Apollo Commercial Real Estate Finance, Inc

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 filings with the SEC for important factors that could cause actual results that 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 accessing the company's financial performance. These measures are 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.apolloreet.com or call us at 212-505-3200. 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 first quarter 2020 earnings call. I hope that everyone dialing in is healthy and safe as we continue to navigate the challenging environment created by the COVID-19 pandemic. Joining me this morning is our Chief Financial Officer, Jay Agarwal, and Scott Wiener, my partner in running ARI since the beginning. Before I begin my comments with respect to ARI, I want to take a moment to update you on how Apollo as a firm has been operating over the past few months. Apollo moved quickly to protect employees and during the second week of March implemented a work-from-home plan. As a firm, we are extremely well equipped to work remotely, and from the most senior levels on down, I continue to be amazed by the incredible effort, dedication, and perseverance being put forth. Over 50 people within Apollo, including the entire real estate credit team, as well as members of the finance, investor relations, and legal teams support ARI on a daily basis, and we are communicating frequently and effectively. Workflow is organized and efficient, and work product is thoughtful and consistently being improved and enhanced. I recognize that this situation continues to evolve, and there is much work ahead of us. but the effort to date gives me great confidence in our team's ability to navigate both the opportunities and challenges that lie ahead. I have often commented about the benefits of the broader Apollo platform to ARI. Over nearly 30 years in business, Apollo has navigated many market cycles, disruptions, and periods of heightened volatility, and has successfully managed through them and thrived. In the current environment, ARI is benefiting from many of the collaborative efforts within Apollo. A few noteworthy examples include a highly coordinated effort across the firm in managing bank relationships, the aggregation and dissemination across investment teams of real-time granular market data and information, and the unified fashion in which Apollo is providing thought leadership, and feedback on the multiple government programs designed to assist companies and the markets. Turning now to the specifics on ARI, I would like to begin by addressing the right side of ARI's balance sheet, including an overview of the current capital and liquidity position. ARI has always focused on maintaining dry powder within the company's balance sheet, and throughout our history, we have utilized discipline with respect to leverage. This positioning has served us well as we manage through the current situation. ARI ended the quarter with $582 million of cash as well as $1.2 billion of unencumbered loan assets. Net of post-quarter payables, including the recently paid common stock dividend of 40 cents per share, ARI has approximately $582 million of available liquidity comprised of 566 $567 million of cash on hand, and $15 million of available and undrawn credit capacity. ARI has credit facilities with six counterparties, which had $4.5 billion of total capacity and $3.6 billion outstanding at March 31st, with a weighted average remaining term of just under three years. As a reminder, all of ARI's credit facilities are collateralized by loans and the weighted average advance rate was 67% at March 31st. Also, to be clear, ARI's portfolio includes only $68 million of single asset, single borrower CMBS, which are not financed. Since inception, we have always maintained an open and ongoing dialogue with ARI's key financing relationships, and since the pandemic began, we have increased the dialogue with each of them. To date, we have found that dialogue to be thoughtful and constructive as we collectively manage the economic impacts of the pandemic. Over the past eight weeks, in discussions with lenders, ARI has agreed to delever certain of its secured borrowings by a total of $144 million, or less than 5% of secured credit facility borrowings as of March 31st. Consistent with the customary process established with our counterparties during ARI's more than 10-year operating history, requests to delever were met with a combination of increased advance rates against certain loans and the posting of additional loan or cash collateral. It is also worth noting that the secured credit facility market for commercial real estate loans has remained open and functioning throughout the pandemic. In the past eight weeks, ARI borrowed over $540 million from existing facilities and closed a new U.S. facility with Barclays, which we utilized to finance one of the loans we closed this quarter. In addition, the term on ARI's facility with Deutsche Bank was fully extended for two years. We believe ARI's ability to access capital and expand the company's facilities demonstrates the strong relationships we have with ARI's lenders, as well as their commitment to the business and their continued desire to work with ARI as we manage through this pandemic. As of today, we believe ARI is well positioned in terms of liquidity management and future capital needs. Turning now to ARI's assets, the company ended the quarter with a loan portfolio totaling $6.4 billion. During the first two months of the year, ARI completed $562 million of new floating rate first mortgage loan originations, $440 million of which have been funded. ARI also received full repayment of an $87 million first mortgage loan on a hotel property in Detroit, Michigan. Since the beginning of March, Our focus has been on our in-place portfolio, and ARI has not pursued or completed any new origination transactions. The entire real estate credit team, with significant involvement from Scott, Jay, and myself, is focused on asset management, and we are in regular constructive dialogue with ARI's borrowers. I also want to highlight