Apollo Commercial Real Estate Finance, Inc

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, 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 gap 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.apollocreft.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, and good morning and thank you to those of us joining us on the Apollo Commercial Real Estate Finance Inc. Third Quarter 2022 Earnings Call. I am joined this morning by Anastasia Maranova, our Chief Financial Officer. From a macro perspective, the dominant themes remain the same. Continued efforts by central banks to fight persistent inflation resulting in additional interest rate increases continued capital markets volatility, and an overall slowdown in capital transaction activity, all of which are permeating the real estate market. Despite the somewhat challenging backdrop, for the third quarter, ARI reported distributable earnings comfortably in excess of the common stock dividend and significant progress on several key asset management and balance sheet optimization initiatives. It is worth noting that Even with a positive move in the stock this morning, ARI's current quarterly dividend run rate of 35 cents per share, ARI is paying common stockholders a 13 plus percent annualized yield while trading at approximately 70 percent of book value with earnings supported by a portfolio consisting of 98 percent floating rate loans. Importantly, we expect ARI's robust pace of originations over the past 18 months will enable the company to continue generating distributable earnings that support the common stock dividend while maintaining a more selective approach to any incremental capital deployment consistent with a focus on maintaining liquidity and balance sheet flexibility. In taking this approach, ARI is fortunate to benefit from Apollo's broader commercial real estate debt platform, which originates over $10 billion of loan transactions per year. Apollo remains active in the marketplace, originating and closing transactions on behalf of other managed capital, which enables ARI to access real-time market data and information as we assess the use of the company's investable capital. Shifting to capital management, I would like to highlight a few key milestones with respect to the right side of ARI's balance sheet. During the quarter, ARI repaid $345 million of convertible notes that matured in August with existing liquidity and without the need to access the choppy capital markets. Also during the past year, ARI has entered new asset-specific lending facilities with Banco Santander and MUFG, respectively, expanding ARI's roster of scalable capital relationships. In addition, the company sold down approximately $328 million of a future funding obligation for one of ARI's largest UK loans, which is financing the construction of a mixed-use property in a prime central London location. ARI ended the quarter with over $1.1 billion of unencumbered assets and a debt-to-equity ratio of 2.8 times. Turning to the portfolio, There are several important updates with respect to the focus loans. We executed a contract to sell the properties underlying ARI's Miami Design District loan. The purchasing group has posted a substantial deposit and we expect the transaction to close prior to year end. As such, ARI reversed $53 million of the previously recorded $68 million loan impairment and will retain some additional performance-based economics that may result in additional recapture of the remaining impairment. In connection with this transaction, ARI will provide seller financing consistent with current market terms, enabling ARI to redeploy a portion of the return capital into a new performing loan. In addition, in connection with the closing of the construction financing provided by Bank of America and M&T Bank for ARI's multifamily development in Brooklyn, known as The Brook. The investment was transferred to ARI's balance sheet as real estate owned, and ARI recognized a $44 million gain to book value, which reflects the difference between the prior loan balance and the current fair value of the development. We are extremely pleased with the progress made on these focused loans, which highlights the strength of our asset management capabilities in addition to our ongoing commitment to and focus on the preservation of capital. Turning to the loan on 111 West 57th Street, commonly known as the Steinway Building, the property was recently recapitalized and the existing senior mortgage loan and a portion of the senior mezzanine loan were refinanced with a new senior loan provided by both ARI and a global money center bank. The bank is also providing 75% financing to ARI for its portion of the senior loan. In connection with the recapitalization, ARI funded a portion of the senior loan at approximately a 50% LTV with no change to ARI's existing junior mezzanine loan positions. Based upon the units closed subsequent to quarter end, as well as units under contract that are expected to close by year end, we anticipate ARI's exposure will be reduced by approximately $150 million by the end of this year. Before turning the call over to Anastasia, I wanted to spend a few minutes on ARI's European portfolio. We added an additional page of disclosure to our supplemental information package this quarter to provide incremental color on the exposure as loans secured by properties in Europe now represent slightly more than 40% of ARI's portfolio. As a reminder, Apollo has been active in the European commercial real estate lending market since 2014 when we moved one of the senior members of our team to London to oversee the expansion of Apollo's commercial real estate debt platform. Today, the team in Europe is comprised of 12 people all of whom have done an outstanding job contributing to our success in capturing market share and developing Apollo's reputation as one of the leading non-bank lenders to the commercial real estate