Apollo Commercial Real Estate Finance Inc (ARI) 2013 Q3 法說會逐字稿

Good morning, everyone, and thank you for standing by. Welcome to the Apollo Commercial Real Estate third-quarter 2013 earnings conference call. (Operator Instructions). I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc., and 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. 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, Operator. Good morning, and thank you for joining us on the Apollo Commercial Real Estate Finance third-quarter 2013 earnings call. As usual, joining me this morning in New York are Scott Weiner, our Chief Investment Officer; and Megan Gaul, our Chief Financial Officer, who will review ARI's financial results after my remarks.

During the third quarter, the economic backdrop continued to be favorable for ARI's business model. While many have been frustrated by the apparent slow pace of recovery in the United States economy, we believe the measured pace of economic growth has worked well for the ongoing recovery in the commercial real estate market. Transaction volume across all commercial real estate asset classes has continued to increase. And although there continues to be a gap between the primary gateway cities and all other markets, we have witnessed price recovery across most major regions in the United States.

Also, just as important, underlying real estate operating fundamentals have continued to improve, as both job and income level growth have led to increased tenant demand, higher occupancies, and expanding rent levels. Lastly, but for multifamily, the pace of development remains below the historic mean, which bodes well for continued improvement in operating metrics and the value of existing assets.

In the capital markets, there was increased volatility during the third quarter due to concerns over rising interest rates tied to the end of Fed tapering, the debate over the next Fed chairperson, and the ongoing political battles in Washington. However, to date, that volatility has had minimal impact on commercial real estate in general, and commercial real estate lending specifically.

While we have seen some fluctuations in loan pricings for first mortgages, interest rates in the mezzanine market have stayed relatively constant. CMBS pricing experienced a brief spike in the beginning of the quarter, but quickly normalized. Spreads on current new-issue, 10-year, AAA-rated CMBS were swaps plus 101 last week, slightly higher than the trailing 52-week average of swaps plus 93, but still at very strong levels.

As a result, CMBS transaction volume has continued at a strong pace. Year to date, CMBS issuance in the United States totaled $64.6 billion, and the general market consensus is that volume will total approximately $75 billion for the year, a 55% increase over 2012 issuance. Given the slow economic recovery, coupled with the news at the end of the third quarter regarding the Federal Reserve's decision to continue with asset purchases, and the appointment of Janet Yellen to succeed Ben Bernanke as Fed Chair, the fears over a pronounced near-term rise in long-term interest rates appear to have been muted for the time being.

Turning our attention to ARI, the Company completed three loan transactions totaling $99 million in the third quarter, including mezzanine loans for a downtown New York City office building, and a mixed-use property in the central business district of Pittsburgh. In addition, ARI closed a whole loan to fund the conversion into luxury condominiums of an existing commercial building in the Greenwich Village section of New York City.

In early 2012, we made a strategic decision to focus on the New York City residential market as, in our view, it offered very compelling risk-adjusted returns. Over the past 12 months, the Company committed $265 million to five transactions in which ARI is financing residential assets throughout New York City. These transactions include ground-up development of for-sale condos, conversion of existing assets into for-sale condos, and the conversion of commercial space to multifamily rentals. We have seen strong operating metrics across all of our transactions.

For example, there has been robust demand for the units in both the downtown high-end luxury condominium development we provided construction financing for in January, and that Tribeca condo conversion we provided financing for in December 2012. While construction at both buildings is ongoing, the pricing for the pre-sale of units and the pace of sales thus far has well exceeded our underwritten expectations. Also during the quarter, the Company deployed $20.6 million of equity to purchase $91.4 million of legacy CMBS, formerly rated AAA.

Apollo's commercial real estate debt platform manages over $2.5 billion of CMBS for strategic accounts, and is involved in the CMBS market on a daily basis. From time to time, our CMBS team finds opportunities to purchase bonds that meet the yield targets for ARI. And during the recent pullback this summer, we identified a strategy that worked for the Company. As we have done historically, we financed the CMBS with five-year term debt in order to avoid a funding mismatch. We entered into a new master repurchase agreement with UBS, which has a five-year term. The investment is expected to produce an underwritten IRR of 15%, and further demonstrates the benefits to ARI of the integrated Apollo platform.

