Apollo Commercial Real Estate Finance's (ARI) CEO Stuart Rothstein on Q2 2016 Results - Earnings Call Transcript

| About: Apollo Commercial (ARI)

Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI)

Q2 2016 Earnings Conference Call

July 27, 2016 09:00 AM ET

Executives

Stuart Rothstein - President and CEO

Jai Agarwal - CFO, Treasurer and Secretary

Analysts

Steve DeLaney - JMP Securities

Jade Rahmani - Keefe, Bruyette & Woods

Richard Shane - JP Morgan

Dan Ochinero - Barclays Capital

Charles Nabhan - Wells Fargo.

Mihir Bhatia - Bank of America

Rick Murray - Midwest Advisors

Operator

Good day, ladies and gentlemen and welcome to the Apollo Commercial Real Estate Finance Incorporated Second Quarter 2016 Earnings Conference Call. All participant lines have been placed on listen-only to reduce background noise. But later we will be holding a question-and-answer session and instructions will follow at that time. [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 Incorporated 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 like to also 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. You have the floor.

Stuart Rothstein

Good morning and thank you for joining us on the ARI’s second quarter 2016 earnings call. Joining me this morning is Jai Agarwal our new Chief Investment Officer who will review ARI’s financial results after my remarks.

The second quarter of 2016 was another solid quarter for ARI operationally as we continue to find attractive investment opportunities and produce strong financial results. Our operating earnings per share for the quarter are $0.51 a share represents a 13% increase over the second of 2015. These numbers reflected adjustment to exclude $1.3 million of transaction expenses associated with our pending acquisition of Apollo Residential Mortgaging Inc. or AMTG, which I’ll comment on towards the end of my remarks.

During the quarter the company closed two first mortgage loans totaling $95 million and funded an additional $64 million for previously closed transactions bringing year-to-date capital commitments and deployment to just over $500 million. On the financing front ARI increased the borrowing capacity on our main credit facility with JP Morgan from $600 million to $800 million, which enabled us to fund our incremental investment activity.

Turning to the portfolio, at quarter end ARI’s commercial real estate debt portfolio totaled $2.7 billion representing 30% growth on a year-over-year basis and generated a leverage weighted average IRR of 13.2%. The weighted average loan to value of the portfolio was consistent at 63% and the portfolio remains diversified, both geographically and across property sectors. Notably for the second quarter in a row our asset mix has shifted to reflect an increase in floating rate first mortgage loans.

As noted in the press release this quarter ARI recorded a $15 million provision for loan loss against our $55 million first mortgage loan on a multifamily property located in Williston, North Dakota. Just to be clear at this time the loan is not in default and as such our earnings continue to reflect scheduled interest from the loan. That being said, the market has certainly changed from when we made the loan and we thought it was appropriate at this time to be conservative and take a loan loss reserve against the asset.

As a reminder the collateral for ARI’s loan consist of 330 multifamily units, 36 single family home rentals and an additional land consisting of both finished and unfinished lots. Based on my recent trip to Williston as well as ongoing dialog by myself and other members of our team with a variety of contacts that are close to the market it appears that the economy in Williston has certainly started to recover from the lows experienced during the first few months of this year.

With oil north of $40 per barrel there has been an increase in economic activity that is reflected in the increase in rig count and the number of active well, consistent with the recovering local economy we have seen an improvement in ARI’s collateral with occupancy at approximately 80%, but it’s worth noting that rents are still well below original underwriting. We continue to be in active dialog with the borrower to ensure the best possible outcome for ARI and preserve the company’s capital. We will certainly provide updates on this situation as they become relevant.

Now turning to our CMBS investments, as a reminder ARI has invested in both legacy AJ bonds and legacy AM bonds with an amortized cost of roughly $357 million and $134 million respectively. We financed our CMBS investments with two termed out facilities and as a result net equity dedicated to our CMBS strategy at June 30th was about $150 million or roughly 9% of our total net equity.

