Apollo Commercial Real Estate Finance Inc (ARI) 2013 Q2 法說會逐字稿

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 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.

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 those statements and projection.

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.apollore.com or call us at 212-515-3200. At this time, I'd like to turn the call over to the Company's Chief Executive Officer, Mr. Stuart Rothstein.

Good morning everybody. And thank you again for joining us on the Apollo Commercial Real Estate Finance Second Quarter 2013 Earnings Call. Joining me this morning in New York as usual are Scott Weiner, our Chief Investment Officer and Megan Gaul, our Chief Financial Officer who will review ARI's financial results after my remarks.

The commercial real estate sector continue to perform well in the second quarter amidst the volatility in the fixed income markets. During the latter part of June, the Fed's commentary regarding the improving economic picture and the future plans for reducing the amount of quantitative easing led to a sharp rise in interest rates.

Following the rise in rates, pricing on a handful of CMBS transactions widened relative to prior [comps] and quoted conduit spreads on new transactions began to widen. Thus far, in the third quarter rates have begun to stabilize and spreads on recent CMBS transactions have tightened slightly relative to the late June deals.

Despite this slight slowdown in the CMBS market, issuance year-to-date is $48.8 billion, which is greater than the total volume of all of 2012. And most market participants are still expecting total issuance this year of approximately $60 billion.

It is important to note that the comments by the Fed and the subsequent volatility in the fixed income markets had a much greater impact on the markets for residential mortgage back securities as opposed to the investments in ARI's portfolio or the pipeline of potential opportunities that we are currently evaluating for the Company.

While the mortgage REITs focused on RMBS had to adjust expectations with respect to duration, extension risks, and the paring back of QE3, these issues are not relevant to the fundamentals of ARI. We recognize that from a technical trading perspective rising rates and their impact on fund flows for yield orientated products will impact the trading in ARI's stock.

It is important to remember that the improving economy is generally beneficial for the collateral underlying ARI's portfolio of mezzanine and first mortgage loans. And in addition, over an extended period of time, it should be beneficial for ARI to have the ability to invest capital in a rising rate environment.

Throughout 2013, we have continued to see an increase in commercial real estate transaction volume, which has led to more financing opportunities and a healthy pipeline of potential investments for ARI. Year-to-date through the end of May, US commercial real estate transaction volume totaled $114 billion, which was a 25% increase in US commercial real estate transaction volume as compared to the same period in 2012.

The rising rate environment has enabled portfolio lenders to become more competitive in both the fixed and floating rate loan markets which have benefited ARI as the Company partners with many of the larger portfolio lenders to co-originate loans. We continue to focus on properties that are outside of the conduit box due to property type or transitional activity.

Whether it is renovation, releasing, or change of use and we still believe we are being appropriately compensated for taking the underwritten credit risk. In the second quarter, we closed two loans totaling $76 million including a $32 million, 10-year, fixed rate mezzanine loan for a portfolio of warehouse facilities; and a $44 million, 15-month, floating rate mezzanine loan for the conversion of five New York City commercial properties into multi-family apartments.

Semantically, New York City residential continues to be an asset class in which we find some of the most attractive risk-adjusted returns. The multi-family vacancy rates across Manhattan continue to be at all-time lows and the need for high-quality rental housing continues to be at all time highs.

This transaction was with a repeat borrower who has significant experience in New York City apartment market, and ARI has underwritten the transaction to generate an IRR of approximately 14%. Subsequent to quarter end, we closed one additional loan totaling $14 million bringing our year-to-date investment activity total to $226 million. We have made significant progress deploying the capital we raised in the first quarter, as well as re-deploying the capital we will receive back from loan pre-payments.

While we continue to see interesting investments in our core lending business, we consistently look for new business opportunities we would believe -- we believe would be complementary to our existing strategy. One topic we have discussed previously, and which we have spent considerable time exploring is the net-lease sector.