Another transaction we announced during the third quarter also demonstrated the benefits to ARI of the integrated Apollo platform. In September, together with other affiliates of Apollo, we reached an agreement to make an investment in an entity that has agreed to acquire a minority participation in KBC Bank Deutschland, the German subsidiary of Belgian KBC Group. ARI committed to invest up to approximately $50 million, or roughly EUR38 million, representing approximately 21% of the ownership. The acquisition is subject to antitrust and regulatory approval, which is expected to take approximately 9 months.

As of December 31, 2012, KBCD had total assets of EUR2.6 billion. KBCD specializes in corporate banking and financial services for medium-sized German companies, and also is active in real estate financing, acquisition finance, and institutional asset management. The bank's existing real estate loan portfolio is focused on development and investment financing, primarily in Germany, across a number of property sectors.

This is an exciting opportunity for ARI to invest alongside other Apollo affiliates in a well-structured transaction to acquire a scalable banking platform at an attractive price. We have explored various strategies to invest capital in Europe, and we found this transaction compelling for ARI because of the potential return, as well as the prospective opportunities to jointly pursue real estate financings throughout Europe. We will provide an update on the expected closing of this transaction as the regulatory process proceeds.

As I discussed on the call last quarter, we have also spent considerable time evaluating the net lease sector, as we believe a portfolio of net leased assets purchased at the right price can generate stable and attractive yields, resembling pools of other real estate fixed-income investments over an extended period of time. We continue to work with an operating partner, gaining market knowledge and underwriting potential investments; but, as of today, we have not completed any transactions. As we have structured this venture as a free option, we will continue to explore the possibility of investing in net lease transactions and will determine whether or not we want to proceed with allocating capital to this strategy.

Subsequent to quarter-end, we closed one additional mezzanine transaction for $47 million, our first in the healthcare sector; and acquired additional CMBS, bringing our year-to-date investment activity to $430 million. We have made significant progress deploying our available capital, and ARI's pipeline remains healthy. We are very 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. As such, we are exploring several strategies to more effectively use leverage to grow the Company.

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 have posted our supplemental financial information package on our website, which contains detailed information about the portfolio, as well as ARI's financial performance. For the quarter ended September 30, 2013, we announced operating earnings of $13.3 million, or $0.35 per share, as compared to operating earnings of $9.2 million or $0.44 per share for the three months ended September 30, 2012.

Net income available to common stockholders for the quarter ended September 30, 2013, was $11 million or $0.29 per share, as compared to the net income available to common stockholders of $11 million or $0.52 per share for the quarter ended September 30, 2012. For the nine months ended September 30, 2013, the Company reported operating earnings of $37 million or $1.05 per share, as compared to $26.5 million or $1.27 per share for the nine months ended September 30, 2012.

Net income available to common stockholders for the nine months ended September 30, 2013, was $31 million or $0.88 per share, as compared to net income available to common stockholders of $30 million or $1.43 per share for the nine months ended September 30, 2012. A reconciliation of operating earnings to GAAP net income available to common stockholders can be found in our earnings release, contained in the Investor Relations section of our website, www.apolloreit.com.

GAAP book value per share at September 30 was $16.18. We do not mark our loans to market for financial statement purposes, and currently estimate that there is another $0.26 per share of value when our loans are mark-to-market; and, as such, estimate our market value per share to be $16.44 at September 30, 2013.

Our investment portfolio as of September 30 had an amortized cost basis of $843 million, with a levered weighted average underwritten IRR of 13.9%. The weighted average duration of our investments is three years. Additionally, the credit quality of our loan portfolio remains stable, and the Company has determined that an allowance for loan loss was not necessary at September 30.

Before I open the call for questions, I would like to reiterate Stuart's comment regarding capital deployment. We expect by the end of the fourth quarter ARI will be close to fully investing the capital raised at the beginning of the year and the capital received in loan repayments.

