Ladies and gentlemen, thank you for standing by and welcome to the Q1 2022 Apollo Commercial Real Estate Finance, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

I’d like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I’d also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements.

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

In addition, we will be discussing certain non-GAAP measures on this call, which management believes are relevant to assessing the Company’s financial performance. These measures are reconciled to GAAP figures in our earnings presentation, which is available in the stockholders 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 to those of us who are joining us on the Apollo Commercial Real Estate Finance first quarter 2022 earnings call. I am joined today by Scott Weiner, our Chief Investment Officer; and ARI’s new Chief Financial Officer, Anastasia Mironova.

Carrying forward the strong momentum from 2021, ARI had an extremely active first quarter of the year, committing $1.8 billion to new commercial real estate loan transactions. The Company’s loan portfolio totaled $8.4 billion at quarter end, representing a 22% year-over-year increase.

Our new investments encompass loan transactions for a variety of property types in both, the United States and Western Europe. Most importantly, ARI’s portfolio produced another quarter of distributable earnings that covered the $0.35 per share common stock dividend.

And we believe the combination of the first quarter strong deployment, coupled with an active pipeline, well positions ARI to continue to generate distributable earnings that will cover the dividend for the remainder of the year.

Pivoting to the real estate investment in capital markets environment, transaction volumes for new investments and financings remain active, however at a slower pace than the prior year.

Not surprisingly, there’s increasing focus and dialogue around the impact of inflation, rising rates, and the ability of the Fed to engineer a soft landing and avoid a recession. To date, the volatility in the broader capital markets has led to a widening of CMBS spreads as well as a slowdown in the CRE, CLO market.

ARI is not active in the securitization markets. And it is possible that the pullback in those markets may create interesting risk-adjusted opportunities for ARI.

We remain active in the market on behalf of ARI, seeking to capitalize on opportunities, while at the same time being disciplined and thoughtful with respect to understanding economic uncertainty, market volatility and the impact on underwriting.

Our access to real-time data and information from all areas of Apollo’s integrated global investment management platform provides us with meaningful information and insight, which enhances our underwriting and analysis and enables us to thoughtfully think through appropriately pricing risk-adjusted returns in a fast-changing environment.

Thus far in the second quarter ARI has closed an additional $530 million of loans. And we expect Q2 to be another strong one from an originations perspective, with approximately $1 billion in closing. Shifting to the portfolio, we remain focused on proactive asset management.

As we reported on our prior call, ARI was fully repaid including default interest on one of its largest loans, which was secured by a well-located retail asset in London. During the quarter, we moved the junior B mezzanine loan secured by 111 West 57th Street to a risk rating of 5.

While we believe ARI’s basis is protected by expected sales on a nominal basis, accounting principles and guidance require that we determine present value of future cash flows in assessing recoverability and as such, ARI recorded a $30 million reserve.

With respect to the Mayflower Hotel, ARI engaged a brokerage firm to begin actively marketing the property.

And we are optimistic we will be able to sell the asset in an amount equal to or above our basis, given recent comps in the market for hotel assets, as well as the significant amount of capital raised for hotel investing over the past 18 months. Finally, we are excited to welcome Anastasia as ARI’s new CFO.

She brings a wealth of knowledge and experience to ARI and we expect her to be a meaningful contributor to ARI’s future success. And with that, we will open the call for questions.

Operator?.

Thank you. And our first question comes from the line of Doug Harter with Credit Suisse..

Hi, Stuart. Hoping we could talk a little bit more about 111, 57th. It looks like the fully extended maturity is coming up in a few days here on more of the loans.

Could you just talk about kind of how we should think about the coming weeks, months, as to how that loan unfolds?.

Yes. Look, I think the expectation -- I think we’ve been signaling this for quite some time. I think ARI will stay in the loan. I think there will be changes in the capital structure broadly, more at the senior portion of the loan and at the junior portion of the loan. ARI has got exposure throughout the capital stack.

