Q3 2021 Apollo Commercial Real Estate Finance Inc Earnings Call
Good day, and thank you for standing by welcome to the Apollo commercial real estate Finance third quarter 2021 earnings Conference call.
At this time all participants are in listen only mode. So if you require operator assistance during the call. Please press Star then zero.
After the presentation, there will be a question and answer session.
To ask a question during the session you will need to press Star then one.
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 S. E. T 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.
Our 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 Dot Apollo REIT dot com or call us at 2125153200.
At this time I'd like to turn the call over to the company's Chief Executive Officer Stuart Rothstein.
Thank you good morning, and thank you to those of US those of you who are joining us. This morning on the Apollo commercial real estate finance third quarter earnings call.
Joining me this morning are Scott Weiner and Jai Agarwal.
As we move towards the end of 2021 we continue to see similar trends from prior quarters in the commercial real estate market.
Specifically the underlying performance of most commercial real estate continues to recover at a measured pace consistent with the recovery in the overall economy.
There have been clear property type and geographic winners as well as those asset types and regions that remain challenged.
Similarly, an improving economy should be positive for the commercial real estate industry and asset level metrics should continue to improve.
The operating performance real estate investment and financing activity recovered sooner and more quickly.
<unk> with the broad and rapid recovery across the capital markets.
At present that.
The pace of activity continues to accelerate and regardless of the asset class. The combination of a low interest rate environment and significant fund flows is supporting robust transaction volume and a well funded high highly liquid financing market.
The commercial real estate lending market has surpassed 2019 levels and is on track for a record year in terms of lending volumes across C. M. B S banks insurance companies and non bank lenders such as they are right in the highly competitive environment the strength of the Apollo commercial.
Real estate debt platform again has proven to be incredibly beneficial as we have complete.
TS, we continue to recognize the importance of ESG issues to our stakeholders and as a reminder.
Incorporates consideration of ESG issues into our investment analysis and decision making processes.
Lastly, I wanted to take a moment to thank our CFO Jai Agarwal, who will be leaving us early in the new year to pursue other opportunities.
<unk> has made valuable contributions to <unk> during his tenure and we will be sorry to see him go one of his greatest contributions was building a strong team below him and he will leave us in good hands.
We have already begun a search for his replacement and we expect his departure will be seamless.
And with that I will turn the call over to Jay for the last time to review our financial results.
Uh huh.
Our distributable earnings for the quarter were $49 million.
45 cents per share.
And GAAP net income available to common stockholders.
$57 million.
What do you sense a diluted share.
GAAP book value per share, Brian to depreciation and the general seasonal reserves increased slightly.
$15 54.
From $15 48 at the end of last quarter.
This increase was primarily due to unrealized gains on currency hedges.
The loan portfolio at quarter end was $7 3 billion.
Decline from the previous quarter due to increased loan repayments.
The portfolio had a weighted average unlevered yield of five 2%.
And the remaining fully extended term of just under three years.
Approximately 89% of our floating rate loans have LIBOR floors that are in the money today.
With a weighted average floor of 1.0%.
During the quarter, we made a 100 $180 million of first mortgage $141 million of which was funded.
We also made $113 million of add on fundings were previously closed loans.
With respect on our borrowings we are in compliance with all covenants and continue to maintain strong liquidity.
We increased our secured facility with Jpmorgan to one 5 billion and.
And extended the maturity to September of 2024.
We ended the quarter with almost $600 million of total liquidity, which was a combination of cash and capacity on our lines.
Our debt to equity ratio at quarter end decreased slightly to two two times.
And we ended the quarter with $1 7 billion.
Unencumbered loan assets.
Lastly, I wanted to thank Scott Stewart.
The board of NII and most importantly, all my colleagues at Apollo for the support over the last five and a half years.
I feel very fortunate to have been on.
For this opportunity and I will truly miss working with this very talented group of individuals.
And with that I'd like to open the lines for questions. Operator. Please go ahead.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.
Our first question comes from Doug Harter with credit Suisse.
Thanks.
I know it.
Oh, it's tough to read them with too much into just a few loans, but it looks like the yield on new loans. This quarter was there was significantly lower than prior quarters.
Can you just talk about whether those were kind of one offs or is that kind of where you see the market for new loan opportunities today.
I think it's a mix of both but I think directionally, it's fair to say that spreads are tightening.
I think you've heard me say on previous calls, but it's clearly a market that.
Favors the borrower versus the lender and I think sitting in my seat or Scott sitting at his seat I don't think any of us are surprised that.
Things are tighter just given where yield alternatives in general are trading these days, so I'm not sure I would.
Take what occurred in the quarter and describe it as the go forward returns on a go forward basis, but I think it's fair to say.
That certainly relative to where we sit today versus where we set two or three years ago. The ROA is achievable by putting dollars out on a call. It <unk>.
Light basis risk for risk are certainly tighter today than they were two or three years ago.
Yes, Scott I would just add.
Financing costs have also have come in and leverage more available. So we've also found that our financing costs in Europe are more efficient than the U S. So the mix matters right. So that's an unlevered yield.
But I think when you look at it on a levered yield after the financing.