As we believe a portfolio of net-leased assets can generate stable and attractive yields resembling pools of other fixed income investments and can generate strong recurring strong cash-on-cash yields over an extended period of time. While there are several key players who dominate the larger transactions in primary markets, we believe the market for smaller transactions in secondary markets is highly fragmented and there are opportunities to earn attractive yields.

We have made progress exploring different ways we would approach and structure ARI's entrance into this business, and recently the board approved a joint venture structure that we formed with what we believe to be a best in-class operator in the net-leased space. We will provide further updates on the activities of the venture as we move forward and deals are completed.

In closing, let me reiterate a few key points from my earlier comments. The pipeline for ARI remains extremely healthy and we are confident in our ability to identify, underwrite, and complete investments that continue to generate returns consistent with prior investments, and consistent with our previously stated return targets for ARI.

In growing the Company, we will continue to remain focused on protecting book value, the cost of raising growth capital relative to investment opportunities, and the important balance between the need for dry powder with the expected timing of investment closings. At this point, I would like to turn the call over to Megan to review our financial performance.

Thanks, Stuart. I want to remind everyone that we posted our supplemental financial information packet on our website which contains detailed information about the portfolio as well as ARI's financial performance. For the quarter ended June 30, 2013, we announced operating earnings of $11.7 million or $0.31 per share, as compared to operating earnings of $8.5 million, or $0.41 per share for the three months ended June 30, 2012.

As we indicated in our press release, operating earnings this quarter reflected a $1.2 million yield maintenance payment the Company received in connection with the prepayment of a $15 million mezzanine loan. Net income available to common share holders for the quarter ended June 30, 2013 was $9.9 million or $0.27 per share, as compared to $9.9 million, or $0.47 per share for the quarter ended June 30, 2012.

For the six months ended June 30, 2013, the Company reported operating earnings of $23.7 million, or $0.70 per share, as compared to operating earnings of $17.3 million, or $0.83 per share for the six months ended June 30, 2012.

Net income available to common stockholders for the six months ended June 30, 2013 was $20 million, or $0.59 per share, as compared to $19 million, or $0.91 per share for the six months ended June 30, 2012.

A reconciliation of operating earnings and operating earnings per share to gap net income and gap net income per share can be found in our earnings release contained in the investor relations section of our website, www.apollore.com.

[GAAP] book value per share at June 30, 2013 was $16.26.

As a reminder, we do not mark our loans to market for financial statement purposes, and currently estimate there is another $0.29 per share value when our loans are mark-to-market. And as such estimate our market value per share to be $16.55 at June 30. Our investment portfolio as of June 30 had an amortized cost basis of $733 million with a levered weighted average underwritten IRR of 14.2% and a weighted average duration of three years.

The credit quality of our loan portfolio remains stable and the Company has determined that an allowance for loan losses was not necessary at June 30.

Before I open the call for questions, I would like to take a moment to discuss ARI's exposure to interest rates. As Stuart mentioned earlier, during the second quarter yield stocks in general and the mortgage rate sector in particular were significantly impacted by a rising rate environment.

Unlike the residential mortgage rates which experience significant book value to clients as rates increased, commercial mortgage rates and ARI, in particular, were far less susceptible to changes in asset value.

We believe ARI is positioned in the rising interest environment as well as positioned in a rising interest rate environment as 34% of the Company's loan portfolio comprised of floating rate loans which should lead to increased yields on those investments.

In addition, ARI continues to maintain low leverage as the Company's debt to equity ratio was 0.4 to 1 as of June 30.

Finally, rising interest rates should have minimal impact on ARI's book value per share as only -- as the only assets in ARI's portfolio that are mark-to-market are the CMBS, which have relatively short duration and represent only 8% of the Company's equity.

And with that, we would like to open the lines for questions. Operator.

(Operator Instructions)

Our first question comes from Jade Rahmani of KBW.

Good morning, Jade.

Good morning. Can you provide any commentary on how loan pricing has changed since interest rates began to move? And on your target loans where spreads are currently and if there's any other discernible changes you'd like to note.

Scott, you want to talk?