But I think, we are weeks away from restructuring the financing in such a way that the project is absolutely fully capitalized to get to the finish line in terms of construction and also give some runway in terms of sales activity..

And I guess, just any update you can give us on kind of with the sales activity, kind of what are you seeing there, and kind of the broader terms that kind of give you comfort in that statement?.

Yes. I would say, a couple of factors. One is from a construction process. Someone from Apollo’s there sort of on site on a weekly basis.

There’s clearly strong progress in getting to the finish line, first and foremost, in terms of the amenity package, which we think is critical to sales momentum at the asset, and then finishing construction throughout the asset. So, that’s a positive development.

Prior units that were put under deposit have begun closing as a TCO has received sort of in section infections of the building -- or TCOs received in sections of the building. So that is creating I would say positive momentum from a marketing perspective as people see units actually being closed and people being able to move into their units.

I would say, foot traffic on a year-over-year basis is clearly up. And it continues to be, I would say, predominantly domestic interest. Though, certainly if the world continues to move in a positive direction from a COVID perspective, we would expect there to be some meaningful foreign interest as well.

And then, lastly, there’s definitely been legitimate interest on units in the last few weeks that we believe will result in contracts getting signed, though nothing’s been publicly announced yet on that front.

And I guess, the last thing I’d say, Doug, is that from a pricing perspective, in terms of discussions around actual units that I believe will lead to contracts.

The numbers people are talking about are reasonably consistent with where we think things will clear from an underwriting perspective as we sort of reunderwrote the transaction from our perspective..

Thank you. And our next question comes from the line of Steve DeLaney with JMP Securities..

Stuart, we’re obviously all sitting here thinking about rates, hopefully some people at the Fed are too. But thinking ahead a year 250, 300 basis points higher, just we haven’t had this -- have this conversation in the last several years.

But at the front end, when you guys are underwriting a project, how important is that? Do you stress test the business plans for various rate cycles? That’s the first part.

And I guess, are you trying to build in a cushion there for higher interest carry? And then, the second follow-up is, do you require your borrowers in some cases to buy -- to use swaps or caps to kind of protect that, that risk? Thanks..

Yes, sure. So, I’ll answer your questions in reverse, Steve. So, the answer is yes. On the cap side of things, it is, I would say in the preponderance of transactions, we’re forcing people to buy out of the money caps that provide some protection in terms of excessive rate movements.

I think, on your underwriting point, we certainly stress test rate movements from a carry perspective, which I think in some regards is almost the easier exercise from a mathematical perspective.

I think the harder part from an underwriting perspective, and certainly not anything we shy away from, because it’s part of what we do, but it’s really trying to figure out the interplay between rate movement, cap rate, exit values, et cetera, and trying to look through -- one of the big debates inside our shop, and probably not different than a lot of other shops is, are rate movements a one to two year phenomenon? Are they a longer term phenomenon? Are their rate movements tied to economic growth? Is there a pullback? Obviously, all the variables that you, we and others think about.

But there’s definitely, I would say, a real emphasis these days, not that there isn’t at all times on various scenarios, and what our path to exit is in various situations. And if anything, making sure things are capitalized to be carried for some time, to the extent there’s continued choppiness in the capital markets..

Yes. That makes sense.

Of course, you’ve got to look at the macro, both not only in the U.S., but the UK and Europe as well with your broader lending markets?.

Correct..

Last Friday, CMA ran up a piece about your Brooklyn project, the Brook, suggesting that you’ve reached the point in the planning to hire WD to look for a construction loan. Just two questions on that.

I don’t know, Witkoff, could you make just some general comments that are market -- general market knowledge about Witkoff and what they bring to the table? And then, some idea of the timeline for a build-out of this, this big project?.

Yes. I think if you talk to people in and around the real estate business, particularly those New York and Florida focused. Witkoff’s got an excellent reputation on the construction side, have done quite a number of high-end projects successfully. They have been historically a reasonable sized client of ours.