Turns are in line with what we've always targeted.
And just Scott if you could just remind me of just kind of what what those levered returns or that range you're targeting today.
I think we've always thought about 11% plus Doug I think we were fortunate enough to have some years, where we could.
Over achieve that but you know for the.
The 12 years of existence.
We've always thought in terms of Levered Roe.
All at plus or minus 11%.
Got it and while there might.
It might be different than the asset yield and the funding is that pretty consistent across the U S and Europe.
Yeah.
As I indicated in my comments.
A little better in Europe.
But net net if you look at.
What we're expecting to do in the fourth quarter.
I think youll see us achieve those types of returns both domestically as well as internationally.
Great. Thank you guys sure.
Our next question comes from Tim Hayes with BT I T.
Hey, good morning Stuart.
My first question just about the broader Apollo parent recently announced its goal to reach a trillion in AUM by 2026, and I'm, just curious where you think real estate credit fits into that initiative and you know do you expect five years now we see the team and origination capacity has materially increased.
And does that mean that <unk>.
He has also gotten bigger just curious how you think <unk> fits into that that broader initiative.
Yes, it's certainly unknown, what's going to happen in light of what markets afford opportunity, but I think it's fair to say the real estate credit business broadly today at Apollo is roughly a $35 billion business of which.
<unk> represents about a quarter of that business.
Yeah, I think we continue to feel optimistic about our ability to originate transactions broadly speaking across IRI and other places that we originated for the real estate credit team is on pace for a record year just in terms of sheer transaction volume.
And hopefully my comments got the point across to people on the call that.
We don't spend a lot of time thinking about quarters and by the time, we get to the end of the year for MRI I think we're going to do very much.
Much in line with sort of pre pandemic origination levels on behalf of <unk>. So I think their continued support for the real estate credit platform. It happens too.
Worked very well in combination between both IRI and what we do for our insurance affiliated insurance company balance sheet and mhm expectation.
Expectation is for.
Continued growth from this point forward, but obviously subject to what goes on in the market.
Okay.
Makes sense and then can you expand you you kind of gave a little bit of color just on New York City office trends and maybe you could expand there I feel like headlines. These days are mixed with both positive and negative trends. Kevin appreciate hearing more about the fundamentals and assets underlying your specific loan portfolio or that.
And anything from the the equity team you can share or just any other observations you have as it relates to New York City office.
Yeah, Yeah, yeah yeah.
Giving you the perspective, both as a you know what we've done for MRI as a lender, but also what we're doing as a firm as a tenant that continues to be committed to New York office space I think what we're finding.
Anecdotally is that.
There continues to be strong foot traffic and.
A healthy level of interest for newly created or recently renovated product and obviously given what <unk>.
<unk> does as a lender where typically lending in situations, where the real estate is being upgraded and improved.
There's clearly a desire for those that are interested in New York office space to focus on what has been.
Most newly created and what is most current in terms of finishes standards systems etcetera. So have definitely been encouraged by that across our transitional portfolio and I think importantly, I think as you get to older product more commoditized product.
You.
You are definitely seeing.
More in the way of sublease space and more in the way of product languishing, because I think it's not uncommon as we've seen as I've seen in my career through multiple cycles. When there is a little bit of softness in the market.
It affords those who are looking.
To lease the ability to look.
Look at newer space that they didn't think they might be able to afford them.
Previously so I think theres more continued bias towards.
Hi, and newly created space and I think Commoditized space will continue to struggle.
Mhm.
Got it got it yeah that I feel like that's pretty consistent with what we've been hearing from some of your peers as well. So I appreciate those insights and just kind of a follow up on an office and this is more in the <unk> market, but you know I recently.
Recently read a stat.
That theres about kind of like 35 billion or so of see MBS of office loans within <unk> that are scheduled to mature.
Over the next call it three years or so and a decent portion of that has 25% or more of their tenant roll expiring over that timeframe. So I'm, just curious going into potentially higher rate environment with.
The notable headwinds to certain office loans do you think that that creates any disturbance in the in the sea MBS market or has the potential to creating disturbance and then on the other side does that create opportunities for transitional lenders. If some of these loans can be refinanced.
No I think it's a great question I think it's probably too early to know.
You know what the net result is going to be I think what you know what we need to factor into all of that is just the sheer amount of.
Capital is continuing to seek opportunity and then things sort of never get to the point where it creates.
Is your question I think implied real distressed and real opportunity probably too early to know I also.
Your question was premised on the notion of a higher rate environment and.
For some of us that are really old like myself, it's hard to believe that we're sitting here with the 10 year at $1 64, and it might go to two and all of a sudden that defines a high rate.
Oh, yeah yeah.
Look I think a lot can happen in three years I think as I indicated in my comments I think.
There is a path towards continued improvement steady improvement and not a lot of distress I think if the economy continues.
Along its you know gently sloping upward trend in terms of recovery.
But we like you as I think was implied by your question.
We do keep a close eye on what the implications of inflation in a higher rate environment might be on the economic recovery over the next one to two years, but I think it's too early to have any real sense of conviction at this point.
