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 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.apollocref.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 for joining us on the Apollo Commercial Real Estate Finance Second Quarter 2024 Earnings Call. As usual, I am joined today by Scott Weiner, our Chief Investment Officer; and Anastasia Mironova, our Chief Financial Officer. Before I speak about ARI's second quarter performance and portfolio updates, I would like to provide an update on the subsequent event disclosed in the 10-Q filed yesterday. In March of 2022, ARI and other Apollo-managed entities co-originated a 55% loan-to-cost first mortgage loan secured by eight hospitals in Massachusetts. At origination, ARI's portion of the loan totaled $379 million. The loan was made in connection with the capitalization of a joint venture between two parties to own the hospitals. That joint venture then leased the properties to Steward Health Care, who also served as the operator of the hospitals. Apollo did not lend to Steward and does not have any involvement in Steward's operations of the hospitals or performance under the lease. The structure and covenants in the loan have provided for cash collateral and amortization since origination that represents approximately 11% of the original loan balance, and ARI's amortized cost was $342 million as of June 30, 2024. As of today, the loan remains current on all contractual interest payments. Steward filed for Chapter 11 bankruptcy in May 2024. During the second quarter, the loan's risk rating was downgraded from 3 to a 4. Subsequent to quarter end, bids were received and the bid process and negotiations are continuing to evolve with multiple constituencies. While there is still a high degree of uncertainty, based upon the information available as of the 10-Q filing and taking into account Steward's bankruptcy court documents made publicly available on July 30th, we currently anticipate…

Thank you, Stuart, and good morning, everyone. ARI reported distributable earnings of $0.35 per share of common stock for the second quarter. GAAP net income attributable to common stockholders was $33 million or $0.23 per diluted share of common stock. ARI portfolio ended the quarter with a carrying value of $8.3 billion and the weighted average unlevered yield of 8.9%. In addition to the new investments, Stuart discussed, during the quarter, we completed $116 million of gross add-on funding from previously closed loans, bringing year-to-date gross add-on funding to $438 million. For the first 6 months of 2024, ARI received $759 million of proceeds from loan repayments and sales. Subsequent to quarter-end, we received an additional $421 million from the repayments of three senior and one subordinate loans. During the quarter, ARI recorded $7.5 million specific CECL allowance on a subordinate loan secured by our interest in a Class A office building in Troy, Michigan, that had previously been risk-rated 4. In conjunction with recording a specific CECL allowance for this loan, we downgraded the risk-rating to a 5. It is worth noting that this loan is current on all its contractual debt service payments. The General CECL Allowance stood at 47 basis points of the loan portfolio's amortized cost at June 30, a 3 basis points increase as compared to the end of Q1. This increase was primarily attributable to new loan originations as well as a more adverse outlook for certain property types. Our total CECL allowance was 440 basis points of the loan portfolio amortized cost basis at June 30, which represents $2.47 per share of book value. ARI book value per share, excluding general CECL reserves and depreciation was $13.62, up from $13.58 at the end of last quarter. We repurchased 38 million of our common…

[Operator Instructions] Our first question comes from Doug Harter with UBS. You may proceed.

Thanks, and good morning. On the hospital loan, just wondering if you have any recourse or obligations to the ultimate borrower, and the operator of the hospitals?

No, we do not.

Got it. So it's just the real estate?

I mean, it's a real estate loan from our perspective, Doug. And we'll do what we can to protect our rights as a lender.

Great. And I guess just as you think about that asset class, how do you think about recovery values, or to the extent that some of those hospitals are ultimately closed?

Look, I think while we lent against it as a portfolio of eight hospitals. I would say we look at them each as eight individual assets right now. And there's -- things are somewhat in flux, but I would say we're sort of doing the work necessary to think about each piece of collateral individually, and how we recovered as much value while also keeping in mind the concerns of other constituents in the process as well.

Great. Appreciate it.

Thank you, Stuart.

Thank you. Our next question comes from Rick Shane with JPMorgan. You may proceed.

Thanks, everybody, for taking my question. Look, the world has evolved a great deal in the last month in terms of interest rate outlook. And I'm curious, I think over the next few years we're going to operate on two timelines. One is the emergence of additional challenges within the portfolio. And the other is the resolution of existing problematic loans. Can you just talk a little bit -- do you feel like we are now sort of reaching the end of the emergence period that you have a pretty good idea of where the risk is within the portfolio? And that going forward it's going to be about the resolution. Can you sort of tell us what inning we're in each of those?

