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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they're the property of the Appollo Commercial Real Estate Finance and 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 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 they refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. In addition, we will be discussing certain non-GAAP measures on this call, which management believes are relevant to assessing the company's financial performance and are reconciled to GAAP figures in our earnings press release, which is available on the Investor Relations 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.apolloreit.com, or call us at 212-515-3200.
At this time, I'd like to turn the call over to the company's Chief Executive Officer, Mr. Stuart Rothstein. Sir, you may begin.
Good morning, and thank you for joining us on the Appollo Commercial Real Estate Finance First Quarter 2018 Earnings Call. Joining me in New York this morning are Scott Weiner and Jai Agarwal. Building on the momentum from our record year in 2017, ARI committed to $922 million of new transactions during the first quarter of 2018. Notably, our portfolio surpassed the $4 billion mark, ending the quarter with an amortized cost of approximately $4.1 billion or weighted-average all in unlevered yield of approximately of 9.2% and weighted average remaining term of just under three years. Importantly, our pipeline remains active, as we continue to identify attractive risk-adjusted investments across abroad spectrum of property types and geographies. Our business continues to benefit from generally stable underlying real estate fundamentals, continued strong transaction volume in the commercial real estate market and ongoing fundraising and investment by opportunistic and value add real estate funds. The 7 transactions closed during the quarter were all floating rate and all but 1 were first mortgages. The loans had a weighted average unlevered yield of 8.4% and a weighted average LTV of 54%. Of the $922 million ARI committed, the company initially funded $489 million, as several of the transactions are construction loans with future funding obligations.
ARI remains selective with respect to construction exposure, focusing on transactions with well-capitalized, experienced sponsors in primary markets. Over the last 5 months, 2 of ARI's larger New York City construction mezzanine loan totaling approximately $370 million were repaired, significantly decreasing ARI's current construction exposure. ARI earned a weighted average IRR of 14.7% on construction loans that repaired. Notably this quarter, ARI closed the company's first transactions in both San Francisco and Seattle. In San Francisco, ARI provided $150 million first mortgage loans for the construction of high end condominiums in the south of market submarkets, which continues to be one of the tightest housing markets in the country. In the greater Seattle area, ARI provided $265 million of first mortgage and mezzanine financing for an office campus located in a strong submarket not far from downtown.
ARI also remains active in London this quarter, completing 2 additional transactions, totaling GBP 235 million. At the end of the first quarter, approximately 16% of ARI's portfolio was secured by loans in the United Kingdom, comprising 6 different loan transactions.
Shifting now to the other side of the balance sheet. ARI completed an accretive 15.5 million shares of common stock offering, including the full exercise of the green shoe, at 109 times book value raising net proceeds of approximately $276 million. In addition, following the end of the quarter, ARI upsized our credit facility with Deutsche Bank to $800 million, which includes incremental borrowing capacity in both pounds and euros, further supporting our increased investment activities in the United Kingdom, and potentially, at some point more broadly in Europe. Before I turn the call over to Jai, I would like to take a few minutes to comment on the current interest rate environment and what if any, impact is it having on market conditions and specifically, on ARI's business model. As we have consistently highlighted over the last few years, 80% to 90% of ARI's portfolio is comprised of floating rate loans, which have resulted in a positive impact on a rise in net interest income. In terms of new originations, ARI's pipeline primarily consists of floating rate opportunities, so we expect this trend will continue. Consistent with my prior comments on last quarter's earnings call, we have, however, seen some spread compression in the market as borrowers are focused on their overall nominal cost of borrowing, which is increased with rising short-term rates. With respect to the long end of the curve, while the 10 year U.S. Treasury action around the 3% level has generated significant headlines, the impact on our business and the broader real estate business to date has been muted.
