© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 are the property of the Apollo Commercial Real Estate, 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 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 latest SEC filings, please visit our website at www.apolloreit.com or call us at (212) 515-3200.
At this time, I would like to turn the call over to the Company's Chief Executive Officer, Stuart Rothstein. You may begin.
Thank you operator. Good morning, and thank you to those of us who are joining on the ARI, second quarter 2019 earnings call. Joining me in New York this morning are Scott Weiner and Jai Agarwal.
Before I discuss ARI's success year-to-date, I want to take a few minutes to provide an update on our perspective on current state of the commercial real estate lending market. After a slow start to the year in the U.S. the market quickly returned to being highly competitive with a mix of both public and private lenders chasing transactions and creating generally favorable conditions for borrowers.
Spreads have remained tight and with expectations for LIBOR to decrease in the future nominal yields our new transactions have come in. We continue to be active in pursuing transaction in the U.S., but is clear from our activity year-to-date, we are taking a somewhat cautious approach to the market and finding more compelling opportunities to invest ARI's capital in Europe. As I have mentioned before, Apollo, on behalf of various forms of capital is one of the more active players in both European real estate equity and debt transaction.
Apollo's London-based CRE debt team is well known and highly regarded in the market, which enables ARI to benefit from their extensive reach and access to deal flow. Over the past five years, the team has completed over $3 billion of transactions throughout the continent on behalf of ARI and other managed accounts. The team has successfully formed first call relationships with high-quality real estate owners and sponsors throughout Europe and has completed a significant number of transactions with repeat clients. In approaching the deployment of ARI's capital, we remained agnostic as to investing in the U.S. or Europe. As such, in evaluating transactions and reviewing our pipeline, we regularly compare potential opportunities in both regions. At present, we believe there are opportunities to generate more interesting risk-adjusted returns by completing transactions in Europe, which are further enhanced from the attractive cost of currency hedging, driven by regional interest rate differentials as well as our ability to source low-cost financing in local currency.
For the first 6 months of the year, ARI's committed capital for 9 transactions totaling $1 billion, and has funded approximately hundred $190 million for previously closed loans. Given the record year we had in 2018, which included a number of transactions with future funding components, we have been able to both keep our capital invested and have the luxury of being somewhat selective in our pursuit of new transaction. There have been several transactions in our own portfolio that are talked to refinance for additional proceeds or obtain extensions or of transition from construction loans to inventory loans and we have chosen not to participate in the refinancings because we felt the returns were not commensurate with the increased risk profile.
I would like to conclude my comments on investing by reiterating a general philosophy I've discussed with many of you at conference presentations or non-deal roadshow meetings, regardless of geography, our fundamental approach to managing ARI's capital and investing in new transactions is to focus on protecting principal and then we see the most attractive risk-adjusted returns available consistent with our view of the appropriate catchment point in any specific transaction. Turning now to our capital markets activities. The second quarter was highlighted by our efforts to opportunistically capitalize unfavorable market conditions and enhance ARI's balance sheet. In May, we completed both another accretive common stock offering, as well as ARI's very successful debut offering in the Term Loan B market. Both transactions further strengthened ARI's capital structure and provided the company with ample liquidity for future investment activity.
The debut Term Loan B offering totaled $500 million and has a 7 year term care. ARI received a BA3 BB- corporate rating from Moody's and S&P, respectively, and the term loan was rated BA2 BB-. The loan was praised at LIBOR +275 basis points and subsequent to closing, we swapped the floating rate loan to fixed at an all in cost for 7 year money of 4.87%. By all accounts, the transaction was extremely successful and enabled ARI to add non mark-to-market term leverage to our capital structure.
Before I turn the call over to Jai, I wanted to mention that the multifamily property in Williston, North Dakota underlying an ARI loans were sold during the quarter for approximately $33 million, which was approximately $2 million in excess of ARI's GAAP cost basis. While the investment underperformed, I'm proud of the efforts of the investment and asset management teams, who diligently focused on achieving the most favorable outcome and allowed ARI to recoup some of the initial impairment.
And with that, I will turn the call over to Jai to review our financial results.
Thank you, Stuart. For the second quarter of 2019, our operating earnings were $69.1 million or $0.47 per share. These numbers exclude realized loss associated with North Dakota loan of $12.5 million or $0.09 per share.
GAAP net income for the quarter was $56.5 million or $0.37 per share. During the second quarter, we closed five loan transactions totaling $554 million and funded an additional $78 million on previously closed loans. Pre-payments during the quarter totaled $168 million. At quarter end, our portfolio had an amortized cost of $5.4 billion which is a 12% year-over-year increase. The portfolio is comprised of 71 loans with a weighted average unlevered yield of 9% and a remaining term of just under three years, and 93% of the loans in the portfolio had a floating interest rate.