As we have stated previously, we believe once this capital is fully invested, the portfolio will produce operating earnings to support our current common dividend. As a result, the Board announced a common dividend for the quarter ended December 31, 2013, of $0.40 per share. Based upon yesterday's closing price, ARI stock yields 9.9%.

And, with that, we'd like to open the line for questions. Operator?

(Operator Instructions). Steve Delaney, JMP Securities.

Good morning, and congratulations, folks, on continued, steady deployment. It sounds like you really are -- you're getting that money put to work. Stuart, I'd like to start by asking about the legacy CMBS. It kind of gave me a flashback to the days of the TALF program, that I'm sure you'll recall; kind of a private market version. Could you give us a little feel for the vintage of these CMBS, the range of the vintage, and what the current ratings might be? I know they were born AAAs, but your press release implied that they were carrying lower ratings currently. And just --

Yes, Steve, I'll let Scott respond to that.

Yes, hello, Steve. Yes, look, TALF is what we're trying to replicate exactly. And that's what we had done in the past, previously with Wells Fargo; where, for us, an important component of the transaction is the ability to put on term financing. Because not only does that mean we don't have to worry about one-month repo going away, but because we are buying fixed-rate loans, that allows us to put a hedge in place. So we effectively are taking out that interest rate risk from what we are buying. With respect to what we're buying, and these are the legacy AM securities, so these were the 20% credit support AAAs.

Got it.

And so that's what we're buying. Previously, we had bought the shorter duration A2's, which we still have, as those have continued to extend and are doing great. And then this program is the AM program. In our supplemental, we actually list out the actual CUSIPs that are there.

And as Stuart mentioned on the call, we have a very active CMBS program. We're not traders, if you will. It's really a hold to maturity type thing. So we're constantly analyzing different bonds. And we saw an opportunity in the market to both get the financing, but also to find bonds that we could really underwrite and liked the credit.

And the remaining life, that looks like it's 3.5 to 4 years, that's telling us we're probably looking at -- what -- 2006, 2007 type of issues?

Yes, these are 2007.

Yes, okay.

Yes, they are 2007. Like I said, they're in the supplemental. So these are 2007, so they were supposed to be 10-year AAAs in 2007; so 10 years, so 2017. And obviously the deals have evolved with both taking losses and extensions, so they are about 3.5 years left. But like I said, we put on the five-year financing to give ourselves some cushion, as these deals tend to go out a little longer; which is a good thing, because going out longer is actually good for us in terms of how these deals work.

And you're about, looks like with the post-9/30 addition of $18 million, it looks like you're about $110 million with UBS now. Are you at liberty to say what your maximum availability is on that line?

It's disclosed. It's actually about $130 million.

Okay. Thank you, Megan.

We have a few million more of equity, if you will, to put out. To the extent we can find more bonds that we like and the returns make sense, we can grow it. We just want to size this facility to an appropriate size, based on where we saw the market opportunity.

Yes. And then I'll hop off and get back in the queue. But Stuart, we've talked over the years about this capital time-to-deploy issue, and I know it's something that you're sensitive to. And I was intrigued by your comments about considering other structures or strategies with respect to leverage that might help you bridge -- have a little longer bridge to the next required raise. And I'll just ask this, and then drop off -- I'm just curious if part of that might be, given that your portfolio is heavily weighted to mezz, are you considering trying to structure some sort of a senior slice off the top of your mezz book? So, thanks for the time and the comments.

Yes, look, where we're trying to take the Company and we are getting to a size where it could make sense, is to put more of a -- call it a corporate revolver in place, with a borrowing base that would allow us to stay in business; close deals; and then, as needed, clean up the revolver with some sort of permanent capital raise. And in any event, minimize the dilution you take when you put unused capital on the balance sheet.

We're in early-stage discussions with a couple different financial institutions. No guarantees in terms of success, but I would say the discussions have been pretty productive so far. And if we could figure something out along that vein, that's the path we're likely to go down, as I think it is the most advantageous type of transitional capital for the Company.

Thank you.

Jade Rahmani, KBW.

Morning, and thanks for taking the question. I was wondering, can you quantify the amount of accelerated accretion income in the quarter as a result of the loan repayments you received? And just generally, where do you think loan yields are headed, given the mix of deals you're pursuing?