Based on the broker quotes we use to mark the CMBS portfolio at quarter end, the AM bonds have remained essentially flat quarter-over-quarter, while the marks on the AJ bonds have resulted in an additional $11 million of mark-to-market loss, approximately $0.17 per share. At quarter end the cumulative unrealized mark-to-market loss on the AJs is about $35.7 million or about $0.55 per share. The market volatility around the AJ bonds is driven by market participants taking varying views on the expected cash flows from each bond, which are ultimately the result of the performance of the loans underlying each bond.

Given the number of loans maturing this year and next, including loans which have been or will be transferred to special servicing and the differing views about where we are in the U.S. economic cycle it is not surprising to see a wide range of expectation on underlying asset values, loan level outcome at maturity and ultimately bond performance. We continue to monitor our bonds closely and each quarter we conduct multiple scenario analysis for the bonds we own including detailed loan by loan analysis where warranted.

Based on our most recent analysis our current expectation for principle recovery and future bond cash flows is in excess of the assumptions implied by the current marks and we still expect that through final resolution the cash flows received by ARI will be consistent with our updated underwriting.

Lastly with respect to an update on the AMTG transaction, pricing for the acquisition was determined and the proxy statement was filed with the SEC. We anticipate the proxy statement and prospectus will be mailed to AMTG stockholders starting later today for a special meeting schedule for August 24, 2016.

The final consideration to be paid values AMTG at approximately $13.83 per share of common stock based upon the closing price of ARI’s common shares on July 22, 2016 and AMTG’s book value as of the pricing date of July 22, 2016 and includes 0.417 ARI shares of common stock per AMTG share of common stock at approximately $6.86 per share in cash.

As we stated in the announcement release, we do not intent to enter the residential mortgage market. We will sell AMTG’s non-agency securities to certain subsidiaries of a seen holding upon closing. In addition, we intent to sell the remainder of the AMTG’s investment portfolio and redeploy the capital into commercial real estate debt investment. We are very confident at this time in our ability to deploy the incremental capital as ARI has a robust transaction pipeline and we expect to see more coming our way in the coming months.

At this point I would like to turn the call over to Jay who started as CFO at the beginning of June. Jai comes to Apollo with many years of finance experience in commercial real estate lending and has hit the ground running. And with that, I will turn the call over to Jai.

Jai Agarwal

Thank you, Stuart and good morning, everyone. It’s a pleasure to be on my first ARI call and I look forward to meeting many of you. For the second quarter of 2016, our operating earnings were $33.2 million or $0.49 per share. Excluding one-time expenses of approximately $1.3 million associated with the pending merger, operating earnings were $34.7 million or $0.51 per share. This is a per share increase of 13% as compared to operating earnings of $26.4 million or $0.45 per share for the June 2015 quarter.

GAAP net income for the same period was $4.5 million in 2016 or $0.06 per share as compared to $22.8 million or $0.39 per share in 2015. A reconciliation of operating earnings to GAAP net income is available in our earnings release, which is posted in the Investor Relations section of our website. GAAP book value at June 30, 2016 declined 2.4% from last quarter to $15.51 a share. This decline was driven by; one, as Stuart mentioned unrealized loss on our CMBS portfolio and; two, loan loss provision of $0.22 per share on our North Dakota loan.

Looking ahead to the third quarter, we expect the AMTG transaction to be accretive to book value. At June 30th, 85% of the loans in our portfolio have floating interest rates. We anticipate that if LIBOR were to increase 50 basis points our portfolio would generate an additional $0.07 per year in operating earnings. With respect to leverage, we ended the quarter with a 1.48 times debt-to-equity ratio. Upon closing of the AMTG transaction, we anticipate paying down our JP Morgan facilities. With respect to the impact of Brexit on our currency exposure, it’s important to note that we had hedges in place prior to Brexit and therefore the impact to results was minimal.

Finally I wanted to highlight our attractive dividend yield. Based on Monday’s closing price, ARI stock offers an attractive 11.1% yield. Given the strength of our results to-date and our previously stated goals we established a consistent quarterly dividend that is covered by operating earnings and meet the redistribution requirements we have confidence in our ability to earn the quarterly dividend in 2016. Our Board will meet again in mid-September to discuss the Q3 dividend and we will make an announcement shortly thereafter.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question for the day comes from the line of Steve DeLaney from JMP Securities. Your line is open.

