Apollo Commercial Real Estate Finance Inc (ARI) Q3 2018 Earnings Conference Call Transcript
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Apollo Commercial Real Estate Finance Inc (NYSE: ARI)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 10:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
I would 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 would also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.
In addition, we will be discussing certain non-GAAP measures on this call, which management believes are relevant to assessing the company's financial performance 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.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Thank you, operator. And good morning and thank you to those of who are 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 a macro perspective the commercial real estate market continues to perform reasonably well despite the recent uncertainty created by increasing volatility in the capital markets, tight 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 amount 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 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 months 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 pre-development and construction transactions. We have been active in these markets for a number of years and have the benefit of experience, went 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 a 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 this center. We have extended the maturity on this loan for 12 months, and we will monitor the asset and dialog with JLL as warranted, as they work to improve the centers operating performance.
Lastly, before I turn the call over to Jay, I wanted 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 one primary financing facility to five. 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 exchanged $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 (inaudible). 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.
Jai Agarwal -- Chief Financial Officer, Treasurer and Secretary
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 five. As of quarter end, we had over $450 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 results 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 stock offers an attractive 10% pre-tax 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.
Questions and Answers:
Operator
Thank you. (Operator instructions). Our first question comes from Steve DeLaney from JMP Securities, please go ahead .
Steven DeLaney -- JMP Securities -- Analyst
Good morning and thank you for taking the question. Stuart, based on your remarks and your comment about your focus or activity in both pre-development and construction loans, I was wondering if you could estimate what percent of the portfolio is actually represented by loans that would be classified is development or construction? You gave us a lot of detail, but I actually can't find that particular breakout.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
I mean, I think the way we think about the portfolio and I think for the most part, we're talking about construction there's one or two 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 a third of our portfolio would fall in that construction or pre-development basis. But remember, not all the commitment gets funded day one, so you're sort of balancing things that we expect to be repaid versus things that have future funding. So I would say on a commitment basis, it's about a third. On a funding basis, it's probably more a quarter or so of what's outstanding.
Steven DeLaney -- JMP Securities -- Analyst
That's great. It's very helpful. And speaking of pre-development, you guys put together a nice tour last winter on the project in Miami and 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? Thank you.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah, 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 project 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 open.
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 -- are collateral in general, is at the area that we're talking about clearly falls within the definition of a new -- of an opportunistic economic zone per the new tax laws, 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 locations been proven. We continue to think there has 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, there are existing assets there --
Jai Agarwal -- Chief Financial Officer, Treasurer and Secretary
Buildings.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Existing 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.
Steven DeLaney -- JMP Securities -- Analyst
Okay, thanks for the comments Stuart.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
You got it.
Operator
Thank you. Our next question comes from Stephen Laws from Apollo. Please go ahead.
Stephen Laws -- Raymond James -- Analyst
Okay. Hi, Stephen Laws with Raymond James. Hi, Stuart (technical difficulty).
Stuart A. Rothstein -- Chief Executive Officer, President and Director
I am aware of that Stephen.
Stephen Laws -- Raymond James -- Analyst
Just don't want anybody to think you guys are taking questions here on the call. Appreciate the time. If you guys -- I would 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 toward the mezzanine investments, is that a coordinated effort of something you guys are seeing that are making you more attractive, the first mortgages or is it simply something going on with competition or are just what's coming through the pipeline at this time, but maybe could you talk about the mix of what the new investments are versus what we are seeing a repay?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah, look, I think at a high level to answer your question, both the shift in our portfolio, the shift in what you've seen and announced recently and to be fair, if you're previewing what may be announced further on in the quarter at the end of the year, clearly, the pipeline is heavily weighted toward 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 stock 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.
Stephen Laws -- Raymond James -- Analyst
Yeah, Stuart, I think you sort of touched on there in your comments, I mean, if we continue to see the shift toward 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?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah, I mean that's the natural evolution. If you think about the goal post of the Company right, mezz has no leverage and first mortgage has somewhere between 2 to 2.5 turns (ph) of leverage. So, yes leverage would naturally trend up. I know you are 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've tended to do 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 toward 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.
Stephen Laws -- Raymond James -- Analyst
Yeah, that makes sense Stuart and you've 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 needs to outpace the repayments in order to drive that leverage number higher?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah look, we believe we're 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 '20, 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 months to 18 months between future fundings and pipeline will be outpacing the repayment rate.
Stephen Laws -- Raymond James -- Analyst
Great. 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 just 3 months ago?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah. So I think on Bethesda, look Bethesda was a 50-unit condo project, of which we -- the last update was that we have sold 35, there's another one under contract today that will -- 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 dialog with the sales team, we think there's 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 us ourselves room on the pricing of units. 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 dialog 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 six 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 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.
Stephen Laws -- Raymond James -- Analyst
Great. Thank you for the color on that and I appreciate you for taking my questions.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Thanks, Steve.
Operator
Thank you. Our next question comes from Ben Zucker from BTIG. Please go ahead.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Hey Ben.