There's about $0.01 of acceleration related to the Hilton timing. And then all of the remaining discount on the Boston property -- the Boston loan.

(Multiple speakers). Was that in the third quarter? Or is that -- what you just said -- is that in the third quarter, or is that expected in the fourth quarter?

Those are both in the third quarter, and then there's some additional accretion left for the Hilton in the fourth quarter.

Given the pricing of the Hilton capital structure, and the funding -- while it hadn't closed yet, we were able to obviously adjust our assumption for when it would get repaid. But with it getting repaid later this month, then will be able to take the remainder of the non-accretive discount.

Okay. What's the remainder of the non-accretive discount?

For Hilton?

Yes. Should we expect essentially a similar benefit in the fourth quarter?

You can actually see it in the supplemental on page 16. The cost basis for the Hilton bond is in there, versus the face amount.

Okay, great. And just, generally, where do you think loan yields are headed based on the mix of deals you're currently pursuing?

This is Scott. I would say we are still seeing opportunities consistent with what we've been doing in the past; whether it's the type of whole loans we're doing, based on what we have in closing -- again, it's consistent. Whether it be the mezzanine loans that we've done in the past on the floating-rate side, or also floating-rate whole loans. And we're also still seeing long-term, 10-year, fixed-rate mezz, again, consistent with what we're doing. So, I would say, yes, that the markets are robust. As Stuart referenced, the CMBS market had a little bit of a hiccup, but it's fully back up and running; the banks and what not.

But, again, as we've talked about in the past, that also presents opportunities for us. For example, we're working on a deal now where we're working with two balance sheet lenders who would do the senior loan at very, very attractive financing pricing. And then we would be doing a mezzanine loan at pricing consistent with what we've done in the past. And to the VAR, this blended cost of funds is outstanding.

Okay. Secondly, a peer of yours just announced a CMBS securitization that had, I think, an 80% advanced rate and 2% cost of funds. Do you view that kind of structure as attractive? The collateral is based on a static pool of participation interest in first mortgages.

Yes, look, I think for someone doing first mortgages, that is attractive. Obviously, there's the aggregation and the cost of actually doing a deal. I think, as we've said in the past, there is no shortage of people willing to finance mortgage loans. We have our facility in place where, depending on the deal, we can actually even get higher advance rates than that. So I think that's just another tool in the shed, if you will, on financing that.

For us, given the availability of that financing, we've seen yields continue to come down on those assets. And so, for us, even with that leverage that the yields that you get on a levered basis are still not that attractive to us, given the -- I would say that the risk involved in those kind of transitional lease-up loans and things like that.

Okay. So we shouldn't expect you to want to do something like that on your existing first mortgage portfolio.

No, look, most of our first mortgages were put in place in 2009, early 2010. There's not a lot of duration left there in order to go out and complete a securitization. And really the focus on what we're originating now, or doing now, is more on the mezz side, or what I would call more transitional first mortgages. Certainly, I think the financing achieved in the securitization market today is attractive. But to date, we have found other ways to put our capital to work productively without taking the risk of warehousing deals, and having some uncertainty of whether or not you can actually get to a securitization market.

Right. And I think on the type of transitional loans -- because, obviously, that's a broad term -- the type of loans we are focused on are not the ones that actually work for CMBS, which is why we can get the more attractive pricing. So, obviously, as capital markets come into any space, and obviously we've all been reading about the single payment for rent deal, that drives down pricing. So we purposely look and focus on assets that don't work well in the capital markets.

Okay. And then just lastly, the portfolio mix of floating-rate loans increased quarter over quarter. Is that a trend you expect to continue -- the mix of incremental originations being more floating-rate based?

Look, we look at both. Our fixed-rate, if we can put out a 10-year, call-protected piece of paper with a teen rate of return, I think that's great. And, yes, it's fixed, but when you look at the weighted-average coupon on our fixed rates, a move in the 10-year from 2% to 3% is not affecting us. The all-in rates is very attractive. As I look at our pipeline, yes, the vast majority today is floating-rate. So I would expect the ratios to continue to move toward floating-rate. But we still like fixed-rate deals when we can find them.