As a reminder, during 2013 and 2014, the 10 year crossed 3% and the impact on ARI's rise business and industry was negligible. Ultimately, we believe what will or will not impact our business in the industry overall is underlying economic data driving interest rate movements. If the FAD in the markets are reacting to continue to strengthen the economy that we believe economic growth should result in continued positive underlying real estate fundamentals and continue real estate transaction volume, both of which provide opportunities for ARI. Certainly, as we sit here today, there's still a healthy level of acquisition, refinancing and recapitalization activity in the commercial real estate market. As 08, the market remains competitive, but given what has been accomplished in a ARI's 9-plus years as a public company, and the strength of Apollo's real estate credit platform, we remain confident in our ability to find investments that meet ARI's target criteria.
And with that, I'll turn the call over to Jai to review our financial results.
Think you, Stuart, and good morning, everyone. For the first quarter of 2018, our operating earnings grew $47.8 million or $0.43 a share as compared to $38.6 million or $0.41 per share in 2017. GAAP net income for the same period in 2018 was $42.6 million or $0.38 a share. This compares to $37.8 million or $0.41 a share in 2017.
Operating earnings this quarter were impacted by the late quarter deployment of the capital and proceeds from the common equity offering in March. As you know, our dividend policy stands across several quarters and as such, we continue to remain confident in our ability to provide a well covered dividend to investors in 2018. Our portfolio remains well-positioned with rising short-term rates as almost 90% of our loans are floating rate. And every 50 basis points increase in LIBOR will result in an additional $0.10 of net interest income per share.
With respect to leverage, we ended the quarter with a modest 0.8x debt to net common equity ratio. Last week, we extended and upsize of [indiscernible] with Deutsche Bank to $800 million. And as of quarter-end, we had over $600 million of liquidity on our secured facilities. Our book value for common shares remains constant this quarter at $16.31 compared to $16.30 at the end of Q4 and $16.05 at Q1 of '17.
While our capital base continues to grow, our G&A expense ratio has essentially remained flat. Annualized Q1 G&A as a percentage of equity, was only 30 basis points, which continues to be one of the lowest amongst.
Finally, I wanted to highlight our dividend. Based on closing price and our recent dividend run rate of $0.46 a quarter, our stock offers an attractive 10.2% pretax yield. Our board will meet again in mid June to discuss the Q2 dividend and we will make an announcement shortly thereafter.
And with that, I would like to open the line for questions. Operator, please go ahead.
[Operator Instructions]. The first question comes from Steve Delaney with JMP securities.
Stuart, we're all hearing about the competition in bridge loans and a lot of new debt funds that have -- are still being raised. It seems like every week in CMA there's a new private bridge loan fund. So my question was going to be where else are you looking in the market for opportunities to allocate capital? And it looks to me from the reading through your deck that the answer to that question might be construction loans and a fresh look at the U.K. or Europe, am I on target there? Is there anything else that you and Scott are looking at these days?
It's no secret. There's a lot of capital in the markets, the existing entrance, the repossessed loans and obviously, as you read certain people in the equity space looking at the market. I would say that we continue to find opportunities. Yes, U.K. has been a good source for us. We have an active equity and debt business over there. So, I think, that we're seeing a lot of good opportunities to date. It's been, primarily London, but we're looking on the continent and we have financing facilities that would allow us to go there, as we mentioned. In the States, construction has always been something that we've looked at. I would say, we really more toward senior home loans on mez and construction, but we will do both in major markets. As well as the transitional loans that we've talked about. I think, what we -- where we have our competitive advantage is it just the certainty of execution relationships that we have. And just given that our size, we're able to find enough deals that work for us. As we talked about before, we're not trying to be a huge bank that's got to put out $20 billion or $30 billion a year. So, I think, we're able to navigate the market. But yes, there's a lot more competition out there.
Good color, thank you Scott. And that leads me into the two large payoffs. It sounds like there's -- mez loans that are being taken out off your books that tells me there's a lot of liquidity out in the market for developers. Would you be able to specifically identify those 2 loans that did pay off. I'm assuming, was one of them possibly the 111 was 57th?
111 was 57th is not paid off. If you recall at the end of last year, our largest mezzanine loan, which was $235 million, if I'm correct, for a project on the west side of Manhattan known as West paid off. Again when you're doing these condo transactions, you're typically paid off post construction through sell downs.
Yes.
