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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 is being recorded. Please note that they’re the property of Apollo Commercial Real Estate Finance, Inc. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I’d also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements.
Today’s conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our recent filings with the SEC for important factors that cause actual results to differ materially from these statements and projections.
In addition, we will be discussing certain non-GAAP measures on this call, while management believes are relevant to assessing the company’s financial performance and 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, 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. Sir, you may begin.
Thank you, operator, and good morning to those of you joining us on the ARI fourth quarter and full-year 2018 earnings call. Joining me in New York this morning as usual are Scott Weiner and Jai Agarwal.
As we enter ARI’s 10th-year in the Commercial Real Estate Finance business, we are very proud of the platform we have built. Base upon our best-in-class relationships with borrowers and brokers, as well as our well-earned reputation as a reliable thoughtful and creative capital source, we firmly believe that the Apollo team has established a leading position in the market.
The strength of the platform was evidenced by another record year of lending activity for ARI, as the company completed $3 billion of loan own originations in 2018, a 50% increase over 2017. The power of the platform was further evidenced by the diversity of deal types, property types and geographies represented in ARI’s 2018 book of business.
Our ability to understand complex business plans, effectively structuring under IPO and execute quickly enabled ARI to complete 27 unique loan transactions during the year. ARI’s average transaction size exceeded $100 million for the first time in 2018, as the continued expansion of its capital base enables ARI to source and participate in larger transactions.
Through Apollo’s extensive network of existing relationships, as well as recently formed one, ARI expanded its footprint in several new domestic markets during the year. In addition, our international presence grew, as our London-based team completed approximately $600 million of lending activity on behalf of ARI. At year-end, investments in the UK represented approximately 14% of ARI’s portfolio.
Another key aspect of the platform is our ability to source transactions by co-originating with like-minded senior lenders, including our repo providers. In these situations, we either structure pari passu senior loans or create attractive senior junior structures. In either case, we believe our ability to work collaboratively and be diligent and thoughtful in underwriting and structuring has enabled us to repeatedly win mandate alongside our partners.
Turning to ARI’s capital markets activities, there are few items of note from 2018. We continue to focus on ways to improve ARI’s balance sheet, including expanding capital sourcing, extending the maturities of liabilities and when possible lowering the all-in cost of capital.
ARI’s capital base grew by $500 million during the year through the combination of a common stock offering, as well the issuance of common stock to the conversion of our 2019 convertible notes. Both of those equity issuances were executed at notable premiums to book value.
During the fourth quarter, ARI issued $230 million of new convertible notes, with a 5.38% coupon and $20.53 price per share initial conversion price, or a 10% premium to the common stock price on the date the transaction was priced. We also diversified and expanded our repo providers and now have five counterparties who provide ARI with over $3 billion of capacity.
Finally, we ended the quarter with 1.1 times debt-to-equity ratio, which continues to be the lowest amongst our peer group. As we look to the year ahead, we remain confident in ARI’s business model and market position. Our focus remains on finding investments, which generate attractive risk-adjusted returns within ARI’s core business.
In considering new transactions, we rely heavily on the experience and debt of Apollo’s real estate credit and equity teams, the knowledge gained from transactions both completed and avoided and the investment discipline, rigor and process that permeates the entire Apollo organization.
Importantly, ARI continues to benefit from the information and analysis that are shared broadly throughout the entire Apollo organization, which we diligently incorporate into our underwriting and structuring.
2019 is off to a strong start. Since January, ARI has committed to $432 million of new commercial real estate loans and our pipeline remains healthy. We anticipate over $400 million of future fundings in 2019, which we believe will help counterbalance a portion of the loan repayments expected throughout the year.
We will remain steadfast to our credit-first methodology, while building ARI’s pipeline and will be prudent in our capital management in finding new business. We believe the combination of our platform, pipeline and financial flexibility will enable ARI to continue to generate attractive, risk-adjusted returns on its invested capital and provide an attractive dividend to our investors in 2019.
And with that, I will turn the call over to Jai to review our financial results.
Thank you, Stuart, and good morning, everyone. For the fourth quarter of 2018, our operating earnings were $61.9 million, or $0.46 per share and GAAP net income was $46.2 million, or $0.34 per share. For the full-year of 2018, our operating earnings were $226 million, or $1.80 per share and GAAP net income was $192.6 million, or $1.48 per share.