Fair enough. Thanks for taking my questions. This morning anytime.
Our next question comes from Stephen laws with Raymond James.
Good morning.
Got it.
Hey.
We've got a quarter on the hotel and the Oreo maybe wanted to touch on that kind of Howard Howard trends going with the asset and then think about the operating expenses, how should I think about fixed versus variable expenses as.
You know as things improve with the asset.
And then I think look I think to your point, we're only a month into the quarter into this but we obviously know the acid extremely well given our history with it.
They are our I think we've done as an effect of a job as we can in terms of cutting expenses at the asset and I'm not sure there's much more to.
To cut their I think before the.
I'll call it the Delta uprising over the summer the asset was actually on a nice path to recovery from a revenue perspective.
I think we feel.
Optimistic that there's more improvement to come on the revenue side as opposed to the expense side as we move forward in future quarters and I also think.
As D C begins to open up.
On a go forward basis, I think there might be a path towards a.
Exit at some point before the asset gets to call. It full stabilization from a performance perspective, because I think there were those on the capital side that would be what we'd be interested in acquiring an asset such event such as this to ride the upside and from our perspective.
We'd rather turn the capital into.
Our performing assets sooner rather than later, if we could.
I appreciate the update and.
Switching to the Brooklyn multifamily I know it looks like the maturity in December of this year.
I think you also recently reduced your specific seasonal allowance sort of given a it looks like the Q says a more favorable market outlook. So can you maybe give us an update on the on that Brooklyn asset and how you think that plays out in the coming months.
Yeah. So we've we've formed a partnership.
With a well.
Well known real estate developer known as the wet cough companies, we are going forward in partnership with them in creating what will be a.
Plus or minus 50 storey multifamily tower, a combination of market rate and affordable units affair.
Effectively the demolition of the legacy assets has been completed we would expect to do foundation work sometime early next year. This will ultimately.
Ultimately be a.
Yeah, two year build a one year lease up so you're really looking about like a three year development project that will take us into 2024, though I do think.
Sometime during next year.
We will put construction financing in place I think there is.
Given the strength of Brooklyn, given the strength of the New York multifamily market recently.
I think there is potential for <unk>.
Real upside to IRI economically if we execute correctly.
But this is a you know a two.
Two to three year project with construction risk lease up risk, so we need to execute well but.
I like where we sit today looking forward in terms of what the potential is in terms of economic recovery and benefit.
Great switching to the leverage side I know prepayments have been a little elevated but you cited I think roughly 900 million of fundings expected this quarter.
You know as we move out of this kind of some turnover in the portfolio and then the shift really to more of a focus on on first mortgages leverage like Nick was to point to at the end of the quarter, where where what is the target for kind of a higher mix of senior loans.
You know in six or 12 months of where you think you would like to run the portfolio from a leverage standpoint.
Yeah, I think if.
When you think about asset specific leverage combined with.
Wanting to maintain access to the various capital markets that we've been able to access in terms of the bond market. The convertible notes market. The term loan market and also I think coming out of the pandemic very convinced that it is a prudent corporate finance strategy to keep some portfolio.
Oh of unencumbered assets on the balance sheet I think at the end of the day when you sort of factor that all in.
We probably run this business at somewhere between.
Two and a half to two and three quarters turns of leverage on a sort of a steady state basis.
Great I appreciate the color comments, Jordan and just in closing Jay Good luck in the future have enjoyed working with you and I appreciate your insight over the years.
Thank you.
Yeah.
Our next question comes from Jade Rahmani with K B W.
Hi, this is obi.
My first question is what drove the sequential decrease in income from subordinate loan is that related to the subordinate Lilly that is held for sale and can you give any color on that at that.
Yeah, I think what what's driving the decrease in income on subordinate loans is.
Both just a shrinking of our mezzanine loan portfolio in general and then I'd also refer you.
To the comments in the 10-Q around.
A portion of the mezzanine loan on what we refer to as the Steinway project, where we've also you know take.
<unk> taken some action there.
Okay and my next question.
Further provision recovery.
In General I think you know again there.
Comment I just made to Steven on the.
Fulton Street asset in Brooklyn leaves me optimistic about around that asset, though I think there's.
A lot of execution work to go I think the.
I think the provisions we've got today I think are appropriately reflective of the mix between.
Our perception of value execution risk and path to resolution that being said I think so.
Sitting here today, I think both the Brooklyn asset and the Miami asset offer the.
Best potential prospects for additional economic recovery, but I think they both.
Entail.
A lot of execution risk complexity and time and I think until we have more visibility there I wouldn't expect any near term change.
Got it and were there any significant count loan modifications during the quarter.
No no no.
Okay, and just lastly has attributable EPS reached a stabilized level that zero point 35 cents or is there still excess earnings.
Hum.
Thank the Aps, which we out earned the dividend level, which we out earned in the first two quarters I think we covered it in the third quarter I think part of it depends on how how capital efficient we are in doing the best we can to line up.
The combination of both repayments and new deployment, which is always a.
A bit of a challenge in a market that is not a publicly traded market, but a market that is based on private origination and timing is a little bit out of our control I think there's also a <unk>.
