Apollo Commercial Real Estate Finance Inc (ARI) 2018 Q3 法說會逐字稿

I'd like to remind everyone that today's call and webcast is 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 filing 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 and are reconciled to GAAP figures in our earnings press release, which is available on the Investor Relations section of our website.

We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloreit.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, and good morning, and thank you to those of us joining us on the Apollo Commercial Real Estate Finance Third Quarter 2018 Earnings Call. As usual, joining me in New York this morning are Scott Weiner and Jai Agarwal. From the macro perspective, the commercial real estate market continues to perform reasonably well, despite the recent uncertainty created by increasing volatility in the capital markets tied to rising interest rates and concerns over the potential impact of changes in trade policy. Driven by the continued strength of the economy, as evidenced by recent GDP growth and employment data, operating fundamentals across most property types and markets are stable.

More importantly for our business, equity capital continues to flow into commercial real estate, which drives transaction volume and creates investment opportunities for ARI. It is fair to say that the optimism in our business created by positive economic fundamentals and robust deal flow is balanced by the recognition that we are now 9 years into an economic recovery, coupled with ongoing competition from the significant amounts of public and private capital seeking attractive risk-adjusted returns. At ARI, we remain confident in our ability to find interesting investment opportunities based upon the talent of the team we have assembled at Apollo as well as the marking lead -- market-leading position Apollo's commercial real estate credit platform has established over the past 10 years. In an industry that is heavily disintermediated by brokers and in which brokers have choices, relations -- borrowers have choices, excuse me, relationships, track record and reputation are extremely important when sourcing new deals and ARI is well served by a platform that is completed over $24 billion worth of transactions.

Following the $2 billion of commitments ARI made in 2017, we are once again on track for a record year of commitments in 2018. Importantly, we are achieving record volume and still identifying investments with attractive risk-adjusted returns that are consistent with our focus on maintaining our strict credit standards. ARI's portfolio remains diversified across property types and geographies. Notably, over the last 12 to 18 months, we have increased our exposure to the United Kingdom, where Apollo's London-based team has committed to approximately $1 billion of new loans on behalf of ARI and has done an excellent job of cementing our reputation as a reliable, creative capital solutions provider in Western Europe. It is also worth highlighting that we remain an active capital partner for both predevelopment and construction transactions. We have been active in these markets for a number of years and have the benefit of experience when underwriting and structuring these loans. In pursuing these types of transactions, we are extremely selective with respect to borrowers, markets, property types and deal structures. When we find transactions that meet our high-underwriting standards, these investments offer very attractive risk-adjusted returns.

I wanted to take a minute to provide a brief update on our first mortgage loan on a lifestyle center in Cincinnati. Since last quarter, management of this center has been replaced with the team from JLL, who have significant experience in the Cincinnati market. At present, JLL is beginning to make inroads on developing a plan to maximize the tenant mix and increase occupancy and foot traffic at the center. We have extended the maturity on this loan for 12 months, and we'll monitor the asset and dialogue with JLL as warranted as they work to improve the center's operating performance.

Lastly, before I turn the call over to Jai, I want to take a minute to highlight some of ARI's capital markets activities. We have been extremely focused on optimizing our balance sheet, including expanding our capital sources, extending the maturities of our liabilities and lowering our all-in cost of capital. Over the past 2 years, we have increased our financing capacity to $3 billion from $1 billion and diversified our counterparties from 1 primary financing facility to 5. Throughout this time frame, we have maintained a weighted average remaining fully extended term on our facilities of 2.5 years, effectively match funding us to the expected duration of our loans. With respect to our unsecured borrowings, during the quarter, we addressed our only near-term maturity and exchange $206 million, representing approximately 80% of our 5.5% convertible notes due in March of 2019 with a combination of approximately $40 million in cash, and the issuance of approximately 10 million shares of common stock. Subsequent to quarter-end, we completed a new issuance of $230 million of convertible notes, which have a coupon of 5.375%. The new notes will mature in 2023, and the conversion price is $20.53 a share or a 10% premium to the common stock price on the date we priced the transaction. This new issuance provides us with incremental capacity to fund our robust investment pipeline while lowering our overall cost of capital. We continue to operate at one of the lowest debt-to-equity ratios in our peer group and believe we are well positioned to continue executing on our business plan.

And with that, I will turn the call over to Jai to review our financial results.