During the fourth quarter, we committed $800 million to new transactions, of which $450 million was funded. In addition, we funded $134 million for previously closed loans. Repayments totaled $466 million during the quarter, with $319 million from first mortgages and $147 million from subordinate loans. Importantly, loans originated during full-year 2018 had a weighted average appraised LTV of 58%.
At year-end, our portfolio had an amortized cost of $4.9 billion, which is a year-over-year increase of over 30%. The portfolio was comprised of 69 loans, with a weighted average of all-in yield of 9.3% and the remaining term of just under three years. 91% of the loans had a floating interest rate.
Moving on, as part of our quarterly asset review process, we recorded $15 million loan loss provision against a $171 million loan known as Liberty Center. The property continues to be low to mid-80% occupied and is covering out debt service.
While our new property manager is making progress with leasing and operations, there’s still significant work to be done to stabilize the property. With respect to liquidity, as of December 31, we had over $575 million of available capital from a combination of cash and availability on our credit lines.
Lastly, our book value per common share was $16.20 at December 31, as compared to $16.27 at the end of the prior quarter. The decline was primarily due to the loan loss reserve and was partially offset by the issuance of convertible notes in October.
And with that, I’d like to open the line for questions. Operator, please go ahead.
Thank you. [Operator Instructions] And our first question comes from Steve Delaney from JMP Securities. Your line is now open.
Good morning, and thanks for taking the question. Stuart, the portfolio had nice growth last year just under $5 billion, over 30% growth. And I’m just curious if you look at the current market opportunity, if you have a range of expectations that you and others there have set for the portfolio growth in 2019, assuming a reasonably stable market conditions?
Yes. I would say at a high-level, Steve. Look, we still expect there to be a significant amount of just broadly speaking transaction activity. There’s still a significant amount of capital held with value add funds, opportunity funds, other structures that tend to be our primary borrowers, and we expect that capital to get put to work, which will lead to at least opportunities for us to look at.
I think the advantageous position we find ourselves in is, I think, the size of what we did last year and where we’ve taken the portfolio to, I think really sets up quite well from an earnings perspective for this year. And I think it allows us to be more selective as we think about what to do with our capital on a go-forward basis without having any significant earnings pressure vis-à-vis dry powder on the balance sheet.
So, I think generally speaking from a market perspective, I would say, there are things going on. So I would say, people certainly started the year somewhat cautious, just trying to figure out where things would settle out given the market volatility we saw at the end of the year. And it’s important to box that market volatility in terms of capital market volatility, not what we’re actually seeing at underlying real estate.
Pipeline is picking up, which certainly expect we will be active. Do I think we get back to $3 billion? We run scenarios, where we could do that, or we could come short of that. But it all comes back to the fact that, I think, we’ve got sort of a nice head start on this year just given how much we did last year, as well as what closed in January of this year.
That’s a good color. Obviously, it’s going to the – whatever opportunities you present are going to really drive it for you. But I think realistically, something inside of the 30% growth would probably make sense at year-end. And then just one follow-up. You did – there is the couple of participations in large ones and you mentioned that in your prepared remarks.
Can you comment on whether the lead lenders on those two loans, if they are large visible banks for one, who are you working with at least by description? And then also, in these cases, are you pari passu or any of these sort of a senior, junior split? Thanks.
No. In the situation you’re referring to, they’re pari passuing for us to answer your questions in reverse. And then…
Okay.
…we have both participated with large banks, as well as just other similarly situated lenders in the market, but all reasonably sizable organizations that you’d be familiar with by reputation.
Okay, great. Thanks for the comments, Stuart.
You got it.
Thank you. And our next question comes from Stephen Laws from Raymond James. Your line is now open.
Yes. Hi, good morning. Thanks for taking my questions, Stuart and Jai.
Yes, sure.
Following up on Steve’s questions about the volumes, can you talk about the mix kind of looking at year-over-year from fourth quarter? I guess subordinated investments were down from 28% of assets to 21%, from an equity standpoint 44% to 35%, it looks like Q4 was all first mortgages. Is that a function of competition? Is that a function of the portfolio or where we are in the cycle? Can you maybe talk a little bit about how we’re seeing a shift in your portfolio allocation between first and mez loans?
