Apollo Initiating

U.S. Research

Please read domestic and foreign disclosure/risk information and Analyst Certification beginning on page 19.

© 2009 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

Apollo Commercial Real Estate Finance, Inc. December 8, 2009

(ARI:NYSE) Initiation of CoverageRJ Milligan, (727) 567-2660, [email protected]

Paul D. Puryear, (727) 567-2253, [email protected]

Alexander Sierra, Sr. Res. Assoc., (727) 567-2564, [email protected]

REITs: Mortgage __________________________________________________ ARI: Initiating Coverage with an Outperform Rating

♦ We are initiating coverage of ARI shares with an Outperform rating. Given the large void of capital in the commercial real estate market, we believe Apollo has the infrastructure and experienced management team to take advantage of the opportunities. Apollo’s more conservative investment profile (only performing loans) and conservative leverage (~35%) will provide ARI shareholders with a very attractive yield on a risk/return basis.

♦ The company completed an initial public offering on September 24, 2009, in which 10 million common shares were sold at a price of $20 per share (an additional 500,000 common shares were sold in a private placement) to form a blind pool. The company expects to invest the proceeds by the end of the first quarter of 2010, based on comments from management. Apollo also intends to create a diversified portfolio of performing commercial real estate mortgage loans and commercial mortgage-backed securities (CMBS) assets that will be held to maturity, providing stable cash flow yields for stockholders.

♦ Apollo believes it can capitalize on the lack of debt financing availability in the current environment, as roughly $1.4 trillion of commercial real estate debt matures over the next five years. The company estimates an unleveraged, blended yield of roughly 11-12% on its debt investments.

♦ Over time, we expect the opportunity in the commercial real estate financing sector to shrink as new competitors emerge and lending spreads compress. However, we believe the window for Apollo to reap above-average risk-adjusted returns will persist for at least the next 12-24 months. As a new company with no existing assets, Apollo also faces execution risk in deploying the proceeds from the IPO (which we expect by the end of 1Q10). For a further discussion of these and other risks, please refer to the section titled “Investment Risks” on page 3.

♦ Despite the differences between the new commercial mortgage REITs and the more established residential mortgage REITs, we believe Apollo and its peers will trade at or above book value (the residential mortgage REIT comp group trades at 1.2x book value) as the market gets more comfortable with their investment programs. Consequently, our $20.00 price target is based on the stock trading at 1.1x book value of $18.40.

GAAP Q1 Q2 Q3 Q4 Full Total EPS Mar Jun Sep Dec Year Revenues (mil.)

2008A NA NA NA NA NA NA

2009E NA NA (0.01)A (0.01) (0.02) 2

2010E 0.26 0.48 0.41 0.47 1.66 34

2011E UR UR UR UR 1.93 65

Rows may not add due to rounding. UR: Under Review. No quarterly results for 2008 and 1H09 as Apollo was organized in June 2009 and completed its IPO in September 2009. Initial public offering within last 12 months; trailing 12-month share price figures represent range since that time.

Rating _________________________________ Outperform 2 Current and Target Price __________________Current Price (12/7/2009) $17.66Target Price: $20.0052-Week Range $19.20 - $17.01Suitability High Risk Market Data ____________________________Shares Out. (mil.) 10.8Market Cap. (mil.) $191Avg. Daily Vol. (10 day) 90,580Dividend/Yield $0.00/0.0%BVPS (09/09) $18.40ROE % 0%LT Debt (mil.)/% Cap. $0/0% Earnings & Valuation Metrics ______________

2008A 2009E 2010E 2011E

P/E Ratios (GAAP) NM NM 10.6x 9.2x Company Description_____________________Apollo Commercial Real Estate Finance, Inc is a commercial real estate finance company (a mortgage REIT) that is focused primarily on originating, investing in, acquiring, and managing senior performing commercial real estate mortgage loans, commercial mortgage-backed securities (CMBS), commercial real estate corporate debt and loans, and other commercial real estate-related debt investments in the U.S. The company is externally advised and managed by a subsidiary of Apollo Global Management, LLC, a leading global asset management company.

Apollo Commercial Real Estate Finance, Inc. U.S. Research


International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

Contents

Company Overview ..................................................................................1

Investment Attributes ..............................................................................2

Investment Risks ......................................................................................3

Investment Overview ...............................................................................6

Industry Overview ....................................................................................7

Management Structure and Overview.....................................................10

Outlook: 2009, 2010, and 2011................................................................13

Balance Sheet and Capital Structure........................................................14

Valuation ..................................................................................................14

Conclusion................................................................................................17

Appendices

Income Statement....................................................................................18

U.S. Research Apollo Commercial Real Estate Finance, Inc.


International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 1

Company Overview

Apollo Commercial Real Estate Finance, Inc. is a real estate investment trust (a mortgage REIT) formed primarily to originate, invest in, acquire, and manage senior performing commercial real estate mortgage loans, commercial mortgage-backed securities (CMBS), commercial real estate corporate debt and loans, and other commercial real estate-related debt investments in the U.S. The company’s primary focus will be originating first mortgage loans with a target size of $25-50 million per loan. The company is externally advised and managed by a subsidiary of Apollo Global Management, LLC, a leading global asset management company.

The company was organized in Maryland on June 29, 2009 and commenced operations on September 24, 2009, when it successfully completed an initial public offering in which 10 million common shares were sold at a price of $20 per share. Concurrent with the public offering, 500,000 common shares were sold in a private placement to sponsor entity Apollo Global Management and certain affiliates. The net proceeds from the public offering and the concurrent private placement totaled $208 million, which the company intends to invest by the end of the first quarter of 2010, based on comments from management.

Apollo expects to create a diversified portfolio of performing commercial real estate mortgage loans and CMBS assets that will be held to maturity, providing stable cash flow yields for stockholders. The company will focus its investing efforts on the core, income-producing commercial property types, including office, retail, multifamily, and industrial. The company will seek to identify properties that have above-average demographics, market demand generators, competitive leasing rates, stable cash flow characteristics, and experienced and well-capitalized borrowers.

Apollo believes it can capitalize on the lack of debt financing availability in the current environment, as roughly $1.4 trillion of commercial real estate debt matures over the next five years. The company estimates an unleveraged, blended yield of roughly 11-12% on its debt investments. Apollo’s expected portfolio allocation is shown in the following table.

Investment Type Projected Allocation Return on EquityWhole Loans 40% 7.5-9%Newly Issued CMBS 20% 12-14%Legacy CMBS 20% 15%B Notes/Mezz 20% 12-14% Source: Company filings, Raymond James.

Following a ramp-up period, we expect the company to pay an annualized dividend of $1.49-1.66, which implies an 8.4-9.4% yield based on the December 7, 2009 stock price.



2 International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

Investment Attributes

High Quality Target Investments; Modest Leverage

Apollo is targeting performing commercial loans, with a bias toward holding the senior position in the asset capital structure. We believe Apollo’s focus on high credit quality investments (predominantly investment-grade CMBS and senior positions in whole loans) should help insulate the company in the event fundamentals in the commercial real estate sector continue to deteriorate materially. The company’s risk-averse, hold-to-maturity business model differentiates Apollo from its peers, as other recently formed commercial mortgage REITs employ strategies that include pursuing riskier distressed debt investments and/or engaging in opportunistic transactions in order to create value. Given the checkered past of the mortgage REIT industry and our skepticism about the strength of this economic recovery, we favor Apollo’s more stable, conservative business model.

