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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Apollo Commercial Real Estate Finance Earnings Conference Call. [Operator Instructions]. 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 any unauthorized broadcast form is strictly prohibited. Information about the audio replay of the 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 your most recent filings with the SEC for important factors that could cause actual results to differ materially from those 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 our 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 the latest SEC filings, please visit our website at www.apolloreit.com or call us at 1-212-515-3200.
At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein. Please being sir.
Thank you, Operator, and good morning, and thank you to those taking the time to join us this morning on the Apollo Commercial Real Estate Finance, Inc. Third Quarter 2019 Earnings Call. As usual, joining me are Scott Weiner and Jai Agarwal here in New York.
This past September, ARI reached its 10-year anniversary as a public company. I wanted to take a minute to highlight the milestones we have achieved over the past decade, which underscore the strength of Apollo's commercial real estate debt platform, which started as a team of 4 people has grown to over 30 investment professionals located in New York, London, Los Angeles and San Francisco. Since 2009, that team has deployed approximately $13 billion of capital into transactions throughout the U.S. and Europe on behalf of the company. ARI's equity market capitalization has grown from $200 million at the IPO to nearly $3 billion at September 30, and the balance sheet is stronger and more diversified with over $2.6 billion in repo facilities, $575 million of convertible notes and this year's $500 million debut offering in the Term Loan B market.
Importantly, since inception, ARI has provided shareholders an attractive yield and consistent income through its quarterly dividend and we continue to focus daily on enhancing shareholder value. In short, we are extremely proud of ARI's performance over the past 10 years, which could not have been achieved without the incredible team of investment, asset management, finance and legal professionals at Apollo.
Turning now to Q3. ARI had another strong quarter of originations committing capital to transactions totaling approximately $960 million and bringing originations to $2 billion for the first 9 months of the year. As we discussed last quarter, we continue to find compelling opportunities to lend in Europe. Broadening our footprint, ARI recently completed its first transaction in Italy. And following the end of the quarter, we committed to 2 large first mortgage loans, which included a EUR 266 million senior loan secured by a Spanish hotel portfolio and a GBP 196 million first mortgage loan secured by a portfolio of senior care homes located across the United Kingdom.
Our success in Europe continues to be a testament to Apollo's broad presence in the European real estate market and the London-based commercial real estate debt team, which has done excellent job establishing a reputation as a reliable, creative and highly regarded capital provider.
In addition, we continue to benefit from our ability to source low-cost financing in local currency throughout Europe. At present, we are working through several other transactions in Europe, which we expect will close prior to year-end. While our pipeline remains weighted towards Europe, we have recently completed several deals in the U.S., including 2 hospitality transactions as well as a large urban retail transaction on a prime retail corner in New York City.
We remain agnostic as to investing in the U.S. or Europe. As such, in evaluating transactions and culling our pipeline, there is an ongoing dialogue comparing potential opportunities in both regions and targeting those transactions we anticipate will generate the most interesting risk-adjusted returns.
ARI is also benefiting from our pipeline of future fundings. During the quarter, the company funded an additional $126 million, which continues to be an effective means of keeping capital invested and offsetting loan repayments. Net loan portfolio growth for the quarter totaled approximately $670 million and we ended the quarter with a loan portfolio totaling over $6 billion. It is worth noting some positive activity in 2 of our larger investments. Our condo inventory loan in the United Kingdom has been paid down through unit sales and we expect additional pay down activity will occur prior to year-end. Also, our Miami urban predevelopment loan had an infusion of equity during the quarter, which reduced the size of our loan balance.
Before I turn the call over to Jai, I will take a minute to discuss the $35 million of loan loss reserves we've recorded during the quarter in connection with our loan securing a lifestyle center in Northern Cincinnati and our condo inventory loan in Bethesda, Maryland. With respect to the lifestyle center loan, I mentioned at the time we took the initial reserve that we were actively pursuing several value enhancing initiatives, which had somewhat binary outcomes. As those initiatives have not fully materialized, this quarter ARI recorded an additional $32 million loan loss reserve, bringing the total reserve on that investment to $47 million.