Yes. I think it’s a factor of few things. I think, first of all, given our larger size than, call it, prior years, we certainly are in a position to speak for the whole loans as opposed to having to find or create mez positions, if you go back, call it, three, four, five years ago. So I think it certainly affords the opportunity to control a situation and speak for the whole capital stack.
I also think it’s fair to say, there are just fewer, sizeable mez positions available in the market these days, largely probably driven by the fact that most senior lenders are willing to push out a little bit in terms of LTV or proceeds in order to control the situation.
So, fundamentally, at a high-level, we are still very open to doing either first mortgages or mezzanine loans and we look at each as a unique opportunity and underwrite it as a unique opportunity. But if you look at our pipeline and look at where the books gone over time and what we anticipate being available in the market, I think, it’s fair to say it will still be more weighted towards first mortgages than mezzanine loans just given what’s available in the market these days.
Great. That’s helpful from a modeling standpoint. And a follow-up on your comments there as you talked about some, I guess, first mortgage lenders willing to stretch a little bit on LTV. Can you maybe talk about competition? Have you seen competition to price kind of subside and stabilize? Are you seeing increased competition from people you haven’t seen in the past, or maybe update us on the landscape of what you’re seeing in the market here now that things have calmed down from the dislocation in December?
Yes. At a high-level, I don’t think we’ve seen any significant or major new entrances – entrants recently. You certainly – from our perspective, I think, you saw the most, call it, increase in competition or increase in interest level probably the first-half of last year, which probably drove more significant pricing or spread compression during the early part of last year and which somewhat moderated as we move through the middle to latter part of last year.
I would say, things are still competitive. I would say, spread compression is moderated, maybe things have ground in a little bit. But we’re also back to a 10-year that’s now in the 2.65% to 2.70% range. And it feels like the rise in LIBOR has certainly abated or ebbed at this point.
So, I would describe the market generally speaking from a competitive perspective as very similar to where it was the latter part of last year. I think what you’re seeing in the market right now is, I would say, the market is still sort of finding its way, call it, all over whatever we occupied six weeks into the year.
The economy at least domestically is still putting up good numbers, underlying real estate fundamentals, but for some pockets here and there are still performing. And I think, everybody is just trying to feel out the market a little bit and see if what we experienced on the capital markets side at the end of last year was just a blip or it’s got any real impact on the market. But from a competitive standpoint, no really new entrants just sort of the same place we were, call it, three, six, nine months ago.
Great. I really appreciate the color on that. Thanks for taking my questions.
Thank you. Our next question comes from Rick Shane with JPMorgan. Your line is now open.
Thank you for taking my question. On the Cincinnati property, it looks like in the third quarter, the provision was related to the restructuring in the compression of the yield from 5, 5 spread to the 3 spread is what you’re describing today now in greater expectation of loss of principal?
Yes. So to be fair, we didn’t take a provision in the third quarter. We go through the same analysis every quarter, which is at a high level the loan on our books and what can we realistically expect moment in time, recovery value within the broader guidance provided from from an accounting perspective.
I think the reserve we’ve now taken in the fourth quarter, again, sort of speaks to where the asset is from a leasing perspective, NOI perspective, looking at where as best you can similarly situated assets are clearing the market. And given sort of where retail is perceived in the country overall. These days, it’s always tough to find good comps.
But look, we think there’s still a lot of work to be done on this asset. It is covering debt service. It is a real center, but low 80s occupancy is not where we wanted to be long-term. We think it’s got – we think there are strategies to certainly increase the occupancy.
We think there are other strategies vis-à-vis the size of the parcel and what you may or may not be able to do without parcels or other strategies to continue to add value to the site. But in terms of the sort of analysis we go through on a quarterly basis from a pure sort of books and records perspective, it was the appropriate time to take a reserve.
And Stuart, just to be clear, because I just spoke on it in the third quarter. The TDR provision was actually in the second quarter, but that was on this property as well, correct?
That was not on this property.
That was a TDR, that was not as reserve. The reserve was on Clay Springs in the second quarter is what you’re referring to that.
