Apollo Commercial Real Estate Finance, Inc

Ladies and gentlemen, thank you for standing by. 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 filing 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. These measures are reconciled to GAAP figures in our earnings presentations. 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, Mr. Stuart Rothstein. Please go ahead.

Thank you. Good morning, and thank you for joining us on the Apollo Commercial Real Estate Finance Year-End 2020 Earnings Call. Joining me this morning are Jay Agarwal and Scott Wiener. We hope that everyone listening continues to be safe and healthy as we work through the challenges related to the pandemic. It is impossible to review ARI's 2020 performance or discuss current market conditions and the implications for ARI's future strategic priorities without acknowledging the initial and ongoing impact of the pandemic. Ultimately, the real estate market resides at the intersection of the economy and the capital markets. To frame my comments in the appropriate context, it is important to note that despite initial concerns expressed by those who viewed the pandemic through the lens of the global financial crisis. Over the past 11 months, the capital markets have remained functioning and experienced a historically rapid recovery. However, overall economic performance is recovering slowly and the ultimate trajectory of the economy will depend on the pace at which fiscal and regulatory policies and capital investment are able to minimize the impact of the pandemic and the ongoing vaccination efforts enable the reopening of as much of the pre-pandemic economy as possible. Unlike every other year-end earnings call in ARI's history, when we would typically highlight origination volume, growth in the capital base and portfolio, as well as capital efficiency, we believe ARI's performance in 2020 is best measured by the company's balance sheet durability and effective proactive asset management. During the year, the in-place strength of the balance sheet was enhanced through effective liquidity management predicated on strong relationships with each of our lenders, as well as opportunistic and well-priced asset sales. ARI's asset management efforts benefited from our ongoing investment in both talent and systems, and our historic practice of keeping originators involved with their transactions which facilitates dialogue with and information flow from our borrowers. The tremendous skill set of Apollo's commercial real estate debt team and the resources, thought leadership, and relationships that come from being part of the broader Apollo organization were instrumental to ARI's achievements in 2020 and continue to differentiate ARI in the marketplace. Importantly, The net result of our 2020 efforts was ARI's continued ability to pay a well-covered dividend to our shareholders. The onset of the pandemic immediately led to concerns over liquidity throughout the real estate sector and heightened security of balance sheet strength and bank lending relationships across mortgage REITs. In managing ARI's balance sheet, we have always focused on implementing a leverage strategy consistent with our asset mix, balancing the use of leverage with return targets, not relying on max leverage on any one asset to generate a target return, and maintaining an unencumbered pool of loans. We have consistently maintained strong relationships with our lenders, always seeking to keep an open and candid dialogue, and ensuring that ARI fully benefits from the one Apollo approach to managing relationships with key financial partners. This approach was validated during 2020 as we materially increased ARI short-term liquidity without the need for any form of rescue capital or having to access the capital markets from a position of weakness during the peak of capital markets volatility. Beyond ARI's basic financial strategy, We also chose to opportunistically sell loans at attractive pricing, generating excess liquidity and eliminating some of our construction and future funding commitments. During 2020, ARI sold approximately $634 million of loans at a weighted average price of 98.1% of par, generating net proceeds of $208 million. Given the significant amount of capital searching for yields, The market for loan sales remains active, and when and if appropriate, we may consider additional sales on behalf of ARI. Another highlight of 2020 was ARI's considered use of its share repurchase plan. In growing ARI, we have maintained our commitment to only issue common stock above book value. In 2020, we remained thoughtful with respect to how our capital allocation could positively impact book value, given the pandemic-driven downward pressure on our common stock price. As such, we determined repurchasing ARI's common stock would achieve the best risk-adjusted return on equity for our excess capital. As a result, we repurchased over $128 million of common stock at an average price of $8.61, resulting in approximately 61 cents per share of book value accretion. I also want to highlight that yesterday we announced our board of directors authorized $150 million increase to ARI share repurchase plan, providing us with total capacity of $172 million. Tiveting to the portfolio, ARI's focus for 2020 was proactive asset management. Our efforts were greatly enhanced through the access to the resources of the Apollo platform, providing our team with extensive real-time data and information. In prior quarters, we have spoken extensively about the challenges within various types, property types, or specific assets in our portfolio. Given the underlying LTV of our loans, the ongoing dialogue with our brokers, borrowers, and the measured recovery in the economy, I am pleased to report that there are no material changes to the credit quality of the portfolio or to our credit outlook since the last call. Anecdotally, with respect to our loans underlying the hospitality assets, we continue to see steady improvement within the roughly 65% of our portfolio, which are resort or destination locations, while business-oriented hotels continue to face challenges. With respect to the Anaheim Hotel that was foreclosed upon and is being carried as REO, The hotel is under contract to be sold, and a hard deposit has been posted. Lastly, with respect to two of our largest focus loans, we have had positive momentum at both the Miami Design District loan and the Fulton Street loan. With respect to Miami Design, since the last earnings call, we entered into a partnership with an extremely well-regarded local developer, who is converting the space into an open-air marketplace and working on leasing the existing space while retaining the option to redevelop the property at a later date. On Fulton Street, we partnered with a best-in-class New York developer to redevelop the site into a multifamily property. The one additional loan I want to discuss is our first mortgage secured by an urban retail property in London. The property is located in one of the most trafficked locations on Oxford Circus in London, and it houses Top Shops and Nike's flagship stores. Last quarter, Top Shops parent company Arcadia filed for bankruptcy. This was an outcome we considered when we underwrote the loan, as we were extremely familiar with the credit. The property is currently being marketed for sale, and the initial feedback from the process indicates the proceeds will be well in excess of our loan. The loan is currently accruing interest, including default interest, and we believe we are well covered. As we look ahead, we believe ARI is well positioned to capitalize on the significant increase in real estate transaction activity, which began in the latter part of 2020 and has continued in 2021. The commercial real estate market is benefiting from the low interest rate environment and record amounts of dry powder in real estate funds, which is leading to increased deal activity. ARI entered 2021 with excess capital on its balance sheet and is positioned to deploy that capital into attractive risk adjusted return opportunities. Also, given the current strength of the capital markets, we believe ARI will be repaid on some of its existing loans, thereby providing additional capital to be invested. Apollo's real estate credit platform remained active throughout 2020 and continues to see a tremendous amount of transaction flow. which has enabled ARI to thoughtfully build a pipeline of potential new deals. Importantly, ARI's lenders have indicated their willingness to provide ARI with financing for new transactions, and we are confident that levered returns achievable today are consistent with the returns on the capital we are expecting back this year. As always, our focus on capital allocation will remain on generating the most attractive risk-adjusted ROE. We will remain steadfast to our credit-first methodology, and we will be prudent in our capital management in funding new business. We recently committed to our first transaction in 2021, a large first mortgage loan in Europe, and the pipeline continues to build. Before I turn the call over to Jay, I want to just highlight that ARI's 104% dividend coverage in 2020 and reiterate that ARI's existing portfolio was able to generate distributable earnings in excess of the current annualized $1.40 dividend per common share. This was achievable even with excess liquidity on our balance sheet through most of 2020. Our common stock offers investors in excess of an 11 plus percent dividend yield which we believe is extremely attractive in this current low-yield environment. With that, I'll turn the call over to Jay to review our financial results.