Part of it depends on.
How quickly we were able to reach resolution on some of the focus assets that are not generating a stabilized level of income or return today. So I think long term.
There is potential.
Beyond the 35, but I think in the near term we've got some challenges both in terms of capital efficiency and focused assets that we need to work through.
Got it thanks, so much for taking my question sure.
Sure.
As a reminder, if you'd like to ask a question at this time that is star then one.
Our next question comes from Rick Shane with Jpmorgan.
Hey, everybody. Thank you for taking my questions and thank you.
And thank you for all of your help over the years, we will Miss you.
Stuart you talked about.
The competitive pressures and how that is impacting spread and frankly that makes a great deal of sense given our.
Both the <unk>.
Technical factors, we're seeing in terms of interest rates and the supply of capital in the space.
I'm curious if you were seeing the same type of erosion in terms of structure in any way, whether its covenants or business plans that you think are more aggressive I'm just curious because it sounds in some ways like youre, a little bit more cautious.
Recognizing what's going on competitively in the market from a pricing perspective.
No look I would say at a high level and in a good way and I always go back to.
Oh, six or seven is my touch point I think in a good way youre not seeing sloppiness in on it.
On any sort of measurable level, just yet and I think that's a good thing I think.
Thank documents or documents I think structures, our structures I think to the extent people want to compete on a.
A different view of underwriting a different view of pricing I think that's fine and I think that's a reasoned way to compete on any given day, but I think as of sitting here today.
I don't think we've seen any.
No noticeable weakening in an overall approach to the market amongst the peer set or their competitive set I think the one thing we continue to.
Watch very closely is obviously the growth in the CRE CLO market, which I think some of you have heard me talk about for 12 years now it is something that.
You know is potentially.
Yeah cause for concern and maybe that's a little bit of PTSD coming out of 2008, but I also want to be very clear that to the extent, our our competitors who are committed balance sheet lenders just at a moment in time choose to finance their.
<unk> sheet through a CLO structure versus some sort of other type of financing structure I don't take that concerns me at all I think that is a moment in time corporate finance decision I think what we.
Try and track as closely as we can and what would be the real.
Concern for us at some point in the future. If it became truly prevalent is those who enter the securitization market at a moment's notice just because they want to originate to securitize and have no intention of being a long term committed.
Balance sheet lender, we really again haven't seen that in scale, yet, but again the types of things that I look at that you probably look at as you think about it.
A potential overall weakening in the market those are the types of things we think about.
Got it that's very helpful.
To extend that now that the portfolio was 40% in Europe.
You had mentioned that the competitive landscape in Europe is.
Theres less competition in Europe.
I'm clearly that impacts pricing in.
I'm curious if you think you also get better struck for lower potential credit risk because of the reduced.
Competitive intensity in Europe.
Yeah again, maybe on the margin and just to make sure I put my comments in context.
Less less competition doesn't mean no competition right. So there's still plenty of people that we compete against I think.
Yeah, I think on par or we've been able to.
A win some large mandates on our own but also I think our team in Europe has done a fantastic job of partnering with others to win large mandates and as effectively.
<unk> also done a great job of winning repeat business with equity sponsorship that seems too.
Value working with us and I think we're at.
Where we can differentiate on structure, Rick and this might be a bit of an esoteric point, but it's not necessarily on you.
Yeah.
Better structures that are much tighter for us in terms of protecting a lender, but when you think about the different regions within Europe in the different countries in Europe and as I've said many times like Europe is not really a thing it's just a continent, where a bunch of different countries reside.
I think we've proven our worth as a lender in.
Our team has done a fantastic job of figuring out.
How to make structures work for us in the countries in which we lend in and I think we've made that process very effective and efficient for the borrower and I think they like doing business with folks were able to make their life easy in terms of getting things to the finish line.
Got it okay. Thank you very much and Jay Thank you again.
Thank you Rick.
That concludes today's question and answer session I would like to hand, the call back to Stuart Rothstein for closing remarks.
Thank you very much operator, and as always thank you to everybody for participating.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Good day, and thank you for standing by and welcome to the Apollo commercial real estate Finance third quarter 2021 earnings Conference call.
At this time all participants are in listen only mode. So if you require operator assistance during the call. Please press Star then zero.
After the presentation, there will be a question and answer session.
I ask a question during the session you will need to press Star then one.
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 S. E. C 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.
Our measures are reconciled to GAAP figures in our earnings presentation, which is available in the stockholder 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 Dot Apollo REIT dot com or call us at 2125153200.
At this time I'd like to turn the call over to the company's Chief Executive Officer Stuart Rothstein.
Thank you good morning, and thank you to those of US those of you who are joining us. This morning on the Apollo commercial real estate finance third quarter earnings call joined.
Joining me this morning are Scott Weiner and Jai Agarwal.
As we move towards the end of 2021 we continue to see similar trends from prior quarters in the commercial real estate market.
Specifically the underlying performance of most commercial real estate continues to recover at a measured pace consistent with the recovery in the overall economy.
There have been clear property type and geographic winners as well as those asset types and regions that remain challenged.