Steve DeLaney

Good morning, and thanks for taking the question. Stuart, I wondered if you or Scott would be willing to kind of just share with us your thought process when you looked at the loss provision on the North Dakota, sort of how you decide to size the amount of provision to take, I notice that you did take the LTV bump it up to 100% from 90% at quarter end. Any thoughts you could share about how you size that would be helpful.

Stuart Rothstein

Yeah, I mean just to be clear the LTV was really just I think we knew wherever we took from a value perspective we would just sort of cap it at 100, the loan is still technically worth $54 million and there are still scenarios where we will get paid ourselves full $54 million. So we wouldn’t read much into the move from 90 to 100.

Stepping back and just trying to figure out what the appropriate loan loss reserve is Steve is really trying to analyze what the actual assets are worth in different scenario and there is really as we looked at it there is really three assets we are trying to value. There is the existing product which is 366 units that is actually the leasing momentum has been positive. But to give you a sense of what’s going on in the market today rents per square foot for multifamily in Williston today are somewhere between $1 and $1.15 a square foot when we originated this loan not that we underwrote based on this numbers; but just to give a sense, when we originated this loan rents per square foot in Williston for multifamily were about $3 a square foot.

We are certainly not assuming the market goes back to $3 a square foot, but there is obviously a lot of room between current rent and what they peaked at last time and I would say right now you are seeing the typical recovery in a market which is occupancy starts moving up, but until occupancy really starts approaching 90% you really don’t have much of a catalyst to see rents popping much beyond where they are today.

So we looked at the existing assets, we then looked at our lots both the finished lots and unfinished lots and I would say the best guide we had in valuing those was that in the last month one of the large oil companies actually auctioned off some access lots they had in the area and I thought that was a great market comp and I think a very good data point for us as we try to figure out the value of the unfinished land. And then using those as the starting point, we really just run a bunch of different scenarios in terms of hold period, stabilization and then ultimately exit value based on cap rate, which is obviously a bit of a desktop underwriting based on what we see in other markets and obviously knowing that Williston will always trade as a discount to other markets.

The other thing that factored into our analysis is we can hold it to the extend we need to foreclose and we are not there yet, the loan as I said is still not in default the owner is still actively engaged in dialog around the property. But to the extent we found ourselves owing this asset at any point in time, we could hold it for a very long time, it’s effectively $40 million, the capital we have already deployed, we don’t need the capital per se, we have other sources of capital. So we could hold this through a cycle and I will tell you when you are out there clearly oil at $25 a barrel was the low point, there is real activity going on, where we are now say $40 to $45 a barrels and I am not saying we are in this camp, but there are many who would take a very optimistic scenario for Williston if we start seeing oil again go north of $50 and head towards $60. We try to take a somewhat balanced view and used as many inputs as we possibly could in trying to derive a number.

Steve DeLaney

Thank you, Stuart that was very detailed, I think paints a good picture for us. Is there an interest reserve left on this loan? I know you are engaged with the borrower, but is there a cash interest reserve in place?

Stuart Rothstein

There is a reserve in place; it will run probably not to the end of this year. So we are already actively engaged with the borrower and as I mentioned earlier to the extent there is something material or relevant that comes out of those calls we’ll update as needed.

Steve DeLaney

Okay, great. And just finally on AMTG, you’ve set the special meeting here for August 24th, should we assume that closing if that goes as hoped the closing would occur in a matter of days or week or so after the special meeting?

Stuart Rothstein

Yeah, I think high level it’s safe to assume a week later we could get this closed.

Steve DeLaney

Okay, great. And you are going to have $400 million of fresh capital. So the obvious question is I know at this point you can’t make commitments until you get everything closed and have it in hand. But how long would that take you in terms of how many quarters to be able to fully deploy that capital as you see the pipeline of opportunities today?

