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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
I’d like to remind everyone that today’s call and webcast are being recorded. Please note that they’re the property of the Apollo Commercial Real Estate Finance 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 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. 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 Web site 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.
Thank you, operator, and good morning. And thank you to those of joining us on the Apollo Commercial Real Estate Finance second quarter 2018 earnings call. As usual, joining me in New York this morning are Scott Weiner and Jai Agarwal. I'll keep my comments fairly brief so we can get to questions fairly quickly, but let me just a highlight a few things. ARI had another very strong quarter of originations, making significant progress deploying the capital raise at the end of Q1. During the quarter, ARI committed to approximately $970 million of new investments, bringing 2018 year-to-date originations to $1.9 billion across 19 transactions.
To put that into perspective, year-to-date originations for ARI are already equal to full year production for 2017. And we remain optimistic with respect to both additional transactions currently in closing and the continued strength of the pipeline. After nine years, we have established ARI as a reliable commercial real estate lender, offering creative financing solutions for bespoke real estate transactions. Commercial real estate lending is relationship business and we continue to find new investments through our strong relationships with real estate owners and operators, as well as brokers and like-minded senior lenders.
While the market remains competitive, we believe our success is due more to qualitative than quantitative factors. Said differently, we do not compete fully on price or proceeds; we invest in transactions where borrowers value responsiveness, diligence and understanding the value proposition and the creative and thoughtful approach to structure and economics. Consistent with our overall strategy, we remain focused on loan secured by institutional quality assets in primary markets. Our business continues to benefit from generally stable underlying real estate fundamentals, continued strong transaction volume and ongoing fund raising and investment by opportunistic and value-add real estate funds.
At quarter end, our portfolio had an amortized cost of approximately $4.9 billion, a weighted average all in unleveraged yield of approximately 9.1% and a weighted average remaining term of just under three-years. And consistent with where we've been taking the portfolio, 91% of the loans in the portfolio have a floating interest rate. As we look ahead, we believe the current economic climate remains favorable for our business model. And as I previously mentioned, our pipeline remains robust. We are confident in our ability to find investments with attractive risk-adjusted profile, while maintaining our discipline with respect to underwriting and credit.
As always, we will also continue to focus on the right side of our balance sheet and remain thoughtful and proactive with respect to the diversity of sources for and the cost of our capital as we efficiently fund the growth in our portfolio. With that, I’ll turn the call over to Jai to review our financial results.
Thank you, Stuart and good morning everyone. For the second quarter of 2018, our operating earnings were $54.9 million or $0.44 per share as compared to $44.6 million or $0.46 per share in 2017. GAAP net income for the same period in 2018 was $48.5 million or $0.39 a share. This compares to $26.9 million or $0.28 a share in 2017. A reconciliation of operating earnings to GAAP net income is available in our earnings release in the Investor Relations section of our Web site.
We continue to optimize the right side of our balance sheet. And to that end, had an active quarter with respect to our current facilities; first, we extended and upsized our facility with Deutsche Bank to $800 million and added the ability to borrow in pound and euros; second, we extended the term of our $1.4 billion JP Morgan facility to three years; and lastly, we entered into a new financing with Credit Suisse to fund the European loan. And as of quarter end, we had over $200 million of liquidity on our secured facilities.
Our book value per common share at June 30th was $16.26 a share as compared to $16.31 at the end of Q1 and $16.16 at June 30th of last year. Book value this quarter was impacted by the $5 million additional reserve against $34 million loan. This loan is secured by the remaining 16 condominium units in Bethesda, Maryland with 35 of the 50 units have either been sold or are under contract as of today. While our capital rate continues to grow, our G&A expense ratio had potentially remained flat. Annualized Q2 G&A as a percentage of equity was only 30 basis points, which we believe continues to be one of the lowest percentages amongst our peer group.
Finally, I wanted to highlight our dividend. Based on Wednesday’s closing price and our recent dividend run-rate of $0.46 a quarter, our stock offers an attractive 9.8% pre-tax yield. Our Board will meet in again in mid-September to discuss the Q3 dividend, and we will make an announcement shortly thereafter.
And with that, we’d like to open the line for questions. Operator, please go ahead.
[Operator Instructions] Our first question comes from Steve Delaney with JMP Securities. Your line is open.
Noting the page for you list each line, there seem to be concentration and new hotel loans, and especially also condo inventory loans. I’m just curious if you could offer a little more color on the inventory loans. And whether you see inventory loan, condo -- inventory loans, is it different risk than your condo development projects that you have? And maybe just some general color about how your loan basis and these inventory loans might compare to sell out and sale prices? Thanks.
