subordinate residential for sale loans, one of which was a large New York City Project and the other was for a Condominium Development in Los Angeles..

Thank you, Stuart. For the second quarter, we reported strong financial results with distributable earnings prior to realized loss and impairments of $59 million or $0.41 per share. GAAP net income available to common stockholders was $64 million or $0.42 per share.

As of June 30th, our general CECL reserve remained relatively unchanged quarter-over-quarter. With respect to this specific CECL reserve, we reversed $20 million against our Fulton Street loan as we continue to make progress in readying the site for a multi-family tower development, as well as improvements in the Brooklyn multi-family market.

We also foreclosed on a hotel asset in Washington D.C. and recorded an additional $10 million loss bringing our total loss against that asset to $20 million. This is now reflected as a realized loss in our financial statements.

GAAP book value per share prior to depreciation and general CECL reserves increased to $15.48 as compared to $15.35 to the end of the first quarter. The loan portfolio at quarter end was $7.5 billion, a 16% increase since the end of 2020.

The portfolio had a weighted average unlevered yield of 5.5% in a remaining fully extended term of just under three years. Approximately 89% of our floating rates U.S. loans have LIBOR floors that are in-the-money today, with a weighted average floor of 1.32%.

In addition to the five loans originated this quarter, we made $246 million of add-on funding for previously closed loans. With respect to our borrowings, we are in compliance with all covenants and continue to maintain strong liquidity..

Our first question or comment comes from the line of Doug Harter from Credit Suisse. Your line is open..

Thanks. You showed in your slide deck that the yield on new loans was just under 6%.

Could you compare that to what the yield of the senior loans that are repaying are?.

Yes, Doug. Look, I think at a high level you're probably pumped for comp as you think about risk and asset type or whatever. You're probably 50 to a 100 basis points tighter on the new loans versus the old loans. Obviously, there are some differences of course in LIBOR floors as well.

But as we look at sort of what's in the portfolio now and what we expect to repay. That's the rough range..

Great. And then, I guess shifting to the capital structure. I guess, how are you thinking about kind of unsecured going forward? And then with $2 billion unencumbered today, what is your outlook for leaving assets unencumbered.

Could you -- what level -- how much of that $2 billion would be kind of eligible to use to support future loan growth?.

Yes. It's a great question. So, if you look at the unencumbered assets in general, it's roughly about 60% mortgages that are potentially financiable and about 40% to 45% mez loans, which as you know we've historically had no interest in putting asset specific financing on.

Though I think in tough times I think the full $2 billion plus is available to use for leverage if we need to. But as we look at the capital structure going forward I think we've now accessed the convertible notes market, the term loan market and the traditional bond market.

So I think we're quite happy to have a presence in all of the call it, non-asset specific leverage markets available to us. I would say, there's no plans to do anything further in those markets in the near term.

I think we will use both available liquidity, as well as selective leverage against some of the unencumbered pool and then anticipated repayments as well to continue to stay active on the investing side.

And then as we look further out into the future, I think we will continue to -- and tends to be a strategic and opportunistic user of unencumbered leverage where we can find it, or a non-asset specific leverage where we can find it. And I think the capital structure will continue to be a mix of both corporate type of leverage.

But we will also continue to use some measure of leverage against a number of our first mortgage investments. But I think we like where we are today in terms of the flexibility that maintaining a large pool of unencumbered assets offers us as we think about both defensive measures as well as offensive measures looking into the future..

Thank you, Stuart..

Sure..

Thank you. Our next question or comment comes from the line of Stephen Laws from Raymond James. Your line is open..

Hi, good morning..

Good morning, Steve..

Good. Hope you guys are well. Stuart and Jai, can you talk about the -- as I think about the REO, if I've got the numbers right, it's one-four of revenue, $2 million of expenses, $0.5 million of D&A.

How many quarters -- how many days was that in the quarter? And how do we think about, so we can think about the full quarter impact of those line items going forward?.

Yes.

Jai, why don't you give the technical answer and then I'll give sort of more of some perspective on the longer term view of the REA?.

Sure, yes. So that's probably -- that's for about six to seven weeks of operations. And then Stuart can give the longer term view..

Yes. I think Stephen, if you think about the asset that we took ownership of which is a hotel in D.C. that we've talked about before. I think D.C. was slow to open up. It is clearly starting to open up just anecdotally this past weekend. The hotel was well north of 60% in terms of occupancy. So it's moving in the right direction.

