Webcasts are being recorded. Please note that they are 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 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. These measures are reconciled to GAAP figures in our earnings presentation, which is available in the Shareholders section of our website.
We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloreit.com or call us at 212-515-3200. At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein.
Thank you. Good morning, and thank you to those of you who are joining us this morning on the Apollo Commercial Real Estate Finance third quarter earnings call. Joining me this morning are Scott Weiner and Jai Agarwal. As we move towards the end of 2021, we continue to see similar trends from prior quarters in the commercial real estate market. Specifically, the underlying performance of most commercial real estate continues to recover at a measured pace consistent with the recovery in the overall economy. There have been clear property type and geographic winners, as well as those asset types and regions that remain challenged. Ultimately, an improving economy should be positive for the commercial real estate industry and asset level metrics should continue to improve.
In contrast to operating performance, real estate investment and financing activity recovered sooner and more quickly, consistent with the broad and rapid recovery across the capital markets. At present, the pace of activity continues to accelerate, and regardless of the asset class, the combination of a low interest rate environment and significant fund flows is supporting robust transaction volume and a well-funded, highly liquid financing market. The commercial real estate lending market has surpassed 2019 levels and is on track for a record year in terms of lending volumes across CMBS, banks, insurance companies, and non-bank lenders such as ARI.
In the current highly competitive environment, the strength of the Apollo commercial real estate debt platform again has proven to be incredibly beneficial, as we have completed approximately $1.5 billion of new transactions for ARI through the first three quarters of the year. The pipeline continues to be a mix of both U.S. and European transactions for well-positioned, high-quality properties with institutional sponsorship in gateway markets. We expect ARI loan origination totals for 2021 will approach pre-pandemic levels as we have already committed to an additional $340 million of transactions in the fourth quarter, and we are working through a number of other transactions that should close by year-end.
It is worth highlighting that ARI's loan originations year-to-date continue to favor Europe, which is reflective of a combination of the strong reputation and market position our team has developed there, slightly less competition, and our team's ability to underwrite and structure large transactions. As a result of our success in Europe, loans securing properties in Europe represent approximately 40% of ARI's portfolio at quarter end. To reiterate what I have said previously, the types of transactions, quality of equity sponsorship, and deal structures for ARI's European loans are very similar to the transactions we complete in the United States. Our European loan portfolio is diversified by property type and geography, and we manage currency risk as we borrow and lend in local currency and use forward contracts to hedge. The strength of the CRE lending market has also led to more normalized repayment activity in our portfolio.
Through September 30, we have received almost $800 million of loan repayments and an additional $277 million of loans have repaid since quarter end. Our repayments reflect encouraging signs from the general economy as transitional assets are achieving their business plans, including construction projects achieving certificates of occupancy and for-sale residential units being sold. As a result, ARI's construction exposure continues to decline, representing approximately only 14% of the portfolio at quarter end. We also have seen positive anecdotes from our portfolio of loans securing office properties, including the repayment of a large Manhattan office loan this quarter, as well as increased leasing activity and foot traffic at our other projects. In general, the credit quality across our portfolio remains stable, and we continue to make progress with our focus loans.
Before I finish my remarks, I want to take a minute to highlight some recent corporate governance highlights with respect to our board of directors. In the past year, ARI expanded the company's board of directors from 8 to 10 members with the addition of Pamela Carlton and Carmencita Whonder . Both women are senior executives, and we believe ARI will benefit greatly from their insight and expertise. We continue to recognize the importance of ESG issues to our stakeholders. As a reminder, ARI incorporates consideration of ESG issues into our investment analysis and decision-making processes. Lastly, I wanted to take a moment to thank our CFO, Jai Agarwal , who will be leaving us early in the new year to pursue other opportunities. Jai has made valuable contributions to ARI during his tenure, and we will be sorry to see him go.
One of his greatest contributions was building a strong team below him, and he will leave us in good hands. We have already begun a search for his replacement, and we expect his departure will be seamless. With that, I will turn the call over to Jai for the last time to review our financial results.
