Apollo Commercial Real Estate Finance, Inc

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2019 Apollo Commercial Real Estate Finance Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require further assistance, please press star 0. I'd like to remind everyone that today's call and webcasts are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance Incorporated and any unauthorized broadcast form is strictly prohibited. Information about the audio replay of the 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 your most recent filings with the SEC for important factors that could cause actual results to differ materially from those 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 and are reconciled to GAAP figures in our earnings press release, which is available on an 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 the latest SEC filings, please visit our website at www.apolloreet.com or call us at 1-212-515-3200. At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein. Please begin, sir.

Thank you, Operator, and good morning, and thank you to those taking the time to join us this morning on the Apollo Commercial Real Estate Finance Inc. Third Quarter 2019 Earnings Call. As usual, joining me are Scott Wiener and Jay Agarwal here in New York. This past September, ARI reached its 10-year anniversary as a public company. I wanted to take a minute to highlight some milestones we have achieved over the past decade which underscore the strength of Apollo's commercial real estate debt platform. What started as a team of four people has grown to over 30 investment professionals located in New York, London, Los Angeles, and San Francisco. Since 2009, that team has deployed approximately $13 billion of capital into transactions throughout the U.S. and Europe on behalf of the company. ARI's equity market capitalization has grown from $200 million at the IPO to nearly $3 billion at September 30th, and the balance sheet is stronger and more diversified, with over $2.6 billion in repo facilities, $575 million of convertible notes, and this year's $500 million debut offering in the term loan B market. Importantly, since inception, ARI has provided shareholders an attractive yield and consistent income through its quarterly dividend, and we continue to focus daily on enhancing shareholder value. In short, we are extremely proud of ARI's performance over the past 10 years, which could not have been achieved without the incredible team of investment, asset management, finance, and legal professionals at Apollo. Turning now to Q3, ARI had another strong quarter of originations, committing capital to transactions totaling approximately $960 million and bringing originations to $2 billion for the first nine months of the year. As we discussed last quarter, we continue to find compelling opportunities to lend in Europe. Broadening our footprint, ARI recently completed its first transaction in Italy, and following the end of the quarter, we committed to two large first mortgage loans, which included a €266 million senior loan secured by a Spanish hotel portfolio, and £196 million first mortgage loan secured by a portfolio of senior care homes located across the United Kingdom. Our success in Europe continues to be a testament to Apollo's broad presence in the European real estate market and the London-based commercial real estate debt team, which has done an excellent job establishing a reputation for as a reliable, creative, and highly regarded capital provider. In addition, we continue to benefit from our ability to source low-cost financing and local currency throughout Europe. At present, we are working through several other transactions in Europe, which we expect will close prior to year-end. While our pipeline remains weighted towards Europe, we have recently completed several deals in the U.S., including two hospitality transactions in as well as a large urban retail transaction on a prime retail corner in New York City. We were made agnostic as to investing in the U.S. or Europe. As such, in evaluating transactions and culling our pipeline, there is an ongoing dialogue comparing potential opportunities in both regions and targeting those transactions we anticipate will generate the most interesting risk-adjusted returns. ARI is also benefiting from our pipeline of future fundings. During the quarter, the company funded an additional $126 million, which continues to be an effective means of keeping capital invested and offsetting loan repayments. Net loan portfolio growth for the quarter totaled approximately $670 million, and we ended the quarter with a loan portfolio totaling over $6 billion. It is worth noting some positive activity in two of our larger investments. Our condo inventory loan in the United Kingdom has been paid down through unit sales, and we expect additional pay down activity will occur prior to year end. Also, our Miami urban pre-development loan had an infusion of equity during the quarter, which reduced the size of our loan balance. Before I turn the call over to Jay, I will take a minute to discuss the $35 million of loan loss reserves we recorded during the quarter. in connection with our loan securing a lifestyle center in northern Cincinnati and our condo inventory loan in Bethesda, Maryland. With respect to the lifestyle center loan, I mentioned at the time we took the initial reserve that we were actively pursuing several value-enhancing initiatives which had somewhat binary outcomes. As those initiatives have not fully materialized, this quarter, ARI recorded an additional $32 million loan loss reserve bringing the total reserve on that investment to $47 million. The center remains at an occupancy in the low 80% range, reflecting the balance between new tenants, which are predominantly food, entertainment, or experience-related, with continued challenges in retaining traditional soft goods retailers whose business models are changing rapidly. Over the past year, the management team in the center has done a commendable job managing and optimizing costs, as well as strengthening the center's presence in and relationship with the surrounding community. We continue to view the center as being well located in a market that continues to see both business and residential growth. The next step in protecting and recovering value is to re-envision the future of the center in the face of an ever-changing retail real estate landscape. We are finalizing terms to enhance leasing by bringing in a team with more of an owner's mentality and a demonstrated track record of creativity in responding to the new paradigm of retail real estate. Finally, ARI also recorded a $3 million loan loss reserve in connection with the condo inventory loan in Bethesda, Maryland, bringing the total reserve on that investment to $10 million. At quarter end, there were seven units remaining, and the reserve taken reflects a more conservative view of timing and pricing. And with that, I will turn the call over to Jay to review our financial results.

Thank you, Stuart. For the third quarter of 2019, our operating earnings were $72.6 million, 47 cents per share. Gap net income for the quarter was 25.7 million, or 16 cents a share, which reflects the impact of the 35 million loan loss reserves Stuart mentioned. During the quarter, we closed eight loan transactions, totaling over 950 million, and funded an additional 126 million for previously closed loans. Repayments during the quarter totaled 353 million. At quarter end, our portfolio had an amortized cost of $6.1 billion, a 12% increase over last quarter. The portfolio was comprised of 74 loans with a weighted average unlevered yield of 8.2% and a remaining term of just under three years. Ninety-four percent of the loans in the portfolio had a floating interest rate. I wanted to note that effective Q4, we will account for the Lifestyle Center loan on a cost recovery basis. That is to say, all proceeds will be applied to reduce the gap-carrying value, which at quarter end was $126 million. With respect to liquidity and leverage, as of quarter end, we had approximately $540 million of available capital in the form of cash and availability on our credit lines, and we ended the quarter with a 1.3 times debt-to-equity ratio. During the quarter, we increased the credit capacity on our JP Morgan and Deutsche Bank facilities to $1.3 and $1.25 billion respectively, bringing our total repo capacity to almost $3 billion. Lastly, our book value per common share was $16.02 at quarter end, a decrease from $16.30 at June 30th. This decrease reflects both the provision for loan loss as well as $0.07 a share from the unrealized loss associated with an interest rate swap. And with that, we'd like to open the line for questions. Operator, please go ahead.