Great. Thanks very much.

Dan Altshcer, FBR.

Hello, thanks, good morning, and thanks for taking my call. On the net lease option now, Stuart, I'm not sure if I'm reading too much into your wording. I think maybe the last earnings call, or two earnings call ago, it might sound like it was a certainty of going into the business. And now maybe it sounds like it's more of an option if the opportunity comes around. Can you maybe just help me clarify the wording there, or help provide the direction there?

Yes, look, the relationship is the same as it was last quarter when we discussed it. And the relationship was always established to give us an opportunity to see deal flow, to have a ready partner who can execute on the deal flow, to the extent it was attractive. But like anything else we do, the desire to invest capital in the net lease space needs to be weighed against other alternatives we have in which to deploy capital. And I would say, in general, right now, what we're seeing on the mezz side or on the senior side is a more compelling risk-adjusted return than what we've seen in the net lease space so far.

And we've spent a fair bit of time looking at deals. We've done deep dives underwriting on a number of deals. Looked like we were about to complete a few transactions, and for whatever reason -- diligence didn't pan out -- so we're still actively looking in the space. But I think what I was trying to highlight is it really is -- I think the relationship was appropriately set up such that we as a company get to see deal flow and get smarter on the market. But to the extent I've got $50 million of deals away from net lease, I'm going to put my capital where I think it's the most attractive risk-adjusted return.

I don't have to be in net lease. I just think at some point -- and I don't know when at some point will be -- there might be an opportunity when it's interesting. And we just wanted to set up a structure whereby we were looking at the market on a more regular basis, and were getting more educated on the market. But any capital allocation decision comes down to a moment of time, and what looks more interesting in a moment in time.

Got it. Okay, no. That makes a lot more sense. Maybe a nice to have if there, and not a need to have, so that makes more sense. Just also on the German bank acquisition, can you just -- beyond the timing, which I guess is probably about nine months from now -- can you maybe just go through a little bit of the story there? How that came about; what's the rationale' what's the opportunity; what's the return set they are expecting there beyond just pure potential loan origination platform at some point?

Sure. It's Scott, I'll answer. As we've talked in the past, Apollo obviously has a very broad platform. And the financial services is a space that we spend a tremendous amount of time on. It's been obviously reported in the press, we started a reinsurance company called Athene that has grown into a very successful reinsurer of annuities. And our private equity side, we have purchased a UK insurance company. And we spend a lot of time in the bank space; in particular, German banking, given our view of -- that the deposit base there, and just what that affords you in terms of cost of funds and whatnot.

And so, given that real estate is always a very large component of a bank's assets base, we spent an extensive period of time with our colleagues looking at these deals. And this is a deal that they have been working on for many years. It's a forced sale, due to some regulatory and other things that's happened with obviously everything in Europe.

And so, for us, we just view it as a very attractive opportunity to get into the German banking business. We were able to underwrite the assets of the bank and management. And we think there's some real opportunities to grow the bank, both in real estate and in other classes. And it's a private equity type deal, with the commensurate returns that one would expect for buying a bank.

I think, Dan, the way we've thought about it is if you do nothing but buy the bank, I think from our perspective -- and obviously we have the benefit of working side-by-side with the big guys here at Apollo -- you're buying the bank really well. And it should be an attractive return just from making a good buy. I think to the extent things go beyond expectations, I think there will be opportunities for us to hopefully work with the real estate folks at the bank to perhaps create mezzanine opportunities for the REIT in Europe.

And it seems as a market that we've looked at pretty extensively, like others, this seemed to be the most efficient way and the most productive way for us to leverage the broader Apollo infrastructure to thinking about opportunities in Europe.

Okay. Thanks, that's helpful. And just maybe a quick follow-up on Steve's question on the CMBS portfolio that you just acquired. For those of us that aren't sitting at a Bloomberg terminal, can you just give us a flavor as to what you purchase them on as a percentage of par, percentage of face, or how many cents on the dollar?

Sure. And to be clear, we went out and bought individual bonds; it wasn't like we bought a portfolio from someone. And I think in the supplemental, we actually show the face and the cost. It was right around par.

