Jade Rahmani: So, a challenging asset, but there is enough subordination where you feel adequately covered?
Stuart Rothstein: Sitting here today, yes.
Jade Rahmani: Okay. And then just a bigger picture question, but if you can give a sense, we get tons of questions about credit performance and people look at, for example, CLOs and they see delinquency issues. They see a lot of modifications. But ultimately, in your mind, what is the driver of whether a loan stays current or goes into default? In other words, what percentage of interest is funded out of a reserve versus property level cash flows? Does most of it come from an interest reserve that is initially established and later replenished?
Stuart Rothstein: It depends, right, so to be clear, right, if you look at our portfolio and you look at our interest, but you also factor in the fact that a lot of what we do are assets in transition, whether it is ground-up development or heavy redevelopment, I think when last we looked, and Hilary could probably get you a more current number after the fact. I think approximately 20% of our interest income, maybe slightly higher, is paid out of reserves. But it’s ordinary way structuring when you are doing a construction deal or a predevelopment loan or a significant redevelopment loan that you are baking in the interest cost into the loan. I think it’s as expected, for the lack of a better phrase. And obviously, particularly, when you are doing things that are development or redevelopment in nature, there are no cash flows to cover interest, so you are effectively baking it into the loan.
Jade Rahmani: Thanks very much.
Operator: Thank you. [Operator Instructions] Our next question comes from Rick Shane with JPMorgan. You may proceed.
Rick Shane: Hi. Thanks for taking my questions this morning everybody and Anastasia, thank you for the additional detail on caps, etcetera. I would love to talk a little bit about the dynamics in terms of your borrowers hedging now, given we are seemingly approaching an inflection in rates. Is the cost of hedging actually starting to come down as the price of caps coming down? And the second part of this is, does it – do borrowers have the alternative instead of buying caps of building up the interest reserve instead, sort of self-insurance so that way, if rates come down, they haven’t paid away, they haven’t sort of wasted the payment and they can recapture through the reserve?
Stuart Rothstein: Scott, do you want to just sort of maybe give like a holistic view of sort of the dialogue with borrowers?
Scott Weiner: Yes. Look, I do think cap costs have come down. Look, I think every borrower has a different philosophy. We have generally – and I am seeing it across the broader real estate platform. Obviously, as we mentioned, we haven’t done many new originations. But across our platform, we have borrowers who are actually buying in the money caps, so effectively prepaying interest because they want to have more coverage and willing to pay it. We have other borrowers who really want to buy a way out of the money cap, and it’s kind of insurance and requiring it. And again, part of it also depends on what the coverage is and what the type of leverage that we are doing, and from our underwriting perspective, what kind of interest rate would we have.
But I would say, generally, it’s not so much building up an interest reserve. I would say, from a credit perspective, if someone wants to buy or spend less money on the cap, generally that would be on a deal where you feel very comfortable with the cash flows and the coverage, and/or you might have some sort of guarantee. So, for example, like on construction loans, where you are, by definition, funding that and you kind of look to the forward, and you have a carry guarantee, oftentimes a borrower will want to buy a less expensive cap have the money or something with a shorter term. Clearly, if you are financing an asset, that is a cash flowing asset and has a lower coverage, if you will, multifamily, you are going to be very focused on what that cap is because you want to make sure that you cover.
Rick Shane: Got it. Okay.
Stuart Rothstein: Then obviously, some borrowers are borrowing fixed now, right. I mean that’s – obviously, that’s the other thing, if borrowers can fully in the market borrow fixed rate loans…
Rick Shane: That’s helpful. And then the follow-up to that is and Anastasia, I apologize. I think you have said that 83% of loans have capped at this point. And I don’t recall hearing that metric in the past. Where is that in historical context?
Anastasia Mironova: Yes. And it was 81% of the principal down.
Scott Weiner: I think that, Richard, again, if we have a strong sponsor, right, and they are willing to – in some ways, we are better off having them guarantee interest, right. That gives the capital and gets you there, where someone is willing to give us a full carry guarantee, that’s certainly a trade that we can make. So, I would say on the deals where we don’t have a cap, it’s because we have some form of other supplemental credit enhancement.
Rick Shane: Perfect. Thank you, guys.
Stuart Rothstein: Thanks Rick.
Operator: [Operator Instructions] Our next question comes from Steve Delaney with Citizens JMP. You may proceed.
Steve Delaney: Thanks. Good morning everyone. I would like to go back to Stephen Laws’ comment about your foreign market investment. Clearly, that’s the most distinctive feature of Apollo ARI. Just noting in your deck here, you have 32% of the portfolio in the UK and just 21% in New York City. Just a couple of questions around that. I am, just curious, I know generally, you have had a good performance. Have you had any NPLs or foreclosures in the UK or any of the European markets based on your lending activity there?
Stuart Rothstein: I appreciate you asking the – you are like an announcer where guys like made 20 flats that are in a row [ph]. To-date, we have had very strong performance in Europe. You heard me talk multiple times about why we like Europe because in many ways, we think about Europe the way we do the U.S. in terms of quality of assets, quality of the sponsorship, ability to protect ourselves through the legal system. It’s not to say, we haven’t had assets where sponsorship did not achieve business plan. But in those cases, the value of the underlying real estate relative to our loan was sufficient to make sure we were made whole on our transaction.
Steve Delaney: Yes. What’s the – gosh, everything is – every loan is unique. Everything is a story, right? Every borrower has a person – different personality. But is there one like principle of doing business or custom that gives – in the UK, that gives lenders more control over borrowers? Is there anything just technical like that, that helps make that a – maybe I will use the word, safer lending market than the U.S.?
Scott Weiner: I wouldn’t say – this is Scott. I wouldn’t safer because obviously, people can lose money on loans and anything in London just as much as they can here. I would say there are some norms over there around kind of ongoing covenants that you don’t really see here. So, whereas in the U.S., you generally, obviously and we have always structure our deals with ongoing cash triggers and maybe extension tests. In Europe and the UK, you would often see, in addition to those type of triggers, we actually have financial covenants that if they are breached, bring everyone to the table, I would say, rule of law and enforcement is obviously very strong there. And I would just say, London historically, it’s just been a center of attracting capital.
So, even office right now, I think I read somewhere, there is like GBP2 billion of office under offer. Across our portfolio, we recently got refinance in some office buildings that are outside the ARI portfolio in London. So, I just think it’s a liquid market that is attracting people from Asia to other parts of Europe, the U.S. And we have a large team there, so we like it. But again, also, we look across Europe as well it’s really for us, the power of the platform. It’s really how we look at it.
Steve Delaney: Well, congrats on how you have taken advantage of that and a solid close to 2023. Thank you.
Stuart Rothstein: Thanks Steve.
Operator: Thank you. I would now like to turn the call back over to Mr. Rothstein for any closing remarks.
Stuart Rothstein: Thank you all who participated on the call this morning. Obviously, to the extent there are follow-up questions, myself, Hilary and Anastasia are always available to talk. Thanks everybody.
Operator: Thank you. Thank you for your participation. You may now disconnect.