Stuart, our distributable earnings for the quarter were $49 million or $0.35 per share. GAAP net income available to common stockholders was $57 million or $0.38 per diluted share. GAAP book value per share prior to depreciation and the general CECL reserve increased slightly to $15.54 from $15.48 at the end of last quarter. This increase was primarily due to unrealized gains on currency hedges. The loan portfolio at quarter end was $7.3 billion, a slight decline from the end of previous quarter due to increased loan repayments. The portfolio had a weighted average unlevered yield of 5.2% and a remaining fully extended term of just under three years.
Approximately 89% of our floating-rate U.S. loans have LIBOR floors that are in the money today with a weighted average floor of 1.20%. During the quarter, we made a $180 million first mortgage, $141 million of which was funded. We also made $113 million of add-on fundings for previously closed loans. With respect to our borrowings, we are in compliance with all covenants and continue to maintain strong liquidity. We increased our secured facility with JPMorgan to $1.5 billion and extended the maturity to September 2024. We ended the quarter with almost $600 million of total liquidity, which was a combination of cash and capacity on our lines.
Our debt-to-equity ratio at quarter end decreased slightly to 2.2 times, and we ended the quarter with $1.7 billion of unencumbered loan assets. Lastly, I wanted to thank Scott, Stuart, the board of ARI, and most importantly, all my colleagues at Apollo for the support over the last five and a half years. I feel very fortunate to have been offered this opportunity, and I will truly miss working with this very talented group of individuals. With that, we'd like to open the line for questions. Operator, please go ahead.
If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Douglas Harter with Credit Suisse.
Thanks. Stuart, you know, I know it's always tough to read too much into just a few loans, but looks like the yield on new loans this quarter was significantly lower than prior quarters. Can you just talk about, you know, whether those were kind of one-offs, or is that kind of where you see the market for new loan opportunities today?
I think it's a mix of both, but I think directionally it's fair to say that spreads are tightening. I think you've heard me say, you know, on previous calls that it's clearly a market that favors the borrower versus the lender. I think, you know, sitting in my seat or Scott sitting in his seat, I don't think any of us are surprised that things are tighter just given where yield alternatives in general are trading these days. You know, I'm not sure I would take what occurred in the quarter and ascribe it as the go-forward returns on a go-forward basis.
I think it's fair to say that certainly relative to where we sit today versus where we sat two or three years ago, the ROEs achievable by putting dollars out on a, call it, light basis risk for risk are certainly tighter today than they were two or three years ago.
Yeah. Stuart, I would just add, you know, financing costs have also come in and leverage more available. We've also found that our financing costs in Europe are more efficient than the U.S. so that the mix matters, right? That's an unlevered yield. I think when you look at it on a levered yield after the financing, you know, the returns are in line with what we've always targeted.
Just, Stuart, if you could just remind me as to kind of what those levered returns are, you know, that range you're targeting today is.
I mean, I think we've always thought about +11% , Doug. I think we were fortunate enough to have some years where we could overachieve that. You know, for the 12 years of existence at ARI, we've always thought in terms of levered ROEs is call it ± 11%.
Got it. While there's, you know, might be different than the asset yield and the funding, is that pretty consistent across the U.S. and Europe?
Yeah, I think, look, as I indicated in my comments, it's a little better in Europe. You know, net-net, if you look at what we're expecting to do in the fourth quarter, I think you'll see us achieve those types of returns both domestically as well as internationally.
Great. Thank you guys.
Sure.
Our next question comes from Tim Hayes with BTIG.
Hey, good morning, Stuart.
Hey.
My first question just about the broader Apollo parent recently announced its goal to reach a trillion in AUM by 2026. I'm just curious where you think real estate credit fits into that initiative. You know, do you expect five years from now we see the team and origination capacity has materially increased, and does that mean that ARI has also gotten bigger? Just curious, how you think ARI fits into that broader initiative.
Yeah, look, it's certainly unknown what's going to happen in light of what markets afford opportunity, but I think it's fair to say, you know, the real estate credit business broadly today at Apollo is roughly a $35 billion business, of which ARI represents about a quarter of that business. You know, I think we continue to feel optimistic about our ability to originate transactions, broadly speaking, across ARI and other places that we originate for. The real estate credit team is on pace for a record year just in terms of sheer transaction volume. Hopefully my comments got the point across to people on the call that we don't spend a lot of time thinking about quarters.