Sure. I would say, you know, you're seeing the biggest change clearly in the fixed rate loan market, you know, clearly for fixed rate bars it's given that price is off, you know, the [drown] in the swap rate of the US Treasury, those rates have gone up considerably, also CMBS spreads wide in -- for those bar in the CMBS market. You know, on that side, you know, you also have the life insurance companies who obviously do fixed rates before there's a lot of them had floors.

They weren't that competitive on the fixed rate market. But now with all the rates going higher, they're able to achieve that. You know for use on the mezzanine side, you know, given really -- or the first mortgage side for that matter, really given the focus that we have in the floating rate business, you know, we're not really seeing any really dramatic change, you know, if you will.

You know, I would say one could argue around the economy and things improving and credit environmental. But I would say, you know, that in respect to our fixed rate mez that we closed, you know, earlier in the year, you know, that's, you know, an absolute rate and why we do look at spreads, we obviously also look at the absolute rate that we're achieving and on the floating rate side, you know it's floating rate and that market hasn't really changed.

And the originations that you announced -- the two in the quarter and the one post [current], how do those yields compare with the existing portfolio?

You know, we're doing things as, you know, consistently sort of in the broadly speaking 12% to 15% range depending on risks, property type, nature of the real estate. So generally speaking, still seeing things consistent with what we've seen before and generally speaking LTVs consistent with what we've seen before.

Yes, I mean, we're in the process of closing a transaction actually hopefully today that if it does, you know, we'll put in the queue and obviously stop seeing disclosed that is, you know, it's an acquisition.

It's [stopped] 70% LTV -- I think it's called 69% LTV. It's a floating rate loan, our expected IRR is approximately 12% so very in line and obviously kind of somewhat, you know, closing subsequence everything that's happened the past few months with rates.

So in line -- and our --

Sorry you were going to say about your pipeline?

No our pipeline, you know, in terms of, you know, (inaudible) same, we're seeing consistently, you know, that range of IRRs and kind of consistent -- so consistent what we been doing the past (inaudible) from an IRR perspective and a leverage perspective.

OK, great, thanks for taking the questions.

Thanks, Jade.

Thank you. Our next question comes from Dan Altshcer, of FBR.

Good morning everyone. I was just wondering can you maybe elaborate a little bit more, I guess, on the potential for a net lease strategy. You know, I guess, how potentially do you see this getting? Or, you know, if you're talking maybe the operator you're looking at or what geography or property types, anything, you know, on the potential structure there.

Yes, I mean, it's something we've talked about previously, I think, clearly, you know, I don't think we're unique so to speak in the mortgage rate space where folks have added net leased exposure to the portfolio clearly the duration is attractive. I think the cash-on-cash levered returns are attractive.

And I think it just gives us another arrow in the quiver I think, you know, for us over the last few years as we've looked, we're certainly not trying to compete with the existing public non-traded rates or the -- excuse me, public rates that focus on the net leased space or the non-traded rates that focus on the space for larger portfolios.

We're really looking at it at a more -- call it asset-by-asset basis. And what we've been looking for is really an operator that brings real expertise in the space, whether it be the acquisition built to suit development, leasing and management capabilities, as well as something we could benefit from the existing Apollo infrastructure on the credit side of things.

And without revealing our JV partner is until the venture gets sort of some legs and doing some real deals, we think we've formed a good venture with someone who's got a lot of experience in the space. We will look at things on general speaking a national platform.

I think it will be fairly granular in terms of deal activity, so it'll literally be building a business asset-by-asset until we can get some scale and then maybe think about doing things on a portfolio basis.

And I think, you know, look, I think the hope is over the next six to twelve months, you could see a deployment of call it $25 million to $50 million of equity as we sort of test our theory, and if we end up being proven correct, I think you've entered a business where you could grow way beyond that capital allocation.

But I think, you know, as is typical of the way we do things around here at Apollo, relative to the size of ARI, I think $25 million to $50 million of equity over the next few quarters, you know, is probably the way to think about testing our hypothesis.