Okay. That’s now I’ve got. Thank you, guys.
Yes, sure.
Thank you. Our next question comes from Jade Rahmani from KBW. Your line is now open.
Thanks very much. Just coming along the Liberty, what’s the justification for the 6.75% cap rate. Just looking at market data from RCA, some other sources, some folks I’ve spoken to, I would have thought that something in mid-7 to as high as potentially 9% or 10% would be more conservative, 6.75% seems kind of optimistic. And in addition, what is the downside risk to the current in-place NOI?
Yes. So, look, at a high level, Jade. We like you seek market data. We look for A, comps that are as nearby as possible and similar in terms of the asset we’re talking about. We also look at broader comps either public or private to the extent. It’s hard to find a robust number of comps in the specific sub market we’re talking about.
And then we also look at a little bit deeper in terms of comps for stabilized properties versus comps for properties that still have some ramp and ability to reflect our higher NOI over time, as well as other ways to create value at the property through additional strategies, to create more revenue over time, whether it be out parcel or other strategies.
So, we certainly are comfortable with the comps we got. I think the cap rate is reflective of where the NOI at this asset can go with some more robust leasing. And sort of that’s where we came out from a valuation perspective. I think in terms of the in-place NOI, I think, who is there now, call it, the tenants that make up, call it, the low-80s occupancy.
We generally feel pretty comfortable with that tenancy. There will always be some ins and outs, but nothing of a material nature right now that we expect to have a major hit on the revenue side. And if anything with new management in place, we’re actually reasonably optimistic that we can create some material savings on the expense side, which will clearly fall to the bottom line from an NOI perspective.
And is the natural rate of occupancy for this property once stabilized much higher than the low-80s, or is the issue really that the rents – the achievable market rents are pretty low right now?
I think it’s more on the occupancy side. I think this can easily be the, call it, high-80s, low-90s from an occupancy perspective. I think the challenge given the changing nature of real estate is actually finding tenants that will succeed long-term and not just trading tenants in and out.
We could actually, if we wanted to today, increase the occupancy rate, but I’m not sure you’d be increasing the occupancy rate with tenants that are long-term viable on location. And the challenge for us right now in partnership with the new management team is actually creating a merchandising plan that makes this center work on a longtime – on a long-term viable basis. But I think, when stabilized, this asset is more of a high-80%s, low-90%s occupied product.
Okay. And just clarification on the language about the VIE that was in the 10-K. I wasn’t sure about that. Does ARI have an equity interest in the entity that owns the property?
We do. We have an equity interest in the property but we don’t – but we did not consolidate it, that’s right. And it’s a nominal equity interest for $1.
So I mean effectively, should this be classified as an ARI property if you have an equity interest? What’s the rationale for that?
No, we have a third-party partner as well. And if you go through the guidance, the way the control mechanism is set up, we are not deemed to be, not to use technical terms, what’s called the primary beneficiary here. So therefore, this was not consolidated on our books.
Okay, it’s a little confusing. And just a quick final point on it. Are you accruing interest on this loan? Why not put the loan on non-accrual status and treat those payments as repayment of principal to reduce the principal at risk over time?
It is covering debt service today. So we feel like it’s appropriate to accrue the interest, especially because we have also marked down the property now, or marked down the loan, I should say.
And under the accounting rules, do you have discretion to classify it as – and put it on non-accrual and then treat those same debt service payments as simply repayment of principal?
We do have some leeway to do that, correct. But we certainly did not, yes.
Okay. More broadly, regarding overall asset quality, are there any other potential problem areas that you believe could result in impairment? There are, of course, those two other risk five rated loans. But beyond those, any issues on the horizon or on watch list?
Nothing that we perceive in the portfolio right now, which is reflected in the ratings that we put on each asset.
And lastly, could you provide any color on the recent [indiscernible] refi, which was through a securitization? At the property level, what’s the status of current performance? I think you’ve said that the debt yields on ARI’s exposure were in the teens. And at the ARI level, what’s sort of your decision to participate in the refi? Would your loan have been repaid otherwise?