So that one was paid off. And another one of our sizable New York condo project, which is known as Gramercy square for those that have picked it up rags or what not is paid off recently in the second quarter.
Okay, great. And then you're new -- in the first quarter, you're $80 million condo construction loans in New York. Could you tell us what part of the New York is that's located in?
That would be, I would say, upper Manhattan. As we look at our condo exposure, we're very sensitive within in New York to different markets whether it be upper east, upper West, Tribeca [ph], Chelsea. We also look at it from not just price per foot, but size of units and price points.
The other comment I make on the condos in New York Steve, and I know we're -- people love to talk about the Steinway project. If you put the Steinway project aside, most of what we do in New York is we're lending somewhere between, call it in or around, $1,000 a foot of last dollar exposure or something that is expected to get sold maybe from the developer's expectations of somewhere between $2,000 to $2,500 a foot. So from our expectations are somewhere, call it, $1,800 to $2,000 a foot. But Other than Steinway project, which I know has gotten its share of media coverage, we had tended to shy away in New York from these super high-end stuff and most of what we do is our exposures of $1,000 a foot. And someone's looking to sell around $2,000 a foot, recognizing that still a high price point compared to what goes on in the rest of the country. But in New York, that tends to be in sweet spot of the market, given where the transactions have taken place.
So somewhere near 50% of value, but may be less than that on cost, based on what you're describing.
And at the end of the day, we tend to call it somewhere in the neighborhood of 50% to 55%, somewhere -- some blend of cost and then expected net sell out value when we use sell-out values as an expect -- of ultimate value.
Our next question comes from Steven Rose from Raymond James.
To follow up a little bit on Steve Delaney's questions, I wanted to look at the origination mix. The unlevered yield was down sequentially, obviously, I think that was due to the much higher mix of first mortgages originated in Q1 versus 4Q. But can you maybe expand a little and maybe talk about levered return is expected originations. You mentioned competition and borrowers are looking more at absolute cost. But can you talk about what trends you've seen over the last quarter or two from a levered return standpoint on new originations?
Yes, look, at a high level, I think, this is not unique to us, to the extent there's, call it, spread compression on what we're originating. We like, I think, most in our space, have been the beneficiaries of more attractive ways to finance our books. So if anything, you haven't seen much movement in levered ROEs at all. And if anything -- if you think about max leverage available, which to be fair, we don't always max leverage available to us when financing something. One could actually argue that ROEs have gotten more attractive, over the last few quarters. Just given those who finance themselves with the CLO market, I think, the action in the CLO market has benefited those who borrow on repurchase facilities or other bank facilities because it's forcing the banks to be more competitive. So look, we've always generally looked at our book as trying to on a capital bases achieve at a high level, call it, 11-plus percent ROEs. And I would say, given what we've been able to originate, we still feel very comfortable that we can create those sorts of levered ROEs on our capital, as we're putting it into new transactions.
And then obviously, one other reasons [indiscernible] it's not just competition, because LIBOR rate is now at 2%, right? So a lot of people are absolute yield focused. So clearly, if we're financing first mortgage the LIBOR rates also impacts our cost of funds on what we finance, but for a big chunk of what's not financed, obviously, we get the full benefit of that LIBOR.
Appreciate the comment, that leads to my next question with regards to leverage. And I realize what the capital raise here recently this quarter so has a few moving parts to it. But looking over the last year, say, from first quarter of last year, the loan mix of senior loans versus mez has increased from 62% to roughly 75%, but we really didn't see leverage change that much over the last year. Can you maybe talk about leverage targets, are you looking to use more leverage than maybe, historically, now that we see a much higher mix of senior loans? And that may lead to Jai's comment in the prepared remarks around the dividend. I mean with the higher mix of senior loans, clearly, you need higher leverage to support that $0.46 dividend. So maybe some comments around leverage and portfolio mix that we've seen shift over the last year.