As Stuart mentioned in May, we completed a common stock offering of $17.2 million shares at a net price of $18.25, which is a 1.13 times book value multiple. The shares generated net proceeds of approximately $315 million and we used $172.5 million of those proceeds to redeem the 8% Series C preferred stock at par. And at quarter end, our total common equity market cap was over $2.8 billion. The offering was accretive to book value per share, which increased to $16.30 from $16.13 at the end of Q1. Lastly, with respect to liquidity and leverage, as of quarter end we have over $900 million of available capital in the form of cash and availability on our credit lines, and we ended the quarter with the one times debt-to-equity ratio which continues to be the lowest among our peer group.
And with that, we would like to open the line for questions. Operator, please go ahead.
Thank you. [Operator Instructions]. And our first question comes from Steve DeLaney with JMP Securities. You may proceed.
Good morning and thank you for taking the question. Hi, Stuart. So, we noticed looking through the portfolio detail that you upgraded from a risk standpoint a large $170 million Manhattan office construction loan to a two from a three. So, just curious if you give us some color on what event drove you to view that loan in a higher quality fashion. Thanks?
Yeah. I mean the history with the loan is, we actually participated in the pre-development loan, and then we are now partners in the construction loan. It was a speck office building where the sponsors have achieved a significant amount of preleasing with high quality tenants. So, based on the amount of preleasing, that's in place today, it's significantly de-risked the transaction and it's also apparent that in light of the preleasing in place today that when they have the opportunity to they will certainly take us out of our loan.
And the construction is also nearly done also. So, its a combination of construction being nearly done with the CCO over the next few months and preleasing we felt it made sense to upgrade the risk rate.
Yeah. The good news is it worked probably better than you thought and bad news that you will get your money back. So, you got to put it back to work, but I think that's a never a bad outcome.
Not a bad outcome.
No, that's for sure. So, shifting to the other side and this is congrats on North Dakota. I know you're glad to have that in the past, but switching down the other end, you've been working, trying to work this thing for a long time, and the condo situation there, just like to have a brief update on activity, pricing sort of there has been any spring, summer pick up there?
Yeah. I'll cover actually but those and Liberty Center someone else from asking that question. Look, our GAAP basis on the Thursday is $20 million and heading down at this point. There are now based on what is under contract or recently closed, there are 9 units left. There is a decent amount of activity on more than half of those, 9 units we've continued to chip away and I know it's my responsibility to keep providing updates on it but I think it's sort of on the path that it's on which is to say, you know we are regular dialogue with the people on site trying to make deals as best we can. And I think the economic or future economic impact of that asset is pretty muted and we're just sort of moving towards the finish line. So, sort of where I guess we expected to be in just sort of working deals as best we can. I think from an asset management perspective, Liberty Center is more of a challenge these days.
Right.
And it continues to operate in the call it, low 80s from an occupancy perspective, which is, it's functioning, it exists, but it's certainly not where we would like to see it be to sort of get us on the path to getting out of the investment. There are several things we're working on that are somewhat binary in their outcome in terms of their ability to jumpstart what's going on and at the asset I'm actually going out there next week I think other members of our team are heading out there later on this summer. That continues to be the primary focus from an asset management perspective and we're still grinding away as best as we can.
Okay. Thank you for comments Stuart.
You got it.
And our next question comes from Jade Ramani with KBW. You may proceed.
Thanks very much. What are the main factors driving your somewhat cautious approach to the market as you've described in your initial comments?
I will say it is just pricing relative value sort of what do we perceive and what we get paid for our capital and in an catchment point that we're comfortable with and look we are certainly seeing it on our existing portfolio, where there are loans we've ended up extending by coming to I would say, a somewhat middle ground with the borrower where they are happy to keep the loan in place with us, don't want to go through the effort of a refinancing, and maybe they're not grinding away to get every last bit of spread in their favor out of the deal. And there are other transactions where, look, there is capital chasing things. If you're willing to turn over every stone or rock, you could arguably find cheaper capital than ours. And in those situations where given what we did last year, and given what we see in Europe, given some other things that we know, sort of coming, we think that will come our way, we're certainly not feeling the pressure to chase anything today. And you know unlike some of our peers and this is not meant to be a positive or negative comment, we've tended never to compete at the tightest end of the market. We have always tended to seek things that have a little bit more complexity, really a little bit more of a credit story to them in order to get paid more for our capital. And we're grinding away, on a relative basis, it's more competitive today than it was 9 months ago.