Ultimately, an improving economy should be positive for the commercial real estate industry and asset level metrics should continue to improve.
And Congress to operating performance real estate investment and financing activity recovered sooner and more quickly consistent with our broad and rapid recovery across the capital markets.
That presence at present, the pace of activity continues to accelerate and regardless of the asset class. The combination of a low interest rate environment and significant fund flows is supporting robust transaction volume and a well funded high highly liquid financing market.
The commercial real estate lending market has surpassed 2019 levels and is on track for a record year in terms of lending volumes across C. M. B S banks insurance companies and non bank lenders such as they are right in the highly competitive environment the strength of the Apollo commercial.
Real estate debt platform again has proven to be incredibly beneficial as we have completed approximately one $5 billion of new transactions for <unk> through the first three quarters of the year.
Wind continues to be a mix of both U S and European transactions for well positioned high quality properties with institutional sponsorship in gateway markets. We expect <unk> loan origination totals for 2020. One we'll approach pre pandemic levels as we have already committed to doing that.
<unk> $340 million of transactions in the fourth quarter and we are working through a number of other transactions that should close by year end.
It is worth highlighting that ari's loan originations year to date continue to favor Europe, which is reflective of a combination of the strong reputation and market position. Our team has developed there slightly less competition and our team's ability to underwrite and structure of large transaction.
As a result of our success in Europe loans, securing properties in Europe represent approximately 40%, but they arise portfolio at quarter end.
To reiterate what I have said previously the types of transactions quality of equity sponsorship and deal structures for Ari's European loans are very similar to the transactions, we complete in the United States, Our European loan portfolio is diversified by property type and geography.
And we manage currency risk as we borrow and lend in local currency and use forward contracts to hedge.
The strength of the CRE lending market has also led to more normalized repayment activity in our portfolio.
Through through September 30th we've received almost $800 million of loan repayments and an additional $277 million of loans have repaid since quarter end.
Our repayments reflect encouraging signs from the general economy.
As transitional assets are achieving their business plans, including construction projects, achieving certificates of occupancy and for sale residential units being sold.
As a result <unk>.
Trade exposure continues to decline representing approximately only 14% of the portfolio at quarter end.
We also are seeing positive anecdotes from our portfolio of loans, securing office properties, including the repayment of a large Manhattan office loan this quarter as well as increased leasing activity and foot traffic at our other projects in general the credit quality across our portfolio remained stable and we can.
To make progress with our focus on loans.
Before I finish my remarks, I wanted to take a minute to highlight some recent corporate governance highlights with respect to our board of directors in the past year a R. I expanded the company's board of directors from eight to 10 members with the addition of Pamela Carlton and Carmen Sito Wonder both women in our senior exactly the executives.
And we believe <unk> will benefit greatly from their insight and expertise we continue to recognize the importance of ESG issues to our stakeholders and as a reminder.
I incorporate consideration of ESG issues into our investment analysis and decision making processes.
Lastly, I wanted to take a moment to thank our CFO Jai Agarwal, who will be leaving us early in the new year to pursue other opportunities.
Jay has made valuable contributions to <unk> during his tenure and we will be sorry to see him go one of his greatest contributions was building a strong team below him and he will leave us in good hands, we have already begun a search for his replacement and we expect his departure will be seamless and with that I will turn the call.
Over to Jay for the last time to review our financial results.
Yes.
Sure.
Distributable earnings for the quarter were $49 million.35 per share.
And GAAP net income available to common stockholders was $57 million.
So do you sense a diluted share.
GAAP book value per share rise in depreciation and the jingles pieces are there.
Increased slightly.
$15.64.
From $15 48 at the end of last quarter.
This increase was primarily due to unrealized gains on currency hedges.
The loan portfolio at quarter end was $7 3 billion.
The slight decline from the previous quarter due to increased loan repayments.
Yes.
Well you had a weighted average unlevered yield of five 2%.
And the remaining fully extended term of just under three years.
Approximately 89% floating rate U S laws has LIBOR floors that are in the money today.
With a weighted average floor, 1.0%.
During the quarter, we made a 101 hundred.
$80 million of course mortgage $141 million of which was funded.
We also made $113 million of add on fundings were previously closed loans.
With respect to my borrowings we are in compliance with all covenants and continue to maintain strong liquidity.
We increased our secured facility with JP Morgan, one 5 billion and.
And extended the maturity to September of 'twenty 'twenty four.
Okay.
We ended the quarter with almost $600 million of total liquidity, which was a combination of cash and capacity on our lines.
Our debt to equity ratio at quarter end decreased slightly to two two times.
And we ended the quarter with $1 7 billion.
Unencumbered loan assets.
Lastly, I wanted to thank Scott Stewart.
The board of Iraq, and most importantly, all of my colleagues at Apollo for their support over the last five and a half years.
I feel very fortunate to have been on this opportunity and I will truly miss working with this very talented group of individuals.
And does that like to open the lines for questions. Operator. Please go ahead.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.
Our first question comes from Doug Harter with credit Suisse.
Thanks.
Stuart I know it's.
Always tough to read in too much into just a few bonds, but it looks like the yield on new loans this quarter was.