Stuart Rothstein

Yeah I think obviously we are somewhat in control of that in terms of how aggressive we want to be in getting it out and you could assume we’ve already started while not getting too far out over our skies [ph] engaging in dialogues that we think could be good business late third quarter early fourth quarter to start getting capital deployed.

But I think it’s a three to four quarter sort of base of capital and part of that depends on opportunity set and where things go in the future. But I think given what we are seeing right now and given what we know is coming from legacy CMBS deals that need to get addressed one way or the other. I really think the challenge is going to be selectivity on our part as oppose to worrying about opportunities to look at.

Steve DeLaney

Got it. Okay, thank you so much for the color.

Stuart Rothstein

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Jade Rahmani from KBW. Your line is open.

Jade Rahmani

Thanks. I wish my last name was Armani. Just wanted to ask or clarify on the North Dakota loan, is that financed on one of your credit facilities since the first mortgage?

Stuart Rothstein

It is currently financed today I would say at less than 20% leverage and you could assume it will be not financed within the next 30 to 45 days.

Jade Rahmani

Okay.

Stuart Rothstein

And when I said less than 20% levers that was based off of the original $55 million principal amount.

Jade Rahmani

Okay. In terms of the current earnings I assume it’s not cash flowing based on your answer to Steve. But you are basically booking interest income through the interest reserve that you drawing down.

Stuart Rothstein

Well which effectively is right. We are getting the cash, but yes we are drawing from the interest reserve. It is positively cash flowing, but the asset itself is not generating enough free cash flow to cover all the interest. So every month we are getting a mix of both cash flow from the asset as well as from the interest reserve to top up to what they need to cover.

Jade Rahmani

And the rent per square foot you sited I mean can you give a sense for what the average monthly rent per unit is right now, is it something like $1,300 a month or I mean you can go on the website to just look.

Stuart Rothstein

I mean you are not far off, obviously there is each of the units is somewhat different size. But I would say you are somewhere in the $1,000 to $1,250 a month depending on the unit.

Jade Rahmani

Okay. I wanted to ask about your UK exposure. I mean the two pre-development loans; can you provide some more color on that? What kinds of projects those are, the duration and what you think the impact of Brexit would be on those two loans?

Stuart Rothstein

Yeah so we’ve got two pre-development condo deals in London. One, which is known as one Groner [ph] Square is a what they would call in London as super prime transaction. It’s the former Canadian embassy in London. The developer has significant amount of capital invested in that field. The loan does not mature until Q2-Q3 of next year, I think it’s actually September and I think it’s too early to know exactly what’s going to happen there, but I would say from...

Jade Rahmani

Right that was September of 2017?

Stuart Rothstein

This year I’m sorry, September 2016 and based on what the developer has tied up in that deal, as well as where our basis is relevant to where similar super prime would trade at. We feel very good about that transaction, potential for an extension as they try and figure out how to raise the capital to build it, but I would say, we feel very good about that.

And in the other deal, we have is also a predevelopment condo transaction known as 48 Carey Street, that actually matured on June 30th and we just executed a 90 day extension on that transaction. And again feel very good about our basis and if anything have used the 90 day extension to generate some incremental economics for ARI at this point.

Jade Rahmani

Okay. And predevelopment loan these are basically just acquisition loans. So they are looking...

Stuart Rothstein

Yeah, I mean we pardon.

Jade Rahmani

So they are looking -- both parties are looking for construction financing.

Stuart Rothstein

They are looking for construction financing. We maintain very tight controls over what they can physically do to the asset or not do to the asset, while our loan is outstanding. And on the 48 Carey Street situation, they had construction financing wind up before Brexit occurred. And now, they are just going back through the process again, because obviously the market has shifted somewhat, but we are fairly confident in their ability to bring capital into the deal.

Jade Rahmani

Is construction financing available right now for condos?

Stuart Rothstein

For certain projects, yes.

Jade Rahmani

In London?

Stuart Rothstein

Yes.

Jade Rahmani

And the LTVs that are in your slides are those -- what are those exactly? Is that based on your cost, or is that future condo projected sellout values?

Stuart Rothstein

It’s not based on the sponsors’ view of condo sellout value; it’s based on appraisal at the time we did the deal, and then our discounted view of the appraisal.