Thank you, Stuart, and good morning, everyone. For the third quarter of 2018, our operating earnings were $60.9 million or $0.47 per share. This excludes the $2.6 million loss on early extinguishment of debt in the form of fees and write-offs of the cost related to the redemption of our notes.

GAAP net income for the quarter was $55.4 million or $0.40 per share. A reconciliation of operating earnings to GAAP net income is available in our earnings release in the Investor Relations section of our website. At quarter-end, our portfolio had an amortized cost of $4.8 billion, a weighted average unlevered yield of 9.2% and a weighted average remaining term of just under 3 years. 90% of the loans in the portfolio had a floating interest rate.

On the financing side. During the quarter, we upsized our facility with Deutsche Bank by $200 million to $1 billion and entered into a new facility with HSBC, diversifying a number of repo counterparties to 5.

As of quarter-end, we had over $415 million of liquidity. Our book value per common share was $16.27 at September 30, as compared to $16.26 at the end of last quarter. This was up slightly from foreign currency hedging, offset by the redemption of our in-the-money convertible notes.

I also wanted to highlight the GAAP earnings per share calculation this quarter. Given that we exchanged our 2019 convertible notes for shares rather than cash, we are required to now apply the if-converted method on the remaining notes for GAAP. This result in a higher share count denominator useful GAAP EPS. The impact of this was a negative $0.02 per share on GAAP EPS and does not affect operating earnings per share calculation.

Moving to G&A. Our G&A remained flat this quarter and annualized Q3 G&A as a percentage of equity was 29 basis points, which highlights the economies of scale we continue to achieve.

Finally, I wanted to highlight our dividend. Based on Wednesday's closing price and our recent dividend run rate of $0.46 per quarter, our offer -- our stock offers an attractive 10% pretax yield. Our board will meet again in mid-December to discuss the Q4 dividend, and we will make an announcement shortly thereafter.

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

(Operator Instructions) Our first question comes from Steve Delaney from JMP Securities.

Stuart, based on your remarks and your comment about your focus or activity in both predevelopment and construction loans, I was wondering if you could estimate what percent of the portfolio is actually represented by loans that would be classified as development or construction? You gave us a lot of detail, but I actually can't find that particular breakout.

I mean, I think the way we think about the portfolio and I think for the most part we're talking about construction, there is 1 or 2 that I would say are heavy redevelopments that we would put in that bucket as well. I think from a construction perspective, if you're looking at the overall portfolio of $4.8 billion, I would say, on a commitment basis, roughly 1/3 of our portfolio would fall in that construction or predevelopment basis. But remember, not all the commitment gets funded day 1, so you are sort of balancing things that we expect to be repaid versus things that have future fundings. So it's on a commitment basis, it's about 1/3. On a funding basis, it's probably more 1/4 or so of what's outstanding.

That's great. It's really helpful. And speaking of predevelopment, you guys put together a nice tour last winter on the project in Miami in the Design District and that is actually now shown as your largest loan at $222 million, also note that it matures next July. Could you just give us a quick update on what may have happened over the last 9 months or so? And how -- are -- is that overall project in line with the original projections and progress?

Yes. I mean, I think at a high level, remember the project we're backing is sort of a later-stage project in an area that there's been a lot of activity going on. Generally speaking, I think the projects that are, call it, ahead of our projects from a timing perspective, continue to perform extremely well in terms of new store openings, new restaurant openings, foot traffic and just per sale levels at the stores that are already opened. Our specific project is one that is probably somewhat contiguous with our loan maturity in terms of when the sponsor will need to decide what they want to do vis-a-vis timing of their development, getting development financing in place. They continue to work on discussions with respect to anchor tenants both on the retail side and the office side. I think it's also important to note that throughout the loan, they've continued to put fresh equity into their transaction as they've needed to rebalance the loan in terms of reserves. And then lastly, maybe the most interesting development for the -- our collateral, in general, is that the area that we're talking about, clearly falls within the definition of a new -- of an opportunistic economic zone per the new tax law. So that's, I think, engendered some additional interest for our sponsor in terms of how they might think about capitalizing things going forward. So at a high level, we think the location's been proven. We continue to think there's been increasing value in the collateral that our sponsor has assembled, and we remain reasonably optimistic on the outcome with respect to the transaction. And the last thing I'd highlight, Steve, is -- if you recall, our collateral is not land, they're existing assets there, exist -- buildings. So I would say, we still control the ability of the borrower to do anything to those existing buildings. And as of today, they still remain as existing assets, obviously unleased, given what the long-term plan is. But I think there is increasing value in the residual buildings, just given what's going on in the market around it right now.