And as I think as you start to think about forecasting out, in the future, I think we're probably continuing to run sort of slightly negative for Q3. But as we move towards the end of the year, we expect as long as D.C. stays open, which I know is a biggest in light of the world we live in right now.

But we're definitely moving towards cash flow positive, which is a mix of both better revenue performance due to occupancy and people coming back, but also I think appropriate changes made on managing the cost side as well..

Great. And then, I wanted to touch on unfunded commitments. Looking at your deck on page 11, it looks like about 70% of your unfunded commitments. So that loan 52, a mixed-use London construction loan originated just before COVID. Can you maybe talk about that small outstanding loan today, but a big unfunded commitment number.

So can you maybe talk about that loan and the drawdown expectations of that unfunded commitment?.

Yes. Look, at a high level the loan sort of performing exactly as we expected it to perform at this point. We knew it was going to be a long. A lot needed to happen both in terms of work at the asset, as well as funding of additional equity and subordinate capital before our funding of commitment was really going to sort of ramp.

I think you will start to see a ramp of our fundings somewhat later on this year, but in reality much more pronounced through next year as construction starts in earnest. It is a mixed-use project both for sale residential, some retail, as well the response to the asset itself has been quite positive.

And I think we've mentioned before, it’s not I'll say it the first time. I think it is a commitment where there is clearly a strong bid from those in the market to take a piece of our commitment if we decided to offer up a piece of the commitment.

And I think that will be a future decision for us based on both our thoughts on our liquidity, obviously thoughts on max exposure that we want to any one transaction in our portfolio.

And then also performance of the asset as it moves through construction and people start to indicate early interest in what will be available either on a lease or a for sale basis in terms of what's being built..

Great. Appreciate the color there. And thanks for taking my questions this morning..

Sure..

Thank you. Our next question or comment comes from the line of Jade Rahmani from KBW. Your line is open..

Thank you very much.

Including credit items, do you view distributable EPS currently as elevated? And should we be thinking about modeling, some modest diminution in coming quarters? Or do you believe based on the increased yield on new originations and the pipeline that it's likely to remain at similar levels going forward?.

Yes. I think it's a great question, Jai. I think it's -- if you look at what has been repaid recently which within the portfolio, I would say has been a couple of the higher yielding mezzanine opportunities that could be fair or probably not replaceable in the market today.

And then if you look at or read through my comments on at least a portion of the 111 West 57th Street, capital structure and sort of having some sense of what we've earned on that historically. I think you'd have to look at Q2 as somewhat elevated relative to what I think potential is on a go forward basis.

I think that being said, given where we're originating things today, given what we think the levered ROEs are on those new investments and also sort of some other things within the portfolio sort of positive and negative as we sort of work through, extending loans or restructuring deals, I would say, the high level commentary would be, we still remain fairly confident in continuing to earn and cover the dividend at a healthy level on a go forward basis..

Thanks.

And based on where things stand today, I guess, year to-date is retaxable income running ahead of the dividend or in line with the dividend or perhaps below the dividend?.

I'll let Jai answer that question..

Yes. I mean, taxable income is -- we look at taxable income mostly on an annual basis, because there they often tend to be episodic and lump sum items, so we look at that on an annual basis. And we have plenty of questions from a tax perspective to the extent we wanted to right-size the dividend.

But taxable income is -- we talked about that more in January for the whole year..

Said differently, Jade, I would say the dividend level that we sent, set is sort of based on what we think operating earnings and covering that dividend will be. I'd call it $0.35 a quarter and don't expect sort of the tax situation to impact that one way or the other..

Okay. And you don't expect, I assume, that's came about something similar.

You don't expect to if required to make a special dividend payment?.

No..

No. Not at this time..

Turning to credit, we've seen the trend of a lot of reserve releases.

Do you anticipate that to continue? Or has there been any developments whether it be portfolio specific or macro related such as delayed reopening to cause that trend to slow or perhaps be on pause, for say, the next two quarters?.

Look, I think what we did on Fulton Street this quarter was probably the one that was most ready for that sort of what you refer to as sort of a reserve release. And I think we were intentionally maybe a little slow in getting that done.

But I think given the strength of the market and the progress we're making on readying the site for development, it felt like the right thing to do. I would say, as I look at our high focused assets at this point in time, I wouldn't be expecting anything additional from us on that front going forward..