Certainly there is a different risk, you’re not taking construction risk so you’re lending against fully finished product, and often times you’re lending in situations where there have been initial sales that have taken place. So relative to a ground up construction transaction there is certainly, I would say, fewer risks with respect to an inventory run as pertained to a ground up construction loan. Though ultimately in some respects, your take-out is the same, which is the sale of units. And again, no different than we've talked about previously as we think about anything we do in the condo space, our focus is on how we see value ultimately to the buyer and then where we size our loan relative to that expected sale price.
We tend to focus on a loan-to-net sale out somewhere in the 50% to 60% range, which is consistent with what we've done historically. We also tend to be very focused on both price per-foot, as well as nominal value of units that need to be sold. And given the experience we've had, both in New York, London and other markets to-date, we certainly from our existing portfolio get a fair bit of current information on the market, which we certainly factor in to anything that comes into the pipeline in the condominium space that we consider on a go-forward basis.
Stuart, how is interest handled on these inventory loans? Is there any actual interest being paid by the developer, or does it all just come out of sales proceeds?
Scott, you want to?
I would say in this general market you’re capitalizing carry cost. So as part of our loan, there is money in there that covers interest, taxes, insurance. So generally, when they sale a condo, we get paid down with a 100% of net sale proceeds.
You’re paying broker commission stuff on the deal.
So said differently, pick interest which is typically run anywhere from 5% to 10% of our interest income on a quarterly basis over the last two years.
And then some terms of these loans, you usually make a transition alone, you're looking at two to three year maturity. How long do you set these deals, the inventory loans?
They're generally, I would say, probably two to three years with general hurdles along the way to make sure that they're selling.
And just one final thing on your additional loss provision, thanks for clarifying, we assumed it was Bethesda, but I wanted to hear that. Could you just comment on whether the additional reserve was a function of lower observed sale prices or is it just slower pace of sales from what you saw a year ago when you set the original reserve? Thanks.
At a high level in doing the accounting analysis you run a bunch of different scenarios, which factor in both pricing and pacing. I would say the reality is pacing has more of an impact than pricing at this point. And I would say that's also been our experience in terms of units that have sold or set differently when we've had a real prospect, someone who is interested in purchasing a unit, I think the units have been priced appropriately to get a transaction done. I think as we've commented on prior calls, foot traffic is not as high as we would like. And as a result, that impacts certainly a conservative year of what pacing maybe in the future.
Our next question comes from Stephen Laws with Raymond James. Your line is now open.
I guess just touch based first on a couple of straight forward questions, with leverage, very strong origination quarter, looks like 1.2 at quarter end. And I realize it’s a function of mix of senior versus subordinated. But can you talk about target leverage, July origination, seem like they’re just shy of $100 million. Maybe some comments about where we should think about the total portfolio size going as we move through the balance of the year?
Sure. Keeping in mind that everything I say about leverage needs to be coveted by the fact that we’ve never actually hit the leverage targets I’ve established. The goal post as you alluded to in your question is it that, it’s a first mortgage its levered 2 to 2.5 times, if it’s a mezzanine loan we use no assets specific leverage. So if we -- that sets the goal post. We’ve tended to be somewhere between 0.9 to 1.3, historically, with a comment that we’d always be comfortable running this company at closer to 2 times leverage if the asset mix supported it.
I think if you look at what we’ve done over the last few quarters, you certainly noticed a greater preponderance of first mortgages relative to mezzanine loans, which I think just leads to a natural rise up in leverage. And I think you’ll continue to see a slow modest pickup in leverage, but the reality is I think this is the company that run somewhere between 1.2 to 1.5, I think 2 is something that I don’t envision us getting to. And I think the desire is to always keep a decent amount of dry powder in the form of leverage capacity within the company.
And to the point on originations, construction loans versus transitional demand, with construction costs increasing. Are you seeing a shift in interest or people delaying construction project starts at all? And is that pushing a higher demand for transitional assets, or maybe higher valuation on some of those assets? But how we’re shifting construction costs or increasing construction costs changing demand?
I would say certain markets. I think there’s certainly being some increased cost obviously, a lot going on in trade but its administration. But I would say, it’s certainly getting factored in, but I’m not sure it’s really delaying. If someone owns a piece of land or a building that they want to develop, there is cost involved. So I would say if someone is delaying a project, and maybe the increased costs are one factor of that, now it’s probably more of market timing where they don’t think they actually want to bring a property to market given what’s going on, but not really seeing that impacting.