Great, that's really good detailing. I mean there are plenty of your competitors in the public market that have, you know, net leased businesses also, so it's not that dramatic for shift forward investors to take a grasp on or understand. Just one more, if I may? You know, if rates are to move higher from here, that's awfully great potentially for the lending business.

But, you know, we did see a little bit of the mark-to-market in the CNBS portfolio. If that's maybe the call moving forward, is there an opportunity to maybe try to wind down that portfolio, or sell it ahead of maturity schedule to kind of mitigate that mark-to-market?

Based on where we put most of the CNBS in place, and let's separate the Hilton CNBS piece, which I think most market participants would expect is going to get paid off before maturity, the legacy AAA CNBS that we still owned which goes back to 2009, 2010, as part of the [Talth] program, you know, that stuff, effectively was expected to be paid off or ready.

I think we were prudent in putting in place financing that allowed for extension of the underlying investments which basically benefited the IRR we're earning on the investment overtime. I think it's just such duration, while I think there was a modest hiccup in pricing we're not expecting much price volatility in that stuff, just given how much duration is remaining.

And I think we've always viewed that as -- to the extent we found, you know, longer duration investments that made sense. We always have the ability to trade out of the CNBS if we need to just to fund new investments. So, you know, I think we're okay with where we are now. You know I wouldn't expect much price volatility. I think it does have some impact on the balance sheet just because it's the only thing we do mark-to-market versus our portfolio of mortgage loans and mez loans.

But I think, you know it will wind down, you know, fairly shortly here.

Yes, and the other reason I kind of ask that is because if the new net leased adventure is going to maybe be a $25 million, $50 million of equity kind of or capital allocation, I mean, that could be potentially a swap in my opinion, you know, from the CNBS just trying to -- for them to raise, you know, new capital.

That could be just a queen type of swap perhaps.

Yes, I mean, I think that's a fair way to think about it. I think, as we look at the balance sheet, we're always trying to access where capital might come from, either from, you know, asset sales or, you know, some prepayments that we may get at some point in the future. So we certainly take that into consideration.

Okay, great thanks.

Thanks, Dan.

Our next question comes from Rick Shane, of JPMorgan.

Good morning guys. Thanks for taking my question.

Sure.

So when we look at the interest income on a sequential basis, it's essentially flat. But when we back out the fact that last quarter there was 2.5 million of yield maintenance. This quarter there was only 1.2, the recurring yield within the portfolio increased modestly. I'd love to get a sense as to what you think the exit rate was because of the timing of the deals that you did during the quarter.

And then put that into context of how big -- how much you think you need to grow the portfolio from here in order to be covering the dividend on a recurring basis.

Yes, I mean, I think taking it backwards, I mean, you know, I think covering the dividend is really about efficient use of capital. I think in terms of the returns in which we've invested in. As Scott mentioned earlier, we're still putting capital out without a dramatic shift in terms of what the portfolio's generating.

I think the issue of earnings relative to dividend is really around capital efficiency. And I think we, you know, between a capital raise and some prepayments that were, you know, not anticipated so to speak, right? We've, you know, we've invested $225 million worth of capital but still have a ways to go. I call it $60 million, $70 million worth of deals to do in order to be more fully using our capital.

I think if you look back on past quarters, whenever we've been substantially invested, we've earned the dividend. Clearly, that's the expectation today, given the pipeline. I think we went into this quarter. And certainly the, you know, consensus estimates reflected it knowing that we were going to be below the dividend by what I would call a meaningful amount just due to the capital rates that we did.

And just the timing between when you commit to deals and when you actually get deals closed. I think, you know, the dividend is something that continue to discuss on a quarterly basis with the Board, and the discussion is really around, as you mentioned Rick, return levels -- or achievable return levels but it's also around capital efficiency and the need to balance call it having dry powder versus your ability to sort of time closings and be in business and making sure that when you make commitments, you can live up to your commitments.

So it's sort of an ongoing discussion with the Board.