Jade Rahmani

So the appraisal of the lands or what…

Stuart Rothstein

Yeah, appraisal of future value as planned.

Jade Rahmani

Okay.

Stuart Rothstein

As condo.

Jade Rahmani

And just the maturities that you have been expecting, the $200 million fully expanded maturities 2016, so you just cited the two of the loans that drive those maturities. I guess, what are you expectations for maturities for cash flows this year? And if we just took that $200 million plus what you anticipate in terms of capital from AMPG, that’s quite a lot of capital $600 million of capital that you need to deploy, which I assume would cause near-term dilution to your earnings.

Stuart Rothstein

Again, we’re in control of the pace, right. You are thinking about $600 million relative to, we deployed $500 million in the first two quarters of this year, and we already have future fundings embedded in the portfolio. I would say the only thing I’d say relative to dilution at this point is given our assumptions on known future funding as well as some things we’re working on already. We don’t see anything from a dilution perspective that’s going to impact our ability to cover the dividend, if that’s where you’re going with your question.

And keep in mind, right, putting aside merger expenses, we’ve already over earned the dividend for Q1 and Q2, and ultimately we think about the dividend on an annual basis not on a quarter basis.

Jade Rahmani

Okay. And just the maturities, so the $200 million do you think that’s still a reasonable expectation? I think you’ve received about $62 million so far.

Stuart Rothstein

Yes. As of now, I think that’s still a reasonable estimate.

Jade Rahmani

Thanks very much for taking my questions.

Operator

Thank you. Our next question comes from the line of Rick Shane from JP Morgan. Your line is open.

Richard Shane

Hey guys, thanks for taking my questions this morning.

Stuart Rothstein

Sure.

Richard Shane

Just want to talk about Williston a little bit more. I’m sure you’re not shocked by that. The loan at this point has not reached the amortization and you walked through with Steve and Jade sort of the interest coverage through the end of the year with the reserve. Can you help us understand the timeframe for amortization and the implications there? And I’m assuming at this point, you are already in discussions about amending some of this. Can you help us understand where that might head?

Stuart Rothstein

Yes. So just to be clear right the loan -- we already amended the loan and once I forget whether it was six to nine months ago, last year or sometime when we took in excess collateral through the finished and unfinished lots. And certainly there is not additional, I wouldn’t assume any additional amortization of the loan right now. We’re just very focused on covering expected interest, which I mentioned cash flow covers partially and an interest reserve covers some of it. And I think I indicted in my response to Steve that the interest reserve certainly won’t get the loan to the end of the year based on sort of our operating assumptions.

So dialog has already started with the equity sponsor. Obviously those discussions can go in many different directions. But I think it’s fair to assume that by the time we’re talking on our Q3 earnings call we should have some sort of update in terms of where those conversation seem to be headed if not sooner.

Richard Shane

And Stuart, what is your history with this particular sponsor?

Stuart Rothstein

It’s a very large well known sponsor also housed within a large alternative asset manager like Apollo. And if you did a Google search you could probably figure out who I’m talking about. So I would say we have many touch points on the real estate side and then I think broadly speaking those firms have many touch points. That being said they’re going to look at this purely economically; we’re going to look at it purely economically. The best I could say is that all expectations are it will be a rationale and open dialog that still unclear where ultimately at the end of the day both parties will decide to be vis-à-vis their respective economic interest.

Richard Shane

Got it, that’s very helpful. Thank you.

Stuart Rothstein

You got it Rich.

Operator

Thank you. We have one another question in queue at this time from the line pardon me if I mispronounce this one Dan Ochinero from Barclays. Your line is open.

Dan Ochinero

Good morning. Just a quick one, do you guys model for merger cost in Q3 or it has most of that gone through Q2?