We are still seeing a lot of demand in really the major markets we follow, whether it’d be New York or the West Coast, Miami, so still lot of demand. I would say on the transitional side. Clearly, we thought about -- pour lots of money in the opportunistic value-add equity side looking at deals, really I think focus on that office lease up transitional. I think from our perspective, we really view that market is putting this price, to be honest, given the risk you’re taking and the market that those deals general are. So that’s not -- we really haven’t been playing that heavy lease up of office transitional loan part.
And to follow up or maybe some comments last quarter, you guys talked about London being attractive in the Q&A. Certainly, you've made a few loans there December, March and June loans, so I think on the senior portfolio total now 10% of that portfolio, just those three loans in London at December. Can you talk about what you're seeing there, how the opportunity is today versus three months ago when we last had comments?
I would say, we continue to see opportunities there. We've been focused on both the forward sale as well as office. We're in the process of closing another office transaction, but at the same time, some of the stuff that we have done more in the predevelopment area should be in the process of being refinanced. I would say not actually three months ago probably versus six months ago, I would say, probably less opportunities there than we used to see. I think there the window that we jumped into post Brexit and other things where we could find some attractive deals, I would say, the margin is somewhat pivoted back where your more traditional commercial banks and others have really come back into the market residential. So I would say, we're still seeing opportunities but not as good as it was at the beginning of the year.
And then one final question on the retail asset, Ohio, looks like you've reduced the rate, I think I saw in the Q. It is still set to mature I think in September. Do you expect the resolution there? Will it be extended -- I think gets a TDR on that. So can you maybe comment on that investment?
I think we alluded to this in our last earnings call. I mean certainly our expectation is not that we get paid off in maturity. This is an ongoing dialog between us and the sponsor. I think it's been a very productive dialog. To-date, I think we are clearly very much, to the extent we can be as a lender involved in the focus on asset management vis-à-vis leasing strategies and merchandizing decisions and outparcel decisions. I think this will much likely to experience with our asset in Harvest Hills, which seems to be turning out. This will be an ongoing focus of ours from an asset management perspective we don't expect the loan to pay-off at maturity, but we do expect to continue to work through it.
And again you got to center that's somewhere in the 80% occupied. The location clearly works the mixed use assets that were part of the broader development are working. I think it’s just given the ever changing retail landscape, this is about coming up with a merchandising plan or strategy that works for the long term, and not just haphazardly putting tenants in spaces just to create the illusion of greater occupancy, but actually coming up with a strategy that continues to make this a vibrant center on a go-forward basis, which will certainly enhance our ability to get out as a lender and hopefully, create value for the sponsor on a go-forward basis.
Our next question comes from Jade Rahmani with KBW. Your line is now open.
Would you characterize ROIs in the market as stable? I think that you've mentioned improved ability to finance first mortgages, so spreads there have also compressed, as well as what we’re seeing on the yield side?
I think broadly speaking, as we think about investing our capital from an ROE perspective, we’ve talked on the last few calls about spreads compression by the same token benefiting from both a higher starting LIBOR, as well as improved financing, to the extent we do use leverage. So generally speaking, I would say we continue to remain comfortable in our ability to generate ROEs consistent with what we’ve done previously.
In terms of the overall business mix, can you give any color on what percentage of the business is from repeat borrowers and perhaps what percent of the portfolio is with your largest single borrower?
I think on the repeat side, it fluctuates quarter-to-quarter, year-to-year. But I think we’ve generally found over the last few years that we’re doing -- repeat business represents about 40% to 50% borrowers that we’ve had some relationship with in the past. In terms of…
And also remember that back in the -- across the platform, not necessarily just what we do with ARI. We do have borrowers who may launch a fixed rate loan that we do with an insurance company or other partner…
And then I think across the $5 billion plus or minus of assets, I think our single largest borrower represents 3% to 4% of that total. I don’t think we’ve ever aggregated across the five largest or 10 largest, you can obviously do that offline if that was necessary. But that would be the largest.
In terms of the 2018 remaining maturities, you mentioned since Cincinnati. I’m assuming that you’ll modify that loan. I don’t know if it will be amortizing or not, but I’m assuming that gets the maturity expense in. Just on the Brooklyn retail, urban predevelopment and also the Manhattan in predevelopment, and I think there is an office project in Brooklyn. How do you feel about those loans’ ability to repay at maturity?