Again, we looked at the new loan as an opportunity given the restructuring of the assets. They broke up the assets into different pools, and we believe we improved our collateral pools in terms of where – what our loan is against. And from a risk perspective, we actually increased the debt yield against our position, which is, call it, solidly in the teens vis-à-vis our risk positions. So as we looked at it in terms of what we are getting paid, what the debt yield was and what the changes to the collateral pool were, it made sense for us to continue our exposure to the asset class, which we were comfortable with at the time we made the original investment.
And would you have been repaid if you have decided not to participate?
Absolutely.
Okay. Thanks for taking the questions.
You got it, Jade.
Thank you. Our next question comes from Ben Zucker from BTIG. Your line is now open.
Good morning, and thanks for taking my questions.
Sure.
Real quickly on leverage. Do you have the ability or maybe a desire is a better word to take that up a little bit? And I ask, because you really didn’t have too much cash on hand at the end of the year, and it looks like you’ve been a clear net deployer of capital subsequent to year-end, especially with those subsequent loans being full – fully funded. Just trying to get a feel of your capacity right now?
Yes, look, we clearly have on the balance sheet right now, Ben, first mortgage loans that are not – we’re not borrowing against that we have the ability to finance on our repo facility. So naturally, as the book shifts towards more first mortgages and we use leverage on those first mortgages, leverage will naturally rise.
We’ve always talked about running this company at somewhere between 1.5 to 2 turns of leverage. I’m not sure we actually get to that leverage level, but there is clearly leverage capacity within the balance sheet and we’re comfortable using it as a source of capital for new opportunities as they arise.
That’s definitely helpful. And looking at your capital stack, Stuart, and I think you might have started touching on this in your prepared remarks when you’re looking at ways to optimize the balance sheet and reduce your all-in costs. About half of your preferred stock is currently redeemable and we saw you redeem some of these preferreds back in the second-half of 2017, I think.
So I’m just wondering how you view your current capitalization set up, specifically with this preferred? And if you think there might be an opportunity to redeem some of these Series Cs here in 2019?
It’s certainly a topic that we discuss frequently. I think, it’s a possibility. I think the advantages of it are that it’s forever permanent equity capital, which is something we don’t want to give up lightly.
We also receive equity treatment with respect to it from those who look at our balance from a, call it, debt to equity perspective and care about more permanent equity under the company. I think there’s theoretically an option to, call it, at some point in time, and it’s something that’s discussed regularly, but no specific plans in place today.
Okay, that’s helpful. And then just lastly and this is kind of maybe a wierd-sounding question, big picture. But it kind of feels like, when the markets are volatile like they were in December, could that actually be framed as like a net positive for you guys as real estate lenders?
And it just seems like outside of the temporary volatility and maybe borrowers putting plans on pause for the short-term, if the end result is a much lower tenure that kind of puts real estate back in the safe haven category and takes pressure off of cap rates. Aren’t you guys net beneficiaries of that volatility?
I mean, I think at a high level, yes, because I think it – I think there will continue to be real estate activity and there will continue to be opportunities for us to look at transactions. That being said, I don’t want to over – I don’t want to oversell what the benefits of three weeks of market volatility is on an industry that is absolutely 100% a lagging indicator.
And what you’re seeing on Bloomberg screens or other markets, not to be flipping about it, it takes sometime for that to actually permeate the real estate market, where by and large things are privately negotiated transactions. There is long lead times. People work on structures and transactions for a very lengthy time. And when you’ve had such a quick rebound, like we’ve had in the early part of this year, I’m not sure it’s dramatically changed behaviors or patterns.
Gotcha. I appreciate the colors. So thanks for taking my questions.
You got, Ben.
Thank you. [Operator Instructions] And our next question comes from Jim Young from West Family Investments. Your line is now open.
Yes. Hi. Just kind of…
Hi, Jim.
Hi. I was just kind of curious, when you think about where we are kind of in the credit cycle and other investment considerations. Can you help us understand how you’re like repositioning the portfolio from like a geographic perspective, property types and really where in the capital stack you would want to be going forward? Thank you.
Yes. So, look, I think where we are is, if you start backwards from real estate fundamentals, I would say generally speaking, real estate fundamentals are still – absent some pockets, still generally positive though, I would say, the rate of improvement is moderating.