The center remains at an occupancy in the low 80% range reflecting the balance between new tenants, which are predominantly food, entertainment or experience related, with continued challenges in retaining traditional soft goods retailers whose business models are changing rapidly. Over the past year, the management team in this center has done a commendable job managing and optimizing costs as well as strengthening the presence -- center -- the center's presence in and relationship with the surrounding community. We continue to view this center as being well located in a market that continues to see both business and residential growth.
The next step in protecting and recovering value is to re-envision the future of this center in the face of an ever-changing retail real estate landscape. We are finalizing terms to enhance leasing by bringing in the team with more of an owners mentality and a demonstrated track record of creativity and responding to the new paradigm of retail real estate.
Finally, ARI also recorded a $3 million loan loss reserve in connection with the condo inventory loan in Bethesda, Maryland, bringing the total reserve on that investment to $10 million. At quarter end, there were 7 units remaining and the reserve taken reflects a more conservative view of timing and pricing.
And with that, I will turn the call over to Jai to review our financial results.
Thank you, Stuart. For the third quarter of 2019, our operating earnings were $72.6 million or $0.47 per share. GAAP net income for the quarter was $25.7 million or $0.16 a share, which reflects the impact of the $35 million loan loss reserve Stuart mentioned. During the quarter, we closed 8 loan transactions totaling over $950 million and funded an additional $126 million for previously closed loans. Repayments during the quarter totaled $353 million.
At quarter end, our portfolio had an amortized cost of $6.1 billion, a 12% increase over last year. The portfolio was comprised of 74 loans with a weighted average unlevered yield of 8.2% and the remaining term of just under 3 years. 94% of the loans in the portfolio had a floating interest rate.
I wanted to note that effective Q4, we will account for the lifestyle center loan on a cost recovery basis. That is to say all proceeds will be applied to reduce the GAAP carrying value, which at quarter end was $126 million. With respect to liquidity and leverage, as of quarter end, we had approximately $540 million of available capital in the form of cash and availability on our credit lines. And we ended the quarter with a 1.3x debt-to-equity ratio.
During the quarter, we increased the credit capacity on our JPMorgan and Deutsche Bank facilities to $1.3 billion and $1.25 billion, respectively, bringing our total repo capacities to almost $3 billion.
Lastly, our book value per common share was $16.02 at quarter end, a decrease from $16.30 at June 30. This decrease reflects both the provision for loan loss as well as $0.07 a share from unrealized loss associated with an interest rate swap.
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 of JMP Securities.
Congratulations on making 10 years. Yes. There are a lot of crazy things have happened in the last 10 years, and you guys are there. So look, your press release, one of the things we noted on the face of the press release. So $960 million or so new loans. And the thing that struck me is whether they were senior loans or subordinate loans, they were all fully funded at the time of closing or shortly thereafter. So what does that tell us about these specific loans, these opportunities versus sort of the more typical bridge loan concept?
Scott, go ahead.
Yes. I mean, I would say -- I mean, look, they're clearly not construction loans. I think you've heard us in the past talking about how we're finding more and more opportunities on transitional, lot of these transitional. And look, some of them are loans where there just isn't a necessarily need for a big future funding. There's not necessarily a huge amount of capital going in, where we would fund that. So I mean, you can -- we like -- I mean, obviously, future fundings are good too. But obviously, we can put all our money out there. One that is even better.
Would you say that since -- I assume most of these are floating rates still?
All of them are.
Yes, they're all floating rate. So we've got historical -- well, not historical low now, but we're still sub-2% on 10 year. Is there some reason why these properties that owner would not want to go into a CMBS loan at this point? Is it -- are they just not optimized?
Look, I mean, I think there's a lot of reasons people might not like CMBS, right versus balance sheet. But look, there are still a lot of owners who like to see payment flexibility, whether they think they're going to create value and might want to refinance more down the road. They might want to sell. There are people who take a portfolio approach, and just obviously like floating rate debt. There are plenty of people who put fixed rate debt on at 4.5% and thought they were a genius. And now they could have borrowed at 3.5% or 3%. And also, look, a lot of our volume has been in Europe. Whereas Europe continues to be a floating rate market. There really is not an established long-term fixed rate product there. So I think for a combination of reasons.