So, we’ve had a firsthand look at their skills and expertise. And I would say, there’s a lot of confidence in terms of what they bring to the table from a development partner.

Timing wise, we’re at the point where we could start doing foundation work, you’re looking at a two year build roughly, it’s a pretty significant it’s a 50-storey tower, plus or minus a floor or two. So, it’s roughly a two-year build. WD is out doing the construction financing for us. I would say -- too early to commit to anything.

But I would say, the initial reaction from those interested has been pretty positive. And I would say the -- that based on the discussions around financing, partnering with Witkoff has proven to be a good strategy..

And our next question comes from the line of Rick Shane with JP Morgan..

So, I’m sitting looking at the interest rate sensitivity chart or table in the 10-Q and it talks about a hypothetical 50 basis-point immediate shift. Basically, since March 31st, we’ve covered about 75% of that ground in a month. So, we really are sort of experiencing that.

I am curious if you can sort of walk us through in a little bit more detail sort of where the window is where you’re not rate-sensitive as you sort of shift through the floors? And then, we’re -- at what levels you think you do become asset -- fully asset sensitive again, just so we can understand in this volatile environment how to model things?.

Yes. I think the best place to look at it, to be honest with you, Rick, is we put a pretty good chart, I think in our supplemental, which basically goes from a 50 basis-point move out to a 200 basis-point move. So, I think that gives you a better sense of how to think about it. I would say, high level, the way to think about it is in terms of U.S.

dollar sort of contracts, right? So, moving to the -- from the LIBOR to the SOFR world, I think you start seeing us become positively correlated with interest rates when you cross a roughly 1% sort of move. And then, I would say, in Europe, it’s actually a little lower.

So, 50 basis points in Europe starts to make us positively asset correlated from an interest rate perspective..

And then, once you become positively correlated, should we think about it that the beta on an ROE basis is about 0.6, given the leverage, so that for every 100 basis points of increase in LIBOR, we would expect about a 60 basis-point pickup in ROE?.

Yes. I mean, that’s directionally or broadly correct. We’re typically financing things with 2 turns of leverage at this point, some at 60% LTV, some at 70% LTV. It’s certainly ballpark correct..

Our next question comes from the line of Jade Rahmani with KBW..

Could you please give some color on activity levels in the market? Seeing some kind of mixed signals or trends that we’re picking up? On the one hand, I would say, transaction volumes in the first quarter surged, up 56%, but that was pretty much all driven by average deal price.

Unit trading was up about 4%, CMBS, which is very rate sensitive, volumes were consistent in the last two months. I’m not sure if the outlook is being diminished at this point, but how would you characterize overall deal activity currently? Healthy, some fall off, is the market recalibrating.

What are you seeing?.

Yes, I think it is healthy but definitely moderating from what we saw, call it from the latter part of 2020 all throughout 2021. And I think, the one thing I’d say with respect to first quarter numbers, I always view first quarter numbers as really finishing a lot of year-end prior year business.

So, I think you came into the year with a lot of momentum, because things were still humming along in the fourth quarter of last year, there were still a lot of deal activity. And I think a lot of what you saw in the early part of this year was just getting to the finish line on things that were done or agreed to, at the end of 2021.

There are still plenty to look at. I look at it from both, what we’re seeing on the credit side, but then I also obviously spend a lot of time in dialogue with the folks at Apollo on the real estate equity side, and there’s still a lot of activity going on, a lot of deals to pursue.

I would say, it is taking a little bit longer to get things to the finish line. I would say, lenders are being a little bit more cautious or thoughtful. I think to the extent on prior earnings calls, I’ve made the comment that the world favors borrowers. I would say, there’s still plenty of options for borrowers these days.

But I would say, things, the pendulum is probably moving a little bit more towards the center or more towards equilibrium. I think, there’s definitely a somewhat of a slowdown in the securitized markets. So, all of which I would describe as -- there are still things to do, which to me sort of define a healthy market.