The company’s capital structure is expected to be similarly conservative with debt at 35% of total assets (excluding TALF financing). This compares favorably to past mortgage REITs that have employed higher leverage to boost returns, a strategy that works in a sound real estate environment but becomes a significant burden in downcycles when loan delinquencies/defaults begin to mount. We expect Apollo to periodically return to the capital markets to raise equity (we have modeled offerings in 2010 and 2011) in order to grow its assets while maintaining modest leverage levels.

Experienced Management Team

Apollo’s management team has extensive experience in identifying, analyzing, financing, and managing real estate investments, therefore providing the company with a competitive advantage in the mortgage REIT industry. The external management team is led by President and CEO Joseph Azrack, a 30-year veteran in the real estate industry. Mr. Azrack has significant prior experience in dealing with real estate debt investments, having been actively involved in the origination of new mortgage loans and the purchase of investment-grade and below-investment-grade CMBS at AEW Capital Management in the 1990s. Mr. Azrack is the head of the investment committee, which also includes Chief Investment Officer Scott Weiner, who has over 13 years of experience in real estate finance and lending, and Chief Financial Officer Stuart Rothstein, who has over 15 years of experience in the real estate industry. The investment committee features seven members and is tasked with advising the management team with respect to the company’s investment strategy, portfolio holdings, sourcing, and financing and leverage strategies, as well as approving the company’s investments.

We believe the management team has the ability to successfully capitalize on the dislocation in the capital markets and generate above-average returns on commercial real estate debt investments without taking on unnecessary risk. The management team is uniquely qualified to identify these opportunities and has the experience necessary to avoid the pitfalls that have plagued the mortgage REITs in the past (over-levering and taking on riskier, higher-yielding investments when spreads begin to contract).

Apollo Sponsorship/Sourcing Capabilities

Apollo benefits from its relationship with sponsor Apollo Global Management, a well-regarded asset manager that has a large network of connections in the real estate investing and financing communities. Founded in 1990, Apollo Global Management, LLC, is a leading global alternative asset manager with a track record of successful private equity and credit-oriented capital markets investing with assets under management of approximately $38.3 billion and 389 employees, including 131 investment professionals, as of June 30, 2009. One of Apollo Commercial Real Estate’s strengths will be




its ability to originate whole loans as opposed to acquiring existing loans, and we believe Apollo Global Management’s wide range of contacts in the commercial real estate sector will provide Apollo Commercial Real Estate with a valuable source of deal flow and real estate market intelligence, differentiating the company from other mortgage REITs.

No Legacy Portfolio

Apollo is a new mortgage REIT that does not have an existing pool of troubled assets. Many of the existing commercial mortgage REITs have been hampered by nonperforming loans in this difficult economic environment. Additionally, the steep drop in commercial real estate prices means a large number of loans held by older mortgage REITs are now underwater (the value of the loan now exceeds the value of the property). The new generation of mortgage REITs such as Apollo is not saddled by any problem loans. In addition, the more conservative underwriting methodologies that have arisen as a result of the fallout in the commercial real estate sector (as well as recession-adjusted property values) will only strengthen the underlying quality of Apollo’s loan portfolio.

Dividend Yield

We expect Apollo to pay an annualized $1.66 per share dividend after the initial offering is fully invested. This implies an attractive yield of 9.4% based on the December 7, 2009 stock price, and compares favorably to the 3.8% average yield for the NAREIT Equity REIT Index. Initially, Apollo will pay a “stub” dividend, as we are projecting EPS of $(0.01) in 4Q09. However, in the first half of 2010, Apollo will announce a more normalized dividend going forward as the company will have greater clarity on its projected cash flows for the year. We are basing our dividend assumption on our 2010 EPS estimate of $1.66, resulting in a 100% payout ratio. For the full-year 2011, we believe the company will pay an annualized rate of $1.80, which equates to a payout ratio of 93%, an 8.4% growth rate over the 2010 pay rate. Our projected dividend in 2011 is based on an EPS estimate of $1.93.

Attractive Valuation

Shares of Apollo trade at ~1.0x book value (4% discount). This compares to Apollo’s peer group of new commercial mortgage REITs that trade at 1.0x book value and a peer group of residential mortgage REITs that trade at 1.2x book value. We are also projecting a total dividend payment of $1.66 per share in 2010, which implies an attractive dividend yield of 9.4%.

Investment Risks

Competition

Apollo may face diminishing returns as banks and other financial institutions re-enter the market over the next several years. The disarray in the financial industry over the past couple of years has trimmed the field of lenders in the commercial real estate sector. Apollo plans to capitalize on the lack of debt financing availability by originating whole loans and investing in commercial real estate debt investments. However, Apollo faces competition from well-capitalized institutions such as insurance companies, pension funds, and other opportunity funds. One factor that may work to Apollo’s advantage is the size of the loans the company plans to originate, which should be in the $25-50 million range. Insurance companies and pension funds typically deal in larger loans (typically $75 million or higher), placing Apollo’s target loans below the investment threshold for most of these institutions.




Apollo also faces competition from other mortgage REITs, as three new commercial mortgage REITs have gone public in recent months – Starwood Property Trust (STWD), Colony Financial (CLNY), and CreXus Investment Corp. (CXS). Each new mortgage REIT employs a different investment strategy (with varying risk tolerances), and in aggregate the companies raised ~$1.5 billion ($3 billion with 50% leverage). There will naturally be a certain amount of overlap in the assets these companies target, but the total ~$1.5 billion is a minimal amount of capital given $1.4 trillion of commercial real estate debt maturities over the next five years. It also appears the wave of mortgage REIT IPOs has ended for the time being, but if the opportunity in the sector persists we may see new competitors emerge.

The banking sector is in the process of deleveraging, limiting the supply of capital from what has been a traditional source of debt financing for commercial real estate. A large number of commercial real estate loans are held by banks – roughly $800 billion maturing through 2014, according to research firm Foresight Analytics – with two-thirds estimated to be underwater. However, many of these properties still generate sufficient cash flow to cover the debt payments, and some banks have decided to extend these maturing loans. This practice may reduce the opportunity set for Apollo, though given the magnitude of the commercial real estate capital requirements over the next few years, we believe Apollo will still have ample opportunities. As the economic recovery unfolds and the banking sector recapitalizes, we expect increased competition will lead to a contraction in spreads. Nevertheless, we believe the window for Apollo to reap above-average risk-adjusted returns will persist for at least the next 12-24 months.

Compressing Investment Spreads; Interest Rate Risk

Mortgage REITs earn the spread between the yield of their investment portfolio and the cost of capital, and to the extent lending spreads compress, the company’s earnings growth may be affected. In the current environment, Apollo believes it can generate an unleveraged, blended 11-12% return on its debt investments. However, we expect these yields to decline as the credit markets improve over time, placing future earnings growth at risk. In the past, compressing spreads have led some mortgage REITs to take on higher leverage or take on riskier, higher-yield loans in order to boost returns, increasing their risk profile. In real estate downcycles, when cash flows diminish and property values plunge, this has proven disastrous for the mortgage REIT sector. Falling into this “yield trap” or employing higher leverage to amplify returns remains our largest concern in regards to the long-term viability of mortgage REITs in general. In Apollo’s case, we believe the company’s stringent, credit-oriented approach and highly experienced management team should help mitigate this risk.