Yes, look, obviously, the premise behind your question is all things being equal, more senior loans versus mez should lead to a natural rise in leverage overall, which it has not to date. I think, we've always tried to be opportunistic on the equity side and have certainly always viewed the windows where one could build our capital base on the equity side as more episodic than what's available on the credit side. So we've probably been out ahead of ourselves vis-à-vis the equity credit mix. I think as we think about leverage long term, we recently as a first step, increased our capacity on our repo facilities, which as you appropriately picked up indicates more first mortgages coming in our pipeline. I think as it pertains to a longer leverage strategy, we've always said publicly, we be comfortable running the company at, call it, 1.5x leverage may be slightly higher than that. We've always also been pretty resolute and that we will not put assets specific leverage on mez loans. We will, obviously, put assets specific leverage on our senior mortgage positions.
We're also at a point right now where we do want to keep our flexibility. We have a convertible note outstanding that matures in the first quarter of next year. I think, we continue to debate internally the merits of assets specific financing with the bank community versus longer dated leverage that may be available in the high-yield notes market. So I'd say, the form of leverage is still to be defined. But generally speaking, would agree with your sort of assumption that as we continue to grow and as more of our originations come in, the form of first mortgage as you'll see a natural rise in the leverage of the company overall.
Our next question comes from Jade Rahmani from KBW.
On the asset in your portfolio that are cash flowing and with the tracking of borrowers business plans, are you seeing a deceleration in rent growth and NOI growth or business plans lagging expectations. Some of the REITs results seem to be continuing to show a decelerating trend. Wondering, if you're seeing that?
It's tough to make a broad conclusion across a bunch of different property types at a high level. I would say, hospitality continues to perform well. And again, these are broad generalizations, but generally speaking, I think hospitality continues to perform well. We don't have a lot of exposure in the industrial sector. But again, probably giving a little color from ARI's and also little color from what we're seeing in our private equity business as well, obviously, industry remains strong. On the office side, I would say, our exposures are performing fine. We're not in a lot of office transactions that I would describe as lease up place right now. But generally speaking, across the portfolio, assets are performing fine. We've commented previously on some of our condo exposures, we've commented previously on our one significant retail exposure in Ohio, where I would say there continues to be leasing activity. I would say we're optimistic about the pipeline of prospective tenants right now for what's known as the Liberty Center project and there's seems to be good dialogue. I think, you'll know a lot more in the coming months. But generally speaking, broadly, I would say, the activity is as expected. I don't think we've seen any significant changes. Again we've a small subset of stuff that I think would be comparable to what you might be hearing in the REITs in terms of what they own and what they're managing.
And so with that in mind, with additional fed rate hikes anticipated, how many rate hikes would you say the market could absorb before we start to see noticeable pressure on cap rates and potentially credit?
Well, I think, ultimately the question is, are they rising rates because the economy continues to hum along? Or are they raising rates just because they kept them short for too long and are now playing catch up. I think if it's the latter situation, and the latter being late, situation and they're just playing catch up, but not underlying economic activity. I think, that's particularly concerning and you see impact on the markets sooner rather than later. We don't expect that. I think to the extent that you're seeing rates rise, because there is continued economic activity, I think, we -- again not that we spent a ton of time forecasting this, I think, we expect several more raises this year whether that's 2 3, don't know exactly what that would be. But I think, if it's on the back of continued economic activity, we would feel comfortable from a credit perspective. And then I think you might see some marginal weakening in cap rates, just as people start seeing attractive alternative uses of capital elsewhere. But I don't think you'd see 75 basis points in the short term rates having any sort of meaningful impact on cap rate more on the margin.
I would add -- again it depends on asset class and location. But I would say, we've seen, in certain instance, cap rates going off. I think, as you look at -- if people want to cop the public market and clearly the rate is down. I think we're certainly seeing larger portfolio, which used to trade at a premium, [indiscernible] premium anymore, maybe a discount in certain stuff. We're seeing definitely cap rates are higher.
By 25 basis points or higher than that?