Okay, so the legacy AAAs were trading right around par?

Yes, maybe like 101 or so; but again, it's in the numbers. It wasn't like we -- it wasn't -- these weren't -- I think these bonds, certainly by us are viewed as money good, no impairment. And so they are going to trade more based on the coupon of the bonds and, obviously, people's expectations on remaining weighted average life and spreads. These are not bonds where we are making the bet that a loan does good, and someone else is making the bet that the loan doesn't do good.

And, as I mentioned, these are 20% credit support bonds. I think the latest predictions from the Street and others are that most of these vintage will have a loss in kind of the 10% area. Obviously it fluctuates by deals, but these are bonds that we underwrote ourselves with our team and using our own underwriting model, and we're comfortable that they're not going to suffer any principal loss.

Got it, right. So these are really income or yield plays, and not credit reflation plays, I guess.

Complete yield play where we locked in our cost of funds. So we've hedged the borrowing and locked it in, now we're just clipping coupons. As I mentioned, to the extent they go out longer than we want because we paid a slight premium, that's even better for us.

Perfect. Thanks, Scott.

Rick Shane, JPMorgan.

Hello, guys. Good morning, and thanks for taking my questions. I've got a couple. First on the KBCD deal -- Stuart, you made an interesting comment, sort of looking at this as a private equity type transaction. Is there an expectation that this will generate current income? Or should we think of this really as a long-term capital gain potential?

It has the potential to generate both current income as well as long-term appreciation, just because there's an existing book of assets. To be perfectly clear, the bank that we would be buying was in no way distressed. The bank is being sold because it is one of the more valuable assets of a parent that was in distress, and needed to monetize some capital. So there is an existing book of assets that, given the price at which we are buying them, would potentially generate a good, call it, current cash-on-cash return.

I think the biggest fluctuation, potentially, on that current cash-on-cash return will be based on how we as part of the ownership group collectively decide that we want to reinvest in the business and grow the business. And it's too early right now to know what impact that might have on, call it, current cash income.

Got it. And this also may end up being a question that's a little premature given the uncertainty of the structure, but what do you think the tax characterization of the potential income would be? Would it be taxable, or would it be REIT income?

The way we've structured it -- and it still a little bit in flux -- but we're pretty confident that we'll be able to structure it such that REIT income and cash received are, for the most part, in sync.

Okay, great. Couple -- one more background question. On the UBS facility, is there a mark-to-market requirement, or is that just permanent financing without mark-to-market?

There is mark-to-market. But, again, we've taken out the interest rate movements from that, given the hedge; so they kind of offset. So it really would be wide moves in spread. That would be the reason for a margin call. And we had some cushion and stuff built-in, but a huge gap out in spreads would cause a margin call.

Got it. And then finally, Megan had talked about a fully deployed run rate of approaching that -- or exceeding that $0.40 quarterly dividend. One of the challenges, as you guys know, with running a mortgage REIT is that these are businesses that are huge consumers of capital, and that you typically need to be in front of that capital cycle. You can never get to that full deployment.

Stuart, do you think in the context of what you're describing in terms of alternative forms of capital, that there is the potential that you will get there without needing to raise additional pure equity? And so that really sets you in the position to fully cover the dividend going forward.

I think we're hopeful we can figure some things out on the, call it, corporate finance side of things. We are running a company today, call it, at about one-half turn of leverage, which seems a little bit on the conservative side, from my perspective.

And I think there's a solid borrowing base of assets that should support some sort of corporate revolver that would allow us to lever up and put additional assets on the books in advance of raising that permanent capital. No guarantees that we get to the finish line, but I think there have been some pretty productive discussions along those lines so far.

Terrific. Hey, guys, thank you as always for the clear answers to our questions. We appreciate it.

You're welcome.

Joel Houck, Wells Fargo.

Hello, this is Chuck Nabhan in from Joel Houck's team. Thanks for taking my question. In terms of your pipeline, how should we think of the opportunities in terms of what you're underwriting internally versus what you're sourcing through your relationships going forward?