Additionally, we believe Apollo's share price is susceptible to interest rate swings as investors compare mortgage REIT dividend yields to alternative fixed income or yield-related investments. Much like a bond, a rising interest rate environment may place downward pressure on the stock price (and vice versa). Interest rate movement will also cause fluctuations in Apollo’s earnings stream, as the company is expected to finance some of its debt investments with a floating rate credit facility. This introduces refinancing risk as the company uses short-term financing for longer-term debt investments.

Blind Pool

Apollo does not own any assets at the moment. Although Apollo has outlined its target assets and allocations, the company has yet to announce any investments to date. We also cannot analyze the credit risk of the company’s loans/debt investments until the portfolio has been established. In the meantime, investors are essentially placing their faith in the management team to identify opportunities that provide a favorable risk/reward profile and their ability to invest the cash proceeds from the IPO in a relatively short period of time. If the company is slow to invest the IPO proceeds or falls short of its target return on investments (expected at 11-12%), our estimates may be at risk.




Conflicts of Interest

Apollo Commercial Real Estate Finance may engage in transactions with sponsor Apollo Global Management or its affiliates that may conflict with the best interests of shareholders. Apollo Global Management beneficially owns roughly 4.6% of Apollo Commercial Real Estate Finance’s outstanding common stock. Additionally, the company is externally managed by members of the Apollo Global Management organization. Any transactions between Apollo Commercial Real Estate Finance and Apollo Global Management may result in less favorable terms for the company than if the agreement had been negotiated at arm’s length. In order to mitigate this risk, all transactions with Apollo Global Management require approval by a majority of the company’s independent directors.

As an asset manager, Apollo Global Management controls multiple investment funds, potentially creating a conflict of interest if Apollo Commercial Real Estate Finance’s target assets overlap with the suitability for another Apollo Global Management-sponsored vehicle. Currently, no other Apollo Global Management vehicle focuses on Apollo Commercial Real Estate Finance’s target assets as part of its core investment strategy and Apollo Global Management has agreed it will not sponsor or manage any U.S. publicly traded REIT that invests primarily in Apollo Commercial Real Estate Finance’s target asset classes. However, Apollo Global Management may sponsor another U.S. publicly traded REIT that invests generally in real estate assets but not primarily in Apollo Commercial Real Estate Finance’s target assets, while other Apollo Global Management sponsored entities may also invest in Apollo Commercial Real Estate Finance’s target asset classes from time to time as part of their larger business strategies.

Capital Markets Risk

Mortgage REITs, such as Apollo, are dependent on access to the capital markets for growth. If the ability to execute deals involving the issuance of debt or equity securities becomes impaired, the end result could be minimal or no growth for the company. The loss of capital market access could be caused by a level of financial leverage that is too high, increased loan loss risk, or any other factor that might be seen to significantly impede REIT operations.

Government Restrictions

Apollo’s yield and investment timeline may be affected by the company’s inability to participate in the TALF program. Starwood Property Trust Inc. (STWD), a commercial mortgage REIT and a peer to Apollo Commercial Real Estate, was asked by the New York Fed to not participate in the most recent CMBS offering (Developers Diversified Realty – DDR) due to fears that international shareholders (of any public company) may benefit from TALF financing. On Starwood Property Trust’s 3Q09 conference call, CEO Barry Sternlicht told investors the company was working with other “compatriots in the space” to address the issue with the Fed and believes the Fed will publish updated regulations in the next 30 days (from 11/16/09). While TALF-financed CMBS issues are not a main focus of Apollo, the inability to participate in the programs could negatively affect the company’s yield projection or investment timeline.

Dividend Risk

Apollo intends to pay out ~100% of taxable income. After the company invests all of its cash proceeds and then invests its borrowed proceeds, we expect the company to raise additional equity if it continues to see investment opportunities. Additional equity raises could result in a temporary dividend cut as the company intends to pay out 100% of its taxable income (more shares mean a lower dividend). We would expect the company to increase the dividend as it invests the proceeds of any additional equity raises.




Investment Overview

Apollo is focused primarily on originating, investing in, acquiring, and managing senior performing commercial real estate mortgage loans, commercial mortgage-backed securities, commercial real estate corporate debt and loans, and other commercial real estate-related debt investments in the U.S. The following is a description of the company’s target assets.

Whole Loans

Whole mortgage loans are performing loans secured by a first mortgage lien on a commercial property. We believe Apollo will seek to originate whole loans in the $25-50 million range. Apollo may retain the entire loan, or may structure the loan in a manner that allows the company to sell the lower-yielding portions of the loan while retaining the higher-yielding subordinate investment. The company may also seek to enhance the returns of all or a senior portion of its commercial mortgage loans through securitizations, assuming the CMBS market recovers. Apollo will not pursue loans that are non-performing or distressed at the time of purchase.

Commercial Mortgage-Backed Securities (CMBS)

CMBS are collateralized by commercial mortgage loans. Apollo will generally target “investment grade” CMBS, which are defined as securities rated Aaa/AAA through Baa3/BBB by the nationally recognized rating agencies. The company will focus on “newly issued CMBS” (issued on or after September 1, 2009), as well as “legacy CMBS” (issued prior to January 1, 2009) with an emphasis on tranches that have retained the highest credit rating (Aaa/AAA) based on the current underwriting criteria of the nationally recognized rating agencies. The company does not plan to invest in “non-investment grade” CMBS at this time. Apollo intends to utilize TALF financing on its investment in some CMBS issues (which can be levered up to 85%).

Non-Core Assets

The company may also opportunistically invest in the following non-core asset classes.

Commercial Real Estate Corporate Debt

Commercial real estate corporate debt (including REITs) may be in the form of a term loan or a revolving credit facility, generally secured by the company’s assets. Apollo may choose to acquire above or below investment-grade corporate bonds that may or may not be secured by any assets. Other securities which meet the company’s investment guidelines include REIT convertible bonds.

B Notes

“B Note” is a moniker for the junior or subordinated interest in a commercial real estate loan secured by a first mortgage on a single large commercial property or a group of related properties (while the senior interest is referred to as an “A Note”).




Mezzanine Loans

Mezzanine loans are secured by pledges of the borrower’s ownership interests in the property. These loans are subordinate to whole mortgage loans (secured by first or second mortgage liens) but senior to the borrower’s equity in the property.

Miscellaneous Assets

The company may invest in other mortgage assets, if necessary, to maintain its REIT status and/or its exemption from registering as an investment company under the 1940 Act.

Capital Allocation

The company plans to leverage the management team’s extensive industry relationships to originate most of the loans in its portfolio, thus whole loans are expected to comprise a large percentage of the portfolio at 30-50%. Newly issued CMBS is expected to comprise 20-40% of the portfolio, while legacy CMBS will be in the 0-20% range. The non-core assets (expected at 10-30%) will most likely be predominantly comprised of newly originated B notes and mezzanine loans. Apollo plans to fully invest the proceeds from the IPO by the end of 1Q10, a goal we believe is attainable. The following table depicts the asset class return and allocation expectations.

Investment Type Projected Allocation Return on EquityWhole Loans 40% 7.5-9%Newly Issued CMBS 20% 12-14%Legacy CMBS 20% 15%B Notes/Mezz 20% 12-14% Source: Company filings, Raymond James.