I mean, depends on what you're talking about it. Look, we're in the market buying assets for our private equity fund as well. I would say, depending on the asset, and again, to draw a conclusion across different property types in different geographies is a little bit risky. I think, look, where have you seen things back up? I think you've seen things back up in multi family, certainly, in the Southeast, Southwestern part of the country, again, not relevant to our business. But if we're talking about cap rates, that's where you've seen the move. You probably haven't seen any move on the industry. If anything industrial has gone the other direction and things are probably as tight as they have ever been. I think, the office is, again, episodic depending on what market you're in. And you've actually seen a little bit of softening in what we were the hottest markets i.e. New York, San Francisco, Seattle, but nothing of note. I'd say more within the 25 to 50 basis points range. And then retail, again, you've certainly seen retail widen. I think, the question on the retail is more not a lot of overall transaction activity right now.
Okay. It was wondering if you could just touch on [indiscernible] Maryland loan, it looks like the maturity was extended, and there is a modest pay down on the loan, can you just comment on that?
Yes, I mean, the loan at this point -- the maturity date is somewhat irrelevant. Because all we're doing is selling condos and paying ourselves up, so to speak. So when we originally took the reserve, it's a 50 unit project. When we originally took the reserve, they were roughly 24 or 25 condos sold at this point. We're now at a point where there are 34 of the 50 have been sold. As we continue to sell additional units, we're additionally paying ourselves down. I think, there's a scenario where due to sell for price, but we're able to pay ourselves down and potentially recover the reserve we took. There's also scenario where we just sell the unit and pay ourselves down and that's the end of the story. But we will know a lot more about that project over the spring and summer selling season, obviously, which is effectively, sort of, kicking off over the last few weeks.
Our next question comes from Rick Shane from JPMorgan.
When we look back a year ago, we would've seen interest rate sensitivity charts that are similar to the ones we're seeing now. And the reality is that, the rent have moved, but we haven't seen full manifestation in terms of earnings that those charts would suggest. Obviously, some of that's a function of spreads tightening, but I'm also curious if some of that's been hampered by poor rates on some of the loans?
I mean, I think, it's a mix of things. Rick, I think the reality is in most documents things don’t adjust immediately as alone as quickly as you're seeing on Bloomberg screen. So I do think there's a bit of a lag effect in some respect. I do think your comment on spread compression or some spread tightening is relevant as well. So I do think it takes a little bit of this to run through the system. Look, I think, we continue to position ourselves for growth, I think, the other thing that's impacted us somewhat is also just the pace of payoff and the lag in getting capital redeployed. I think, we're happy with the overall deployment level. But as you saw in the first quarter here, a good headline number, but tight in matters. And again, there's just a little bit of inefficiency in a business that is based on, call it, private transactions because you can't force timing as much as you would like. So I think it's a little bit of everything. But I do think the biggest component is probably the balance between what you're seeing in LIBOR rates rising and the combination of some spreads compression and just some lag that takes place in loan document before something actually does adjust.
Got it. Turning to construction lending. Look, there's a little bit of a feeling that -- if you listen to the conference call, it almost feels like a 100% of the companies we follow are going to gain market share in construction lending. Obviously, that's not possible, that doesn't end well. Is there just such a surge in construction, how can we see the growth across the industry in construction lending and not have it ultimately manifest into a problem?
Look, ultimately, it comes down to individual credit decision. I think, before you talk about how it doesn't end, I do see, there has been a fundamental shift in real estate borrowing these days. And I do think through this cycle, we have proven that whether it be for pure construction or things that have a high degree of business plan execution risk, borrowers seem more comfortable in many instances borrowing from entities like ARI's or it's peers, because they're borrowing on a principal-to-principal basis because they know who is on the other end of the phone. When things go better than expected in a business plan, and they want alternate loan terms, or when things go worse than expected in a business plan and they want to modify loan terms. So I do think there's a natural trend for construction and, call it, high touch redevelopment transactions going in favor of ARI and its peers. So I do think we have a lot to look at. I think, obviously, 9 years into our recovery cycle, there's just more construction in general going on. I think like any cycle and any investment business, ultimately, tough to generalize about the sector as a whole, but it will depend upon credit-by-credit decisions of each entity.
That's a great point. It's a market size issue, it's an individual market share issue, but the point about the weakness shift and basically shifting the addressable market for the mortgage [indiscernible] as well.
Our next question comes from Ben Zucker from GMP.