Was significantly lower than prior quarters.
Can you just talk about you know whether those were kind of one offs or is that kind of where where you see the market for new loan opportunities today.
Oh.
I think it's a mix of both but I think directionally. It's fair to say that spreads are tightening them I think you've heard me say on previous calls, but it's clearly a market that.
Favors the borrower versus the lender and I think you know sitting in my seat or Scott sitting at his seat I don't think any of us are surprised that.
Things are tighter just given where yield alternatives in general are trading. These days, so I'm not sure I would take what occurred in the quarter and describe it as the go forward returns on a go forward basis, but I think it's fair to say.
That's certainly relative to where we sit today versus where we set two or three years ago. The ROA is achievable by putting dollars out on a call. It <unk>.
White basis risk for risk are certainly tighter today than they were two or three years ago.
Scott I would just add you know financing costs have also have come in and leverage more available. So we've also found that our financing costs in Europe are more efficient than the U S. So that the mix matters right. So that's an unlevered yield, but I think when you look at it on a levered yield after the financing.
Turns are in line with what we've always targeted.
And just Scott if you could just remind me of just kind of what what those Levered returns are you know that range you're targeting today.
I think we've always thought about 11% plus dog I think we were fortunate enough to have some years, where we could.
Overachieve that but you know where the 12 years of existence, where they are I. We've always thought in terms of Levered Roes as call it plus or minus 11%.
Got it and while there's no it might be different than the asset yield and the funding is that pretty consistent across the U S and Europe.
Yeah. They go up.
As I indicated in my comments, it's all it's a little better in Europe, but you know net net if you look at what we're expecting to do in the fourth quarter I think you'll see us achieve those types of returns both domestically as well as internationally.
Great. Thank you guys sure.
Our next question comes from Tim Hayes with B T I D.
Hey, good morning Stuart.
My first question just about the broader Apollo parent recently announced its goal to reach a trillion in AUM by 2026, and I'm, just curious where you think real estate credit fits into that initiative and you know do you expect five years now we see the team and origination capacity has materially increased.
And does that mean that our eye is also gotten bigger just curious how you think oh right fits into that that broader initiative.
Yeah, well, it's it's certainly unknown, what's going to happen in light of what markets afford opportunity, but I think it's fair to say you know the real estate credit business broadly today at Apollo is roughly a $35 billion business of which.
Ah represents about a quarter of that business.
I think we continue to feel optimistic about our ability to originate transactions broadly speaking across <unk> and other places that we originated for the real estate credit team is on pace for a record year just in terms of sheer transaction volume in and hopefully.
<unk> My comments got the point across to people on the call that we don't spend a lot of time thinking about quarters and by the time, we get to the end of the year for MRI I think we're going to do very much.
Much in line with sort of pre pandemic origination levels on behalf of <unk> right. So I think their continued support for the real estate credit platform. It happens too.
<unk> worked very well in combination between both <unk> and what we do for our insurance affiliated insurance company balance sheet and.
Patient is for.
Continued growth from this point forward, but obviously subject to what goes on in the market.
Okay.
It makes sense and then can you expand you you kind of gave a little bit of color just on New York City office trend and maybe you could expand there I feel like headlines. These days are mixed with both positive and negative trends haven't appreciate hearing more about the fundamentals and athletes underlying your specific loan portfolio or that you know.
And anything from the the the equity team you can share or just any other observations you have as it relates to New York City office.
Yeah, Yeah, yeah yeah.
Giving you the perspective, both as a you know what we've done for MRI as a lender, but also what we're doing as a firm as a tenant that continues to be committed to New York office space I think what we're finding anecdotally is that there.
There continues to be strong foot traffic and a healthy level of interest for newly created or recently renovated product and obviously given what <unk>.
<unk> does as a lender where typically lending in situations, where the real estate is being upgraded and improved.
There's clearly a desire for those that are interested in New York office space to focused on what has been.
Most newly created and what is most current in terms of finishes standards systems et cetera. So have definitely been encouraged by that across our transitional portfolio and I think importantly, I think as you get to older product more commoditized products.
You know you are definitely seeing.
More in the way of sublease space and more in the way of product languishing, because I think it's not uncommon as we've seen as I've seen in my career through multiple cycles.
When there is a little bit of softness in the market.
It affords those who are looking.
To lease the ability to.
Look at newer space that they that they didn't think they might be able to afford them.
Previously so I think theres more continued bias towards.
Hi, and newly created space and I think Commoditized space will continue to struggle.
Mhm.
Got it got it yeah, I feel like that's pretty consistent with what we've been hearing from some of your peers as well. So I appreciate those insights and just kind of a follow up on an office and this is more in the <unk> market, but you know I recently read a stat.
There's about kind of like 35 billion or so of CBS.
Office loans at and see MBS that are scheduled to mature.
Between you know over the next call it three years or so and a decent portion of that has 25% or more of their tenant roll expiring over that timeframe. So I'm, just curious going into potentially higher rate environment with the.
