Q3 2019 Earnings Call
Good morning, and welcome to the K K, our real estate.
Finance Trust Inc. third quarter 2019 financial results Conference call all participants will be in listen only mode should you need assistance play said no conference specialist I pressed into Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference over to Michael Shapiro. Mr. Shapiro. Please go ahead.
Thank you welcome to the KKR Real estate Finance Trust earnings call for third quarter 2019, I'm joined today by a co Ceos, Chris Lee and not Salem, our COO, Patrick matching and our CFO ms. stopping the gotti.
Before we begin I would like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release in the supplementary presentation, both of which are available on the Investor relations portion of our web site.
This call will also contain certain forward looking statements, which do not guarantee future events for performance. Please refer to our most recently filed 10-K for cautionary factors related to these statements before I turn the call over to Chris I'll provide a brief recap of our results for the third quarter. Our GAAP net income was 23.6 million dollar.
Others or 41 cents per share net core earnings were $25 million or 43 cents per share book value per share as of September Thirtyth 2019 was 1954 consistent with our book value per share as of June Thirtyth 2019.
In October we paid a dividend of 43 cents per share with respect to the third quarter based on October 20, Night's closing stock price of $20.17 dividend reflects an annualized yield of 8.5%. Our board is scheduled to meet in mid December to discuss the fourth quarter dividend and we'll make an announcement shortly thereafter with that I'd now like to.
Turning the call over to Chris.
Thank you Michael Good morning, Happy Halloween and thank you for joining us for our third quarter earnings call.
This quarter reflected the earnings potential of our capital base following a record quarter of originations in the second quarter.
It also highlights our efforts over the past year to negotiate tight LIBOR floors, many of which are already seeing a benefit from.
We continued to execute on our strategy of lending on transitional assets in larger liquid markets to experience sponsors.
In a competitive environment in the later stages of an economic cycle, we have more conviction than ever and continuing our conservative investment strategy focused on capital preservation and credit quality.
The combination of our attractively priced liability structure, the quality of our investment team.
And the brand in depth of our relationships have allowed us to compete in still win our fair share of deals.
In the third quarter, we close for loans totaling 484 million.
Through October Thirtyth, we've originated approximately 2.4 billion of loans year to date, resulting in a record funded portfolio of approximately 5.2 billion a 26% increase since the end of 2018.
Over the last 12 month, we've originated approximately 3.3 billion, a 22% increase over our 2018 calendar year record origination volume.
Notably since inception, we have now made over 7.5 billion of loans.
In addition, we've built a robust pipeline of another 460 million of loans currently under exclusivity that we expect to close within the quarter subject to customary closing conditions.
Of course as is typical for the industry. We will continue to see fluctuations in deployment due to the timing of closings repayments in capital markets activity.
To better navigate potential repayment in origination timing mismatch, we implemented a new cash management strategy that we began executing subsequent to quarter end.
Patrick will discuss this strategy in further detail.
This quarter, we further simplified our balance sheet the successful sale of our remaining investment in our direct CMBS portfolio.
Allowing us to Deconsolidate, approximately 1 billion of assets and liabilities.
As a reminder, between second quarter 2015 in first quarter 2016.
The company invested in the B pieces of five CMBS transactions.
The investments totaled approximately 426 million in face value of bonds and 187 million of equity invested.
This sale represents our full exit from these investments and resulted a gross realized dyer, our and multiple of investment capital of 18.8% and 1.3 times respectively.
Lastly, we continue to focus on creating more liquidity in our shares.
We're pleased with the company's recent inclusion in the S&P Smallcap 600, we believed that the inclusion will further drive institutional demand for our shares.
We will continue to focus on ways to improve the trading volume with the goal of the company being accessible to the broadest array of shareholders.
In summary, the economic backdrop remains favorable for our business real estate fundamentals and capital markets have remained open and strong cash.
KKR, we invest across the capital structure in real estate and across many other risk assets as we look across the broader real estate in yield focused investment landscape. We still believe that real estate direct lending offers attractive absolute and relative risk adjusted returns in this rate environment.