Just in terms of interest rate sensitivity, I think you've disclosed about $0.07 impact from 50 basis point decline in rates, if that were to happen, you know, would you anticipate that play out, which is about a 4% decline in earnings or do you believe that the company's lack of relatively lower financial leverage you know would be one area which you could address that.
I guess I would say this, I would say our desire to keep our capital fully invested within the leverage ranges we have always talked about, historically, which is sort of our comfort level from a leverage perspective, which is call it ultimately 1.5 to 2 times, which is obviously in some respects a relevant part of our dialogue in the whole Term Loan B marketing process as well. So, I think there is capital for us to invest here. I think we have some room on the leverage side, but I don't think leverage is the answer if ultimately the market shifts down. But, you know, let's also keep in mind that we're talking about futures and a year ago, we were talking about LIBOR going up and not being a positive for earnings.
So, we'll see how it ultimately plays out. But, I don't think leverage is necessarily the answer on a go forward basis.
And in terms of the mix of deals, I think this quarter the highest percentage of first mortgages that I believe you originated in some time, you know, a levered basis, are those investments similar to what you would've made subordinate investments, or if the company does begin to do a disproportionate share of first mortgages, will that also create a downward pressure on the earnings?
I think in the world in which we are operating today, I think levered first actually provide better ROEs than this, so, I think on a risk-adjusted return basis and that also factoring the impact of Europe where we tend to just do first mortgages as well, I think that will impact the ROEs. Generally speaking, getting to what I think is the crux of your question. If you look at some of the legacy mezzanine loans on our books, those sorts of ROEs from that loans don't exist in the market today, certainly not at risk levels that we would be comfortable taking.
Okay. Thanks very much for taking the questions.
And our next question comes from Rick Shane with JPMorgan. You may proceed.
Hey guys. Thank you for taking my questions this morning. In the maturity schedule, it looks like, you've had a multifamily property in Brooklyn mature in June and another multifamily in Manhattan mature in July or scheduled to mature in June and July and each has been extended, one to September and one in November. Just curious what you sort of see as an outcome there. Was there any incremental economics picked up associated with the extensions on those loans?
No. I mean June was just a simple extension of loans paid off, so it's not an issue, and we would expect in New York again, it's, we're just being working with our borrower, but not a situation where we're creating any sort of material economics for ourselves.
Got it. And any impact obviously we have seen some loan categorization move from a peer related to New York multifamily, any impact there on that. Because those loans, the Manhattan loan was a sub one.
No. I mean, we generally across the board sort of avoided the rent stabilization to marketplace. While we certainly read the headlines with interest and think this will play out over a long period of time it has just not had any meaningful impacts on our portfolio.
Terrific. Thank you for that commentary.
Sure.
[Operator Instructions]. And our next question comes from Stephen Laws with Raymond James. You may proceed.
Thank you. Good morning Stuart and Jai.
Good morning.
Impressive the color you guys have provided already on the loan and then obviously Rick's question to that New York multifamily you just addressed. Kind of flipping to the liability side of the balance sheet, you guys have really done a good job of diversifying your capital structure and adding the Term Loan B.
Can you talk about other opportunities there to further diversify or there are opportunities to grow the term loan facility and increase at sort of fixed source or may be talking about where you plan to go from here now that that term loan is in place?
Yeah. Look, I think the term loan was important cause it sort of activated our ratings with the rating agencies, and now made us a issuer of rated paper, which certainly also opens us up to a significant number of investors who will now follow us. There is obviously, given what we have did. There is no immediate plans to do anything today, but I think we were like we do with all our potential capital market strategies sort of keep an open dialogue with investors and obviously other peers in the space have done things in the traditional high-yield notes market and there is other things for us to explore.
I think separately, you know, to his credit, one of Jai's roles here is to keep a very active dialogue with all of our various relationship banks on the repo side of things, and I think both in terms of the U.S. and what we've done in Europe on a literally a deal-by-deal basis there is a very active dialogue around creating the right source of capital and the right structure and the right pricing for us to allow us to get business done. Going forward, I think the Term Loan B was important as it sort of give us a new avenue and a new dialogue with investors. I don't think there's anything today, specifically that we're focused on that will call it another new avenue.
Okay. Great. I appreciate the color there. Thanks a lot, Stuart.
Sure.
Thank you. Ladies and gentleman, this now concludes our Q&A portion of today's conference. I would now like to turn call back over to Stuart Rothstein for closing remarks. You may proceed, sir.
Thank you, operator. And thank for those of you for participating on the call.
Ladies and gentleman, thanks for joining today's conference. This does conclude the program. And you may now disconnect. Everyone have a great day.