Stuart Rothstein

Most of it’s gone through Q1, Q2 I think Dan you could expect realistically another plus or minus $2 million in Q3. And look the way we think about it right at the end of the day we’re buying the AMTG assets I call it a 10.75% discount right given the price of 89 spot 25. The accretion to ARI from doing the deal is really coming two fold. One it’s coming from an equity issuance north of book value. And then two it’s coming from whatever we can recover north of the purchase price we assumed less transaction expenses. A lot of those transaction expenses plus it will incur in Q3 have already run though our P&L. And we clearly anticipate recovering the transaction expenses plus some when we ultimately liquidate the portfolio.

Dan Ochinero

Thank you.

Stuart Rothstein

You’re welcome.

Operator

Thank you. Our next question comes from the line Charles Nathan from Wells Fargo. Your line is open.

Charles Nabhan

Good morning and thanks for taking my question. The investments have shifted towards floating rate senior mortgages in recent quarters. And just wanted to get a sense for what the pipeline looks like at the current time and if we can anticipate continuation of that shift or emphasis when after the AMTG deal is closed and those the capital is deployed?

Stuart Rothstein

Yeah, I think it’s always stuck to predict what exactly it is we’ll do, because we sort of take things on a deal-by-deal basis, but certainly if you look at the pipeline, it’s probably marginally weighted towards senior opportunities versus subordinate opportunities. But I would expect we’ll continue to be active in both parts of the bucket.

Charles Nabhan

Okay, great. And as a follow-up I was wondering if you could comment on what you’re seeing in the environment from a competitive standpoint from a spread standpoint. Not just in the U.S., but maybe in Europe as well and if you potentially see any opportunities coming out of Brexit either in the UK or in Europe over the long-term?

Stuart Rothstein

Yeah, I think for the U.S. not much has changed to be honest with you over the last three months, it’s still a active market, there is a lot for everybody to look at I would say it’s no more or no less competitive than it has been over the last few quarters. I think everybody is trying to figure out what’s going to happen as we move towards the end of year and the impact of risk retention on the CMBS market, but as someone who sits inside of a shop that is both a lender and then elsewhere within our business were a borrower I would say we have still seen a very healthy lending market where there are lot of transaction activity, lot for us to look at is a lender and I think for us it all comes down to finding those few interesting transaction where we think we can earn excess return for trying to understand complexity or create a bespoke solution for someone on the borrowing side.

I think with respect to Brexit and Europe and obviously, the only place we’ve done business at so far is in the UK. I think it is possible though still too early to tell, but I think it is possible that we will see some interesting things come our way as a result of Brexit. I do think there are may be some situations where folks who are on a path to financing might see that path as being longer than they originally envisioned and for those who can move quickly and solve problems for people. There is potentially opportunities, but just to be clear even with Brexit there is no dearth of capital looking to pursue opportunities in Europe and in a world awash in capital you can only imagine how quickly all the setting everybody now pivoted and said and may be okay, may be Brexit is an opportunity.

So, I do not want to over emphasize the opportunity, but we are certainly spending a little bit more time trying to look for unique situations that occurred as a result of Brexit.

Charles Nabhan

Great, thank you for the color.

Stuart Rothstein

You got it.

Operator

Thank you. We have a follow-up from Jade from KBW. Your line is open.

Jade Rahmani

Yes, hi. Just wanted to ask about the pipeline, can you give a sense of the types of deals that you are looking at, you said that they are weighted towards first mortgages, but I mean are they condo loans, do they have a construction components are there specific property types that you are more inclined towards or geographies? And also I think, no one asked about 111 West 57th I was wondering if you could give an update on that project?

Stuart Rothstein

It’s being built and our loan matures in 2019 and we continue to build it and we continue to monitor it, just to make sure there is capital there to continue building it. But as long as they are building it our loan doesn’t mature until 2019. So, there is really not much of an update since then. In terms of the pipeline broadly, look I think at a high level if you think what’s likely to come our way, I think property type wise it’s office, it’s hotel, there is a little bit of retail, there is a little bit of condo, it’s not to say we’ll do, anything specifically but that’s sort of what’s coming our way, we are a multifamily generally speaking there is still more attractive financing away from us.