Industry Overview

In the wake of the turmoil in the financial sector over the past couple years, the availability of debt financing for commercial real estate has been greatly diminished as many traditional financial institutions are in the process of delevering along with the lack the funds or inclination to lend in the current environment. The CMBS markets, another source of financing, remain muted (though showing some signs of life), therefore expanding the supply-demand imbalance for debt financing in the commercial real estate sector. The expected capital void over the next few years should provide opportunities for companies such as Apollo to generate above-average risk-adjusted returns in commercial real estate debt investments.

The total value of institutional quality U.S. commercial real estate is approximately $4.8 trillion, which is supported by approximately $3.6 trillion of debt (75% loan-to-value). Over the next five years, roughly $1.4 trillion (or 40% of the outstanding debt) is scheduled to mature. The following charts illustrate the composition of the commercial real estate market.




Source: Urban Land Institute’s Emerging Trends in Real Estate, Raymond James.

Source: Urban Land Institute’s Emerging Trends in Real Estate, Raymond James.

($ in billions)Total

CMBSFixed $193Floating 46

Insurance 111 Bank/Thrift 1,066 Total $1,416

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CMBS - Fixed Rate CMBS - Floating Rate Insurance Company Bank/Thrift

Source: Mortgage Bankers Association, Federal Reserve, Raymond James.




Many of these loans face refinancing challenges, as the underwriting standards of the past few years have proven aggressive in hindsight. That, combined with one of the worst recessions in U.S. history, has resulted in diminishing cash flows and/or large property value declines for many commercial real estate properties. The subsequent rise in loan delinquencies and defaults has been a large contributor to the dearth in capital availability in commercial real estate, as many banks remain saddled by portfolios of troublesome assets (on both the commercial and residential side). About two-thirds of the $800 billion in commercial real estate loans held by banks that mature between now and 2014 are underwater (the loan value exceeds the property value), according to research firm Foresight Analytics. A large number of these loans are held in small and regional banks, essentially removing some of the competition for the $25-50 million commercial real estate loans that Apollo intends to originate.

However, the U.S. government is doing everything in its power to stabilize the banking sector and restore liquidity to the corporate lending market. This may help shrink the debt capital void in the commercial real estate market over time, though we believe this will be a multiyear process. Newly issued guidelines allow banks to reclassify nonperforming loans (subdividing them into performing and nonperforming segments) to ease the bank’s capital requirements, which should help some banks avoid failure. In the event that a commercial property is underwater but generates enough cash to cover the debt service requirements, the bank may seek to extend the loan when it matures in order to avoid recognizing a loss. This may shrink the pool of commercial mortgage loans that require refinancing in the near term, but it may also discourage banks from lending while troubled loans remain on their books.

As the credit crunch took hold in 2008, debt financing became much more expensive, pushing cap rates higher. Concurrently, the difficult macroeconomic landscape placed downward pressure on income growth (lower occupancy and rental rates), exacerbating the situation and ultimately driving substantial price declines across the commercial real estate sector.

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The Federal Reserve hopes to resurrect the CMBS market through the Term Asset-Backed Securities Loan Facility (TALF) program, which provides non-recourse loans to investors of AAA-rated CMBS. Although we have seen some encouraging signs in recent months [such as Developers Diversified Realty Corp (DDR) offering the first TALF-eligible CMBS], it still remains to be seen whether the TALF program will ultimately succeed in its goal. However, in the DDR deal, only 20% of the buyers planned to use TALF financing, signaling a renewed appetite for CMBS. In the near- to intermediate-term, there is no obvious refinancing source for the roughly $240 billion of CMBS that mature over the next five years.

Given this backdrop, we believe there is a multiyear window of opportunity to generate above-average returns investing in commercial real estate debt, though we expect spreads to narrow over time as traditional lenders re-enter the market and the credit market reverts to historical norms.

Management Structure and Overview

Apollo is externally managed and advised by ACREFI Management, LLC (“the Manager”), a recently formed indirect subsidiary of Apollo Global Management. The Manager will be responsible for the selection, purchase, and sale of the company’s assets, the sourcing of financing, and will also provide the company with advisory services. The Manager will handle the day-to-day operations of the company and provide support staff as Apollo will not have any employees. However, the Manager will be under the supervision and oversight of the board of directors.

The Manager will not receive an incentive fee, but will receive a base management fee equal to 1.5% per year of Apollo’s stockholders’ equity, calculated and payable quarterly in arrears. In the event the management agreement is terminated without cause (requires a two-thirds vote by the independent directors), the termination fee will be equal to 3x the average annual base management fee earned by the Manager during the prior 24-month period immediately preceding the termination date. The following table compares Apollo’s compensation structure to that of the other new commercial mortgage REITs.




Company Management Fee (% of equity) Incentive Fee Overhead/G&A

Apollo Commercial Real Estate Finance, Inc. 1.5% None 1% of equity

Colony Financial, Inc. 1.5% 20% above an 8% hurdle

CreXus Investment Corp.0.5% in the first year, 1.0% in the

following six months, 1.5% thereafterNone

Starwood Property Trust, Inc. 1.5%20% above an 8% hurdle

(50% paid in shares)1% of equity

Source: Company filings.

The board of directors has granted 257,500 restricted common shares (~2.4% of the outstanding common shares) to the company’s officers, the Manager’s personnel, and the independent directors under the company’s 2009 equity incentive plan, which is intended to align shareholder interests with management. The shares will vest over a three-year period.

Joseph F. Azrack President, CEO, and Head of Investment Committee

Mr. Azrack is the president and chief executive officer of the company, as well as a director. He is also the president and chief executive officer of the Manager and the head of the Manager’s investment committee. Mr. Azrack is the managing partner of Apollo Global Real Estate Management, L.P., a position he has held since August 2008. Mr. Azrack has 30 years of real estate investment management experience. Prior to joining Apollo, from 2004 to 2008, Mr. Azrack was president and chief executive officer of Citi Property Investors where he chaired the firm’s management and investment committees, directing investment policy and strategy. From 1996 to 2003, he was chief executive officer and chairman of AEW Capital Management, L.P., founder and president of the AEW Partners Funds (1988 to 2003), a director of Curzon Global Partners (1998 to 2003), and founder and chairman of IXIS AEW Europe (2001 to 2003). Mr. Azrack served with AEW from 1983 to 2003. Mr. Azrack graduated from Columbia University with an MBA and from Villanova University with a BS.

Scott Weiner Vice President, Chief Investment Officer, and Investment Committee member

Mr. Weiner is a vice president and the chief investment officer of the Manager and is a member of the Manager’s investment committee. Mr. Weiner joined Apollo in 2009 from Barclays Capital where he was in charge of the U.S. Commercial Real Estate Large Loan and Structured Loan business from 2005 to 2009 (managing director from 2006 to 2009 and director from July 2005 to January 2006). From 1996 until 2005, he held various positions at Lehman Brothers, including senior vice president (December 2003 to July 2005) in the commercial real estate finance area where he specialized in structured first mortgage and mezzanine investments. Mr. Weiner graduated from Johns Hopkins University with a BA in international studies.

Stuart A. Rothstein Chief Financial Officer, Treasurer, Secretary, and Investment Committee member

Mr. Rothstein is the company’s chief financial officer, secretary, and treasurer. He is also the chief financial officer, secretary, and treasurer of the Manager, in addition to being a member of the Manager’s investment committee. Mr. Rothstein was previously co-managing partner of Four Corners Properties, a real estate investment company that acquired over $200 million of real estate in Silicon Valley. Prior to




Four Corners Properties, Mr. Rothstein served as a director of KKR Financial Advisors LLC from January 2005 to March 2006, overseeing all investments in commercial real estate. Mr. Rothstein also served as acting chief financial officer of KKR Financial Holdings LLC through May 2005. From 2002 to 2004, Mr. Rothstein was an executive vice president and chief financial officer of the Related Capital Company, also serving as chief financial officer for three publicly traded operating companies, CharterMac, American Mortgage Acceptance Company, and Aegis Realty. Mr. Rothstein graduated from Stanford University with an MBA and Pennsylvania State University with a BS in accounting.