Hey, Stuart, a couple of comments to their -- comment and question. I think you guys have been very transparent in terms of what the trajectory was going to be. And I think it's also clear that it is a matter of capital deployment because I think the returns on the investments have really been in sort of the boundaries that everybody anticipated.

What I heard from your comment was-- and I want to see how fine a point we can put on this, is it $60 million or $70 million of net investments in place for a full quarter that gets you there to covering the dividend? I just want to get some context of how much capital needs to be deployed on a run-rate basis to where you think that will be.

Yes, I mean, I think, you know, on a net basis -- so putting aside repayments, venue, roughly you need to call it plus or minus $60 million of additional equity to be invested on a full-quarter basis to sort of get us where we need to be.

Okay, great, thank you for answering that so specifically. I appreciate it.

Got it.

Thank you. Our next question comes from Joel Houck, of Wells Fargo.

Hi, this is Charles Nabhan, from Joel Houck's team. Thanks for taking my question. At quarter's end, you have about 156 million in cash on hand, that's obviously before the transaction completed after the quarter. And then you have the Wells Fargo facility. Could you talk about the lending capacity on the current balance sheet?

Yes, I mean with the Wells Fargo facilities effectively, a facility matched against our CNBS investments as they exist today. So there's no existing capacity on the Wells Fargo facility. Where we do have some capacity is on the JPMorgan facility which is a -- it's a $100 million facility, but it is primarily for borrowing against first mortgages.

And given our existing portfolio of first mortgages, we have somewhere in the neighborhood of $50 million of capacity on that facility. You know, the one thing I'd caution against on the $150 million of cash on the balance sheet at the end of the quarter is, you know, as Scott mentioned, we already closed one deal at the end of the quarter.

We have another deal that's in closing today. And we also have, if you look back at past announcements on deals we've done -- a couple of deals that have future funding commitments. So you need to keep some powder dry to meet those future funding commitments clearly. We have sort of used -- or viewed the JPMorgan facility as they call it 'shock absorber' so to speak in the capital structure and will try to get cash invested as soon as possible.

And we might need to keep some of the JPMorgan capacity available for some of those future funding commitments.

Great, thank you. And as a follow-up, getting back to the commentary on the net lease business, which, you know, I realize is in its development phases. But how should we think about potential IRR on the $25 million to $50 million in equity that you're thinking about deploying?

I mean, look I think conservatively putting aside what you may want to assume on, you know, ultimate exit value of assets. I think consistent with everything else we've done, you know, I think we tend to be conservative, but we've always tried to shoot for at least call it 12 plus percent returns on our invested capital.

And certainly that would be a minimum for the net lease business.

Right, thank you for taking my questions.

You're welcome. Thank you.

Thank you. Our next question comes from Ken Bruce of Bank of America-Merrill Lynch.

Thank you. Good morning.

Good morning.

Good morning. I'm sorry I jumped on the call a little late, so if you covered this in your prepared remarks, I apologize.

But I was hoping to get a sense as to if you've seen a significant change in market activity levels, given, you know, the volatility in rates that we witnessed earlier in the second quarter and how you're thinking of, you know, you'd mentioned I think a fairly strong pipeline, but how you're thinking activity levels will prevail here just given the, you know, the back-up and rates.

You know, I'll let Scott answer in a minute, but I think, you know, going back to the, you know, initial remarks, I think, look the general commentary was that from a fundamental underpinnings of our business, what has occurred in rates is far more relevant to those here at Apollo who spend time thinking about investing in the residential mortgage back security space given the impact on rates on duration issues, extension risks, and then the overall dialogue around QE3.

We certainly understand from a technical perspective that rising rates might have some impact on our stock just due to fund flows, call it out-of-yield oriented products, or fund flows that now find other yields more attractive. But I think in terms of the fundamentals of the real estate business to the extent rates are rising, I would argue that's actually -- if they're rising because of good economic activity, it's a good thing for our existing collateral.

And it's also probably a good thing for our opportunity set in the future given the ability to invest in a rising rate environment. I'll let Scott comment sort of on the day-to-day -- what he's seeing in terms of deals.