We are encouraged by our pipeline and the quality of opportunities, we're seeing through our deep relationships with sponsors intermediaries. We will continue to deploy capital without sacrificing credit quality and are confident in our ability to continue to to deliver attractive risk adjusted returns to our shareholders with that I'll turn the call over to Matt.
Thanks, Chris and good morning, everyone.
I'll start by providing more detail on our recent investment activity.
In the third quarter, we originated for floating rate senior loans totaling 484 million.
Weighted average LTV and coupon for these loans are 66% and LIBOR plus 2.9% respectively.
Levered basis, the loans at a weighted average underwritten IR are up 12.9% Spotlight war, which is consistent with our existing portfolio.
In order to highlight our differentiated conservative investment focus.
We would again like to provide some additional details on the loans. This quarter. So please bear with me.
First in July .
We made an approximately 170 million dollar loan secured by a 39 story 1 million square foot class a office tower located in Chicago is central loop Submarket.
The sponsors a global real estate investment manager with over $30 billion of assets under management.
The property underwent a comprehensive renovation in 2015.
And that loan closing with approximately 70% leased.
Leasing momentum has been strong with the property, 80% leased as of quarter end.
The sponsors business plan is the lease up the remaining vacancy.
An expiring leases to stabilize market occupancy of a profit of approximately 90%.
We source this loan directly with the sponsor and our reputation and ability to meet the sponsors timeline differentiated us from other potential bidders.
While this was a new relationship for US It has already led to another transaction, our Colorado mixed use loan, which I will discuss in a minute.
In August we made 61 and a half million dollar loan.
To repeat sponsor for the refinance of a 360 unit class B plus multifamily apartment complex located in Atlanta MSA.
The sponsor one of the largest multifamily operators in the United States.
Acquired the property in March 2013.
And executed a comprehensive renovation plan, including interior and exterior renovations.
The enhancement of landscape and property amenities.
In the construction of eight townhouse units.
Since that acquisition.
The sponsors achieved a monthly rent premium increase of approximately 50%.
In late August .
On the back of our successful deal in Chicago.
Which I just mentioned.
We made a $185 million alone to refinance a mixed use property comprised of two luxury multifamily properties with 594 units and 55000 square feet of retail space located in Denver, Colorado.
The sponsors near term business plan is to complete the remaining development of one of the multifamily properties in the retail space.
And stabilize the delivered property from 77% occupancy currently to 94%.
Finally in September we made a 67 and a half million dollar loan secured by a newly constructed.
353 unit class a multifamily asset located in Austin, Texas.
The sponsors a local real estate property management and investment firm.
With over 70 properties valued at more than one of the half billion dollars.
At closing the property was approximately 82% leased.
To sponsor plans, a complete its lease up and burned off in place concessions.
Weve markets stabilize rents and occupancy.
Post quarter end, we closed an additional 93.4 million dollar loan to repeat sponsor.
Sure about five building student housing portfolio, consisting of 439 units and more than 1200 beds.
In addition.
Forward pipeline remains strong.
Another $460 million of loans under Exclusivities, which are expected to close during the quarter.
As always these are subject to customary closing conditions.
During the quarter, we received approximately 194 million of repayments.
In addition.
At quarter end, we sold a $55 million participation on our Arlington, Virginia multifamily loan.
Allowing us to capture incremental.
Incremental economics.
As we said in our calls earlier in the year.
We expected to see a higher level of repayments.
As our portfolio season.
And our borrowers execute on their business plans.
Well, we've had some relatively light in the second and third quarter.
It can be difficult to predict.
We still expect the total repayments for the back half of the year to match the $900 million of repayments during the first half of the year.
Turning to our portfolio.
As of September Thirtyth, the balance totaled approximately 5.2 billion.
With another $556 million of future funding obligations.
The portfolio is 99% invested in senior loans and.
And is diversified both geographically and across property types.
Notably multifamily office loans comprised 87% of the portfolio.