Eric Press Vice President and Investment Committee member

Mr. Press is a vice president of the Manager and a member of the Manager’s investment committee. He is also a director of the company. Mr. Press has been a partner of Apollo Private Equity since November 2008. Mr. Press joined Apollo in 1998. From 1992 to 1998, Mr. Press was associated with the law firm of Wachtell, Lipton, Rosen & Katz, specializing in mergers, acquisitions, restructurings, and related financing transactions. From 1987 to 1989, Mr. Press was a consultant with The Boston Consulting Group, a management consulting firm focused on corporate strategy. Mr. Press graduated magna cum laude from Harvard College with an AB in Economics and from Yale Law School, where he was a senior editor of the Yale Law Review.

Marc Rowan Vice President and Investment Committee member

Mr. Rowan is a vice president of the Manager and is a member of the Manager’s investment committee. Mr. Rowan has been a senior managing director and director of Apollo Global Management, LLC since July 2007 and a managing partner of Apollo since October 1990. Mr. Rowan co-founded Apollo Management in 1990. Prior to joining Apollo, from 1985 to 1990, Mr. Rowan was a member of the mergers & acquisitions group of Drexel Burnham Lambert, Incorporated, with responsibilities in high yield financing, transaction idea generation, and merger structure negotiation. Mr. Rowan graduated summa cum laude from The University of Pennsylvania’s Wharton School of Business with a BS and an MBA in Finance.

Henry R. Silverman Vice President and Investment Committee member

Mr. Silverman is the chairman of the board of directors. He is also a vice president of the Manager and a member of the Manager’s investment committee. Mr. Silverman is the chief operating officer of Apollo Global Management, LLC and joined Apollo in 2009. From November 2007 until February 2009, Mr. Silverman served as a consultant for Apollo. From July 2006 until November 2007, Mr. Silverman served as chairman of the board and chief executive officer of Realogy Corporation, formerly Cendant’s real estate division. Mr. Silverman was chief executive officer of Cendant Corporation from December 1997 until the completion of Cendant’s separation plan in August 2006, as well as chairman of the board of directors from July 1998 until August 2006. Mr. Silverman served as president of Cendant from December 1997 until October 2004. Mr. Silverman continues to serve as a director and chairman of the board of Realogy Corporation, a position he has held since July 2006. Mr. Silverman graduated from Williams College in 1961 and the University of Pennsylvania Law School in 1964.




James Zelter Vice President and Investment Committee member

Mr. Zelter is a vice president of the Manager and is a member of the Manager’s investment committee. Mr. Zelter is the managing partner of Apollo’s capital markets business. Mr. Zelter joined Apollo in 2006. Prior to joining Apollo, Mr. Zelter was with Citigroup and its predecessor companies from 1994 to 2006. Most recently, as the managing director and global head of the Special Situations Investment Group, he was responsible for the global expansion and strong financial performance of the Special Situations Investment Group, a proprietary investment group he founded within Citigroup’s Fixed Income division. From 2003 to 2006, while with Citigroup, Mr. Zelter also served on the Global Fixed Income Management Committee and the Fixed Income Division Planning Committee. From 2003 to 2005, Mr. Zelter was chief investment officer of Citigroup Alternative Investments, and prior to that, from 1997 to 2003, he was responsible for the firm’s Global High Yield franchise. Mr. Zelter graduated from Duke University with a degree in economics.

Corporate Governance, Board of Directors

Apollo’s Board of Directors consists of seven members, four of which are independent. The members of the management team on the board include President and CEO Joseph F. Azrack, Vice President and Investment Committee member and Chairman of the Board Henry R. Silverman, and Vice President and Investment Committee member Eric Press. All positions on the board are up for election at the annual meeting of shareholders.

The independent directors will receive $75,000 per year, paid in 50% cash and 50% restricted stock which vests over three years. Additionally, each independent director received 5,000 shares of restricted common stock upon completion of the IPO.

The board has a traditional structure comprised of three committees: audit, compensation, and nominating and corporate governance. All are comprised solely of independent members of the board.

Outlook: 2009, 2010, and 2011

We are currently modeling EPS of $(0.02) in 2009, $1.66 in 2010, and $1.93 in 2011. Our 2011 EPS estimate represents 16% growth over 2010. In our model, we assume the company maintains roughly 30-35% leverage (excluding TALF financing) and returns to the equity markets at the midpoint of 2010 and three months into 2011, issuing 7.5 million shares each time. Our model also includes a management fee of 1.5% of shareholders’ equity and general REIT expenses of 1% of shareholders’ equity, per management guidance.

Earnings Model ($ in thousands except per share data)

3Q09A 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E

Net Investments - 63,000 63,000 210,000 300,000 365,000 430,000 430,000 690,000

Net Investment Income 1 1,523 1,524 4,375 6,812 9,965 11,003 32,154 58,368

Net Income (91) (88) (179) 2,764 5,201 7,533 8,570 24,068 46,049

Average Common Shares Outstanding (Diluted) 10,500 10,500 10,500 10,758 10,758 18,258 18,258 14,508 23,883

Net Income/Share (fully diluted) (0.01)$ (0.01)$ (0.02)$ 0.26$ 0.48$ 0.41$ 0.47$ 1.66$ 1.93$ Source: Company documents and Raymond James estimates.




Balance Sheet and Capital Structure

The company raised $208 million of net proceeds at $20 per share, and now has ~10.8 shares outstanding. Apollo currently has no debt but has targeted a leverage ratio of 35% of debt-to-total assets (excluding TALF-sponsored CMBS financing), which is conservative in our opinion. Overall company leverage will appear higher, as Apollo may use up to 85% leverage for CMBS where non-recourse financing is available through the TALF program.

We expect Apollo to close on a new credit facility in the near future, and for modeling purposes we are assuming an interest rate of LIBOR plus 300 bp with no LIBOR floor. As previously mentioned, we are also assuming equity raises at the beginning of 3Q10 and 2Q11 (7.5 million shares each) as the company continues to grow its asset base. Apollo is also responsible for the repayment of a deferred underwriting fee associated with the IPO totaling $10 million, which is triggered when the company’s return on equity exceeds an 8% hurdle rate for four consecutive quarters. We believe this will occur in the first quarter of 2011.

Consolidated Balance Sheet (dollars in thousands)

Assets 9/30/2009

Cash and cash equivalents 210,001Accrued interest receivable 1

Total Assets 210,002

Liabilities and Stockholders' Equity

Accounts payable and accrued expenses 75Other liabilities 1,879Due to affiliate 138Deferred underwriting fee 10,000

Total Liabilities 12,092

Common stock 107Additional paid-in-capital 197,894Accumulated deficit (91)

Total Stockholders' Equity 197,910

Total Liabilities & Stockholders' Equity 210,002

Source: Company 10-Q filing.