Our next question comes from Stephen Laws from Apollo (sic) [Raymond James].

Stephen Laws of Raymond James. If you guys -- we'd love to get a little bit of color into the mix we've seen. I think, from reading the release and subsequent events, it looks like much more of the investment activity has been on the first mortgage side. You've seen some repayments more slanted towards the mezzanine investments. Is that a coordinated effort of something you guys are seeing that are making you more attracted to the first mortgages or is it simply something going on with competition? Or just what's coming to the pipeline at this time? But maybe you could talk about the mix of what the new investments are versus what we were seeing a repay?

Yes. Look, I think at a high level to answer your question, both the shift in our portfolio, the shift in what you've seen announced recently and to be fair if you're previewing what might be announced further on in the quarter, at the end of the year, clearly the pipeline is heavily weighted towards first mortgages these days. I would say that is less driven by any strategic shift on our part and more driven by what is available in the market today. And I think you're seeing a few things going on in the market today. I think with increased competition at some level, I think you're seeing senior lenders want to speak for a larger portion of the capital stack as a way to control transactions. So I think you're seeing just less interesting mezz available, which is influencing our pipeline. I also think our bigger size as a company allows us to step into situations where we can control our own destiny. So again, that's not to say that our pipeline is devoid of mezz because there are certainly a few things that we're working on these days. But I would say, at a high level, to answer your question, I would say the interesting mezz pieces that are available these days are not as abundant as they once were, and we, like others in our space are generating returns through first mortgages that we can then lever to generate the right ROE and ultimately end up, as we've said many times before, similar attachment points, similar ROE. You're just doing it by controlling the first on the front end as opposed to co-originating with someone or waiting for a mezz piece to be created by someone else.

Yes, and, Stuart, you -- I think you sort of touched on there on your comments. I mean, if we continue to see the shift towards the higher mix of first, obviously given that shift, is it reasonable to expect we should see leverage start to move higher just because you'll use more leverage on the first to generate the same net ROEs.

Yes. I mean, that's the natural evolution if you think about the goalpost of the company, right. Mezz has no leverage and first mortgage has somewhere between 2 to 2.5 turns of leverage. So yes, leverage would naturally trend up. I know you're relatively new to covering the company. Those who have been on these calls longer are probably getting tired of me talking about how I think natural leverage will rise over some time, because we tended to be out on our front foot sort of adding more equity capital into the company as the markets allow us access to it, because we're, I think, smart enough to know that at some point that access will go away. But I think there will be a natural rise in leverage over time, but I think even as we run various scenarios inside here, I think we're talking about a leverage number that moves, call it, towards 1.5 across the company. I'm not sure, it moves much beyond that, just given our sort of current purview on pipeline and expected repayments and portfolio shift.

Yes, that makes sense, Stuart. And you immediately hit on my next question, which is kind of what does the near-term repayment expectation look like versus your funding pipeline? Clearly, originating and funding those new investments need to outpace the repayment in order to drive that leverage number higher.

Yes. Look, we believe we are ahead of it in terms of what we expect to repay and what we know is in our pipeline. Look, I think our experience has historically been things typically pay slightly slower than we expect them to though. We're talking about a quarter, we're not talking about years of delay. We've obviously got a healthy amount of repayments in 2019 and 2020, if you look at our loan portfolio. We've chipped away at some of that just with future fundings within our portfolio. And I think it's fair to say that some of the things we expect to close in the fourth quarter will also have future funding components. So we are getting ahead of it in some respects. And I would say, we also continue to, I don't know the exact percentage, but certainly on some of the things we expect to repay. There are certainly situations where I think we will end up staying in the refinance in a new piece of paper that also attractive -- offers an attractive risk-adjusted return. But we're comfortable sitting here today knowing what's coming in the next 12 to 18 months between future fundings and pipeline will be outpacing the repayment rate.

Right. And lastly, I appreciate the update in your prepared remarks on the Cincinnati asset. Can you maybe touch on the Williston, North Dakota and Bethesda, Maryland, I think those mature, one in April, one in November, so roughly in the next 12 months. But can you maybe talk about any updates there since the last time you guys talked to us 3 months ago?