Building on to Steve's first question on your international exposure, now stands at 27% of your book versus a year at 13%. And I think, it makes a lot of sense to pivot overseas because the European property markets still lags U.S. recovery and the global Apollo platform, which seemingly give you guys a competitive advantage over there. But are you comfortable taking this exposure a bit higher so long as your interest rate exposure is hedged? Or is there a level that you're going to start looking to cap this eventually?
You know, this is Scott. Again we really look at everything on a deal by deal basis. With respect to the hedging, we absolutely hedged, I think, you meant currency. We're not hedging the industry, we're hedging our currency. Clearly, we're doing a senior loan growth of borrowing in that currency so that we're hedging our net equity, if you will. Yes, we're focused on the major markets in Europe. Again as you said, we do think interest rates low there for a while. We still think there is, depending on the product, room to run the clearly behind the U.S. in terms of the recovery. We have boots on the ground. We have a very, very large European real estate equity business, also been active in debt business for a number of years for ARI's and also for other vehicles. And I think, we have been able to -- in the U.K., specifically, we have office, we have condo inventory, we have some, call it, predevelopment loan, where they're going to redevelop stuff in Central London into a [indiscernible] projects.
We've senior living portfolio, so we have been able to build up a diverse portfolio. We've got and closed some deals in the condiment, one reason we have not executed, but we do continue to look. So I don't think there's a hard and fast rule. And just no different I think what you'll start to sing also, repayments in the portfolio, which we already had, right? We had a 1 large time in the predevelopment loan already getting repaid. But I think as the U.K. portfolio a little younger than the U.S. portfolio, you really haven't see the repayments coming. So I think over time, you'll have those repayments come and so as loan come off and new loans will go on. But we have no hard and fast rule. And we look at other geographies Paul has a global business. We'll continue to look at other geographies, but I think, in the near term probably more in Europe than other areas.
Great color. Appreciate that. Turning to the repayment front, I saw the fully extended repayment schedule on the slide deck, but I was wondering if you would provide any insights into our actual expectations for repayments for 2018. And I asked this totally understanding that with your large loans, this is a really tough number to pin down. But with the moving rates, do you think some of your specific borrowers maybe won't be looking to exercise the extension options you include in the deck because I know each loan is project specific which is why I kind of wanted to see the stuff to see what you guys are seeing in your own book?
I mean, I think our experience has been -- there are things we're 100% positive that will pay off and they end up not paying off and there are things that we think will be out for a while and they end up paying off. Look, I think, we put the information out there. I think, our expectations -- at a high level, we've got $4 billion book with the roughly 3 year average duration. So if you think about annual basis, you're in and around $1 billion to $1 billion plus a year. I don't know exactly where we will come out this year or next year, but we kind of going to each year thinking we sort of need to do some where between $750 million to $1 billion just sort of cover what's going to repay.
Right and that's also one of the benefits of structured loans and future funding so that we have kind of capital committed going forward. We also are reaping the absolute dollars is also important, but so is the competition. Because mezzanine loan of $100 million, right, pays off to replace that perspective that's either $300 million of the mortgage or another $100 million of mez. So we really probably focus more on the net equity invested if you will than the actual dollar return.
And I think that's a great point you have to focus on equity being returned not just the loan balance repaying.
[Operator Instructions]. Our next question comes from Dan Occhionero from Barclays.
Can you just touch on the components of the book value changes this quarter. I guess, I would've thought that the equity raise would've been a little bit more accretive and was just curious if there was an offset for that?
Yes, sure, this is Jai, what you're missing there is RSUs. And we have 1.6 million RSUs outstanding, as of March 31, which -- when they invest, which will be around 750,000 in January of '19, with reduced book value as a shake out. So just looking backwards, what you're missing there is, we have about 600,000 RSUs divested in the first quarter of this year that reduced the share count -- increased the share count, therefore reduce the book value.
I'm showing no further questions at this time. I'd like to hand the conference back over to Mr. Rothstein.
Thank you, Operator. And thanks for participating today.
Ladies and gentlemen, thank you for participating in today's event. This concludes the program, you may now disconnect and have a wonderful day.