Valuation

We employ several methods in valuing mortgage REITs, including book value analysis and peer group comparison, which includes dividend yield and multiple analysis. We believe that book value is the best valuation yardstick for mortgage REITs over the long term. However, as Apollo’s book value is currently comprised solely of cash, we believe dividend yield comparison (based on our estimated dividend) is the most appropriate valuation metric at the moment.




Book Value

Apollo currently trades at ~1.0x its book value (4% discount) of $18.40 per share. This compares to a peer group of new commercial mortgage REITs that trade at 1.0x book value. However, as Apollo begins to invest the proceeds from its IPO, we expect the stock to trade at a premium to book value similar to the peer group of residential mortgage REITs that trade at 1.2x book value.

Commercial Mortgage REIT Comparable Company Analysis as of 12/07/09 (amounts in millions except per share data)

Price Market Book Price/

Ticker Company Name 12/07/09 Value Value (1) BV (1)

New Commercial Mortgage REITsCLNY Colony Financial, Inc. 19.31 283$ 18.81$ 1.0xCXS CreXus Investment Corp. 13.42 243$ 14.18$ 0.9xSTWD Starwood Property Trust, Inc. 19.38 922$ 18.65$ 1.0x

Mean 87$ 1.0x

Median 283$ 1.0x

Residential Mortgage REITsAGNC American Capital Agency Corp. 26.53 645$ 22.23$ 1.2xNLY Annaly Capital Management, Inc. 18.45 10,199$ 16.52$ 1.1xCIM Chimera Investment Corporation 3.96 2,654$ 3.27$ 1.2xHTS Hatteras Financial Corp. 29.55 1,070$ 26.07$ 1.1xRWT Redwood Trust, Inc. 14.47 1,124$ 11.68$ 1.2x

Mean 3,138$ 1.2x

Median 1,124$ 1.2x

ARI Apollo Commercial Real Estate Finance, Inc. 17.66 190$ 18.40 1.0x (1) EPS and book value are consensus Street estimates per SNL Financial as of 12/07/09, unless

otherwise noted. Source: Thomson Reuters, SNL Financial, Raymond James estimates.

Multiple Comparison

On a multiple basis, shares of Apollo trade at a premium to the peer group of new commercial mortgage REITs. Our EPS estimates in 2010 and 2011 are $1.66 and $1.93, respectively. ARI shares are trading at 10.6x our 2010 EPS estimate and 9.2x our 2011 EPS estimate. This represents premiums of 11% and 5% in 2010 and 2011 over the peer group, respectively, which carry an average EPS multiple of 9.6x and 8.8x in those years. However, given that Apollo and its peers have no track record to date (all are still primarily comprised of cash) and their relative earnings potential is hypothetical at this point, we believe peer multiple valuation is less relevant for the time being and should be taken with a grain of salt. With that said, once Apollo and its peers have established their initial investment portfolios, we would not be surprised to see shares of ARI trade at a premium to the peer group on a multiple basis, given Apollo’s high credit quality focus and more predictable cash flows.




Commercial Mortgage REIT Comparable Company Analysis as of 12/07/09 (amounts in millions except per share data)

Price Market

Ticker Company Name 12/07/09 Value 2009E 2010E 2011E 2011E 2010E 2011E

New Commercial Mortgage REITsCLNY Colony Financial, Inc. 19.31 283$ 0.06$ 2.23$ 2.14$ -4.0% 8.7x 9.0xCXS CreXus Investment Corp. 13.42 243$ 0.08$ 1.41$ 1.66$ 17.7% 9.5x 8.1xSTWD Starwood Property Trust, Inc. 19.38 922$ 0.03$ 1.81$ 2.11$ 16.6% 10.7x 9.2x

Mean 87$ 10.1% 9.6x 8.8x

Median 283$ 9.5x 9.0x

Residential Mortgage REITsAGNC American Capital Agency Corp. 26.53 645$ 6.10$ 4.95$ 4.33$ -12.5% 5.4x 6.1xNLY Annaly Capital Management, Inc. 18.45 10,199$ 2.72$ 3.00$ 2.73$ -9.0% 6.2x 6.8xCIM Chimera Investment Corporation 3.96 2,654$ 0.46$ 0.62$ NA NA 6.4x NAHTS Hatteras Financial Corp. 29.55 1,070$ 4.82$ 4.99$ 4.90$ -1.8% 5.9x 6.0xRWT Redwood Trust, Inc. 14.47 1,124$ 0.30$ 1.72$ NA NA 8.4x NA

Mean 3,138$ -7.8% 6.4x 6.3x

Median 1,124$ 6.2x 6.1x

ARI Apollo Commercial Real Estate Finance, Inc. 17.66 190$ (0.02)$ 1.66$ 1.93$ 16.2% 10.6x 9.2x

EPS EPS Mutliple (1)Growth

EPS

(1) EPS and book value are consensus Street estimates per SNL Financial as of 12/07/09, unless otherwise noted. Source: Thomson Reuters, SNL Financial, Raymond James estimates.

Dividend Yield

Apollo has yet to announce a dividend and will likely initially pay a “stub” dividend in late 2009 or early 2010 as the company ramps up its investment portfolio. Once Apollo has fully invested the proceeds from its public offering, we expect the company will pay a normalized annual dividend of $1.66 per share, which equates to a dividend payout ratio of 100% and implies a dividend yield of 9.4% based on ARI’s stock price as of December 7, 2009. This compares favorably to the 3.8% average dividend yield of the NAREIT Equity REIT Index.

REITs are required to pay out a dividend of at least 90% of taxable income, and in Apollo’s case, taxable income and net income should be one and the same (as the company does not own real estate and therefore records no depreciation expense). Thus, we arrive at a dividend range of $1.49-1.66 per share (payout ratio of 90-100% of taxable income) based on our 2010 EPS estimate of $1.66. In 2011, we are projecting a dividend range of $1.74-1.93 per share based on our 2011 EPS estimate of $1.93. For the full-year 2011, we believe the company will pay an annualized rate of $1.80, which equates to a payout ratio of 93%, an 8.4% growth rate over the 2010 pay rate.




Conclusion

We are initiating coverage of ARI shares with an Outperform rating and a $20 price target. Our price target is based on the stock trading at 1.1x book value of $18.40, as we believe Apollo will trade at or above book value as the market gets more comfortable with their investment program, similar to the valuation of more established residential mortgage REITs (trade at 1.2x book value). Given the large void of capital in the commercial real estate market, we believe Apollo has the infrastructure and experienced management team to take advantage of opportunities. Apollo’s more conservative investment profile (only performing loans) and conservative leverage (~35%) will provide ARI shareholders with a very attractive yield on a risk/return basis.

Public companies mentioned in this Document.

Recent RJ Rating RJ Rating Company Name Ticker Exchange Closing Price (if Applicable) Organization American Capital Agency Corp. AGNC NASDAQ 26.53 Annaly Capital Management Inc. NLY NYSE 18.45 Chimera Investment CIM NYSE 3.96 Colony Financial Inc. CLNY NYSE 19.31 CreXus Investment Corp. CXS NYSE 13.42 Hatteras Financial Corp. HTS NYSE 29.55 Redwood Trust Inc. RWT NYSE 14.47 Starwood Property Trust Inc. STWD NYSE 19.38 Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be approved for sale in all U.S. states.