Thanks.

And just lastly on Liberty Center, could you give an update on what's going on there?.

Yes. Look, I think as I've mentioned previously, I think the challenge or the asset management challenge on Liberty Center is really sort of multi-pronged. It is -- one is to increase retail occupancy with more of a focus on local and regional tenants as opposed to national tenants. And I would say, we're making good progress on that front.

And I think if things that we expect to come to fruition, it will allow us sort of continue to hang in and call it the low 80% occupant -- with low 80% occupancy level.

I think the two other initiatives which are more about really getting this thing to a finish line that makes sense, is over time continuing to convert some of the existing retail square footage to alternative use, which in our minds today is more of an office type use.

And we've signed some office tenants for discrete spaces that lend themselves to that type of use.

But the bigger project for us is really a little bit slightly larger reconfiguration of the way the asset lays out to allow us to meaningfully shift some square footage to office use, but have it blend such that the office and the retail work well together as opposed to just sort of creating a jigsaw puzzle that doesn't make a lot of sense.

But I would say, we've had good conversations with productive -- with prospective tenants. Also good conversations with the local planning commissions and boards. So making progress. But still a lot of work to do. And then the third leg of sort of the move forward is to continue to create more density around the site in general.

There is a new multi-family project that will be built around the site, which is great news.

And then we are actually working with the same, call it planning commissions and boards that I just referenced to think about ways to potentially use some of our excess parking or surface area to convert those into potential multi-family development sites as well which we think would be positive in terms of creating more density for the site.

So, I think the partners we've got working with on the site are doing a great job in terms of creating the environment. Foot traffic is back up again, which is great. But still a fair bit of asset management work to be done on our side..

Thanks. Appreciate the update..

Sure..

Thank you. Our next question or comment comes from the line of Rick Shane from JPMorgan. Your line is open..

Hey, guys. Thanks for taking my questions this morning. Stuart, you made an interesting observation related to dividend policy in the $0.35. And obviously the world's changed a great deal since you set the $.35 dividend policy last year.

And I realized, the credit environment's likely better, but the interest rate environment is arguably more challenging with how long rates have been at such low levels.

I'm curious how you think about the dividend policy now? And with what's in front of you, how challenging that could be?.

It's a great question. As you know, because I think I've said it to this group collectively many times before. We try and take a modestly long-term view on the dividend.

Because I know from an investor's perspective much easier to value what appears to be a somewhat stabilized quarterly dividend as opposed to something that is bouncing around from time to time. And it's very similar to the dialogue we have with the board of ARI, who's ultimately responsible for setting the dividend.

But I think we've always tried to manage through any quarterly sort of either ups or downs relative to the dividend level. And I think when we set the dividend level down last year, which was really right at the sort of start of the pandemic, peak disruption in the market, most uncertainty.

We were trying to set a level where we looked out over four to eight quarters carrying excess liquidity, expecting there would be some downside in cash flows other sort of unforeseen externalities. Did we think it was a level that we could continue to cover based on sort of various scenarios on the portfolio that's clearly proven to be the case.

And I think we've comfortably covered the dividend for the last four or five quarters. And obviously given what we've achieved the early part of this year we certainly have set ourselves up pretty nicely to continue at that level on a go-forward basis absent any unforeseen circumstances.

I think the challenge and the exercise that we're going through right now, which I think is sort of implied in your question is now that we think there's probably a more call it steady state experience on the repayment side.

And obviously, we know where we've been originating in terms of call it levered ROEs which I think we sort of know where we can continue to put capital out.

As some stuff rolls off, as you give yourself some room, what does a model look like on a go forward basis? And I would say, sitting here today I don't anticipate any changes to where we've settled in from a quarterly perspective. We'll continue to have those conversations with the board on a quarterly basis.

And we'll continue to refine our model as we move through this year and head into next year. But I would say sitting here today, yes, it's getting more challenging. But there's a little bit more challenging on the origination side a little bit more beneficial in terms of the way we think about levering and financing our business.

So net-net still feel okay in terms of where we are. Though at a personal level, don't love paying 8.5% to 9% dividend, which is 800 basis points north of the tenure or 750 basis points north of the tenure. It seems like a fair bit of excess return. But certainly feels like we can earn it right now given what's available to us..

Terrific. I appreciate that the thoughtfulness of that answer.