Apollo's recent hire, Daniel Ho, who joined Apollo from Morgan Stanley at the beginning of March as the head of real estate credit asset management. This was a hire that was in the works prior to the pandemic, and Dan brings additional senior level talent and extensive experience to our efforts. For the month of April, ARI received 99% of the interest that was expected to be paid from outstanding loans. Beyond the receipt of interest, There are conversations taking place with borrowers and each situation is being handled in a bespoke manner. The underlying properties are predominantly located in major markets throughout the U.S. and Western Europe and our borrowers are sophisticated, well-capitalized institutional investors. Our conversations with borrowers have centered around working with them to determine the best possible situation for them to sustain a period of disruption. Some of the discussions include reallocating lender reserves, deferring interest with a true-up at the end of the loan term, or new sponsor contributions of equity with minimal debt service deferral. With respect to the hospitality and retail loans in our portfolio, which represent the two sectors that were immediately impacted by the dramatic economic shutdown, the situation is incredibly fluid. and each market, sponsor, and underlying asset has been impacted differently. After a thorough review of each loan and underlying asset, including detailed financial analysis, we reported $32 million of impairments against our hotel loans and an additional $20 million impairment against Liberty Center, the retail property in northern Cincinnati. I would also like to provide an update on two pre-development loans. the $183 million Miami Design District loan, and the $154 million Fulton Street loan, both of which have the same sponsor. On the last earnings call, we indicated that the borrower elected not to move forward with the planned development in Miami, and a sales effort with respect to the property was launched in February. The intent and expectation from the sale was to repay our loan as well as deferred interest and fees. Subsequent to the earnings call, a similar situation arose with the Fulton Street property, followed by a subsequent similar planned sales effort. As expected, the sales processes have been impacted by the pandemic, and as such, both loans were moved to non-accrual status, and we have recorded an aggregate $95 million of impairments against these two loans. Finally, with respect to ARI's construction loans and near-term future fundings, We highlighted in the supplemental package that we expect $180 million of net fundings for the remainder of 2020. In addition, at the beginning of May, ARI proactively sold interest in three unlevered first mortgage construction loans totaling approximately $261 million in commitments, $90 million of which had been funded at a weighted average price of 98.9% of par. The sales reduced ARI's construction exposure, generated $88 million of proceeds, and eliminated $173 million of future funding obligation. Before I turn the call over to Jay, I want to take a moment to thank the entire team focused on ARI who have worked tirelessly and have shown immense dedication and determination in unprecedented circumstances. We know the road ahead is going to be challenging and the commitment and fortitude I have seen from the ARI team has made me extremely proud. I, as well as the rest of the management team and our board of directors, remain fully committed to navigating ARI through this volatile environment and we take our responsibility as stewards of your capital extremely seriously and personally as we all stand beside you as stockholders. Due to our durable capital structure and our focus on downside protection in our assets, we believe ARI's business is well positioned to manage the ongoing market disruptions. In addition, ARI will continue to benefit from the tremendous breadth and resources it derives from the Apollo platform, and we will continue to communicate and provide updates as they are warranted. And with that, I will turn the call over to Jay to review our financial results.

Thank you, Stuart. Good morning, everyone. I would like to echo Stuart's sentiment, and I hope that you're all safe and well. For the first quarter of 2020, our operating earnings were 62.7 million, or 40 cents per share. Gap net loss for the quarter was 131.2 million, or 86 cents per share. This net loss reflects 98 cents per share of loan-specific reserves as well as 22 cents per share in general reserves taken in accordance with CECL, which we adopted this quarter. In coming up with the general CECL reserve, we considered various factors, including the historical loss experience in the commercial real estate sector, the timing of expected repayments and future fundings, and our view of the macroeconomic environment. Given the significant uncertainty around this pandemic, which has resulted in a slowdown in new originations and extension of projected maturity dates, the actual reserve we recorded was higher than what we previously reported on our Q4 earnings column. I do want to highlight that none of our debt covenants are impacted by the general CECL reserve. Moving to book value. GAAP book value per share prior to the general CECL reserve was $14.94, as compared to $16.03 at the end of Q4. Since quarter end, we terminated our interest rate swap, which further reduced book value per share by $0.03. As of quarter end, our portfolio is comprised of 75 loans with an amortized cost of $6.4 billion, and the portfolio had a weighted average unlevered yield of 6.7% and a remaining fully extended term of just over three years. Approximately 82% of our U.S. loans have LIBOR floors that are in the money today. And lastly, with respect to our borrowings, we are in compliance with all our covenants and, as Stuart mentioned, continue to maintain strong liquidity. As of today, we have $567 million of cash on hand, $15 million of approved and undrawn credit capacity, and $1.1 billion in unencumbered loan assets. And with that, we'd like to open the line for questions. Please go ahead.