Benjamin Zucker -- BTIG -- Analyst
Hey guys. Thanks for taking my questions this morning. 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 in 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 could possibly see a flip with more 1Q strength next quarter, just -- what are you guys seeing with your borrowers, right now?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Look, I think -- I'll go backwards and say -- look 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 volume. 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 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 over the longer. That being said -- to the extent people have hit their business plan. There's plenty of ways to get people taken out of deals.
We're 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 are in the market right now seeking a loan that represents, call it 2X, what our outstanding loan is. So there's 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.
Benjamin Zucker -- BTIG -- Analyst
That's very helpful and thoughtful Stuart, so thank you there. 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 is this just a little bit of risk management to lighten up your exposure there?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah, I mean, let's -- so, to go back to the beginning, when we did the original $265 million financing and this is on an office development in the southern part of Suburban Seattle. We structured the original financing as a first mortgage and 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've created it that way.
We had some dialog 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 de-risks our investment somewhat, enhances the overall risk adjusted return on the piece we returned and is ultimately consistent with business plan, if you think about how we structure the financing, when we originally put it in place.
Benjamin Zucker -- BTIG -- Analyst
That makes sense and it ties into your earlier remarks about people skewing more toward 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 parse off risk when you deem it necessary?
Lastly, and this is just a bit of housekeeping, I heard you mention the growth in your UK exposure. So I jump to the pie chart in your earnings supplement and it shows the UK at 15%. But then I noticed that chart is based on amortized cost and I don't believe that recent UK 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?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Correct.
Benjamin Zucker -- BTIG -- Analyst
Okay, cool. Good to know. Well, we like seeing that international exposure growth, so congratulations guys and look forward to seeing this portfolio continue to ramp.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Thanks, Ben.
Operator
Thank you. Our next question comes from Ric Shane from JPMorgan. Please go ahead.
Richard Shane -- JPMorgan -- Analyst
Hey guys. Thanks for taking my questions. Obviously, the exposure in the UK 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 you would expect to see in terms of either spread, collateral LTV on the UK loans, so we can understand the benefits of being in that market?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Look, I think, to go backwards Ric and then I'll get to your question. 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 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 US in terms of economic recovery and given the breadth of opportunities we saw in the US, 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, which 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 US 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 pre-developed 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 mixed 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 lending becomes much beyond the 15% of our portfolio or a 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.
Richard Shane -- JPMorgan -- Analyst
And I assume it's fair to say fewer competitors, but a higher concentration of heavyweights?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
I think that's fair to say and before we leave the topic and I assume you do this, but obviously we hedge -- completely hedge our currency risk on anything we do over there to the extent we're levering our 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.
Richard Shane -- JPMorgan -- Analyst
Yeah, I think in my old age I've asked the question about hedging on two or three calls previously, so I do remember that now.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Right. What else.
Richard Shane -- JPMorgan -- Analyst
That's it. Thank you.
Operator
Our next question comes from Jade Ramani from KBW. Please go ahead.
Jade Ramani -- KBW -- Analyst
Thanks very much. Just -- what do you think drove the slowdown in originations in the quarter? And also I was surprised to see the sale of the $75 million subordinate position in Renton, Washington, just given the somewhat lighter origination pace this quarter.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah, look. I think 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 de-risk 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.
Jade Ramani -- KBW -- Analyst
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 assets are almost near completion and that market has been --
Stuart A. Rothstein -- Chief Executive Officer, President and Director
None, whatsoever.
Jade Ramani -- KBW -- Analyst
Okay.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
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 are 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 what is behind us in the mezz position now, who certainly provides additional capabilities underneath us as lender and Seattle to your point, continues to perform very strong.
Jade Ramani -- KBW -- Analyst
Okay. Just in terms of asset management, I think the (inaudible) 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 dialog 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?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah. So it's 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 (inaudible), 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 loop 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's not much we can do as a borrower, other than to make sure there's a regular dialog. 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 for 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 dialog 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.
Jade Ramani -- KBW -- Analyst
And just for things that are sort of on a watchlist 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, any worsening, any improvement? I mean the pick-up in refinancing, this does suggest some improvement?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Yeah, 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 modesly 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 under performance, 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 the way I would describe it.
Jade Ramani -- KBW -- Analyst
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, so I believe that got extended?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
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.
Jade Ramani -- KBW -- Analyst
What's the status of the project, are they just looking to sell it or do development?
Stuart A. Rothstein -- Chief Executive Officer, President and Director
No, they plan to go forward with developing it. Since we made the original loan, they've continued to pick-up incremental parcels, which make it more of a fully contiguous block. There is 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 in additional equity to go forward with the development and we retain our right 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.
Jade Ramani -- KBW -- Analyst
Okay. Thanks for taking the questions.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Thanks Jade.
Operator
Thank you. 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.
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Thanks, operator, and thanks to those of you participating on the call.
Operator
Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.
Duration: 44 minutes
Call participants:
Stuart A. Rothstein -- Chief Executive Officer, President and Director
Jai Agarwal -- Chief Financial Officer, Treasurer and Secretary
Steven DeLaney -- JMP Securities -- Analyst
Stephen Laws -- Raymond James -- Analyst
Benjamin Zucker -- BTIG -- Analyst
Richard Shane -- JPMorgan -- Analyst
Jade Ramani -- KBW -- Analyst
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