Yes. So I think on Bethesda -- look, Bethesda was a 50-unit condo project, of which we -- the last update was that we had sold 35. There's another one under contract today that will set -- that should close before the end of the year, so that will get us down to 14. And I would say, given foot traffic and our sort of weekly dialogue with the sales team, we think there is a reasonable chance that another couple could be put under contract in the next weeks or month or so. So that will get us down to, call it, roughly 12 remaining. And we're basically in Bethesda until the unit sell and pay us down. So I think maturity date is somewhat irrelevant in that particular case. We took the reserve last quarter to give ourselves room on the pricing of unit side. I think that pricing has generally been well received by the market and we're just sort of slogging through it a unit at a time. There is a regular dialogue with the sales team and within pretty broad parameters, the goal is to make sure that we never miss a potential sale and that message has been delivered to the sales team. I think on Williston, things continue to improve on the Williston side. We've now sold, either completed the sale or under contract, 30 of the 36 single-family homes that are part of the collateral and have a very high degree of confidence that the remaining 6 will sell quickly once the tenants in place subject to lease either vacate or decide to make an offer to stay in the home and buy it. On the multifamily side, which is a 330 unit multifamily apartment, rents have moved probably to about $1.15 a foot these days. Occupancy is solidly in the 90s. Concessions have gone away. We're feeling pretty good about how the asset is performing right now, starting to consider when it may make sense to try and sell the multifamily asset. There have been smaller comps in the market, but nothing of our size yet. And then, we still also control a significant number of finished and unfinished lots, which, again, nothing specific to note at this point, but we are in conversations -- I mean active dialogue with the powers that be within Williston to see if there is some sort of trade, JV structure, whatever it might be where we can work with the city to activate some of those lots, because there clearly is a need, particularly for more housing development in Williston. So given where oil is these days, Williston feels pretty positive. We're certainly more than comfortable with where we've written the asset down to from a reserve perspective. I would say the return on our capital, while still below where we would like it to be, is improving just as the cash flow from the multifamily goes up. And we're, I think, on the path to a decent outcome on that absent anything surprising happening on the oil front right now.

Our next question comes from Ben Zucker from BTIG.

Can we just start broadly with the environment and talk about borrower demand on specifically for your products and more generally? We've obviously had higher rates and more volatility the last month. So I'm just wondering if it's possible -- fourth quarter is not the seasonally strongest that we usually see and maybe we see -- could possibly see a flip with more 1Q strength next quarter. Just what are you guys seeing with your borrowers right now?

Look. I think I'll go backwards and say that this all starts with capital. And if you look at sponsor-based, opportunistic and value-add real estate funds, those funds are sitting on historically high levels of capital. So that capital will get deployed at some point and that capital will lead to transaction volumes. So I think, generally speaking, there is no dearth of real estate activity today. I think as you try and fine-tune this to particular quarters. Look, it's fair to say that everything we've been working on to date that we expect to close in the fourth quarter has been in process for quite some time. It's the nature of our business, things are fairly long-dated. And I'm not sure, I would jump to making any particular conclusions or trends based on what you see us close in the fourth quarter because I think that's been in the works for a while. I think as you look much beyond that while we've seen rates move and we've seen the short end of the curve move, I would say, we haven't seen any significant impact on transaction volume. I do think where it might potentially benefit us over time, and I don't want to say this is occurring today, but I do think it could potentially make refinancing somewhat less attractive for some of what we've lent against, and thereby, allow us to keep assets on the books a little longer. That being said, to the extent people have hit their business plan, there is plenty of ways to get people taken out of deals where along a hotel deal right now in Miami. That was a very transitional asset at the time we made the loan. And lender has nailed their business plan, and they're in the market right now seeking a loan that represents, call it, 2x what our outstanding loan is. So there is plenty of ways for people to get refinanced out of things today. So I'm not sure we see any dramatic shift right now in terms of pipeline or deal activity, but obviously something we're watching closely, given the shift in capital market.

That's very helpful and thoughtful, Stuart. I did notice that you sold a mezzanine loan this quarter. Just wondering what motivated that? I know you still have a good chunk of capital in this property through a senior mortgage, so was this just a little bit of risk management to lighten up your exposure there?

Yes. I mean, let's -- so to go back to the beginning when we did the original $265 million financing and this is on a office development on the -- in the southern part of Suburban, Seattle, we structured the original financing as a first mortgage in a mezz loan. So we always created the optionality for ourselves to sell a bottom piece, if we desired. It wasn't an imperative, but people were aware that we -- people in the market were aware that we have created it that way. We had some dialogue with a handful of different parties and ultimately, made the decision based on the quality of the sponsorship that was willing to buy the mezz. And the economics we still retain for ourselves at a $190 million first mortgage that we could lever attractively. It was the right decision for the portfolio overall to sell the piece. It derisks our investment somewhat, enhances the overall risk-adjusted return on the piece we returned and it ultimately consistent with business plan if you think about how we structured the financing when we originally put it in place.