Thank you, Stuart. Before I review earnings, I wanted to discuss our secured financing arrangements. From March 15th of last year, total deal leveraging on our $3.5 billion financing arrangements were $190 million, which is less than 6% of our outstanding balance. Our strong relationships with key counterparties were beneficial as we navigated volatility in the capital markets throughout the past 11 months. We also proactively worked with our financing partners and availed ourselves of the benefits of the broader Apollo platform to ensure adequate liquidity and term out financing. Moving to earnings, I want to highlight that at the beginning of this quarter, we will use the words distributable earnings instead of operating earnings. with no change to the definition. For the fourth quarter of 2020, our distributable earnings prior to realized loss on investments were $51 million, or 36 cents per share of common stock. Distributable earnings were $21 million, or 15 cents per share. And the realized loss on investments was comprised of 25 million in previously recorded specific CECL reserves, and $5 million on loan sales and restructurings. Gap net income available to common stockholders was $33 million, or 23 cents per share. And the common stock dividend for the quarter was 35 cents per share. As of December 31st, our general CESA reserve remained relatively unchanged, declining by three basis points to 68 basis points. And our total CECL reserve now stands at 3.24 percent of our portfolio. Moving to book value. Gap book value per share prior to the general CECL reserve was $15.38 as compared to $15.30 at the end of the third quarter. The increase was primarily due to the accretive share repurchases Stuart mentioned earlier. Since the end of the first quarter of last year, of book value prior to general CESA reserve increased by 44 cents per share. At quarter end, our $6.5 billion loan portfolio had a weighted average unlevel yield of 6.3% in the remaining fully extended term of just under three years. Approximately 90% of our floating rate U.S. loans have LIBOR floors that are in the money today, with a weighted average floor of 1.46%. We completed $109 million of add-on fundings during the quarter for previously closed loans, bringing our total add-on fundings to $413 million for 2020. 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 $250 million of cash in hand, $30 million of approved at undrawn credit capacity, and $1.1 billion in unencumbered loan assets. And with that, we'd like to open the line for questions. Operator, please go ahead.