Executive Summary / Key Takeaways

• Strategic Capital Rotation Driving Earnings Uplift: Apollo Commercial Real Estate Finance (ARI) is intensely focused on converting capital from "focus assets" – underperforming or non-income-producing properties – into higher-yielding, levered senior loans. This strategic rotation is expected to significantly boost distributable earnings in late 2025 and throughout 2026.
• Robust Origination and Diversified Portfolio: Leveraging Apollo Global Management 's extensive platform, ARI achieved $3 billion in new loan commitments year-to-date Q3 2025. The portfolio, valued at $8.3 billion (Q3 2025), is increasingly diversified, with residential properties (31%) as its largest segment and a strong presence in Europe, a key competitive differentiator.
• Strengthening Financial Position and Liquidity: ARI successfully refinanced its Term Loan B, extending corporate debt maturity to June 2029, and expanded secured debt capacity by $1.4 billion in 9M 2025. With $312 million in liquidity and a disciplined leverage target of around 4x, the company is well-positioned for future deployments.
• Positive Outlook Despite Macro Headwinds: Management anticipates Q1 2025 was a trough for distributable earnings, with expectations to meet or exceed the quarterly dividend rate going forward. While macroeconomic uncertainties persist, ARI's focus on high-quality, floating-rate senior loans (98% of portfolio) and proactive asset management mitigates risk.
• Competitive Edge in Europe and Specialized Lending: ARI benefits from Apollo's "first mover advantage" and "Alternative Lender of the Year" status in Europe, operating in a less competitive securitization market. Its balance sheet lending approach also offers certainty to borrowers in the U.S. amidst securitized market disruptions.

The Foundation: A Specialized Lender in a Dynamic Market

Apollo Commercial Real Estate Finance, Inc. (ARI) operates as a specialized real estate investment trust (REIT), primarily engaged in originating, acquiring, investing in, and managing performing commercial first mortgage loans, subordinate financings, and other commercial real estate-related debt investments. Established in 2009, ARI benefits significantly from its external management by ACREFI Management, LLC, an indirect subsidiary of Apollo Global Management, Inc. (APO). This affiliation provides ARI with access to Apollo's vast global infrastructure and an experienced team of real estate professionals, enabling robust deal sourcing, underwriting, and asset management capabilities.

ARI's core strategy revolves around maximizing shareholder returns through a disciplined investment approach, emphasizing high-quality, floating-rate senior loans. As of September 30, 2025, approximately 98% of its loan portfolio consisted of floating-rate loans, positioning the company to benefit from rising interest rates while mitigating interest rate risk. The company's overarching narrative is currently defined by a strategic capital rotation, aiming to unlock value from underperforming "focus assets" and redeploy that capital into new, higher-yielding investment opportunities. This strategy is unfolding against a backdrop of improving commercial real estate markets, where transaction activity is picking up, and a clearer valuation reset has been accepted by market participants.

A History Forged in Real Estate Cycles

ARI's journey began in 2009, quickly establishing its REIT status to benefit from tax advantages and distribution requirements. A pivotal moment in its history was the strategic expansion into Europe around 2012-2013. This move was initially driven by existing U.S. sponsors seeking Apollo's expertise in European markets. The company's commitment led to establishing a dedicated originations and asset management team in London, which has since developed into a significant competitive advantage. Apollo's European platform was recognized as the "Alternative Lender of the Year" in 2024, underscoring its strong market position and ability to source high-quality deals in a less fragmented lending environment.

Over the years, ARI has actively managed a portfolio that, at times, included real estate owned (REO) assets acquired through foreclosure. Key examples include the D.C. Hotel (acquired 2021), the Brooklyn Multifamily Development (2022), and the Atlanta Hotel (2023). These assets, along with specific loan challenges like the Massachusetts Healthcare Loan and the Michigan Office Loan, represent a historical commitment to maximizing recovery and value. The ongoing resolution of these "focus assets" is a central theme, as their monetization is expected to free up substantial capital for redeployment into ARI's core lending strategy.

Operational Excellence and Portfolio Dynamics

ARI's operational effectiveness is evident in its consistent origination and active portfolio management. Year-to-date through Q3 2025, ARI committed $3 billion in new loans, with $1 billion committed in Q3 alone. This robust activity is supported by Apollo's broader real estate credit platform, which is on pace for a record year with over $19 billion in originations. The company's loan portfolio reached a carrying value of $8.3 billion as of September 30, 2025, with a weighted-average unlevered yield of 7.7%. Notably, 54% of this portfolio was originated after the 2022 rate hikes, reflecting investments made in a reset valuation environment.