Yes, points taken. The resort loan in Italy, is that made to a U.S. or U.K. sponsor or is the borrower actually an Italian entity?
It is a local borrower.
Meaning, local New York or local in Italy?
Local in Italy.
It's a family.
It's a family that created a resort. They've built the hotel company around it and they still control the equity and manage the property.
Got it. Okay. And one final thing for me. The new -- and on Page 6 of your deck where you listed your new loans. The $470 million loan at 5th and 57th, that's not your old 111 West 57th property, is it?
No. It's the corner of 57th Street and 5th Avenue, it's an asset in New York known as the Crown Building. We're lending on a portion of it, not the entire asset.
Got it. And when you use the term retail condominium, I kind of -- first, I scratch mind saying are those -- are you just saying they're for sale resi condos, no. But it sounds like this is actual retail store footprints that are, for whatever reason, structured in a condominium ownership for REIT purpose?
It's a mix. Think of the asset as a traditional building in New York that has now been turned into multiple components, whether it'd be resi, hotel, as you say, street retail, we're only lending against the retail component of the asset.
And our next question comes from Stephen Laws of Raymond James.
I wanted to touch base on a couple of the mezz loans. I think if I look maybe 2 of the 5 largest are on residential condo construction in Manhattan. I think there's actually a second loan that's attached to one of them or at least on the same property, but can you talk about that market, what you're seeing? Others have been concerned, high end condos or kind of a soft spot in Manhattan. But can you talk to your exposure there, how those business plans are going and maybe what the attachment points are or LTV on those mezz loans?
Yes. So look, obviously, our largest mezz loan and the one that we've talked about repeatedly is on the asset, Steve just referred to, which is the Steinway building or 111 West 57th Street here in Manhattan, which is the targeted highest price point sale of anything in our portfolio. Again, I think the sponsor is chipping away on the sales side, the asset is still under construction, will be completed shortly. I think what we're seeing in Manhattan today from a condo side is that there is a very healthy market for inventory loans. We were paid off on one of our larger condo mezz loans, another project known as 108 Leonard recently through a replacement financing. So there continues to be a very healthy inventory loan financing market, I think, to be candid about the New York condo market overall. Things have certainly slowed in terms of pace of sales and pricing of sales. That being said, away from the Steinway building, most of what we've lent in New York, either on the senior side or through the mezz side is something generally in the, call it, plus or minus 1,000, a couple of hundred dollars in either direction, price per square foot for something that we'll sell in the, call it, $1,800 to $2,200 a square foot. And there is continued to be activity at those price points. And generally speaking, we're very comfortable with the portfolio across the board.
Great. Stuart, shifting to office, any WeWork exposure or maybe to take that a step further, can you talk about what you've seen since the rent control regulations have gone in. And any estimates on how much that's impacted valuations of those assets? I've kind of heard a fairly wide range from different people. So curious to get your thoughts on valuations of those assets in Manhattan?
Yes. Look, in terms of WeWork, there's no WeWork exposure in our portfolio. So not something that we're obviously following the story, but it doesn't have any impact on the portfolio. Scott, you can comment on rent control, if you want.
Yes, look, I think we really avoided the rent -- that rent-regulated market. Obviously, always concerned about things that are tough to underwrite, legal risk being a primary one. And we've also been one where when we just kind of look at cap rates and then how low they are, we actually struggle with kind of the resulting low debt yields that you would get. And so I'm certainly -- we're certainly not an expert on that market, which is something we never did.
I kind of crammed those questions together. But then lastly for Jay, kind of just into the G&A declined sequentially. I kind of found in the 10-Q that that maybe first half had a little elevated on the RSUs and also some, I guess, some one-time broken deal expenses. Is this current third quarter level more of what you expect run rate G&A to be? Do you think we'll go back into the low to mid $6.5 million on a quarterly basis or kind of any guidance on the G&A front.