The notable headwinds to certain office loans do you think that that creates any disturbance in the in the MBS market or has the potential to creating disturbance and then on the other side does that create opportunities for transitional lenders. If some of these loans can be refinanced.
No I think it's a great question I think it's probably too early to know.
You know what the net result is going to be I think what you know what we need to factor into all of that is just the sheer amount of.
Capital that is continuing to seek opportunity and does that sort of never get to the point where it creates.
As your question I think implied real distressed and real opportunity probably too early to know you know I also.
Your question was premised on the notion of a higher rate environment and you know.
For some of us that are really old like myself, it's hard to believe that we're sitting here with the 10 year at $1 64, and it might go to two and all of a sudden that defines a high rate environment.
Yeah, No I didn't.
Look I think a lot can happen in three years I think as I indicated in my comments I'd say.
I think there's a path towards continued improvement steady improvement and not a lot of distress I think if the economy continues.
Along its you know gently sloping upward trend in terms of recovery.
But we like you as I think was implied by your question you know, we do keep a close eye on what the implications of inflation in a higher rate environment might be on the economic recovery over the next one to two years, but I think it's too early to have any real sense of conviction at this point.
Yeah.
Fair enough well thanks for taking my questions. This morning.
Right.
Our next question comes from Stephen laws with Raymond James.
Good morning.
Got it.
Hey.
They're not really got a quarter on the hotel and the Oreo maybe wanted to touch on that kind of Howard Howard trends going with the asset and then think about the operating expenses, how should I think about fixed versus variable expenses.
You know as things improve with the asset.
And then I think look I think to your point, we're only a month into the quarter into this but we obviously know the actually the extremely well given our history with it.
R. R. I think we've done as an effect of a job as we can in terms of cutting expenses at the asset and I'm not sure there's much more to.
To cut their I think before the.
I'll call it the Delta uprising over the summer the asset was actually on a nice path to recovery from a revenue perspective.
I think we feel.
Optimistic that there's more improvement to come on the revenue side as opposed to the expense side as we move forward in future quarters and I also think.
As D C begins to open up.
On a go forward basis, I think there might be a path towards a.
Exited some point before the asset gets to call. It full stabilization from a performance perspective, because I think there were those on the capital side that would be what we'd be interested in acquiring an asset such of this such as this to ride the upside and from our perspective.
We'd rather turn the capital into.
Our performing assets sooner rather than later, if we could.
Alright, I appreciate the update and switching to the Brooklyn multifamily I know it looks like the maturity is December of this year. I think you also recently reduced your specific seasonal allowance or given us it looks like the Q says a more favorable market outlook. So can you maybe give us an update on that.
One asset and you know how you think that plays out in the coming months.
Yeah. So we've we've formed a partnership with.
With a.
Well known real estate developer known as the wet cough companies, we are going forward in partnership with them in creating what will be a.
Plus or minus 50 storey multifamily tower, a combination of market rate and affordable.
And it effectively.
Effectively the demolition of the legacy assets has been completed we would expect to do foundation work sometime early next year. This will ultimately be a.
No two year build a one year lease up so you're really looking about like a three year development project that will take us into 2024, though I do think.
Sometime during next year, we will put construction financing in place I think there is.
Given the strength of Brooklyn, given the strength of the New York multifamily market recently.
I think there is potential for.
Real upside to cry economically if we execute correctly.
But this is a you know two to three year project with construction risk lease up risk and so we need to execute well but.
I like where we sit today looking forward in terms of what the potential is in terms of economic recovery and benefit to our.
Great switching to the leverage side I know prepayments have been a little elevated but you cited.
Roughly 900 million of fundings expected this quarter.
You know as we move out of this kind of some turnover in the portfolio and the shift really to more of a focus on on first mortgages leverage Lubbock was two two at the end of the quarter, where where what is the target for kind of a higher mix of senior loans.
You know in six or 12 months of where you think you would like to run the portfolio from a leverage standpoint.
Yeah, I think if as we think about asset specific leverage combined with our wanting to maintain access to the various capital markets that we've been able to access in terms of the bond market. The convertible notes market. The term loan market and also you know I think coming out of the pandemic.
I'm very convinced that it is a prudent corporate finance strategy to keep some portfolio of unencumbered assets on the balance sheet I think at the end of the day when you sort of factor that all in.
We probably run this business at somewhere between.
Two and a half to two and three quarters turns of leverage on a sort of steady state basis.
Great I appreciate the color comments, Jordan and just in closing Jay Good luck in the future have enjoyed working with you and I appreciate your insight over the years.
Thank you.
Yeah.
Our next question comes from Jade Rahmani with K B W.
Hi, This is Trevor Ob.
My first question is what drove the sequential decrease in income from subordinate loan is that related to the subordinate Lilly that is held for sale and can you give any color around that at that.
Yeah, I think what's what's driving the decrease in income on subordinate loans is.
Both just a shrinking of our mezzanine loan portfolio in general and then I'd also refer you.
To the comments in the 10-Q around.
A portion of the mezzanine loan on what we refer to as the Steinway project, where we've also you know take.
<unk> taken some action there.
Okay and my next question is do you expect further provision recovery.
In General I think you know again I you know the comment I just made to Steven on the.
