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, 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 press release. which is available on the Investors 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 joining us on the Apollo Commercial Real Estate Finance second quarter 2020 earnings call. I hope that everyone dialing in is healthy and safe as we continue to navigate this challenging environment. Joining me this morning is Jay Agarwal, our CFO, and Scott Wiener. ARI had a solid quarter operationally, generating operating earnings in excess of the $0.35 per share common stock dividend, while preserving excess liquidity and maintaining a cautious and thoughtful approach to considering new investment opportunities. ARI's team continues to operate extremely effectively and collaboratively from home offices, and the entire platform at Apollo provides the company with ongoing support, real-time data and information, and extensive resources. I am proud of the over 50-person team that supports ARI daily, and am confident in our collective ability to navigate ARI through this unprecedented situation. Over the past several months, ARI has achieved several critical objectives. We fortified the company's balance sheet, working with our secured credit facility counterparties to extend, modify, and enhance ARI's borrowings. We have selectively sold certain loans at attractive prices to both generate additional liquidity and eliminate over $250 million of our future funding obligations. As a result of our actions, ARI ended the quarter with over $518 million of cash and undrawn credit capacity. Finally, we have effectively maintained a constructive dialogue with the company's borrowers, working with them to support and stabilize their underlying properties. We believe our actions position ARI for the ongoing market volatility and uncertainty that lies ahead. With respect to ARI's capital structure, our balance sheet strength begins with best-in-class banking relationships that are further enhanced by our affiliation with Apollo. During the quarter, we took proactive steps to extend the duration of ARI's liabilities including amending our facility with the nearest term expiration to a six-month evergreen structure. In addition, at the end of June, ARI refinanced its existing secured credit facility with Barclays into a private securitization with $782 million of senior notes outstanding, the collateral of which is six loans secured by properties throughout Europe. There were several major benefits to the transaction, including a six-month holiday for any valuation requirements, the establishment of LTV-based covenants with cure rights, and additional flexibility with respect to modifying underlying loan terms. We continue to be proactive with each of ARI's counterparties, and since the last earnings call, ARI completed an additional $59 million of deleveraging. In addition, as of July 29th, ARI still maintains over $1 billion of unencumbered loan assets. Turning now to our loan portfolio, the company ended the quarter with 71 loans totaling approximately $6.4 billion in amortized costs. As a reminder, ARI's borrowers are generally comprised of sophisticated, well capitalized real estate operators who continue to maintain significant equity in the underlying properties. For the second quarter, ARI received 99.8% of the interest that was expected to be paid from outstanding loans. Not surprisingly, within the portfolio, certain hospitality and retail assets have been most impacted by the pandemic, and these situations are being handled in a bespoke manner. As we mentioned on last quarter's call, discussions with borrowers may include, but are not limited to, flexibility with respect to certain covenants, reallocation or delayed funding of reserves, deferring interest with a back-ended catch-up, and extending maturities. In all instances to date, sponsors have made equity contributions alongside any short-term interest deferral. Our asset management group continues to do an excellent job communicating and working with ARI's borrowers, and we believe we have a thorough understanding of the current issues within the portfolio. As I mentioned on our last quarter call, at the beginning of May, ARI proactively sold interest in three unlevered first mortgage construction loans, totaling approximately $262 million in commitments, $90 million of which had been funded. Later in the second quarter, ARI sold the remainder of one of the loans, bringing the total to $122 million of liquidity generated and eliminating over $250 million of future funding obligations. For the remainder of the year, ARI expects approximately $92 million of net future funding obligations, which is net of expected secured credit facility advances, and self-funded interest payable to ARI. And construction has resumed across all ARI's entire portfolio of construction loans. Subsequent to quarter end, the company sold a 97.5 million pound inventory loan secured by the remaining units in an ultra luxury residential for sale project in London to a third party at 99.5% of par generating excess liquidity as well as reducing London residential exposure. In addition, in July, we converted an existing New York City multifamily mezzanine loan into a mortgage loan and subsequently financed the mortgage loan, resulting in proceeds of approximately $44 million. In terms of new business and the overall market, deal activity is slowly returning. ARI continues to benefit from being part of the broader commercial real estate debt platform at Apollo, which has remained active in the market and consistently reviews transactions in both the U.S. and Western Europe. The bar is high for any new ARI investment, but the breadth and depth of the Apollo real estate credit platform allows us to continue to explore opportunities on behalf of the companies. Lastly, it is worth noting that as we vet new opportunities for ARI, we consider both additions to the portfolio as well as the use of capital within ARI's existing capital structure. Consistent with this approach, we invested approximately $52 million in repurchasing 6.5 million shares of ARI common stock year to date, which is accretive to both book value and earnings per share. Before I turn the call over to Jay, I again 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. Given our excess liquidity and low leverage, our strong borrower and lender relationships, and the power scale and expertise of the entire Apollo platform, We believe ARI is well situated to navigate what lies ahead and will continue to communicate to our fellow stockholders when the situation warrants it. And with that, I will turn the call over to Jay to review our financial results.

Thanks, Stuart. For the second quarter of 2020, our operating earnings, excluding realized losses, were $59 million, or $0.38 per share of common stock. Gap net income available to common stockholders was $56.8 million, or $0.36 per share. The realized loss is comprised of loss from the sale of three construction loans and unwinding of the $500 million notional interest rate swap we entered into last year to fix the rate on our term loan B. This swap termination is expected to result in annual interest expense savings of approximately $10 million, which assumes a flat one-month LIBOR. During the quarter, we increased our loan-specific CECL reserve on the Miami design and the Pittsburgh hotel loan by a total of $5.5 million. Our general CECL reserve decreased quarter over quarter, and our total CECL reserve now stands at 3.7 percent of our portfolio. This decrease was primarily related to asset sales, seasoning of our loan portfolio, as well as a modest improvement in our overall economic assumptions relative to the approach taken at the end of March. Moving to book value, GAAP's book value per share prior to the general cease of reserves was $15.12 as compared to $14.94 at the end of the first quarter. This increase was primarily related to the accretive share repurchases Stuart mentioned earlier. At quarter end, Our $6.4 billion loan portfolio had a weighted average unlevered yield of 6.7% and a fully extended term of just over three years. Approximately 90% of our floating rate 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 covenants and continue to maintain strong liquidity. As of today, we have $480 million of cash on hand, $31 million of approved and undrawn credit capacity, and $1 billion in unfinanced loan assets. And with that, we'd like to open the line for questions. Operator, please go ahead.