By the time we get to the end of the year for ARI, I think we're gonna be very, you know, much in line with sort of pre-pandemic origination levels on behalf of ARI. You know, I think there's continued support for the real estate credit platform. It happens to work very well in combination between both ARI and what we do for our insurance-affiliated insurance company balance sheets.
The expectation is for, you know, continued growth from this point forward, but obviously subject to what goes on in the market.
Okay. Makes sense. Can you expand. You kind of gave a little bit of color just on New York City office trends, and maybe you could expand there. I feel like headlines these days are mixed with both positive and negative trends. I would appreciate hearing more about the fundamentals of assets underlying your specific loan portfolio or that, you know, anything from the equity team you can share or just any other observations you have as it relates to New York City office. Thanks.
Yeah. Let me, you know, I'm giving you the perspective both as a, you know, what we've done for ARI as a lender, but also what we're doing as a firm, as a tenant that continues to be committed to New York office space. I think what we're finding anecdotally is that there continues to be strong foot traffic and a healthy level of interest for newly created or recently renovated product. Obviously, given what ARI does as a lender, we're typically lending in situations where the real estate is being upgraded and improved. There's clearly a desire for those that are interested in New York office space to focus on what has been most newly created and what is most current in terms of finishes, standards, systems, et cetera.
Have definitely been encouraged by that across our transitional portfolio. I think conversely, I think as you get to older product, more commoditized product, you know, you are definitely seeing more in the way of sublease space and more in the way of product languishing, because I think it's not uncommon, as I've seen in my career through multiple cycles. You know, when there is a little bit of softness in the market, it affords those who are looking to lease the ability to look at newer space that they didn't think they might be able to afford, previously. You know, I think there's more, you know, continued bias towards high-end, newly created space, and I think commoditized space will continue to struggle.
Got it. Yeah, I feel like that's pretty consistent with what we've been hearing from some of your peers as well. So appreciate those insights. Just kind of a follow-up on office, and this is more in the CMBS market, but you know, I recently read a stat that there's about kind of like $35 billion or so of CMBS of office loans within CMBS that are scheduled to mature between you know, over the next, call it three years or so. A decent portion of that has 25% or more of their tenant roll expiring over that timeframe.
I'm just curious, going into a potentially higher rate environment with, you know, the notable headwinds to certain office loans, you know, do you think that that creates any disturbance in the CMBS market or has the potential to create any disturbance? On the other side, does that create opportunities for transitional lenders if some of these loans can't be refinanced?
No, I think it's a great question. I think it's probably too early to know, you know, what the net result is going to be. I think, you know, what we need to factor into all of that is just the sheer amount of capital that is continuing to seek opportunity.
Does that mean that things sort of never get to the point where it creates, you know, as your question I think implied, real distress and real opportunity? Probably too early to know. You know, I also, you know, your question was premised on the notion of a higher rate environment and, you know, for some of us that are really old, like myself, it's hard to believe that we're sitting here with the 10-year at 1.64, and it might go to two, and all of a sudden that defines a high rate environment.
Right. Yeah.
You know, I think. Look, I think a lot can happen in three years. I think as I indicated in my comments, you know, I think there's a path towards continued improvement, steady improvement, and not a lot of distress, I think if the economy continues along its, you know, gently sloping upward trend in terms of recovery. We like you, as I think was implied by your question, you know, we do keep a close eye on what the implications of inflation and a higher rate environment might be on the economic recovery over the next one to two years. I think it's too early to have any real sense of conviction at this point.
Fair enough. Well, thanks for taking my questions this morning.
Sure. Anytime.
Our next question comes from Stephen Laws with Raymond James.
Good morning.
Hey, Stephen.
Hey. Now we got a quarter on the hotel and the REO. Maybe wanted to touch on that, kind of how are trends going with the asset? And then when we think about the operating expenses, you know, how should I think about fixed versus variable expenses as you know, as things improve with the asset?
I mean, I'd say, look, I think to your point, we're only a month into this or a quarter into this, but we obviously know the asset extremely well, given our history with it. I think our I think we've done as an effective a job as we can in terms of cutting expenses at the asset, and I'm not sure there's much more to cut there. I think before the, you know, I'll call it the Delta uprising over the summer, the asset was actually on a nice path to recovery from a revenue perspective. I think we feel optimistic that there's more improvement to come on the revenue side as opposed to the expense side as we move forward in future quarters.