The portfolio exhibits increasing diversification, with residential properties (including multifamily, for-sale residential, senior housing, and student housing) now representing ARI's largest segment at 31% of the portfolio. This thematic overweight to housing benefits from strong secular tailwinds. ARI is also strategically active in data center construction loans, focusing on hyperscale facilities pre-leased to strong credit tenants. The company maintains a disciplined risk management framework, with a weighted-average risk rating of 3.0 for its portfolio and a weighted-average origination loan-to-value (LTV) ratio of 57% (excluding risk-rated 5 loans), indicating significant equity cushions.

Progress on "focus assets" continues to be a key operational highlight. At 111 West 57th Street, six new contracts were signed since the Q2 earnings call, with three closing post-Q3, generating approximately $55 million in proceeds. Management anticipates reaching the "finish line" on this asset in early 2026. The Brooklyn Multifamily Development saw its leasing office open in June 2025 and tenant move-ins commence in July 2025, with the asset expected to become modestly cash flow positive in early 2026 and a potential sale or partnership targeted for late Q3/early Q4 2026. The Liberty Center asset's exit timing is expected to be clearer in late Q1/early Q2 2026, pending resolution of a tenant bankruptcy. Furthermore, a $17.4 million gain from a litigation settlement related to the Massachusetts Healthcare Joint Venture was recognized in Q3 2025, contributing to a 14¢ increase in book value per share.

Leveraging Platform Capabilities as a Differentiator

While ARI does not explicitly detail proprietary "technology" in the traditional sense, its competitive edge and operational efficiency are deeply rooted in leveraging Apollo Global Management's sophisticated platform. This platform acts as a powerful differentiator, providing:

• Superior Deal Sourcing and Underwriting: Apollo's "global infrastructure and operating platform" enables ARI to access an "incredibly robust pipeline of transactions" and "source, evaluate and manage potential investments." This is a critical advantage in a competitive lending landscape.
• Advanced Risk Management: The platform's expertise includes a "dedicated team of asset management professionals" performing loan surveillance and a quarterly risk rating process. ARI also utilizes a commercial mortgage-backed securities (CMBS) database from Trepp LLC for historical loss rates in its Current Expected Credit Loss (CECL) allowance calculations, integrating data analytics into its credit assessment.
• Strategic Market Access: Apollo's established presence in Europe, where it is the "most active alternative lender," provides ARI with unique access to a market characterized by a "fragmented lender universe" and a "less developed securitization market." This allows ARI to participate in larger, Pan-European deals that might be challenging for competitors.

These platform capabilities translate into tangible benefits for investors: efficient capital deployment, diversified portfolio construction, and attractive risk-adjusted returns. They form a competitive moat by enhancing ARI's ability to identify, underwrite, and manage complex commercial real estate debt investments globally, effectively serving as a technological differentiator in a relationship-driven industry.

Financial Performance and Liquidity Strength

ARI's financial performance in Q3 2025 reflected both the ongoing capital rotation and market dynamics. Net income available to common stockholders was $47.7 million, or $0.34 per diluted share, while distributable earnings (a non-GAAP measure closely watched by investors for dividend coverage) stood at $42 million, or $0.30 per share. The run rate distributable earnings for the quarter were slightly below the dividend level, primarily due to the timing of capital redeployment. However, management expressed confidence that Q1 2025 represented a trough, with distributable earnings expected to meet or exceed the quarterly dividend rate for the remainder of 2025.

For the nine months ended September 30, 2025, net interest income decreased by $32.9 million compared to the same period in 2024, primarily due to lower average index rates and loan modifications. Despite this, the Massachusetts Healthcare JV litigation settlement contributed significantly to income from equity method investments, reaching $17.1 million in Q3 2025. The company's book value per share, excluding general CECL allowance and depreciation, increased to $12.73 as of Q3 2025.

Liquidity remains robust, with $312 million in total liquidity as of September 30, 2025, comprising cash on hand, loan proceeds held by the servicer, and available borrowings. ARI also holds approximately $359.5 million in unencumbered assets. The company's debt-to-equity ratio stood at 3.8x, down from 4.1x in Q2 2025, reflecting disciplined leverage management. ARI successfully refinanced its Term Loan B facilities in June 2025 with a new $750 million Term Loan B (SOFR plus 3.25%), extending its next corporate debt maturity to June 2029. Additionally, secured debt arrangements saw a $1.4 billion increase in borrowing capacity during 9M 2025, and the Revolving Credit Facility was upsized to $275 million and extended to August 2028. These actions underscore ARI's strong access to capital and proactive liability management.