Yes, I think I agree with the general premise of your question, Rick, which I feel like we sort of know what our focus list is or what our hot spots are. And I think at this point we're focused on a path towards resolution, which could play out over some time. And I think we've all been around this sector long enough to know that just because there is a stated maturity date or a target resolution date, sometimes things can go through an iterative process where it plays out over time. I think we are encouraged by the fact that the market in general, there seems to be more activity, which I think that leads to some enhanced clarity around where value is and where things can get resolved. But I would say sitting here today, given where you started the question, I feel like we've got a good sense of what those things are that we need to focus on. And it's really a matter of getting to resolution on the things that are on our focus list while at the same time making sure we're doing a good job of getting capital that comes back to us redeployed into transactions we're excited about.

Got it. And look, there's a concept of rational expectations. And I'm curious how quickly you see the rate outlook impacting sentiment and behavior amongst your borrowers. I mean, again, we are just weeks into this in terms of a pretty seismic shift in terms of rate outlook. But you guys are in the market every day. You're having conversations. Are you seeing the tenor of things change that quickly? Or what should we expect in terms of how you think borrowers are going to potentially become more aggressive about defending their positions given the carrying costs are likely to go down over the next 12 to 24 months.

Yes, I mean, I think you're asking the right question. I think it is anecdotal at best right now because things are occurring fairly quickly and it's also arguably a month where people sort of get somewhat disattached for a period of time. But I could say certainly anecdotally I would say both in terms of existing borrowers as well as potential new transaction in the market, anecdotally it feels like there's renewed interest on the equity side of the real estate business in general for people feeling like if they can sort of step into assets today, they might end up in a fairly attractive financing market from a rate perspective sooner than they might have thought.

Got it. Really appreciate it, Stuart. Thank you so much.

Thank you. Our next question comes from Stephen Laws with Raymond James. You may proceed.

Hi, good morning. Stuart, I guess first to follow-up on Doug's question around the hospital, any thoughts on how timing plays out, or do you expect the loan to go nonperforming? I know you said its current as of today. And will that specific reserve hit in Q3 or are there events that happen further out in the future that drive that way?

Best guess today is that the reserve should be coming in the second half of the year. There's just a lot of moving pieces, a lot of constituents involved, and we don't want to sound non-responsive, but it is playing out daily and it's tough to give any more clarity right now.

Understood. Shifting gears to the investment pipeline, pretty active quarter there with a lot of new originations, that's continued in July. I think it's coincidental, but Q2 had four U.S. loans, July had two Europe loans. But can you talk about your pipeline, what you expect as far as portfolio turning over with repayments coming in the back half and being recycled into new investments? And should we take this recent pace of the last 4 months and expect that to continue over the remainder of the year?

I mean, look, as I am -- as I indicated in my response to the question from Rick, I mean, it's a pretty active market right now. I think both equity investors and lenders are finding ways to get transactions done. And I would say if anything, the volatility around the economy over the last week or so and what that certainly implies for certain people vis-à-vis rate movements probably only adds to the positive momentum behind transaction activity. So broadly speaking across the real estate credit business at Apollo the pipeline is robust and we're looking at a lot of things and we're going to have a pretty robust year in terms of overall deployment and I think we remain optimistic about AMI getting paid back on the things we anticipated repaying this year and as a result we think we're well-positioned to get that capital redeployed as capital comes back to us.

Great. And then finally wanted to touch on the dividend. The current dividend rate implies about a 10.5% ROE on book and pro forma for the specific reserve coming on the hospital loan, it would be a little over an 11% return on book. Do you view that as sustainable, given your outlook for portfolio returns and kind of what you're seeing on the new investment side?

I mean, I think as I implied in my remarks, I think, we're generating ROEs consistent with what we've done historically. So that feels good. I think as OA, we'll handle the dividend through our quarterly discussion with the Board, which is plus or minus 5 weeks from now. I think for us, we just want to make sure we are being mindful of what the earnings trajectory looks like over time. Obviously, there's positive momentum for us as we bring back and hopefully some of the underperforming capital, but we might be facing a different interest rate curve environment, so a lot of factors will go into the dialogue overall, but just in terms of the ROEs we're generating on new transactions, they're pretty consistent with where they've been historical.

Great. Appreciate the comments this morning, Stuart. Thank you.

Thank you. Our next question comes from Steve Delaney with Citizens JMP Securities. You may proceed.