100% about loans are performing.
In summary, we have a differentiated portfolio.
Prize of institutional real estate and sponsorship.
With like transitional business plans.
The brand and the franchise are delivering a strong pipeline of opportunities with approximately 2.9 billion of loans closed or pending closing year to date as of today.
Now I'll turn the call over to Patrick.
Thank you, Matt and good morning, everyone.
Our portfolio, which totaled 5.2 billion at the end of the quarter has a weighted average risk rating of 2.9 on a five point scale.
Compared to a 2.8 risk rating at the end of second quarter.
During this quarter no assets experienced a deterioration in risk rating.
While the rating of three investments improved.
The change in the weighted average rating with a reflection of two loan repayments with a rating up one.
And the addition of new assets in the portfolio.
Additionally, we have no loans with a rating above three.
Given some of the recent publicity around we work and other co working tenants and the potential impact on certain office assets, let me spend a minute on our exposure to that tenant profile.
We currently have no we weren't exposure and very minimal co working exposure.
As of quarter end, we had 12 office loans with approximately 8.7 million square feet of net rentable area.
Oh that approximately 77000 square feet or less than 1% of our office portfolio is leased by co working tenants.
With the continued diversification and improvement in our funding sources.
Matched with a decreasing LIBOR, we haven't focused on capital deployment and leverage efficiency.
As a reminder, we generally target a three times to four times leverage ratio when new senior loans, depending on the source of financing.
As we've grown our non mark to market financing.
At quarter end made up 74% of our outstanding secure financing.
We have increasingly finance loans at a low 80% advance rate.
As of quarter end.
Our debt to equity ratio.
In total leverage ratio were 2.0 times and 3.6 times respectively.
As of quarter end, 99% of the portfolio was invested in LIBOR based floating rate loans.
As we discussed previously.
LIBOR floors provide income protection in a declining rate environment.
And we began to see the increased benefit of those floors in the third quarter.
Notably through quarter end.
Our 2019 year to date originations have a weighted average LIBOR floor of 2.3 times through 2.3%.
Additionally, approximately half of our portfolio has a lot more floor of at least 2%.
And the weighted average floor on our liabilities is close to zero.
Which as you can see in the chart on page 13 of the supplemental materials should enable us to continue to capture incremental income if we see further declines in LIBOR.
Finally, as Chris mentioned subsequent to quarter end and following the discussion with our board.
We implemented a short term investment strategy targeting liquid securities to better manage the impact of cash drag from loan repayment and origination timing mismatches.
The strategy will aim to target floating rate investment grade.
Single asset single borrower CMBS.
And sorry CLL bonds.
Given the expected repayments in Fourq you that Matt described in his remarks.
We began investing this strategy earlier this month with the purchase of 94 million of CMBS Securities.
In summary, it was another strong quarter.
We simplified our balance sheet with the sale of our remaining direct bps investments.
And we continued our strong origination pace.
And the pipeline remains robust.
Thank you again for joining us today.
And now we're happy to take your questions.
Thank you we will now begin the question and answer session to ask a question May Press Star then one on your tax downtown.
Using a speakerphone please pick up your handset before proceeding the keys.
Joe Your question. Please press Star then.
My first question today comes from Jade Rahmani with KBW. Please go ahead.
Good morning, everyone. This is actually Ryan on for Jason Thanks for taking the questions.
Just just starting off I was hoping you can provide us with some commentary on where incremental Unlevered returns are and if you feel it's the dividend is set to an appropriate level for the current environment.
Clearly the IR are you cited on the Three Q2 originations was very strong, but just wondering how youre thinking about the recent and potential future rate cuts coupled with.
I'm going to spread compression in the lending markets and if you think that.
These low double digit IR ours will be achievable on a go forward basis.
Right. Thanks for your question it's Matt.
Cover.
Turn to cover a couple of those of those questions.
Obviously, there were very focused on on covering the dividend.
And as we did as we did this quarter.
If you look at the existing portfolio it does benefit a little bit from some of the LIBOR floors. So if you're thinking about forward rate curve there'll be some impact positive impact from that.