Income Statement

EPS: (0.01)$ (0.01)$ (0.02)$ 0.26$ 0.48$ 0.41$ 0.47$ 1.66$ 1.93$

Apollo Commercial Real Estate Finance, Inc.EARNINGS MODEL

($ in thousands unless indicated)3Q09A 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E

Net Investments 0 63,000 63,000 210,000 300,000 365,000 430,000 430,000 690,000

RevenuesInterest Income 1 1,523 1,524 4,375 7,223 10,166 11,873 33,637 64,553

ExpensesInterest Expense - - - - 411 201 870 1,482 6,185

Management Fees - 717 717 717 717 1,204 1,204 3,842 6,347 REIT Expenses 92 893 985 893 893 1,229 1,229 4,244 5,972

Total Expenses 92 1,611 1,703 1,611 2,022 2,634 3,302 9,568 18,504

Net Income (91) (88) (179) 2,764 5,201 7,533 8,570 24,068 46,049

Net Investment Income 1 1,523 1,524 4,375 6,812 9,965 11,003 32,154 58,368 EBITDA (91) (88) (179) 2,764 5,612 7,734 9,440 25,551 52,234

Interest Coverage Ratio NA NA NA NA 13.7x 38.4x 10.9x 17.2x 8.4x

Average Common Shares and Units Outstanding (Diluted) 10,500 10,500 10,500 10,758 10,758 18,258 18,258 14,508 23,883

Net Income/Share (0.01)$ (0.01)$ (0.02)$ 0.26$ 0.48$ 0.41$ 0.47$ 1.66$ 1.93$

Div/share -$ -$ -$ 0.42$ 0.42$ 0.42$ 0.42$ 1.66$ 1.80$ EPS Payout (fully diluted) 0% 0% 0% 161% 86% 101% 88% 100% 93%

Closing Price, End of Period 18.30$ 18.57$ 18.57$ 18.95$ 19.32$ 19.71$ 20.11$ 20.11$ 21.34$ Equity Market Cap. 196,862 199,815 199,815 203,811 207,888 359,881 367,079 367,079 549,649 Consolidated Debt - - - - 45,046 20,922 85,922 85,922 214,981 Total Capitalization 196,862 199,815 199,815 203,811 252,934 380,803 453,001 453,001 764,630 LT Debt/Total Cap. 0.0% 0.0% 0.0% 0.0% 17.8% 5.5% 19.0% 19.0% 28.1%

LT Debt/Assets 0.0% 0.0% 0.0% 0.0% 17.7% 5.7% 20.0% 20.0% 31.2%

Book Value Per Share $18.40 $18.40 $18.40 $18.40 $18.40 $18.19 $18.19 $18.19 $18.36Price/Book 1.0x 1.0x 1.0x 1.0x 1.1x 1.1x 1.1x 1.1x 1.2x

Return on Equity 0.0% 3.1% 3.1% 8.8% 13.8% 12.0% 13.3% 12.1% 13.3%Return on Assets 0.0% 2.9% 2.9% 8.3% 10.7% 10.9% 10.2% 10.2% 9.9%




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Ratings and Definitions Raymond James & Associates (U.S.) definitions

Strong Buy (SB1) Expected to appreciate and produce a total return of at least 15% and outperform the S&P 500 over the next six months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months.

Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12 months.

Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities.

Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.




Raymond James Ltd. (Canada) definitions

Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months.

Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months.

Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities.

Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.

Raymond James Latin American rating definitions

Strong Buy (1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Buy (2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Hold (3) Expected to perform in line with the underlying country index. Underperform (4) Expected to underperform the underlying country index.

Raymond James European Equities rating definitions

Strong Buy (1) Absolute return expected to be at least 10% over the next 12 months and perceived best performer in the sector universe. Buy (2) Absolute return expected to be at least 10% over the next 12 months. Fair Value (3) Stock currently trades around its fair price and should perform in the range of -10% to +10% over the next 12 months. Sell (4) Expected absolute drop in the share price of more than 10% in next 12 months.

Rating Distributions

Out of approximately 769 rated stocks in the Raymond James coverage universe, 48% have Strong Buy or Outperform ratings (Buy), 44% are rated Market Perform (Hold) and 8% are rated Underperform (Sell). Within those rating categories, 24% of the Strong Buy- or Outperform (Buy) rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 13% of the Market Perform (Hold) rated companies are or have been clients and 14% of the Underperform (Sell) rated companies are or have been clients.

Suitability Categories (SR)

For stocks rated by Raymond James & Associates only, the following Suitability Categories provide an assessment of potential risk factors for investors. Suitability ratings are not assigned to stocks rated Underperform (Sell). Projected 12-month price targets are assigned only to stocks rated Strong Buy or Outperform.

Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.

Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, possibly a small dividend, and the potential for long-term price appreciation.

Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets.

High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal.

Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.

Raymond James Relationship Disclosures Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months.

Company Name Disclosure

Apollo Commercial Real Estate Finance, Inc.

Raymond James & Associates co-managed an initial public offering of 10.0 million ARI shares at $20.00 per share in September 2009.




Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. We employ several methods in valuing mortgage REITs such as Apollo, including book value analysis and peer group comparison, which includes dividend yield and multiple analysis.

Risk Factors General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

Specific Investment Risks Related to the Industry or Issuer

REITs Industry Risk Factors Investment Risks An investment in any REIT involves certain risks particular to the company and to the real estate industry in general. Prospective investors should carefully consider the appropriateness of the stock and carefully consider the following risk factors and critical variables before making an investment.

Economic Risk An extended downturn in the national economy could negatively affect consumers' disposable income and spending patterns, job growth, travel expenditures, interest rates, and subsequently, the stock price of REITs in any sector. In addition, fluctuations in certain local or regional markets throughout the country could impact key properties in a REIT's portfolio, which could be located anywhere in the nation geographically. In a depressed economic environment, access to equity capital may also be restricted or costly, to the point of becoming impractical. It is important to note that the performance of the real estate industry in general typically trails that of the national economy.

Interest Rate Risk The REIT industry has historically been negatively correlated with changes in interest rates. In addition, many REITs are exposed to variable interest rates, which could lead to increased interest expense during times of rising interest rates and could ultimately impair net income. Certain parts of a REIT's business may be dependent upon achieving a spread between its cost of financing and the yield achieved on acquisitions. In an environment with high or rising interest rates, a REIT's ability to attain this spread may be diminished.

Capital Markets Risk Access to the capital markets is crucial to the growth prospects of any company and REITs are no exception. If the ability to execute deals involving the issuance of debt or equity securities becomes impaired, the end result could be minimal or no growth for the companies. The loss of capital market access could be caused by a level of financial leverage through mortgage financing of properties that is too high, an increased tenant credit risk, or any other factor that might be seen to significantly impede REIT operations.

Regulatory Risk The real estate industry is subject to extensive and complex regulations. Although most REITs have fairly limited exposure to Medicaid and Medicare reimbursement, a material change in reimbursement rates from Medicaid or Medicare could adversely affect the operators/lessees of healthcare-related REITs and perhaps their ability to pay lease obligations to the REIT. In addition, the industry is subject to the extensive and changing federal, state, and local regulations governing the protection of the environment. There is a risk that unforeseen future regulations may adversely affect a company's development schedule, net income, or competitive position. REITs also enjoy the benefit of tax exemption at the corporate level on certain parts of income; any regulatory change to this status may make REIT shares relatively less attractive and impact demand for shares.




Tenant Concentration Any REIT may have significant tenant concentration risk, sometimes deriving material amounts of revenue from a particular tenant. Any negative change to a high contributor tenant may negatively affect a REIT's revenue, profits, and subsequently, the stock price.