I also think, as D.C. begins to open up, on a go-forward basis, I think there might be a path towards an exit at some point, before the asset gets to what we call full stabilization from a performance perspective. Because I think there are those on the capital side that would be interested in acquiring an asset such as this to ride the upside. From our perspective, we would rather turn the capital into a performing asset sooner rather than later, if we could.
Great. Appreciate the update. You know, switching to the Brooklyn multifamily, I know it looks like the maturity is December of this year. I think you also recently reduced your specific CECL allowance, given it looks like the consensus has a more favorable market outlook. You know, can you maybe give us an update on that Brooklyn asset and how you think that plays out in the coming months?
Yeah. We've formed a partnership with a well-known real estate developer known as the Witkoff Group. We are going forward in partnership with them in creating what will be a, you know, ± 50-story multifamily tower, a combination of market rate and affordable units. Effectively, the demolition of the legacy assets has been completed. We would expect to do foundation work sometime early next year. This will ultimately be a, you know, two year build, a one year lease-up, so you're really looking about at like a three year development project that will take us into 2024, though I do think sometime during next year we will put construction financing in place. I think there is.
You know, given the strength of Brooklyn, given the strength of the New York multifamily market recently, I think there is potential for real upside to ARI economically if we execute correctly. This is a you know a two years to three year project with construction risk, lease-up risk. We need to execute well. I like where we sit today looking forward in terms of what the potential is in terms of economic recovery and benefit to ARI.
Great. Switching to the leverage side, I know prepayments have been a little elevated, but, you know, you cited, I think, roughly $900 million of fundings expected this quarter. You know, as we move out of this kind of some turnover in the portfolio and the shift really to more of a focus on first mortgages, you know, leverage I think was 2.2 at the end of the quarter. Where what is the target for kind of a higher mix of senior loans as you look out, you know, in 6 months - 12 months of where you think you would like to run the portfolio from a leverage standpoint?
Yeah, I think as we think about asset-specific leverage combined with wanting to maintain access to the various capital markets that we've been able to access in terms of the bond market, the convertible notes market, the term loan market. And also, you know, I think coming out of the pandemic very convinced that it is a prudent corporate finance strategy to keep some portfolio of unencumbered assets on the balance sheet. I think at the end of the day, when you sort of factor that all in, you know, I think we probably run this business at somewhere between 2.5-2.75 turns of leverage on a sort of steady-state basis.
Right. Appreciate the color, comment, Stuart. Just in closing, Jai, good luck in the future. I've enjoyed working with you, and I appreciate your insight over the years.
Thank you.
Our next question comes from Jade Rahmani with KBW.
Hi, this is Sarah Obeidy on for Jade. My first question is what drove the sequential decrease in income from subordinate loans? Is that related to the subordinate loan that is held for sale, and can you give any color on that asset?
Yeah. I think what's driving the decrease in income on subordinate loans is both just a shrinking of our mezzanine loan portfolio in general. I'd also refer you to the comments in the 10-Q around a portion of the mezzanine loan on what we refer to as the Steinway project, where we've also taken some action there.
Thanks. My next question is, do you expect further provision recoveries?
In general, I think, you know, again, you know, the comments I just made to Stephen on the Fulton Street asset in Brooklyn leaves me optimistic about around that asset, though I think there's a lot of execution work to go. I think the provisions we've got today, I think, are appropriately reflective of the mix between our perception of value, execution risk, and path to resolution. That being said, I think sitting here today, I think both the Brooklyn asset and the Miami asset offer the best potential prospects for additional economic recovery. I think they both entail a lot of execution risk, complexity, and time. I think until we have more visibility there, I wouldn't expect any near-term change.
Got it. Were there any significant loan modifications during the quarter?
None. No.
None.
Okay. Just lastly, has distributable EPS reached a stabilized level at $0.35, or is there still excess earnings?