Thanks. Good morning, Stuart and team, and congrats on your full [indiscernible] coverage in a challenging market for the second quarter. My question is to piggyback, Stephen just a bit, but looking back to the first half of the year, ironically, or maybe it's by design, but your portfolio was $8.3 billion, including the subs and the seniors at year-end '23, and it's right on the same number, within 100 million, it rounded at June 30. If you look forward to the second half of this year, would you think the best approach from the analysts and modeling would be to maybe stick a kind of flattish portfolio as we look for the rest of the year. It sounds like you are seeing opportunities that would prevent like material shrinkage. But just curious about your thought, can you maintain the portfolio? And given that it feels the -- sorry for the long question, but I want you to just have to answer one question, not two. Given what appears to be more of a lender's market developing over the next 1 to 2 years beyond the second half of this year. Could 2025 be a pretty active and new equity coming into CRE? What's your expectation and hope for 2025 after we get through the end of this year? Thanks very much.

So I'd say a few things. I think your notion of 2024 sort of moving sideways in terms of portfolio side is a reasonable assumption. We'll get capital back. We'll put capital out. But there's really not a catalyst for growth per se. So again, don't give me a hard time if we're talking $100 million in either direction, but that feels pretty good. I think sitting here today and I'm looking at it both through the lens of what we're seeing in our real estate credit business, but also what we and others are thinking about vis-à-vis various tools of real estate equity capital. I do think 2025 could be a pretty active year. Obviously there's sort of an overall economic overlay around that, but if we achieve the hoped-for soft landing with some moderation of interest rates, with the economy in there, I do think there's still a lot of capital looking to be active and 2025 could be pretty busy. I think the greatest opportunity for us to be growing and more active in 2025 is around turning some of our more challenging asset management situations into resolutions which give us back capital with which to deploy. So if you go back to my comments, I'm harping on getting the senior paid back on 111 West 57th because once the seniors paid back, every incremental dollar of unit sales comes back to us directly which provides capital to put to work offensively. And then obviously, I think everybody's aware of some of the other situations we're involved in as well.

That's helpful. And of course, if we get something close to a 3% fed funds rate, I guess that doesn't do anything but help that scenario, right, for 2025 [ph]?

I think you're right. Yes.

Yes. All right. Thanks. Stay well.

You as well.

Thank you. Our next question comes from Jade Rahmani with KBW. You may proceed.

Thank you very much. Starting with 111 West 57th, if we could just summarize the deal and ARI's position, could you give the remaining units left to be sold at this stage?

I'd rather not be specific on the number of units, but to start the question, Jade, as I sort of indicated in remarks, we ended the first quarter with there being a $200 million senior loan in front of ARI's position that has been paid down to about a 140 million bucks and there's roughly another 70 million of units under contract. So we think we are in short order down to 70 million in front of us with confidence around continued sales on that.

So the 70 million that's under contract, over what time frame will that close?

It'll close during the second half of the year.

Okay. And as of the second quarter, ARI's position included 261 million of senior med [ph] and $74 million and $28 million of junior meds [ph] for a total of $363 million.

Yes.

Okay. Just wanted to make sure that was clear. Turning to the health care situation, can you say whether this will be an REO property? Because it's quite complicated. The owner of the real estate is in a joint venture 50-50, and then there was an operator. There's media reports that the operator rejected the lease. There's reports that there weren't bids on at least two of the hospitals, and also that the rent payments are too high, complicated the situation. So I know there's ongoing negotiations with the state and such. But do you anticipate this will be an REO?

I think I'll refer back to what I said to, I think was Doug's question, which is at this point. I think you need to think about is eight individual assets as opposed to one consolidated portfolio. And I think it is certainly possible that there will be differentiated outcomes for different hospitals.

Okay. And then the adequacy of the $90 million reserves, sorry to say this about the industry, but mortgage REITs don't tend to be overly conservative when it comes to reserves. Anything you could talk about as to how you got to the $90 million? I know it is about 26% of ARI's loan exposure, but any color on that?

I think the process we went through for this reserve was consistent with the process we've been through for every other specific seasonal reserve we've taken.

Okay. And then on the new origination front, I've always appreciated ARI's differentiated perspective on multifamily. And so now I see two multifamily loans, which are refinanced loans at quite a low LTV as well. So I'm not sure if that's a future projected stabilized LTV or what the basis is. But how are you thinking about approaching the multifamily space, something historically ARI has not really played it?