Yes, I think the non-stock-based G&A, you can think of between, call it, $8 million to $8.5 million per year. And there will be some noise, plus or minus $300,000 a quarter, but $8 million to $8.5 million is a good run rate for the cash G&A.
And our next question comes from Jade Rahmani of KBW.
Just looking forward into the earnings trajectory of the company, there's multiple factors thinking about anticipated repayments, which would probably be of higher yielding loans. Incremental yields, probably lower than the existing book, mix shift to first mortgage. And then also noting that your current leverage is at, I believe, the highest level since second quarter of '16, and I know you've historically run the company modestly leveraged in terms of balance sheet leverage. So how should we think about those factors and the implications for the dividend in 2020? I mean, it seems that's the reason there could be the potential for a reduction in the dividend, which would make sense, given those factors. Do you agree with that?
Here is what I'd say, Jade, look, I think from a high level, both on the asset side and on the financing or leverage side, and I'll get into a little bit more specificity. I don't think there'll be any significant change in the overall business strategy of the company, which is to say, on the asset side, we continue to look for, for the most part, either senior loans or mezz loans against transitional opportunities. I think the returns are, what the returns are. I don't think we are going to, in any way, change our view of where we want to be from an attachment point perspective, where we want to be in terms of relative to the overall value of the asset. I don't see us changing in any way. Our approach to the market, vis-Ã -vis overall risk appetite. So I think, again, what is achievable on the asset side will ultimately be dictated by the market, but I have a lot of confidence in our team's ability to continue to find things that are interesting from a risk-adjusted return perspective.
I think on the leverage side, I think what you're seeing in terms of the increase in leverage overall, the company is very much driven by asset mix, which is to say, if you think about the goalpost of a company that is all first mortgages are a company that is all mezzanine loans. Obviously, as we move more from mezzanine loans to more and more first mortgages in our book. That has implications for the overall leverage. But I would say the approach to leverage strategy has not changed at all, which is to say, yes, we will continue to lever our first mortgages. We will not, as anticipated today in any way you put asset-specific financings on the mezzanine loans, but you could see a modest uptick in leverage. But I think as we think about future earnings.
And look, ultimately, dividends are a result, they're not the goal. The dividend is a result of what happens by maintaining discipline on the investment side and maintaining discipline on the leverage side, there is no expectation that we will change either the investment strategy and/or the leverage strategy going forward. And ultimately, as we put a portfolio together and see what returns are achievable. There will be discussions with the Board about what the appropriate dividend level is. And those discussions will, as they've always done in the past, tend to focus on what is a sustainable long-term earning. And then as a result, dividend strategy as opposed to doing something that tends to bounce around on a quarterly basis.
Understood. Just pointing out the current dividend against your book value equates to an 11.5% levered return, which is after management fees and G&A. So it's quite a high hurdle to be able to hit in this market. Would you agree with that?
Yes. Look, I think what I would say is we've earned it for the first 3 quarters of the year, I would say, based on expectations going forward. We expect to earn it for the full year. I think if you look at where we're doing new deals at as well as what's going on competitively in the market as well as where the overall rate environment is. I think it is certainly a challenging market in terms of overall ROEs. And I think what you'll hear from us is that there's no plans and no desire to either chase risk to generate more ROE or change leverage philosophy to generate more ROE. The portfolio will generate what the portfolio generates consistent with an investment in financing philosophy, similar to what we've done in the past.
And in terms of the types of transactions you're originating with the emphasis on Europe, a slight mix shift toward more first mortgages. Do you view the -- this quarter's originations and what's in the pipeline as lower risk on average than what's in the existing portfolio or comparable?
I think it's comparable from a business plan perspective. I think as we've gotten bigger, I think we've had more opportunities to step into larger senior loans or allow us to control the overall, call it, credit stack. But I think if you look at the investment memos and the business plans that were articulated in what exists in the current portfolio as well as the 10 most recent investment memos and business plans that were articulated. I think you would find more similarities than differences.
With the factor of where we are in the cycle and where our view of prices and values and cash flows, right? Obviously, we continually update our views of markets in underwriting. And obviously, as does the market with valuations and things like that.