I think.
Ultimately, it's a discussion that we're going to have to have the board and it'll depend on a lot of different factors taxable income financial conditions other factors and the sustainability of what we see our earnings.
In some of those factors, we can control and some we can.
And a good example of what we can't control is the forward wafer.
I'd say, we're focused on what we can control.
And I hope that it's evident that we're really positioning K rep has a different risk profile than our competitors are.
If you look at our asset quality institutional sponsorship.
Markets lower volatility property types.
Look through to kind of the level of transition, which within each business plan that we underwrite and.
We think we've created a high quality and and defensive portfolio.
So that's one thing we aren't going to change we're not going to change the our credit DNA if you will.
And we're not going to go out the risk curve.
So I think our earnings will be an output.
What a high quality portfolio yields.
When it yields when its financed that the best in class cost of capital.
Which I'll note the more majority of which today is almost three quarters right is on a non mark to market basis.
So.
Thats kind of how we're thinking about it right now as I mentioned before the portfolio. While the portfolio has been originated in the last call. It 12 months or so and so we have.
Near term protections in the form of LIBOR floors and.
Prepayment penalties.
Great. That's that's very helpful.
And then just moving over to the CMBS sale can you give us a bit more color on really what what drove that is just execute that you really just view that as a way to unlock capital for reinvestment into core amending based on the strong I or are you saw in that legacy book.
Hi, Ryan Good morning, its Patrick I'll I'll take that one so as you recall last year in the second quarter, we took advantage of a pretty robust market and sold the majority of our CMBS portfolio at that point and recognized pretty nice gain through that sale, we had some residual positions here.
Which totaled less than 10 million in value.
And so we sort of view this sale that we did this quarter as kind of a clean up for that.
And by extension that 10 million of CMBS value resulted in a gross up of our balance sheet of about $1 billion. Both on the asset side and the liability side. So we were able to deconsolidate that.
Through this sale and at this point, we continue to be effectively 99% senior loan positions.
And then just just one more on the on the cash management strategy that you guys announced with the release.
You mentioned, you're targeting a single asset single borrower and CRC all those securities, but just wondering if you can give us a bit more.
Metrics on what you're targeting for our we use.
What kind of leverage you expect to use on these positions and if you. If you plan to use any sort of hedging in that strategy.
Yeah, right, it's Matt I guess I'll have I'll take that I think.
You know when from an ROI we perspective.
I don't think we have set a set target will depend on what's available in the market the time and there's going to be a range of ratings, we buy which on a levered basis can create different or are we were not thinking about it as a way to fully supplement the yield in the ROI. We that we can get on our on our loan portfolio. This is really about.
About.
It's really about cash management, it's about if trying to create a little bit more incremental return than we would otherwise get sitting in cash it's really not about replacing fully we're placing the yield that we can get on our core business our core lending business.
And so.
Thats kind of how we think about just a little bit incremental earnings from from that portfolio.
From a leverage perspective, I think you'll.
Can see us, we'll see us the relatively conservative in terms of the amount of financing, we put we put against that versus whats available in the.
It's available to us in the market.
Thanks for taking the questions.
The next question comes from Steve Delaney with JMP Securities. Please go ahead.
Good morning, and thanks for taking my question, Matt I'd like to start with you.
Obviously, it seems like repayments have really settled in after you guys had to deal with a huge amount of money coming back in the first quarter. The deployment is really allowed you to show your crew earnings power here in the third quarter looking ahead, and you gave us some color for the second half of the year when you.
You think about the portfolio, probably somewhere around five and a half billion at year end and when you look at the average seasoning can you bank make good shot at a range of what you would expect prepayments to come in and 2020.
Seems like there were some pretty quick trigger loans that paid off in the first quarter. This year and just curious if you know if you could ballpark arrange sort of a high and low while on a percentage of of your in principle for next year's repayments. Thank you.
Sure.
Very difficult to predict the future as it related repayments I would say I mean, the way I think about it is.