Yes, and I think someone had a similar question earlier. I mean I think obviously you see the biggest change on the fixed rate market just given, you know, how that's priced off the swap rate. But I still think that all on rate basis, you know, the rates are still very attractive.

I was at a conference where someone was saying, you know, no one ever thought, you know, the 10 year would break through 3%, let alone 2%. So the fact that we're still kind of the mid 2s, it's still very, very attractive. You know, on the floating rate which is a huge component of obviously our business and just the market in general, in many ways the [bar] and costs are going down today from a senior perspective as the CNBS market and balance sheets both, you know, compete for product.

And they also said, you know, we haven't really seen a big change in the mezzanine market or the type of floating rate loans that we do just given us geared toward this CNBS market. From an activity and buying perspective, you know, it continues to be very robust, both obviously with REITs buying and private investors and equity funds.

So, you know, there was probably a little bit of pause, you know, as people just waited to see where things were going. I would expect that as we get into August, maybe there'll be a little bit more of a pause at the end of August. But seeing that people are still, you know, very optimistic around the fundamentals and the ability to, you know, depending on what type of investor you are to generate the right returns for your capital.

Okay, and are you seeing any change in terms of, you know, competitiveness in the market. You hear some of your, you know, some of your peers that, you know, effectively are, you know, capable of writing the big check they think effectively gets them out of what is a very competitive market, you know. That's not your wheel-house, but how are you seeing competition and spread levels, you know, kind of work their way into, you know, into what you're looking to invest in?

Well I think you mentioned -- we're really trying to kind of more structure, you know, more transactions. And if 10 people are going to show up for a transaction and [broker it], that's not really, you know, where we want to play. I mean we work with, you know, both repeat borrowers as well as senior capital sources who care who's behind them.

So we're doing a lot with, you know, balance sheets. So as those balance sheets get more aggressive and competitive on the senior piece, you know, it actually is good for us from the mez perspective just because the borrower looked at the blended cost of funds.

You know, and we certainly have seen, you know, on those bigger tickets -- deals that really don't work for CNBS as some of our [brethren] have kind of entered the business, I think we have seen pricing come down.

As I think people, you know, they're looking at kind as leverage comes in, to the space for them, they're obviously looking at their leverage return which allows them to bring down their cost of funds, you know, I think borrowers are benefiting, you know, benefiting from that.

Okay, and you know, you've probably figured out where I'm going with this. I'm trying to reconcile the, you know, the kind of the market backup you're, you know, seeing in your primary business, if you will, and then as you kind of look at the alternatives of, you know, whether it be in the net lease business or other areas as that's being, you know, essentially driven by, you know, what, you know, more difficult operating backdrop in the primary market or what's kind of necessitating that move? If it's necessitating at all or if it's just a strategic in nature?

I think it's strategic, it's not really a reaction. I mean we don't view there being a market backup. As I mentioned earlier, we're closing a deal today that's very consistent with, you know, what we've been doing in the past and we have deals from the pipeline that we're closing that are consistent.

I mean I think it's a function of we've been exploring the stakes for a while and trying to find the, you know, the right partner and right entree. And as you've seen, you know, the public markets have certainly bit off the stock of the net lease REITs, to the point, you know, that they could buy things at very low cap rate very accretively. So we need to just define, you know, the right part of the market that made sense.

You know, I do think, you know, the part, you know, the addition of yields that we like is the duration. You know, clearly, while in the last quarter we did call at 10-year call protected deal. A lot of portfolio is shorter in quoting rate. And so as we talked about before, while we're putting out capital we're also getting capital back.

So one (inaudible) tracks is the net lease, you know, is the duration and the, you know, the longevity of it, if you will. And also look, we're also now a bigger Company and so it didn't make sense, you know, when we're $200 million or $300 million of capital to be doing net lease as we're growing and looking at other options, you know, as we've talked in the past we chose not to do the single family for rent because we view that more as a trade than a business.