Just turning to Liberty, 7.75% cap rate seems -- I thought that 6.75% cap rate in Q4 '18 was highly optimistic. I candidly think the 7.75% is also optimistic. How did you come to that? And what are the risks of further write-downs? A follow-up would be, why not just foreclose on the property, sell the asset and move on in terms of the amount of management resources, et cetera, that has to be put to work in this asset?
So I think to answer all 3 or 4 questions. Look, I think from a cap rate perspective, there's a mix of quantitative and qualitative factors based on both publicly available as well as to the extent you can get your hands on them. Private comps for what one could hope or similarly situated assets in various markets. And then, obviously, the most robust source of information is the cap rates on the range of public companies that are in various parts of the retail real estate space, where the market is making a commentary, I'll call it, cap rates on a daily basis. And then we've got to overlay what we know of the situation in Cincinnati and come up with a cap rate that we believe is as best as possible, reflective of what's going on today, and that's where we ended up with the 7.75%.
I think in terms of what may happen in the future or not happen in the future. I think, look, to the extent we believe today that we were going to take additional write-downs in the future, that would actually need to be reflected today from an accounting perspective. So we believe the reserve we took today reflects best available information and perspective on what is going on at the asset and what can be done to improve the asset.
And I think to your last question, I think we believe that there are -- is still value to be achieved or value to be recaptured through the efforts being spent on the asset, both by those here at Apollo as well as those who are working on behalf of ARI, Apollo and a consulting or other capacity. So we think there's still work to be done in order to maximize what we think the return could be for the investment.
Okay. That makes sense. On 111 West 57th, were there any additional contracts signings this quarter? And how would you evaluate the prospects for a refi of the loan?
Yes. Look, there's been nothing publicly disclosed vis-Ã -vis additional contracts or nothing we can comment on. I think, look, I think earlier, I think, in relation to maybe another question. There's a very healthy market for condo inventory loans today. So to the extent the asset is fully built out, which we expect it will be completed shortly. And to the extent there's a decent level of initial deposit activity on units. I think there's a reasonable expectation that our capital, which is certainly not cheap capital can be replaced in the inventory market, but there's still work to be done because it's not a simple refinancing. But certainly a receptive market for sponsorship to be approaching in terms of having those discussions.
I do believe that it would be -- you would receive a payoff at par. And in addition, I think looking at the supplemental, there's, I believe, 2 loans is how it's broken out. So that's about $203 million and another $48 million, just making some assumptions on what the yields could be. I believe it amounts to close to 20% of ARI's earnings. So just wondering about if you think a full payoff could be reasonable? And if that quantification about earnings percentage is correct?
Yes, I think based on the way we're carrying it, you could assume we expect to get every dollar were owed repaid to us. So we feel very comfortable from that perspective. Jay, if you want to comment on the earnings?
Sure. Yes. This is a north of a 20% blended yield. So your math is spot on the -- in terms of the earnings impact.
[Operator Instructions]. Our next question comes from Rick Shane of JP Morgan.
As we head into seasonal implementations, not something you guys have discussed. Curious how we should think about the difference between the first lien and the mezzanine or the subordinated portfolio in terms of potential reserve levels? And then I am curious from a strategic perspective, given the upfront -- potential upfront costs associated with the subordinated lending, is that something -- will that accounting treatment actually changed your appetite for that product?
Yes, sure. So mezz loans basically are a kind of first mortgage loans for this purpose. So if you have a mezz loan, you basically treated as if it were a first mortgage loan to come up with the CECL results. And the way we think of our business going forward, this is just an accounting change, and we expect this to have no impact on how we think of future business.
And what types of allowances are you expecting to take?
So we've spent a lot of time on it so far. We're not in a position to have finalized that. So far, we expect to disclose this number in our fourth quarter filings, which will be sometime in February.
So the plan, Rick, is to give people a snapshot based on Q4 of what they could expect when we go live in 2020.
And I'm currently showing no other callers in the queue. I'd like to turn the call back over to Mr. Stuart Rothstein for closing comments.
Operator, thank you, and thank you for those who participated this morning.
Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.