We are focused on lighter transitional lending, which we think it's a positive from a from a risk perspective.
Just a shorter duration to stabilization.
Less uncertainty as it relates to.
Either renovation or the amount of lease up but that has to happen.
And so we think thats a positive one of the potential negative to that is that the duration of the loans that right have is slightly less.
Because you would expect those to stabilize a little bit more quickly.
As compared to something Thats, a little bit heavier renovation or construction et cetera.
Understood and stuff so.
The way I think about our loans is.
Three year duration on on the outside.
Could have it and we've seen some obviously come in and slightly shorter than that so.
So I think we're we're monitoring it very very closely but just from a modeling perspective to divide our balanced by a factor of three or something slightly less would would make sense.
From my perspective.
Okay that helps frame it. Thank you I appreciate that Chris is shifting over to you.
Congrats on.
The smoke S&P small cap inclusion best certainly bring eyeballs.
I guess the question is you guys have pretty much stayed out of the market and I realized capital deployment in the first half of this year certainly had something to do with that but your shares appear to us to be trading over book now you Havent taken a bite of the Apple so to speak since August of 2000.
He 18, so how.
Speaking to this need for look market visibility market cap and you know trading liquidity.
Piece of that because you guys were about six or 7 million a day how high. The question is how high is the bar for you guys to do to consider doing more frequent follow ons to switch to deal with the technical aspects of your stock valuation because your fundamentally you're you're doing all the right things. Thank you.
Yeah. He see if it's something that we think about a lot I mean, we think we are doing all the right things in our our view is our strategy has been very consistent.
Prior to IPO going in even post IPO is Matt was talking about earlier and we.
We sometimes are little bit frustrated with with our stock price, but I think that at the at the end of the day, we will be very prudent about how we think about accessing the capital markets. We're very focused on.
Earnings per share dividend coverage per share and making sure that.
We're only adding capital to the extent there is kind of an immediate use of proceeds. So I think in the short term. We have we have capital that's available to us on balance sheet.
As Matt mentioned, we have a pretty good window into what the repayments are looking like in the at least in the near term. So we feel like we have plenty of capital to fund our pipeline, but we will be very judicious in of course, you know we have the ATM and other.
Avenues at our disposal, but will be pretty pretty thoughtful about how we how would how we bring capital than business and increase the share count.
With a focus on on the all the per share earnings metrics.
Well congrats on the quarter thanks for the comments.
Thanks, Steve.
The next question comes from Don Fandetti with Wells Fargo. Please go ahead.
Mr. Fandetti your line is open.
Yes, good morning.
Quick question on the Chicago alone.
We are there other bidders on that transaction and then secondarily can you just talk a little bit about the competitive environment I know what the C alone market's been.
Turning to increase are you seeing new competitors at the table or is it the same group, that's just getting a little bit more.
Aggressive.
Got it.
So to answer your first question on the Chicago deal.
There were a few competitors on that deal it was direct.
With the sponsor there.
But we did it was it was a competitive situation.
I think your second question was as it relates to receiving new competitors.
I don't think we're seeing any new names pop up over the last few years, it's been pretty consistent mix.
Of.
Of the thing of the same.
Lenders it.
In my mind, it really goes it really speaks to him who can make the larger the larger loans and hasn't relationships with the institutional sponsors. So within the segment of the market that call. It 100 to 150 million dollar loan size.
It's been very very consistent overtime.
And have you considered other sort of longer duration different asset classes aside from the cash management.
When you have commented could you look at different areas or anything that sort of stuck with the core here.
Siri lending.
Hey, Don as Chris Yeah, we've definitely explored.
Different different asset classes is you know we have a much broader real estate business, where we invest.
Across the capital structure and own.
On a large portfolio of assets.
You asked.
We have not seen anything as of as of late it's been you know overly interesting Everett overly interesting given the the yield that we've been targeting on am on a gross and net basis and also from a from a cash yielding basis. So right now we're very focused on the the transitional.
Lending strategy.