But underlying performing either measured by occupancy rates, rent levels, ADR or rent par performance, if you’re looking at a hotel, has generally been pretty strong over the last, call it, 12 to 18 months and still probably expected to be positive if the economy hangs in overall, but probably slowing.
I think as we think about ARI, a couple of things worth noting and you always hear either myself or Scott talked about. We truly do look at the portfolio from a bottoms-up deal by deal basis and try not to draw any sort of bright line either must use or must don’t as we think about constructing the portfolio.
That being said, I’ll go back to the – where I started this conference call in the first question, which was the level of activity we completed last year really positions the company extremely well as we think about earnings and generating earnings to cover the dividend for 2019. And it allows us to be somewhat more cautious or thoughtful with respect to new transactions even if it means we keep excess dry powder on the balance sheet for a time being and under-earn, call it, our max earnings capacity for lack of a better phrase.
As we think about exposures either by property type or geographies, we continue to be, for the most part, major city focused, gateway city focused. We tend to like those markets just given the quality of sponsorship on the equity side, as well as the ultimate liquidity of those markets, if you truly believe things will slow or add at some point in time.
In terms of property types, I think, it’s fair to say that if you look at our current exposure to New York condos these days, I feel very comfortable with the investments we’ve made to date. But I would say, we’re not looking to aggressively add new exposure in that area.
Right now, I would say, we continue to see a lot on the hospitality side, a lot on the office side and a lot on what we have traditionally described as the predevelopment side of things. Again, those transactions tend to be somewhat episodic bottoms-up. It really comes down to do you like the transaction or not.
So I would say, we’re still open to looking at everything. We’re not changing in terms of what we do or how we think about the world. But I think, to the extent, you’re picking up somewhat of a more thoughtful or sort of cautionary tone in my comments. I think that’s reflective of how we’re thinking about the world right now. And while the volatility that we saw at the end of last year in the capital markets hasn’t really spilled over to the real estate market in a material way.
I think we do – I think can ignore what happened. And I think, for us that means, our first job out at all times is to protect principal and then you think about what return is achievable after you’ve protected principal. And I would say, most of the conversations we have with our team as we look at new transactions these days is first and foremost how do we feel about protecting principal.
Great. Thank you very much.
You’re welcome.
Thank you. Our next question comes from Ken Bruce from Bank of America Lynch. Your line is now open.
Thanks. Good morning, gentlemen.
Good morning, Ken.
Hi. Gosh, that was a good segue. I guess, for really the last couple of years on both the GAAP and an operating earnings basis, you’ve been under-earning the dividend. I’m interested in what the taxable earnings were in the fourth quarter as well as full-year 2018, if you could provide us that?
Yes, sure. So if you look at that 1099 filing, we had a 10% return of capital this year from a tax perspective. So our taxable earnings were lower than our dividend for the full-year of 2018.
Okay. And is there anything that just kind of given Stuart’s earlier comment in terms of protecting principal first and earnings are kind of second, which is, I wouldn’t say, do not pursue that strategy, that’s very much the best one. But could you provide maybe some thoughts around what the security of the taxable income is in the dividend going forward?
Yes. I think I’ve said it very early on in the call. Look, I think, given the success we had last year in terms of just gross originations volume, we feel very comfortable with the earnings we will generate with respect to the current dividend run rate without having to use all of the available capital that we have to invest or said differently, I think, we can continue to churn out earnings consistent at a high level where that dividend has been and still have dry powder on the balance sheet, which is where we want to be.
I think, the other thing, I’d say, sort of in reference to where your question started, Ken, is, look, we – I think some of the noise around whether we earned or didn’t earn the dividend by a $0.01 in any specific quarter from an operating earnings perspective. We very much discount the impact of capital markets activity in terms of whether we happen to raise equity and that had an impact or something – we converted notes last year, which had an impact on the share count.
As long as we see through on an investable basis being able to generate the dividend with the capital we have available and the returns that we think are achievable at a moment in time on that capital. We don’t plan on bouncing the dividend all over the place on a quarterly or annual basis, and we’re feeling very good about 2019 just given where the portfolio sits today.