Fulton Street asset in Brooklyn leaves me optimistic about around that asset, though I think there's.
A lot of execution work to go I think the.
I think the provisions we've got today I think are appropriately reflective of the mix between.
Our perception of value execution risk and path to resolution that being said I think so.
Sitting here today, I think both the Brooklyn asset and the Miami asset.
Offer the.
Best potential prospect for additional economic recovery, but I think they both entail.
A lot of execution risk complexity and time and I think until we have more visibility there.
I wouldn't expect any near term change.
Got it and were there any significant count loan modifications during the quarter.
No no.
Okay, and just lastly has attributable EPS reached a stabilized level at your point 35 cents or is there still access their name.
Look I think the Aps, which we out earned the dividend level, which we out earned in the first two quarters.
I think we covered it in the third quarter I think part of it depends on how how capital efficient we are in doing the best we can to line up and the combination of both repayments and new deployment, which is always.
A bit of a challenge in a market that is not a publicly traded market, but a market that is based on private origination and timing is a little bit out of our control I think there's also a part of it depends on how quickly we were able to reach resolution on some of the focus asked.
Sets that are not generating a stabilized level of income or return today. So I think long term I think there is potential.
Beyond the 35, but I think in the near term we've got some challenges both in terms of capital efficiency and focused assets that we need to work through.
Got it thanks, so much for taking my question.
Sure.
As a reminder, if you'd like to ask a question at this time that is star then one.
Our next question comes from Rick Shane with J P. Morgan.
Hey, everybody. Thanks for taking my questions. Thank.
Thank you.
Thank you for all of your help over the years, we will Miss you.
Stuart.
You talked about.
The competitive pressures and how that is impacting spread and frankly that makes a great deal of sense given our.
Both D.
Technical factors, we're seeing in terms of interest rates and the supply of capital in the space.
I'm curious if you were seeing the same type of erosion in terms of structure in any way, whether its covenants or business plans that you think are more aggressive I'm just curious because it sounds in some ways like youre, a little bit more cautious.
Recognizing what's going on competitively in the market from a pricing perspective.
No look I would say at a higher level and in a good way and I always go back to you know or six or seven is my touch point I think in a good way youre not seeing sloppiness.
On any sort of measurable level, just yet and I think that's a good thing.
These documents are documents I think structures, our structures I think to the extent people want to compete on a.
A different view of underwriting a different view of pricing I think that's fine and I think that's a reasoned way to compete on any given day, but I think as you know sitting here today.
I don't think we've seen any.
No noticeable weakening in an overall approach to the market amongst the peer set or their competitive set I think the one thing we continue to.
Watch very closely is obviously the growth in the CRE CLO market, which I think some of you have heard me talk about for 12 years now it is something that.
You know there's potentially.
You know cause for concern and maybe that's a little bit of PTSD coming out of 2008, but I also want to be very clear that to the extent, our our competitors who are committed balance sheet lenders just at a moment in time choose to finance their.
<unk> sheet through a CLO structure versus some sort of other type of financing structure I don't take that concerns me at all I think that is a moment in time corporate finance decision I think what we.
Try and track as closely as we can and what would be the real.
Concern for us at some point in the future. If it became truly prevalent is those who enter the securitization market at a moment's notice just because they want to originate to securitize and have no intention of being a long term committed.
Balance sheet lender, we really again haven't seen that in scale, yet, but again the types of things that I look at that you probably look at as you think about.
Potential overall weakening in the market those are the types of things we think about.
Yeah.
Got it that's very helpful.
Stunned that now that the portfolio was 40% in Europe.
You mentioned that the competitive landscape in Europe is there's less competition in Europe.
<unk>.
I mean, clearly that impacts pricing I am curious if you think you also get better structure lower potential credit risk because of the reduced competitive intensity in Europe.
Yeah again, maybe on the margin and just to make sure I put my comments in context.
Less complex competition doesn't mean known competition right. So there's still plenty of people that we compete against I think.
Yeah, I think on par or we've been able to.
A win some large mandates on our own but also I think our team in Europe has done a fantastic job of partnering with others to win large mandates and as effectively.
So then.
<unk> job of winning repeat business with equity sponsorship that seems too.
Val.
Value working with us and I think we're at.
Where we can differentiate on structure, Rick and this might be a bit of an esoteric point, but it's not necessarily an.
No.
Better structures that are much tighter for us in terms of protecting a lender, but when you think about the different regions within Europe in the different countries in Europe and as I've said many times like Europe is not really a thing it's just a continent, where a bunch of different countries reside.
I think we've proven our worth as a lender and.
Our team has done a fantastic job of figuring out.
How to make structures work for us in the countries in which we lend in and I think we've made that process very effective and efficient for the borrower and I think they like doing business with folks were able to make their life easy in terms of getting things through the finish line.
Got it okay. Thank you very much and Jay Thank you again.
Thank you.
That concludes today's question and answer session I would like to turn the call back to Stuart Rothstein for closing remarks.
Thank you very much operator, and as always thank you to everybody for participating.
This concludes today's conference call. Thank you for participating you may now disconnect.