Given the risk return that we're seeing in the market, but we're always evaluating different ways to create.
To create similar yield to the extent that the did the returns or or.
Are justified by the you know the.
We are taking.
Thank you.
The next question comes from Aaron Cygnets with Citi. Please go ahead.
Thanks, and just on the cash management strategy. It maybe I just don't know the logistics of how this works but.
I always just assumed repayments would generally just good towards paying down the facilities and.
No matter, how big does this.
Cash management piece got to be in and just maybe some of the dynamics of why you think it's necessary.
Hi.
Good morning, Patrick I'll take that one yes. So I think when we think about repayments. We have several different options certainly one is a repayment of our debt that's outstanding.
You know for some of our financing whether its yellow or other types of structures, that's not really applicable and as we get more.
From non mark to market facilities in place.
That's not necessarily the optimal way.
So we look at it as a bridge to on a short term basis, if we're getting cash and we're trying to sort of manage timing that we can invest over a short period of time and then when we get the opportunity to re originate that.
Originate the an asset we can then deploy that capital.
Okay.
In terms of the the broader market. There was an article about New York City condo being particularly weak are you seeing any any other tenants niches within sea area in the gateway markets that you'd highlight is particularly weaker or stronger.
Hey, it's its Chris I think maybe starting with with the New York City condo market, we definitely.
We have we have a little bit of exposure, but we like the the exposure we have broadly the market is experiencing oversupply, especially at the very high end of the luxury market. So from our perspective, we've been focused very much on sponsorship location price point and.
In in really even unit mix to make sure that you have the broadest.
Array of potential buyers.
We have seen other other parts of the market that are that are there, they're showing 'em some weakness clearly.
Retail broadly across almost all formats is.
His has been weaker just given the a.
Retailing environment for for many of the company's at least that space in the footprint that they ultimately want to have in more omnichannel market I think hotels in certain markets have experienced some some pressure.
Some of the urban locations experienced pressure not just on the on the revenue side, but also on the expense side I think.
In New York City, we've seen I'm, a little bit of margin deterioration.
As is Revpar has been generally flat to down in expenses, if can continue to move up.
So we're always looking at where we own assets, where we have lending positions in really thinking thematically around where we want to be in.
Matt touched on earlier most of what we've been doing has been focused on multifamily or.
A shorter duration business plans in the I'm on the office sector, and we've really only picked our spots in things like hotels and in condos, which are indeed under well very very small majority of our portfolio and of course that changes depending on where we are at a cycle or et cetera, but right now we're much more focused on.
The most defensive asset class in this market.
Okay. Thanks, and then your quarter to date funding.
Student housing investment or loan.
You bet seems to be kind of a nichey area what was the.
I thought process around that one.
I mean, it's Chris in student housing is actually an area, we have a a lot of experience as a group.
We actually own a platform and control over over 4000 units in our interact with the business and it's a market that we have.
It's an asset class that we have it just a tremendous amount of experience and so that was an area. When we when we had an opportunity to make the loan that we did we understood. We already had underwritten this market we knew the I'm, new the operator and.
That's that's really the benefit of having this integrated platform, where we own a lot of real estate and can you that expertise to benefit.
This platform and shareholders. It. It also works vice versa term to how this is platform benefits our equity business. So that's an area, where we have a lot of experience, but you have to be very knowledgeable because their markets in assets depending on how.
Close to campus or not to close camp is he actually very careful about.
Market, but we have a very strong platform there to strong understanding of that that asset class.
Well, it's a great school. So appreciate it thanks [laughter].
Your next question is a follow up some jade Rahmani with KBW. Please go ahead.
Hi, everyone out Ryan again, thanks for taking a follow up.
Just just.
Following up on the repayments commentary I guess.
Based on your commentary for this second half repayments to match the first that would imply somewhere north of 700 million of repayments in the fourth quarter.
Then I believe you mentioned around 550 or so million of loans closed during the pipeline post threeq. So I guess you know do you expect this new CMBS cash management strategy to enable you to manage that that headwind in the fourth quarter or do you think that Threeq Hughes.