That makes sense and it ties into your earlier remarks about people skewing more towards senior mortgages to control the capital stack, and I guess that's an example of having kind of the flexibility then to structure these loans how you want and parts of risk when you deem it necessary. Lastly, and this is just a bit of housekeeping, I heard you mentioned the growth in your U.K. exposure. So I jump to the pie chart in your earnings supplement and it shows the U.K. at 15%. But then I noticed that, that chart is based off of amortized cost, and I don't believe that recent U.K. origination was funded yet. So does that mean that new loan is not even reflected in that pie-chart figure that we're looking at?

Correct.

Okay, cool. Good to know. Well, we like seeing that international exposure grow, so congratulations, guys, and look forward to seeing this portfolio continue to ramp.

Our next question comes from Rick Shane from JPMorgan.

Obviously, the exposure in the U.K. is a little bit of a contrarian play and that totally makes sense given the breadth of the platform. I am curious if you can highlight to us some of the term differences that we would -- you would expect to see in terms of either spread or LTV on the U.K. loans, so we can understand the benefits of being in that market?

Yes. Look, I think to go backwards, Rick, and then I'll get to your question, right. I think we, like others, established a beachhead, for lack of a better phrase, in London in roughly 2013, 2014. Apollo broadly has always been active in Europe, broadly and specifically, in the United Kingdom on the real estate private equity side. So it was a natural for us to establish a lending operation side-by-side with that based in London. I think when we established the beachhead like many of our peers, the fundamental thesis at that point in time was that Europe seemed a few years behind the U.S. in terms of economic recovery and given the breadth of opportunities we saw in the U.S. It was only a matter of time before we saw that breadth of opportunity in Western Europe broadly. That thesis ended up to be proven incorrect by us and our peers, and that the bank market continue to sort of dominate the lending market. And we did a few things episodically, but it wasn't as deep a market as we hoped. The opportunity was ultimately created on the back of the initial Brexit announcement, it was roughly 2.5 years ago that caused some to get more cautious on the market, caused certain lenders to back away. And by having a presence there and being in the market, all of a sudden we started finding some interesting things to do. At a high level, generally, what we lend against is not all that different from what we do here in the U.S. in terms of -- tends to be high-quality financial sponsors for the most part, we're focused on Central London, institutional quality assets, whether it be office, something that's being redeveloped or predeveloped residential. I would say, at a high level, we've probably been able to pick up on a like-for-like basis a little bit more in spread in London. I'm not sure that will continue, but there was certainly a moment in time when that was available to us. Again, it's a mix of mortgage and mezz. If you look at the underlying assets though, again, like our portfolio heavily weighted to first mortgage. So we like the market. We think we've established ourselves on the borrower side, which will lead to more opportunities. I'm not sure London becomes much beyond the 15% of our portfolio or high-teens percent of our portfolio that it is today. I'm not sure that the spread differential will continue, but even on a pure like-for-like basis, we like the opportunities we see in London and would expect that we will remain active there.

And I think it's fair to say fewer competitors, but a higher concentration of heavyweights?

I think that's fair to say. And before we leave the topic, and I assume you knew this, but obviously we hedge -- completely hedge our currency risk on anything we do over there to the extent we're levering a first mortgage, we're borrowing in local currency and then any remaining equity value is fully hedged on a currency basis. So again, it's an international city. We're lending against institutional quality assets for high-quality sponsors, and I think it just gives us another interesting place to find unique deal flow.

Yes. I think in my old age, I've asked a question about hedging on 2 or 3 calls previously. So I do remember that now.

Right, what else?

Our next question comes from Jade Rahmani from KBW.

Just what do you think drove the slowdown in originations in the quarter? And also, yes, I was surprised to see the sale of the $75 million subordinate position in Renton, Washington, just given the somewhat lighter origination pace in this quarter?