And obviously, it does highlight the resilience of the model if you think back where we were 15 months ago and how differently the world has evolved since whatever framework you were using was created and the fact that the dividend is sustainable covered et cetera really does demonstrate the resilience?.

Yes. Thanks Rich. Look, I've taken a little bit over the last four months and I don't think this is unique to us. I think we all -- we were all running throughout this space at a fair bit of excess liquidity which is obviously unproductive capital at the end of the day.

So when you start running at a more realistic corporate finance strategy even with somewhat tighter returns. I think everybody's models prove to be at least today fairly resilient.

We'll see where things go in the future given sort of the incredible amount of capital searching for any type of yield which continues to make the market highly competitive..

Got it. Okay. Thank you very much..

Sure..

Thank you. Our next question or comment comes from the line of Tim Hayes from BTIG. Your line is open..

Hey. Good morning, Stuart. Thanks for all the insight this morning on the troubled assets and focus assets rather. But one more on just the credit side. Were there any notable upgrades or downgrades this quarter? I was looking at the Q and I think maybe I saw one loan might have been downgraded to a four this quarter? I don't know if that's correct.

But if you can maybe just touch on that or maybe a question for Jai?.

No. It was only the one that we move. We moved a piece of a loan to a four which I referenced in the script. And then, it's in the subsequent events note in the 10-Q as well. It's a portion of the 111 West 57th..

I see. Okay..

Loan, which is obviously experienced both self-inflicted as well as COVID inflicted as well as weather inflicted construction delays. And I think it is clearly on track to be completed. We're excited to get it done. Very focused on getting it done in what appears to be a fairly attractive sales market right now.

But you need to make more progress on the asset in order to encourage people to make complete sales. But that's the only change for the quarter..

Okay. Got it. I guess I thought that asset or that loan had already been a four. So thanks for clarifying. And then just on the pipeline, I know you gave some stats about quarter to-date investment activity and repayments.

But can you maybe size the pipeline for us and put that into context with repayments, which I know that that can be difficult for you to predict. But it sounds like you're seeing a normalization repayment activity.

So, just trying to get a feel for how you see portfolio growth in the back half of the year as repayment activity picks up a bit?.

Yes. Look, I think there's a couple aspects to that. So first of all, as I think we've been talking about for quarters now. There's not a lot for us to do these days in the call it, discrete mezzanine loan sort of opportunity set.

So, as unencumbered mezzanine loans pay off and we convert that capital into levered senior loans there's a natural increase in the portfolio overall, which we will continue to benefit from in terms of this share portfolio size.

I think beyond that we're starting to get back to a normalized repayment pace, which for us historically has been -- typically, we originate roughly three years average duration, but by the time you factor in us offensively extending certain loans because we want to keep the loans outstanding or borrowers coming to us and requesting extensions.

We end up getting paid off about 20% to 25% of the portfolio a year. So I think it's realistic to expect that will happen. I would say, we feel very confident in terms of our ability to redeploy that capital through the rest of the year. And if anything would probably envision slightly taking down the liquidity numbers that Jai referenced as well.

So I thing the net of all of that is you will probably see some slight increase in the portfolio, but nothing material. I think were sort of the $7.5 billion to $8 billion portfolio, which for us means were being very efficient in keeping our equity capital deploy..

Got it. That's very helpful. And then just touching on what's in the pipeline right now. Is pretty consistent with where you'd seen or what's been come in over the past couple quarters? I know you're doing more in Europe. So you expect to kind of those levered returns to be a little bit higher there given that markets to kind of trailing U.S. a bit.

And how do the structures look on those type of assets versus what you're seeing? I know, it’s kind of a broad general question.

But just trying to get a feel for where we see structures and yields trending on new loans versus the portfolio today?.

Again, and I think it was Doug that asked the question early on. Look, I think spreads are a little tighter today than what in the existing portfolio. But I think that is somewhat reflective of sort of the overall interest rate environment. But I think it’s more bouncing sideways than anything.

I think what's in the pipeline today, if you look at what we closed year to-date -- I think what we close your to-date is a pretty good proxy for what is truly an interest in our pipeline today..

Okay, great. Thanks for taking my questions..

Sure..

Thank you. At this time, I'd like to turn the conference back over to Mr. Rothstein for any closing remarks..

I'll say, our greatest thanks as always to all that participated in the call this morning. We'll talk you in other few months. Thanks..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day..