sector throughout Western Europe. Importantly, as we have expanded our origination activity there, the transaction types, the quality of equity sponsorship, and the deal structures have been consistent with ARI's U.S. loan originations. ARI only transacts in countries with legal systems and structures that provide necessary lender protections. Further, ARI does not take currency risk when lending in Europe. Any asset-specific financing used by ARI is transacted in local currency, and we work with internal and external advisors to appropriately hedge expected principal and interest payments. We consistently review the effectiveness of the hedging strategies used, which to date have proven to be highly effective. With respect to ARI's European portfolio, operating performance at the asset level is very market and property specific and has generally been positive to date, consistent with the post-pandemic economic recovery. At quarter end, ARI had 25 positions in Europe totaling $3.8 billion, approximately two-thirds of which are secured by properties in the United Kingdom. 99% of the portfolio consists of senior loans, and the portfolio has a weighted average LTV of 62%. The equity sponsors are some of the most sophisticated real estate private equity owners and operators in the world, with Blackstone being our largest borrower in Europe. In addition, five loans totaling $900 million have debt subordinated to ARI's senior mortgage position. At present, ARI's entire European portfolio is risk-rated three, and there are no asset-specific reserves. In terms of property-type exposures, The non-UK portion of the portfolio is over 50% comprised of industrial and hotel assets. Given the ongoing strength of the U.S. dollar, European hospitality assets continue to perform very well, and the assets underlying these loans continue to report positive REVPAR metrics. With respect to the UK assets, The portfolio is broadly diversified across multiple property types split between London and other major cities. Approximately one-third of ARI's UK exposure is in retail assets, which include outlet centers and retail warehouse properties, both of which have typically outperformed traditional retail due to lower occupancy cost and a focus on discounted goods. At present, we are comfortable with ARI's European portfolio, but we recognize that the market has challenges, including heightened recessionary risks from persistent inflation, rising interest rates, and the added burden of increased uncertainty around energy supply given the reliance on Russia. As a result, we will continue to monitor ARI's European portfolio closely and, where possible, be proactive in managing and limiting any asset-specific exposures. With respect to new capital deployment in Europe, the bar has risen significantly given the economic uncertainty coupled with the decline in relative value as compared to the U.S., primarily due to the impact of rising rates and its impact on currency hedging costs. With that, I will turn the call over to Anastasia to review ARI's financial results for the quarter.

Thank you, Stuart, and good morning, everyone. REI reported another stable quarter of financial results in Q3, with distributable earnings prior to the realized gain on investments of $52 million, or $0.37 per share. Gas net income available to common stockholders was $180 million, or $1.27 per share, and diluted net income of $1.13 per share. The progress with our focused loans positively impacted our book value per share this quarter, which, prior to the general CECL allowance and depreciation, increased 6% to $16.12 as compared to $15.19 at the end of the second quarter. This includes $0.38 in net reversals of specific CECL allowance, $0.31 in realized gain from the title acquisition of the brook, and 23 cents in net unrealized gain on our currency and interest hedges, which continue to be beneficial in this volatile forex climate. As Stuart mentioned, we take several steps to mitigate our foreign currency risk, given that 42% of the loans in our portfolio are secured by properties in Europe. We hedge our exposure on net equity basis for all foreign currency-nominated transactions by entering into forward currency contracts at closing. Forward point impact on forward currency contracts resulted in 1.5 million of realized gains during the quarter, which also positively impacts our distributable earnings. Our portfolio remains well positioned for rising interest rates, as 98% of our loans are floating rate. And as of quarter end, all of our US and UK floating rate loans were in excess of their respective floors. An additional increase of 50 basis points in the US and the UK and Europe would lead to an incremental $0.043 per share, respectively, of net interest income. With respect to our borrowings, we are in compliance with all covenants and continue to maintain strong liquidity. We ended the quarter with $361 million of total liquidity. which was a combination of cash and undrawn credit capacity on our existing facilities and $1.1 billion of unencumbered loan assets. Our debt-to-equity ratio at quarter end decreased to 2.8 times. Turning to our CECL allowance for the quarter, as Stuart mentioned, we had several positive developments in connection with our focus loans. During the quarter, $53 million specific CECL allowance was reversed on our Miami Design District loan, as the collateral which secures the loan is under contract to be sold in the near term, at a higher value than the carrying value of the loan pre-reversal. In addition, REI's general CECL allowance decreased by $2.6 million, primarily due to portfolio seasoning and the previously mentioned sale of the unfunded commitments on our loan, secured with a mixed-use asset in London. This was partially offset by one new loan origination and a more adverse macroeconomic outlook. And with that, I would like to open the line for questions. Operator, please go ahead.