The Brooklyn predevelopment, we’re in the -- the borrower continues to work on their ultimate development plan and acquiring additional adjacent parcel. So we are working with them to continue -- that loan will be or has been extended as they continue to execute their business plan and continue to effectively reduce our basis as they keep adding to the property. That was one. There is a -- the Brooklyn loan, we expect there’s some major leasing that happened there. We expect that to get paid off prior to maturities and we know they are in the process of re-financing it. And then was there a third question?
There was a Manhattan $65 million urban predevelopment?
That is also in the process of being refinanced. It was extended but in the process of being refinanced.
The Brooklyn retail predevelopment, you say that they’re acquiring properties and that reduces your basis. Is there actual retail revenues being generated on that project, or just the status of the project?
The ultimate highs is that use is a larger redevelopment that will have retail where they’re active and been talking to tenants on leasing and then above that given Brooklyn will be residential, whether -- most likely, whether it’d be for rent or sale. They have also contemplated office, there is different zoning benefit they do office versus -- so we're very comfortable, borrower continues to put additional equity. And as they gets bigger and you can see to do more of this, you get even more value.
Besides the project, is it about two years of remaining absorptions to sale out of that project? And then are there any concentrations in remaining units that could cause further loss provisions?
There is 15 remaining units, just to be perfectly candid. They are all three-bedroom remaining units. I think part of the question you asked Jade in terms of how much time is there, that's part of the analysis from an accounting perspective, is it 18 months, is it 24 months, is it 36 months. We ran a handful of different scenarios. If you think about what we've done since we took the original reserve, which was about a year ago we sold nine units in that time period. We would hope to make additional progress this summer and fall, which tends to be good selling seasons. But look I think the reserve we took we believe is adequate to address, both pacing, pricing and any other externalities that may arise as we get to the finish line.
The, I think that there is a CMBS technical default maturity on the skilled nursing loan, and I believe ARI a mezzanine loan. I think that might be technically related. So I was wondering if you could provide a commentary there. I know skilled nursing has been facing a lot of headwinds in the news recently.
I think the overall skilled nursing industry does face headwinds from an operating perspective. You are correct that the CMBS loan was put into special servicing for what I would describe as a technical issue. I think as we look at our mezzanine position, the property is still generating net cash flows through our mez basis in the mid-double digits. So we feel very comfortable that we are well protected from a cash flow perspective. Our loan is also covered on a debt service coverage basis very comfortably. The borrowers actually recently launched a refinancing effort, and it would not surprise us at all if we were paid off on our loan towards the end of the year when the prepayment window opens up.
And do you think that there is adequate liquidity in that space for them to refinance?
Absolutely.
And then lastly, could you give an update on the 111 West 57th?
62nd floor I think and it continues to go up at the pace of about a floor every seven to 14 days. It is capitalized to be completed. It is -- the materials in trades have been contracted to complete it. It continues to move a pace -- I think we commented on an earlier call that there were at least four sales without much of a marketing effort to-date. And given where our last dollar bases will be when it's completed, which is, call it $2,800, $2,900 a foot. We continue to be very comfortable that as long as it’s completed, we’re comfortable with our bankers, comfortable with our collateral. This is a loan that’s generating an L plus mid 15 return to us. It’s one of those loans that I wouldn’t be surprised when it’s ultimately completed and there is the ability to pay us off, which goes for another almost two years on an inventory basis, someone could take it out with much cheaper financing. So we’re quite happy to have it in place for the next couple of years.
Our next question comes from Ric Shane with JP Morgan. Your line is now open.
First, in terms of the unfunded commitments, obviously, that really grew at the end of the last year. And this quarter, we saw you draw $113 million on that, which basically suggests a run-rate on the draw of about two years. When we build our models, is that a reasonable way to think of that?
I think it’s reflective of the increased representation of construction and/or significant redevelopment projects in the portfolio. And I’d say it’s spreading something over the next six to eight quarters is probably appropriate.
And when we think about the spread on that loan, both given the timing and the nature of it. Is it fair to say that given where spreads have moved in the market that is an above market yields versus the rest of your portfolio?
I wouldn’t necessarily say that. I think one of the reasons we find that area attractive is that spreads on return have held generally pretty steady, because it’s not really -- because people can’t CLO, or SMBS and can’t repo it so people are looking to absolute yields. So you haven’t seen the compression -- you found in transitional market that we’ve talked out before. So I would say we really haven’t seen as much of this, it’s just little with obviously LIBOR going up, but it certainly not as dramatic as you saw in some of the other product types.