Yes, look, I think the perspective at the macro level is that long-term, there is still need for and demand for high-quality multifamily. So we like the space in general. Our historic reticence with respect to multifamily has been a combination of concerns over valuations, competition in certain situations from GSEs, et cetera. et cetera. I think sitting here today, we've been in a window whereby on the margin there's been for a brief period of time, maybe less competition on certain of the transactions we've pursued. We like the long-term macro positioning of multifamily and we found some situations that work for us. As always, we continue to run the portfolio on a bottoms up deal by deal basis. So I would not read into this any change in sort of overall thesis or a desire to create something at a certain percentage. We'll continue to look deal by deal, but for a moment in time, given the volatility in the marketplace, the team was able to source some pretty interesting opportunities. So we've always had a positive macro thesis about this space. It's really been about sort of valuations at a moment in time and how we thought about the ROEs on a risk-adjusted basis for multifamily deals versus other opportunities.

And the two deals in the slide deck are these -- at least one of them in California looks like a new build, Class A, perhaps luxury. But what are you going after? Are these recently completed construction deals and you're doing the lease up financing, or …

Yes.

Okay.

It's new product lease up place.

All right. Thanks a lot for taking the questions.

Yes. I think, Jade, the one in D.C. was recently built. I think it was like 2016. That was -- it's not a, I guess, lease up playing in the normal one. If you recall, D.C. had some pretty liberal laws in terms of -- with tenants [indiscernible] with COVID and stuff like that. So it had some disruptions with tenants in terms of evictions and things like that, that the sponsor has been working through. So on that one, it was a refinance for the sponsor invested substantial equity paid down the loan and they're working on cleaning up the rent roll, if you will.

Thank you.

Thank you. Our next question comes from Eric Dray with Bank of America. You may proceed.

Hi, good morning. Jade covered most of my questions, but just one I guess is can you talk a little bit about the opportunity in Europe and kind of what you're seeing over there in terms of the pipeline? And also was just curious about kind of the office trends there. Most of the upcoming office maturities in your portfolio are in Europe. So any color you could kind of give on that would be interesting as well. Thanks.

Scott, go for it.

Yes, sure. So I'll start. I'll go back -- I'll start with the office question. I would say, look, similar to the U.S., every market and city is a little different. I would say, thankfully most of our exposure is in London, which continues to be one of the better, tighter markets, people going back to the office. I would say the other phenomenon, if you will, in London and Europe, much more so than here in the U.S. is the importance of LEED and environmentally friendly offices. It's taken much more seriously by occupiers. And so you see a real need for tenants to be in new modern green space. And at the same time, I think London is viewed as a safe place for capital. So you continue to see international capital going there. So I would say you're seeing in London in particular people being back in the office, occupiers, signing leases at the newer buildings. And you also see capital, both financing is available as well as acquisitions. Thankfully for us, our largest office exposure is in London. And it also is a long-term lease headquarters building. So we have a 20-year lease to a large financial institution as their headquarters. So that's our largest one, and that will continue to fund up over time. So that's why you're seeing our office exposure going up because that continues to fund. But obviously we're very comfortable on that deal. But I would say generally seeing positive trends in London and other markets in Europe. As far as deal opportunity, I would say, Europe, given solvency, for other reasons, really has never had a large CMBS market or capital market that way. They did have, I would say, a much more robust corporate bond market that the REITs over there took advantage of. But CMBS really never took root. So whereas in the U.S. everything seems to be getting done by the SASB market, that doesn't really exist in Europe. And so for us, we've really seen opportunity where you're getting into pan-European deals because of having to go multi-jurisdictional. The banks there don't like as much. We have some good technology there, acquisition facilities, industrial, other property types. just larger deals where we can marry Apollo Capital across vehicles, right, and basically not have a bar and not take syndication risk. Those have all been things where we've had a competitive advantage. And I would say similar to the U.S., the loan-on-loan or warehouse financing business is very much alive in Europe. So we're able to get very attractive terms in terms of not market-to-market stuff, advanced rate spread, so we're able to create a -- attractive absolute return. And then I would say on the hedging basis, things obviously shift. I would say there's not much of a pickup right now from pound or any pickup really from pound to dollar. It does continue to be a little bit of a pickup from Europe's [indiscernible].

Thank you. I would now like to turn the call back over to Mr. Rothstein for any closing remarks.

Thank you all for participating.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.