Great. Well, that’s our concern as well. I mean, I understand these numbers can – the earnings can move around on any given quarter. But the more important kind of vector that we’re trying to really hone in on is if there’s a bias on the dividend one way or the other just being able to understand where that’s going to show up and when. So that was really kind of the basis of the question. But thank you very much.
You got it, Ken.
Thank you. And we have a follow-up question from Jade Rahmani from KBW. Your line is now open.
Hey, Jade.
Hey, thanks for taking the follow-up. Just regarding the New York City condo market, I want to see if you could give an update how you’re seeing things. And just the large deal that you participated in, if you could provide some color there, because it’s a extremely large building, I think, over 500 units, for example, a lot of retail in the financial districts. Any color there?
Yes. Look, at a high level on the New York City condo market, it’s fair to say that the pace of activity and the volume of transactions has certainly slowed over the last 12 to 18 months, and we’re cognizant of that in all of our various exposures through the city. Ultimately, as we think about it really from a lender’s perspective, there are two risks that we fundamentally take when we do a condo transaction in New York.
On those that have a construction component, obviously, the first risk you’re taking is will the product be created to spec and is it capitalized to be created to spec? And I would say, in any of our New York construction-related condo transactions, we are very comfortable from that perspective.
Then once you actually have salable product, the risk you’re taking from our perspective is really the basis of the loan relative to what you think is an achievable clearing price for the unit, irrespective of whether ultimately the equity sponsor makes their desired return or not.
I will tell you that we feel very comfortable across the Board on the basis we have in the various projects, even though pricing – even though pacing has slowed and pricing has slowed somewhat relative to where it was 12 to 18 months ago. Generally speaking, when we’re going into these condo transactions, we’re going in at, call it, roughly 50% to 55% loan basis to our expected view of net sellout value, which is typically somewhat inside of where the equity sponsor thinks they will sell units.
And units are still selling and even when they’re selling at low price points, it still provides a significant cushion relative to our basis on the transactions we’re involved in that are still selling right now. So generally, again, slower pacing, somewhat lower pricing, but relative to our basis still feel very comfortable with respect to the exposures that we have.
In terms of the one large participation we did, which I’m assuming you could figure out the asset just given the mix of condo and retail. There’s great traction on the retail side in terms of the leasing that’s been done to date. There have actually been 50-plus condos sold to date already in a very sort of quiet, sort of prelaunch marketing process. And from a, call it, loan-to-sellout value, price per pound, square foot value, given what we’re getting paid for the risk we’re taking, we feel very comfortable with the transaction.
And what’s the current absorptions? What’s the expected duration of the product? How many condos will they ultimately be able to ramp up to selling every month, since there is over 500?
I mean, at this point, it still needs to be created. So you’re, call it, one to two years out in terms of actually creating the product. They haven’t really formally launched the sales effort yet. This will be a multi-year project in terms of both construction and then sales process, but they’ve already gotten a decent head start in terms of the units they sold to date.
And just hypothetically though, if it was completed today and they were selling condos, how many do you think they can sell a month?
Well, again, how many can they sell a month? The way I think about and the way we come back to it this way, we look at it from our basis, Jade, and from our basis, they need to sell far fewer than the total number of condos to actually get us paid off, given the success they’ve had on the retail already.
We’ve been in projects previously, where people sell, 10 to 15 a month. We’ve been in projects where people sell one to three a month. Again, we look at it from our basis perspective and given sort of what our basis is and what they’ve achieved to date both on the retail side and the 50-plus condos they’ve sold, we’re very comfortable. And I think it’s inappropriate for me to speak to what their sales expectations are given that they haven’t sort of publicly disclosed it, they want to do it on a sales basis per month.
And just cash flow wise, so condo sales and whatever proceeds they’re able to generate through retail leasing activity, those cash flows are used to pay down principal before there’s any payments to equity?
Cash flow to retail is also a separate entity, so that could be sold at some point in time to pay down as well.
Okay. Thanks very much.
Sure.
Thank you. And I’m showing no further questions. I would now like to turn the call back over to Stuart Rothstein for any further remarks.
Thanks, operator, and thanks for those of you who participated.
Thank you, ladies and gentlemen, for participating in today’s conference. This concludes today’s program. You may all disconnect. And everyone, have a great day.