So I think you’re answer suggest you’re agreeing with the primus of my question, which is that the spread on that is likely above where most of the papers that you’re originating right now as?
It depends on the type of transaction…
Yes, in terms of like-for-like, I mean…
Second question is related to -- or second topic is just related to repayments. June went through a number of loans that had repaid, but I am curious in general would you expect that durations are going to be extended or we’re going to see more extensions in the current environment given the favorable nature of your financing?
I think consistent with what we saw in the past, I think given the underlying business plans of our sponsors that’s really what drive the refinancing. So if it’s someone who is -- obviously, given the development, they’re selling the properties or if someone doing leasing or things like that. So that’s really what’s driving it. Obviously, if they’re going to be a holder of the product both as seller and they think they can get more financing that’s attractive, hopefully, they’ll come talk to us and talk about redoing the loan or something like that. But I think that's really more driving is what’s going on in the property, let’s hope so than the overall market financing constituents…
So it's still regular way at this point in terms of being a function and meeting the benchmarks and the development?
Yes.
[Operator Instructions] Our next question comes from Ben Zucker with BTIG. Your line is now open.
Based on Slide 13, it shows your quarter-end liquidity, it looks like there is room to grow the portfolio another 15% or so. And I was curious how long you thought it might take to reach that full deployment level. I know we're in the slower summer months right now and we can see subsequent activity to-date. But do you think this is something that you could hit by year-end?
We certainly had a good six months and certainly, I meant for my comments in the speech indicates that both based on what's in closing, as well as pipeline remains fairly robust. You've spoken to me enough to know, I’m always a little hesitant to try and predict things on a quarterly or year-end basis, just given that a lot of what we do is tie up transactions. And then it's a fight to get to the finish line, so to speak. But given what we did during the first half of the year, we feel pretty good about getting that capital deployed. But let’s also recognize that as we think about our business plan, going forward, we're also aware of what we think is likely to repay between now and the end of the year. So you might not see that. Even if we invested enough to meet what you just described as, call it a, growth target we know there is deals coming back the other way that they’re going to pay us off.
That's a great point, I think, we always need to remember how quickly the capital can comeback. Since someone asked about -- we just spoke about dry powder and we've also spoken about maybe the ability to pick leverage up a little bit. What are your current thoughts on the dividend level that you guys are paying relative to the rest of the peer group? I'm not sure if you think based off your outlook and the current capital base, you could support a dividend increase. But any thoughts or color you have there about where your stock is yielding relative to peers in the market might be helpful.
We wish our yield was lower like everybody else. We're very comfortable with the dividend we're paying and very comfortable with the portfolio on call it, a steady state invested basis covering that dividend comfortably. I think I've said publicly before our desire is not to grow the dividend at this point. I think we're paying healthy dividend and we are confident in our ability to continue to cover that dividend.
And then lastly, I know we've touched on Bethesda condo and the retail center in Cincinnati. But could you provide a quick update on the Williston, North Dakota Multifamily loan?
Certainly, the story is better in Williston these days, as everybody can surmise given where oil prices are these days. If you again remember the components of our Williston collateral are 36 single family homes and a garden style 330 unit multifamily project, and then north 200 finished and unfinished lots. We have been actively selling the single family homes.
I think when last I looked at the report we have sold or have under contract 20 of the 36 single family homes and would expect to make further progress there. And as we sell a home, we’re just paying ourselves down and those homes sell anywhere from $250,000 to $300,000 as a range on the multifamily. Rents probably got as low in that market as probably somewhere in the call it, $0.80 to $0.85 a foot market. Rents are now north of a buck a foot with no concessions. And occupancy levels are solidly in the 90s. More importantly, I would say the market overall for multifamily, is solidly in the 90. So that allows us to continue to hopefully push rent. And as we push rent, we generate more cash flow from the asset.
And while the capital is still under earning what we would have like it to earn, that cash flow is a benefit to us. And the more we can stay at those levels, I think the more optimistic we are about some overall exit at some point in the future, but I don’t want to get ahead of ourselves. I would say after battling this asset for the last couple of years, the market generally has a better tone to it, overall. And we, like everywhere in Williston is probably hoping that oil stays at these levels, it creates a nice level of economic activity in Williston.
That is great color. It’s probably nice in Williston in July with $75 oil. Appreciate your comments guys. Thanks again.
At this time, I’m showing no further questions. I’d like to turn the call back over to Stuart for closing remarks.
Well, thank you everybody for participating. Operator, thank you. We’re done.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a great day.