Yes level might see some temporary.
Blips going into the fourth quarter as you kind of manage that timing gap.
Hey, Ryan, it's Matt I'll I'll take that again.
I think that from a net funding perspective.
I would make two comments on the origination side, we think we still have a few weeks to potentially add to the.
Fourth quarter pipeline. So that's the number that obviously is variable.
The change in go up.
On the on the repayment side, it's never exactly clear you know that's kind of what we're estimating things can slip we've seen things get pushed out so if and if that's an estimate.
And then anything if we had a negative net.
Funding clearly that.
New program in terms of that we're using that liquid markets to help offset some of that cash drag will be in place I think thats a combination of those things will.
Obviously drive the fourth quarter earnings.
And then on the on the pipeline of originations can you give us some color of what what that is comprised of in terms of property type geography and.
I guess on Iraq cars incremental yields if those are commensurate with what you saw in the second quarter, and then kind of as a follow up earlier questions on the condo market was wondering if we can get your views on you know condo inventory loans, we've heard some other competitors talk about that market more recently.
Just wanted to get your thoughts or if that's never Congo condo inventory loans are still find attractive.
Deployment opportunity as you've done in the past, particularly in New York.
Got it maybe I'll take that first part and then turn it over to Chris and it could discuss the the condo.
Market, but.
Just in terms of what's in the pipeline it looks pretty similar to what we've been doing I mean, it's all right now what we've identified as office and multifamily.
Property types, so I would say right down the middle of fairway of these sectors that we've been here that we've been focused on office side again, it's a lighter transitional well leased assets that are going through a small renovation and small lease up.
And then.
Similar stories on the on the multifamily side at this point.
Yeah and on the on the condo inventory.
Loans. It is definitely a ah theres definitely liquidity in that market given that there is there's yield in there are still financing for providers of that.
I would say that that's not an area that were overly focused on we think of that really is an opportunistic bucket for us that we have utilized for really top tier sponsors who are extremely well capitalized or in are extremely capable developers. So.
It looks like Matt said, it's not it's not something that were incredibly incredibly focused on but that market does still have liquidity in it.
Thanks for taking the follow ups guys.
Yes.
Next question comes on mix JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question and I apologize were scrambling around a little bit. So if this is repetitive I I apologize.
I am curious in current environment, if you anticipate with rates falling a little bit of better pricing power again, we know that people think about things on the spread basis, but we also know that they think about them on an all in coupon basis and as we saw when rates were right.
Using a there was very low beta on an hourly basis to higher rates I'm curious, if you think theres going to be much opportunity to recapture that as rates start to decline.
Continued decline right, yes, I think.
The answer is it remains to be seen as you mentioned with the rate rise we saw coupons remains similar and spread compression obviously.
What we've seen as the.
Forward expectations have changed is that there's been relatively consistent LIBOR floor market.
So all in coupons have been.
Relatively stable versus expectations around.
Forward LIBOR.
Now if that LIBOR floor dynamic changes could you see spread widening I think that's that's a question that remains for the market.
Got it and obviously, we see the high percentage of loans with a 2% LIBOR floors.
Presumably that is ticking down as rates move or is that is there some that are negotiating power there.
Hi, Rick its Patrick Yes, certainly the 2% LIBOR floors are reflective of the market at the time, when we originate those loans and now as we sit today with spot liable read 1.78, I'm very difficult to get a 2% LIBOR floor and so you see the market adjust.
That said I think what you've seen is that.
The rates were rising and even as they start to decline.
There was a bigger gap between where the spot market was and where the floors are and I think what we're starting to see now some compression in that gap, meaning that the floors are much closer to the spot rate in the market at least that's what we're seeing at the moment.
Great. That's very helpful. Thank you guys.
This concludes our question and answer session I would now like to turn the conference back over to Michael's prepare for any closing remarks.
Thank you very much for joining us. This morning, if theres any follow up please don't hesitate to region have a happy Halloween.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.