Yes. Look, I think and you and I have talked about this many times before, Jade. It's tough to think about this thing on a quarterly basis, right. If you look through the quarter and look on a year-to-date basis, we're on a record pace and pretty confident, given what we've already announced in the fourth quarter and what I know is in the pipeline that we will set a record and exceed last year in terms of activity. So we tend not to spend a lot of time thinking about quarters, it's really hard to run this business on a quarterly basis. I think as I said -- earlier, I think the sale in Renton was an option we created for ourselves at the time we did the transaction. Again, we think it was the right long-term decision for our investment to derisk our piece to create an attractive risk-adjusted first mortgage and the impact of selling that $75 million, whether it happened in this quarter or last quarter, had no bearing on what the decision was whatsoever. We're not making investment decisions based on volume in a particular quarter. It's about what's the right long-term decision for the investment.

And in terms of that asset, in particular, are there any performance issues? Or anything market dynamics that are of concern at this point? I believe the asset is almost near completion and market has...

None whatsoever. It's being built as expected. I would say, the volume in terms of lease meetings and those that are coming in are pretty impressive. I think they're holding out for a sizable anchor tenant, which is fine with us as lender, and I would say even better for us, given who we know is behind us in the mezz position now, who certainly provide additional capabilities underneath us as lender. So and Seattle, to your point, continues to perform very strong.

Okay. Just in terms of asset management, I think the Ozark impairments they took in the quarter, I've gotten a bunch of investor calls on that. Can you give some sense of how ARI approaches asset management, just the regularity of dialogue with borrowers? How much information you're receiving? How proactive you are in terms of looking at reappraisal values, for example, just things of that nature. Can you give any color?

Yes. So at a high level, and I'll be very open, right, our asset management effort consists of a team of several people internally who are solely focused on asset management. And then, we use a third-party service provider. I think everybody on this call has probably heard of Situs who assists us with, I would say, base-level servicing, monitoring and reporting. We meet as a team, so the entire real estate credit team meets as a team to review the entire portfolio on a quarterly basis. When we do that, we looped in the equity side of our business as well, because we think that provides additional market color and oftentimes asset level color, because our real estate equity folks are in the market on a regular basis as well. So we're reviewing and discussing each asset on a quarterly basis. To the extent, additional conversations are required. Those conversations with borrowers happen real time. Often times, those conversations are just about furthering our understanding and making sure the borrower is aware of what our concerns are obviously as a lender. As long as the borrower is current on their loan from an economics’ perspective and in compliance with their loan qualitatively, there is not much we can do as a borrower other than to make sure there is a regular dialogue. But I would say, we are as hands-on as it needs to be with respect to each asset and for those things that have risen to the level of being from more concerned from a credit perspective and everybody on this phone is aware of the loans that rise to that level, those that are risk rated 4 and 5 right now. I would say, the dialogue is much more frequent than quarterly basis, could be as frequently as weekly, if need be and no less than, call it, biweekly or monthly for things that we've got significant concerns about.

And just for things that are sort of on a watch list beyond the 4- and 5-rated loans, some of which have been asked about on the call. What's the trend been in terms of migration there? Is it a stable trend? Is -- any worsening? Any improvement? I mean the pickup in refinancing does suggest some improvement.

Yes. I think -- let me, sort of, break it down by asset type, if I can. I would say, the general trend has been modestly better, I would say, flat to modestly better. I think where we've been most surprised to the upside has been on the hotel assets, where operating performance has been, generally speaking, pretty strong across the board. I think where there has been modest underperformance, I would say, it has been the pacing on some of the condo projects. Though I would say, things that have transacted while the pacing might be somewhat slower, I would think -- I would say, we feel as confident in our basis per square foot as we have at the time we made the loan. So I would say, slightly better is the way I would describe it.

Okay. And in terms of the RedSky deal in Brooklyn, did you give an update on that already? Or could you provide that? I think it did have a maturity in the third quarter or so, I believe that got extended.

That's been extended. I would say, there are things going on both with respect to planning as well as recapitalization, which I would say have us feeling very comfortable about our position in that loan right now.

What's the status of the project? Are they just looking to sell it or do development?

No, they planned to go forward with developing it. Since we made the original loan, they have continued to pick up incremental parcels, which make it more of a fully contiguous block. There is a still one parcel outstanding that they have designs on acquiring, but all indications are that they plan to go forward with the development. They will likely, my guess would be, bring an additional equity to go forward with the development, and we retain a right of -- to participate in the construction project or construction loan, but no decision has to be made on that front from our perspective at this time.

This concludes our Q&A session. At this time, I'd like to turn the call back to the CEO, Stuart Rothstein, for closing remarks.

Thanks, operator, and thanks to those of you participated on the call.

Thank you, ladies and gentleman, for attending today's conference. This concludes the program. You may all disconnect. Good day.