But I would say, the pacing has slowed down. And I think it goes back to my earlier comments and that I think there are still varied opinions on what the rate movements mean, what it means for the economy. Obviously, the volatility in the capital markets in general has had an impact on the securitization markets.

And I think when you put that all together, it indicates a modest slowing in pace, but still something that I would define as a healthy market and that there’s borrowers looking to do things, equity capital, looking to buy things, and lenders willing to participate in market..

And then, can you talk to the theme of how significant a factor cost of debt is in borrower business plans? Let’s keep in mind, these borrowers, these sponsors are already looking at non-banks as their primary or one of their primary avenues of capital.

So by that definition, they are paying a premium in order to have flexibility on the business plan and their execution strategies. So, perhaps they may be less rate sensitive as they’re looking at real value add strategies.

How do you think about that? Do you agree or do you expect further rate increases by the Fed to significantly diminish deal flow?.

I think, you raise a fair point. I think, you know, I think where you were sort of going with your question, if you think about the returns on equity most of these borrowers are seeking to achieve. There’s a lot of room between the cost of leverage and what their sort of target returns on equity.

So, there’s positive leverage, generally speaking, despite a gapping out in the cost of credit. I would say, we haven’t seen a gapping out yet. We’ve seen sort of a modest uptick in the cost of credit. So, I would say, still within the sensitivity ranges as most people think about the cost of leverage and what’s achievable.

But I think it’s a fair point.

And I think to be honest with you, as we think about it, it’s arguably less relevant on sort of the cost of getting something done and probably more relevant as people think about what continued rate rises mean for economic impact on lease-up, sell-through, et cetera, whatever the business plan actually is, and then ultimate exit value on the real estate to the extent we’re in an elevated rate environment for some time.

So, I would say, people definitely sensitize it, but I would say we’re not yet at the level, at least from our perspective, where we’re seeing it dramatically impact business plan..

Dramatically impact business plans, or dramatically impact the deal flow?.

I would say both. In the sense that I think people are still confident in their business plans, they sensitize rates, and they’re still generally moving forward with their equity investment strategy. And you’re still seeing activity..

Okay, great. And very good to hear. In terms of New York overall, I’m not sure if at the outset you made a comment as to your market view, just getting some investor questions recently. I think people are just looking for weak spots. So, 1740 Broadway, there was a large loan default and a large asset that got people’s attention.

Clearly, there’s a lot of debate about Midtown office and Class B, Class C office in New York City. And then, the condo market has been very strong, but perhaps, might be slowing. Also, perhaps geopolitical uncertainty plays into that market.

What are your thoughts around the overall New York City, the health and vibrancy of the market and the outlook for real estate?.

It’s a big question. And I think there’s not one answer that fits all of it, I’d say, specifically with a couple of things that you’ve touched on.

I think what we’re seeing on the office side, at least in the exposures in our portfolio and sort of what we’re hearing anecdotally is that there’s a clear sort of separation between recently created whether developed, renovated, remodeled office space and older more commoditized space, I can tell you that in two transactions we’re involved in, rent levels on new leases have exceeded what was underwritten.

Not surprisingly, TIs and -- TI and leasing commission is a little bit above underwriting as well, both due to the need to provide some added concessions, and then also just the cost of getting things built out. But I would say, in a positive sense, there seems to be real demand for newly created space.

And my expectation is that we’re probably likely to get refinanced out on a couple of our more significant office projects in New York, which are secured by newly created space. I think on the commoditized or as you said, B or C quality space, I think there’s actually a dearth of interest, lack of activity.

So I think, there’s a real bifurcation on the office side. I would say, on the condo side, the market’s been extremely strong for the last, whatever it’s been, 15 to 18 months coming out of the pandemic. And at least sitting here today, we have not seen any evidence of a slowdown.

There still seems to be very-healthy demand, strong price per square foot numbers. So, we continue to see positive momentum on the condo side. And then, I think the last asset class that we spent a lot of time thinking about, you didn’t ask about it, but I’ll comment on it anyway, is on the hospitality side.