Competitive Landscape and Strategic Positioning

ARI operates in a competitive landscape alongside other commercial mortgage REITs such as Starwood Property Trust (STWD), Blackstone Mortgage Trust (BXMT), Ladder Capital Corp (LADR), and Ares Commercial Real Estate Corporation (ACRE), as well as indirect competitors like traditional banks and fintech lenders. ARI's competitive positioning is defined by several key strengths:

• Apollo Platform Advantage: ARI leverages Apollo's extensive network for deal sourcing, underwriting, and asset management, providing a "robust pipeline" and "certainty" to borrowers that can differentiate it from competitors, especially amidst disruptions in securitized markets.
• European Market Dominance: ARI's "first mover advantage" and established presence in Europe, where Apollo is a leading alternative lender, is a significant differentiator. This market has a less developed securitization market, allowing ARI to "speak for larger deals" and execute Pan-European transactions, which is a competitive edge over U.S.-centric rivals.
• Disciplined Risk and Leverage: ARI maintains a "very focused" approach on "downside protection" and being "senior in the capital structure," employing "moderate leverage" (target around 4x). This conservative stance, coupled with its floating-rate loan portfolio, aims for stable, attractive returns without "pushing leverage or business plans."
• Targeted Asset Class Focus: The company strategically focuses on residential properties (31% of portfolio) due to "strong secular tailwinds" and is selectively active in "hyperscale" data center construction loans with strong credit tenants. Conversely, ARI is currently not looking to originate new office deals within its portfolio due to ongoing market challenges and a desire to manage existing exposure.
• Flexible Financing: ARI's secured debt arrangements are "generally term-matched to the underlying loans" and do not contain capital markets-based mark-to-market provisions, offering stability. The company also avoids the series CLO market, preferring the flexibility and borrower privacy offered by warehouse loans.

While ARI's specialized focus and platform access provide strong competitive advantages, it remains susceptible to broader macroeconomic cycles and interest rate fluctuations, similar to its peers. However, its disciplined underwriting and proactive asset management aim to mitigate these vulnerabilities.

Outlook and Risks

ARI's outlook is characterized by an anticipated uplift in earnings driven by the strategic capital rotation. Management expects "meaningful earnings growth, somewhere in the neighborhood of 30% to 40%" as capital from focus assets is redeployed into levered senior loans. The reinvestment of proceeds from 111 West 57th Street sales is expected to provide "upside to earnings in Q4 and further in 2026," with additional "uplift to earnings in 2026" from other self-performing assets. The company anticipates approximately $1.5 billion in repayments this year, fueling active deployment. The long-standing dividend policy remains to distribute the "lion's share of earnings," aiming for stability. Analyst consensus projects a significant rally in 2025 earnings (141.9%) and continued growth in 2026 (6.3%), with a 2025 EPS estimate of $1.05.

Despite this positive outlook, several risks warrant investor attention. Macroeconomic uncertainties, including inflation, labor shortages, and interest rate volatility, could impact commercial real estate markets. A significant recession could particularly affect the hospitality sector due to its sensitivity to cash flow movements. While the office market is showing signs of recovery, a downturn could slow decision-making. The subjective nature of valuation estimates for certain assets also presents a risk. ARI's ability to meet debt covenants could be challenged by adverse macroeconomic conditions. However, the company's proactive risk management, disciplined underwriting, and diversified funding sources are designed to navigate these potential headwinds.

Conclusion

Apollo Commercial Real Estate Finance (ARI) presents a compelling investment thesis centered on its strategic capital rotation and the formidable backing of Apollo Global Management's real estate credit platform. By diligently monetizing "focus assets" and redeploying that capital into high-quality, levered senior loans, ARI is poised for a significant uplift in distributable earnings through late 2025 and into 2026. The company's strong origination pipeline, diversified portfolio with a thematic overweight to residential properties, and unique competitive advantages in the European market underscore its ability to generate attractive risk-adjusted returns.

While macroeconomic uncertainties and sector-specific challenges, particularly in office and hospitality, remain pertinent, ARI's disciplined approach to risk management, robust liquidity, and proactive liability management provide a solid foundation. The company's commitment to a stable dividend, supported by anticipated earnings growth, further enhances its appeal to income-focused investors. ARI's strategic positioning, leveraging its platform capabilities for superior deal flow and risk assessment, positions it to capitalize on evolving commercial real estate market opportunities and deliver long-term value.