Look, I think the EPS which we outearned in the, you know, the dividend level which we outearned in the first two quarters, I think we covered it in the third quarter. I think part of it depends on how capital efficient we are and doing the best we can to line up the combination of both repayments and new deployment, which is always, you know, a bit of a challenge in a market that is not a publicly traded market but a market that is based on private origination, and timing is a little bit out of our control. I think there's also part of it depends on how quickly we are able to reach resolution on some of the focus assets that are not generating a stabilized level of income or return today.
You know, I think long term, I think there's potential beyond the $0.35, but I think in the near term, we've got some challenges both in terms of capital efficiency and foreclosed assets that we need to work through.
Got it. Thanks so much for taking my questions.
Sure.
As a reminder, if you'd like to ask a question at this time, that is star then one. Our next question comes from Richard Shane with JP Morgan.
Hey, everybody. Thank you for taking my questions.
Sure.
Jai, thank you. Thank you for all of your help over the years. We will miss you. Stuart, you talked about the competitive pressures and how that is impacting spread, and frankly, that makes a great deal of sense given both the technical factors we're seeing in terms of interest rates and the supply of capital in the space. I'm curious if you're seeing the same type of erosion in terms of structure in any way, whether it's covenants or business plans that you think are more aggressive. I'm just curious because it sounds in some ways like you're a little bit more cautious, but recognizing what's going on competitively in the market from a pricing perspective.
No. Look, I would say at a high level and in a good way, and I always go back to, you know, 2006, 2007 as my touch point. I think in a good way, you're not seeing sloppiness in on any sort of measurable level just yet, and I think that's a good thing. I think documents are documents. I think structures are structures. I think to the extent people want to compete on a different view of underwriting, a different view of pricing, I think that's fine, and I think that's a reasoned way to compete on any given day. I think as of, you know, sitting here today, I don't think we've seen any, you know, noticeable weakening in overall approach to the market among the peer set or the competitive set.
I think the one thing we continue to watch very closely is obviously the growth in the CRE CLO market, which I think some of you have heard me talk about for 12 years now. It is something that, you know, is potentially, you know, cause for concern, and maybe that's a little bit of PTSD coming out of 2008. I also, you know, want to be very clear that, to the extent our competitors who are committed balance sheet lenders, just at a moment in time, choose to finance their balance sheet through a CLO structure versus some sort of other type of financing structure. I don't think that concerns me at all. I think that is a moment in time corporate finance decision.
I think what we try and track as closely as we can and what would be the real concern for us at some point in the future if it became truly prevalent, is those who enter the securitization market at a moment's notice just because they want to originate to securitize and have no intention of being a long-term, committed balance sheet lender. We really, again, haven't seen that in scale yet, but again, the types of things that I look at, that you probably look at as you think about, you know, a potential overall weakening in the market, those are the types of things we think about.
Got it. That's very helpful. To extend that, now that the portfolio is 40% in Europe, you had mentioned that the competitive landscape in Europe. There's less competition in Europe. Clearly, that impacts pricing. I am curious if you think you also get better structure, lower potential credit risk because of the reduced competitive intensity in Europe.
Again, maybe on the margin and just to, you know, make sure I put my comments in context. You know, less competition doesn't mean no competition, right? There are still plenty of people that we compete against. I think, you know, I think on par, we've been able to, A, win some large mandates on our own, but also I think our team in Europe has done a fantastic job of partnering with others to win large mandates and has effectively also done a great job of winning repeat business with equity sponsorship that seems to value working with us.
I think where we can differentiate on structure, Rick, and this might be a bit of an esoteric point, but it's not necessarily on, you know, better structures that are, you know, much tighter for us in terms of protecting a lender. When you think about the different regions within Europe and the different countries in Europe, and as I've said many times, like Europe is not really a thing. It's just a continent where a bunch of different countries reside. I think we've proven our worth as a lender, and our team has done a fantastic job of figuring out how to make structures work for us in the countries in which we lend in. I think we've made that process very effective and efficient for the borrower.
I think they like doing business with folks who are able to make their life easy in terms of getting things to the finish line.
Got it. Okay. Thank you very much. Jai, thank you again.
Thank you, Rich.
That concludes today's question and answer session. I'd like to turn the call back to Stuart Rothstein for closing remarks.
Thank you very much, operator. As always, thank you to everybody for participating.
This concludes today's conference call. Thank you for participating. You may now disconnect.