Geographically speaking, I would say our pipeline as always still tend to skew slightly more towards New York and the East Coast, but we have looked at things elsewhere and are continuing to explore further opportunities both in the Southeast and out West probably not a lot in the middle of the country. I think we are probably spending the most time right now trying to figure out where the market is in certain secondary markets both for office properties and for hotels. Because there is a clearly diversions of view if you look at how capital is acting in terms of what it’s buying and what the public markets are saying in terms of value if you look at the underlying REIT stocks. Ultimately everything we do is on a deal-by-deal basis. But I think those are primary at a high level sort of property types we’re at looking at these days.

Jade Rahmani

Thank you.

Stuart Rothstein

You got it, Jade.

Operator

Thank you. Our next question comes from the line of Mihir Bhatia from Bank of America. Your line is open.

Mihir Bhatia

Hi, guys. Thanks for taking my question. Just real quick question on your -- on the table you guys put in your press release on the fully levered weighted average underwritten IRR. I noticed it’s bound I think it’s like 1.3% quarter-over-quarter and I was just wondering what’s driving that, are you seeing lower yields in terms of just new loans compared to what’s running off is there also a cost of funds impact?

Stuart Rothstein

No, it’s really driven by sort of the constant re-underwriting of the CMBS portfolio. If you think about the CMBS portfolio as loss assumptions move up and move down, everything you do on the CMBS portfolio is done prospectively and as the time to maturity shrinks you have less time to catch up on your perspective.

Accounting, so really what’s reflected in the table is just a decline in our sort of this point forward CMBS, IRRs, but if you look at the history of the CMBS investment going back to the time we made the investment. The IRRs are still performing pretty consistent with overall underwriting. So that’s what’s driving the change in the table.

Mihir Bhatia

Got it. And then just a quick follow up on the subordinate loans, most of this like the first time we are seeing debt on there and I think as I was just a participation sold so it’s about GAAP just presentation thing. Is this -- should we be expecting that going forward that you are looking to be selling more participations and things like that or just wondering what’s going on with that strategy…?

Stuart Rothstein

I think if anything you are going to see that amount go down pretty quickly. So I would not expect much change there.

Mihir Bhatia

Okay, thank you.

Stuart Rothstein

You got it.

Operator

Thank you. Our next question comes from the line of Rick Murray from Midwest Advisors. Your line is open.

Rick Murray

Hi, good morning. Recently there has been a fair amount of press and discussion about the kind of changing dynamics in the New York hotel market and some volatility around asset values, just curious if you could update us on your thoughts on your exposures there? Thank you.

Stuart Rothstein

Yeah we’ve got two exposures in New York. One we show as a hotel, it’s an asset known as 1568 Broadway. We call it a hotel; I would actually describe it as a mix use project. It is a DoubleTree Hotel in Times Square that sits above the Palace Theatre and if you Google what’s going on with the Palace theater Fortress Investments is sponsor is actually planning to raise the theatre and create a significant amount of street retail underneath the theatre fronting I believe it’s 47th in Broadway if I’ve got the address correctly.

So we are very comfortable with our exposure there and ultimately we’ve got various corporate and fund level guaranteed backing our loans. So we are fine with that and then our other exposure in New York is the Carlton Hotel, which was also a fairly extensive renovation and rebranding of the hotel. So we feel good about both of our exposures. I think the -- a lot of the negative headlines around what’s taken place in New York is really very focused on limited service and select service product where there has been a significant amount of new supply created over the last two or three years.

There is still a lot of hotel possibilities that come in through our pipeline. We continue to be very selective. I think the concerns over what’s happening in New York are arguably somewhat over blown in terms of the negative reaction though the impact of new supply and the slowdown in rent rates and ADRs is real. But I would say right now we feel very comfortable with both our exposures in New York on the hotel side.

Rick Murray

Thank you.

Stuart Rothstein

You’re welcome.

Operator

Thank you. That now concludes today’s question-and-answer session. I would like to turn the call back over to management for closing remarks.

Stuart Rothstein

Thank you operator and thank you everybody for participating.

Operator

Ladies and gentlemen, thank you again for your participation in today’s conference call. This now concludes the program and you all may disconnect at this time. Everyone have a great day.

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