Clear Omicron impact in January and February, but a, I would say, better than expected pickup in March and April, and forward bookings for the spring are looking pretty strong, which hopefully is an indicator that absent anything unforeseen from a pandemic side or to your point, geopolitically, it seems like from a tourism perspective, and what that means for hospitality is trending in a fairly positive direction.

So, it’s definitely mixed in New York, but I would say there’s clearly things that are doing well. And I think you just need to be very thoughtful about what exposures you’re willing to live with..

And our next question comes from the line of Stephen Laws with Raymond James..

covered a lot and I’ve got to ask about Europe. I know asked about this last quarter, but maybe you’re able to leverage the Apollo platform, and you’ve got some exposure in Europe, and it’s provided a lot of growth.

Can you talk about, maybe since the last conference call, any conditions improved there for the lending environment? And conversely, is there anything that you’re more cautious on there than we spoke three months ago?.

I mean, I think at a high level, it still continues to be an attractive environment from a lender’s perspective. If your perspective is basically same quality of equity sponsorship, same general business plans around assets, same quality of assets, and ultimately, same ability, generally speaking, to protect yourself as a lender legally.

So, there’s a lot to like about Europe. And it is again -- my team in London doesn’t appreciate this when I say it, but it’s competitive. But it is on a relative basis, just not as crowded in the U.S., either in terms of number of players, size of securitization market, et cetera.

So, I think our team on the ground there has done a fantastic job in building their presence, becoming a leading lender in the market, having great relationships with borrowers and just continuing to generate interesting opportunities. I think the flip side to that is that I would say, the European economy has its challenges as well.

If anything, as we talk broadly inside Apollo, not that we spend a lot of time trying to make macroeconomic predictions, but to the extent there are those inside the firm who think about those things, I would say, Europe is probably slightly more at risk for a recession than the U.S. is.

So, that certainly factors into underwriting decisions, et cetera. So, it’s been a positive 12 to 18 months in Europe from our business perspective. We think we’ll still see really interesting opportunities, just given the strength of our team over there.

But I would say, more focus in terms of stressing deals and thinking through economic uncertainty as we debate whether or not we can get comfortable with something from a credit perspective..

Our next question comes from the line of Eric Hagen with BTIG..

A couple for myself. Number one, if markets do stay a little choppy, how big of a cash position do you feel comfortable running? And then, the second one, on the origination of the retail loan in the UK since the end of the quarter, can you share some of the key metrics, like the coupon on the loan and how you’re financing it? Thanks..

Yes. I think, in terms of cash or liquidity, we tend to think more about liquidity than cash. We’ve typically been running just short of as best we can vis-à-vis efficiency and both, money going out and money coming in. We’ll probably always have a few hundred million dollars of actual cash.

But remember, we’ve got $1.6 billion of unencumbered assets on the books, which are always available to the extent we need to address any liquidity concerns. So, we feel very well protected there.

In terms of the retail transaction that we just announced, it was two best-in-class outlet centers in the UK, a space that is proven to be remarkably both, pandemic-resilient as well as shifting nature of retail-resilient. Our exposure’s roughly a 60% LTV.

We think we’re sort of on a debt yield perspective, lending it sort of low-double-digit returns, if you think about where cap rates would need to go for us not to be protected.

And then, we typically don’t disclose specific yields on the deals, but it’s sort of consistent with what we’ve done in Europe broadly, which is sort of a floater plus ballpark, 300, 400 basis points and then we lever into a low-double-digit ROE from our capitals perspective..

Thank you. I’m showing no further questions at this time. So, with that, I’ll turn the call back over to CEO, Stuart Rothstein, for any closing remarks..

Thank you, operator. I appreciate everybody taking the time this morning. And obviously, if there are any follow-up questions, Hilary, myself, and now Anastasia are all available to answer any questions on a go forward basis. Thanks..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And you may now disconnect..