Company-Specific Risks for Apollo Commercial Real Estate Finance, Inc. Competition Apollo may face diminishing returns as banks and other financial institutions re-enter the market over the next several years. The disarray in the financial industry over the past couple of years has trimmed the field of lenders in the commercial real estate sector. Apollo plans to capitalize on the lack of debt financing availability by originating whole loans and investing in commercial real estate debt investments. However, Apollo faces competition from well-capitalized institutions such as insurance companies, pension funds, and other opportunity funds. One factor that may work to Apollo’s advantage is the size of the loans the company plans to originate, which should be in the $25-50 million range. Insurance companies and pension funds typically deal in larger loans (typically $75 million or higher), placing Apollo’s target loans below the investment threshold for most of these institutions. Apollo also faces competition from other mortgage REITs, as three new commercial mortgage REITs have gone public in recent months – Starwood Property Trust (STWD), Colony Financial (CLNY), and CreXus Investment Corp. (CXS). Each new mortgage REIT employs a different investment strategy (with varying risk tolerances), and in aggregate the companies raised ~$1.5 billion ($3 billion with 50% leverage). There will naturally be a certain amount of overlap in the assets these companies target, but the total ~$1.5 billion is a minimal amount of capital given $1.4 trillion of commercial real estate debt maturities over the next five years. It also appears the wave of mortgage REIT IPOs has ended for the time being, but if the opportunity in the sector persists we may see new competitors emerge. The banking sector is in the process of deleveraging, limiting the supply of capital from what has been a traditional source of debt financing for commercial real estate. A large number of commercial real estate loans are held by banks – roughly $800 billion maturing through 2014 according to research firm Foresight Analytics – with two-thirds estimated to be underwater. However, many of these properties still generate sufficient cash flow to cover the debt payments, and some banks have decided to extend these maturing loans. This practice may reduce the opportunity set for Apollo, though given the magnitude of the commercial real estate capital requirements over the next few years, we believe Apollo will still have ample opportunities. As the economic recovery unfolds and the banking sector recapitalizes, we expect increased competition will lead to a contraction in spreads. Nevertheless, we believe the window for Apollo to reap above-average risk-adjusted returns will persist for at least the next 12-24 months.

Compressing Investment Spreads; Interest Rate Risk Mortgage REITs earn the spread between the yield of their investment portfolio and the cost of capital, and to the extent lending spreads compress, the company’s earnings growth may be affected. In the current environment, Apollo believes it can generate an unleveraged, blended 11-12% return on its debt investments. However, we expect these yields to decline as the credit markets improve over time, placing future earnings growth at risk. In the past, compressing spreads have led some mortgage REITs to take on higher leverage or take on riskier, higher yield loans in order to boost returns, increasing their risk profile. In real estate downcycles, when cash flows diminish and property values plunge, this has proven disastrous for the mortgage REIT sector. Falling into this “yield trap” or employing higher leverage to amplify returns remains our largest concern in regards to the long-term viability of mortgage REITs in general. In Apollo’s case, we believe the company’s stringent, credit-oriented approach and highly experienced management team should help mitigate this risk. Additionally, we believe Apollo's share price is susceptible to interest rate swings as investors compare mortgage REIT dividend yields to alternative fixed income or yield-related investments. Much like a bond, a rising interest rate environment may place downward pressure on the stock price (and vice versa). Interest rate movement will also cause fluctuations in Apollo’s earnings stream, as the company is expected to finance some of its debt investments with a floating rate credit facility. This introduces refinancing risk as the company uses short-term financing for longer-term debt investments.

Blind Pool Apollo does not own any assets at the moment. Although Apollo has outlined its target assets and allocations, the company has yet to announce any investments to date. We also cannot analyze the credit risk of the company’s loans/debt investments until the portfolio has been established. In the meantime, investors are essentially placing their faith in the management team to identify opportunities that provide a favorable risk/reward profile and their ability to invest the cash proceeds from the IPO in a relatively short period of time. If the company is slow to invest the IPO proceeds or falls short of its target return on investments (expected at 11-12%), our estimates may be at risk.




Conflicts of Interest Apollo Commercial Real Estate Finance (ARI) may engage in transactions with sponsor Apollo Global Management or its affiliates that may conflict with the best interests of shareholders. Apollo Global Management beneficially owns roughly 4.6% of Apollo Commercial Real Estate Finance’s outstanding common stock. Additionally, the company is externally managed by members of the Apollo Global Management organization. Any transactions between Apollo Commercial Real Estate Finance and Apollo Global Management may result in less favorable terms for the company than if the agreement had been negotiated at arm’s length. In order to mitigate this risk, all transactions with Apollo Global Management require approval by a majority of the company’s independent directors. As an asset manager, Apollo Global Management controls multiple investment funds, potentially creating a conflict of interest if Apollo Commercial Real Estate Finance’s target assets overlap with the suitability for another Apollo Global Management-sponsored vehicle. Currently, no other Apollo Global Management vehicle focuses on Apollo Commercial Real Estate Finance’s target assets as part of its core investment strategy and Apollo Global Management has agreed it will not sponsor or manage any U.S. publicly traded REIT that invests primarily in Apollo Commercial Real Estate Finance’s target asset classes. However, Apollo Global Management may sponsor another U.S. publicly traded REIT that invests generally in real estate assets but not primarily in Apollo Commercial Real Estate Finance’s target assets, while other Apollo Global Management sponsored entities may also invest in Apollo Commercial Real Estate Finance’s target asset classes from time to time as part of their larger business strategies.

Capital Markets Risk Mortgage REITs, such as Apollo, are dependent on access to the capital markets for growth. If the ability to execute deals involving the issuance of debt or equity securities becomes impaired, the end result could be minimal or no growth for the company. The loss of capital market access could be caused by a level of financial leverage that is too high, increased loan loss risk, or any other factor that might be seen to significantly impede REIT operations.

Government Restrictions Apollo’s yield and investment timeline may be affected by the company’s inability to participate in the TALF program. Starwood Property Trust Inc. (STWD), a commercial mortgage REIT and a peer to Apollo Commercial Real Estate, was asked by the New York Fed to not participate in the most recent CMBS offering (Developers Diversified Realty – DDR) due to fears that international shareholders (of any public company) may benefit from TALF financing. On Starwood Property Trust’s 3Q09 conference call, CEO Barry Sternlicht told investors the company was working with other “compatriots in the space” to address the issue with the Fed and believes the Fed will publish updated regulations in the next 30 days (from 11/16/09). While TALF-financed CMBS issues are not a main focus of Apollo, the inability to participate in the programs could negatively affect the company’s yield projection or investment timeline.

Dividend Risk Apollo intends to pay out ~100% of taxable income. After the company invests all of its cash proceeds and then invests its borrowed proceeds, we expect the company to raise additional equity if it continues to see investment opportunities. Additional equity raises could result in a temporary dividend cut as the company intends to pay out 100% of its taxable income (more shares means a lower dividend). We would expect the company to increase the dividend as it invests the proceeds of any additional equity raises.

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The Raymond James Real Estate Research Team

Paul Puryear, Director of Real Estate Research

William Crow, Lodging/REITs

Buck Horne, CFA, Housing/REITs

RJ Milligan, REITs

Dan Amer, Sr. Research Associate

Alexander Sierra, Sr. Research Associate

Jeff Koche, CFA, Research Associate

Collin Mings, Research Associate

Ryan Zaborske, Research Associate

Apollo Initiating

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