This is Scott. I'm not sure if I'm following the question. But we are continuing to see deals directly from VARs and intermediaries. And were also continuing to work, as I mentioned, with other lenders who are providing the senior part of the capital structure and co-originations, where we do the subordinate debt. And then, like I said before, there's deals where we'll provide the whole loan.

Okay.

So, the mix continues, and I would say with what we have in closing, and then what we're working on -- it's very consistent with the deals that we've announced this year, whether it be mezzanine -- floating-rate mezzanine loans on cash flowing properties; whether it be whole loans in the residential space to convert or construct properties; long-term, fixed-rate mezz behind CMBS loans. It is kind of more of the same.

I think one subtlety I'd point out -- and I think at times there's a little confusion about this -- even to the extent on a new deal, we are the mezz behind someone's senior.

Right.

Typically, those situations are arising -- we're aware of the deal in the market; we're doing the work ahead of time; we're reaching out to borrower or broker; and either reaching out to relationships on the Street to see if we can jointly pursue a piece of business, or reaching out to relationships and see if there's a way to be paired up with someone. But the large majority of what we do is predicated on something where we've been involved in the origination early on; we've been involved in the transaction early on.

And I would say the scenarios whereby someone calls us up and says -- hey, I've got this piece of paper sitting around, do you want to buy it? -- are more the exception than the rule in terms of how we originate business around here. And I think sometimes we talk about co-origination or mezz behind someone's senior. But even when we are mezz behind someone's senior, we're involved in the transaction up front. We're not waiting for someone else to close a deal and then say, hey, I got to sell a piece of paper and give us a call. We are very upfront, and early in the process on most of what we put in the book.

Okay, I appreciate the clarification. Thank you.

Jim Young, West Family Investments.

Yes, hello. A couple of questions. First, with respect to the mezzanine loan that was issued post- the quarter, what's the attachment point this was issued at? And what was the underwritten IRR for this deal?

You're referring to the healthcare deal?

The $47 million mezzanine loan.

Our ending LTV was 58. And I think our beginning LTV was also kind of in the low 50s. And then we underwrote it to a 12 IRR. It has nine months remaining. This is a deal that we're actually actively working on the refinancing with some other parts of Apollo, which is why we got involved. And we'd already been doing all the work and underwritten it. So even though the remaining term is only nine months, while not done, we do expect in some form to be part of the refinancing which could take the form of a mezzanine loan like this, or it could take the form of taking a piece of the senior loan, which we would then use our facility to lever.

But that's how it came about. So we view it as a very safe piece of paper with additional capital behind us in the form of a junior mezzanine loan from a very large financial institution; and really got the opportunity to buy this due to our relationship with the sponsor, and the sponsor wanting to get another lender out of their capital structure who was, I guess, being difficult.

Okay, thank you. And the second question is a capital allocation question, and during the quarter your stock traded at a notable discount to book, but it doesn't appear that you bought back any stock during the quarter. And I was kind of curious why. But then, secondly, it looks like you just instituted dividend reinvestment plan so you'll be issuing stock below book. And I'm just wondering why you would want to be issuing stock below book at this time.

Just to be clear, Jim, the dividend reinvestment plan has been in place for about three years. And I would say, given that most folks hold in Street name as opposed to individual name, I would say what we've seen over the last three years is at best a dribble of stock, and pretty inconsequential. And I think in terms of the discussion on using the share repurchase plan, at the end of the day, any decision on that front is based on -- what's in our pipeline? What do we have a capital need for, versus the benefits of potentially buying stock back? And I would say given what's in the pipeline, there's a need for every dollar of capital we have, and potentially more.

And right now we're sort of -- like the returns we can generate, and think it fits with the long-term story of the Company. But we're certainly not sneaking out equity through a DRIP plan. The plan has been in existence for the better part of three years now.

Well, I apologize for that. I guess the new part that it looks like you instituted was a direct stock purchase plan. Is that correct, then?

No, it's always been there. So, unless I'm missing something, I don't think there's been any changes other than maybe just refreshing the filings, as need be, to keep the plan going.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to Apollo for any concluding remarks.

Thank you, Operator. And thank you for everyone for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a great day.