We haven't done distressed investing when we felt, you know, the net lease business both from an Apollo overall platform and re-specifically what was consistent with the strategy.

Great thank you very much for your comments.

Thank you. Our next question comes from Steven Delaney, of JMP Securities.

Thanks. Good morning, Stuart and Scott, how are you? I was a little late hopping on because we had three calls at 10 am so my apologies if any of this has been -- I've just got a couple of quick questions. I apologize if you've already covered it. Interesting developments going on, as you've observed I'm sure, in sort of CLS/CNBS market.

You know, pricing below LIBOR $200 million. You've got about $140 million of senior loan collateral currently. Are you looking at that for those loans? How much more would you need to originate in the bridge loan bucket to be able to take advantage of some of that financing? Realizing that, you know, right now you've got some cash capacity, but down the road that might be a good move for you. Thanks.

Yes, clearly, we look at that, I mean, you know, around the power we're actually one of the bigger CLO, you know, issuers and managers. So we're very familiar with the technology and certainly the street likes to show us ideas. I mean for now, as you mentioned, we do have cash that we're in the process of investing and then we do have capacity on our JPMorgan line to lever it.

I think actually the JPMorgan line while slightly higher in cost than what [revenues] the CLO cost once you factor an issuance cost and that we get higher leverage, I think we're actually better off right now using the JP facility. You know, strategically, you know, when you're (inaudible), you know doing senior loans at kind of what I'll call it tight pricing because then we can put leverage on it.

That hasn't been a strategy that we've pursued. Obviously there are others in the stakes who have focused fully on that with the, you know, the idea being that because they're doing senior loans maybe, you know, they can kind of pay out a lower dividend. You know the senior loans that we tend to do tend to be the whole loans where, you know, where we can get paid on unlevered basis the rate that makes sense.

So it might be something like, you know, a New York City deal with some conversion aspects or things like that. But I think to the extent we do, you know, a first mortgage, you know, with the idea of putting leverage on it for now, you know, we would be using the JP facility.

Okay, and Scott, you led right into my second question was which follow-ups on Ken's just sort of about pricing pressure and competition. In your recent activity, you know, [step limit] concentrated on the mez side and we've got a lot of new entrance into this bridge space and a lot of new capital.

And we're going to be seeing some, you know, price compression there in terms of spread over LIBOR. But I'm looking at your mez book. You were 12.9 underwritten IRR, unlevered at March, you're 13.8 at June. And we look at what you're originating, everything looks like 12, 13, 14, so I mean it doesn't -- are you seeing any increased pressure on yields? It seems like you can get what you're targeting.

Yes I feel -- I think we can certainly what we're targeting, you know, I think part of the benefits size I'm not going to say we'd want to invest billions, you know, we could do that or certainly or without kind of changing the credit profile. As I mentioned before, we certainly are seeing senior loan pricing coming in. I mean you have large bank balance sheets which are backing the space, the CNBS floating rate market functioning.

And then you do have some of other [brethren] -- other sources of capital looking to do big senior loans and then applying leverage. So I would say for cash flowing assets, yes your senior loan market has certainly, you know, come in. I think that the approach we have taken is to partner with those folks who are looking at a CNBS or a balance sheet execution, you know, and doing the mez -- as I mentioned we're closing a deal today with a balance sheet consistent with what we're doing.

We have another deal in our pipeline where we're providing, you know, the whole loan, at, you know, at our kind of yields. So I would say we are able to achieve that. I mean we do always look at the senior loan market and it kinds of doesn't make sense with leverage and obviously, you know, it would just be in some ways easier to do that and take a lower yield and going back to dividends discussion, we kind of always have that debate.

Is do I move quicker to put on a lower yielding asset? But then I'm locked into that for a period of time. Or do I wait a little while and put on a, you know, a higher yielding asset that we like.

Well thanks, guys for the color. I appreciate it.

Thanks, Steve.

(Operator Instructions)

At this time there are no further questions. I would like to thank all of the participants for joining today.

Thanks, operator. Thanks everybody.

Thank you. Have a wonderful day.