Q1 2020 Earnings Call
[music].
Good morning, My name is Andrew and I will be your conference facilitator.
At this time I would like to welcome everyone to the granite point mortgage Trust first quarter 2020 financial results Conference call.
All participants will be and they listen only mode.
After the speaker's remarks, there will be a question and answer period.
Please note today's event is being recorded.
I would now like to turn the conference over to Chris pedal with Investor Relations for granite point.
Please go ahead.
Thank you good morning, everyone. Thank you for joining our call to discuss credit points first quarter 2020 financial results.
The other call. This morning are Jeff Taylor, President and CEO.
Sure about six or CFO, he about part our CIO and Steve Clark our CFO.
After my introductory comments, Jeff will review, our current business activity and a brief recap market conditions.
See about part will discuss our first quarter originations and portfolio Marshall highlight key items from our financial results.
The press release, the financial tables associated with today's call.
That's what was our form 10-Q filed yesterday with the FCC.
You do not have a copy you may find them on our website or on the Fccs website actually see though.
In our earnings release on slides, which are now posted in the Investor Relations section.
Site, we've provided a reconciliation of GAAP to non-GAAP financial measures.
Urge you to review this information in conjunction with today's call.
I would also like to mention that this call is being webcast and maybe accessed on our website and the same location.
Before turning the corner, Josh I would like to remind you that remarks made by management during this conference call and the supporting slides.
May include forward looking statements.
Well, we're looking statements reflect our views regarding future events and typically associated with it gets the words, such as anticipate expect estimate and believe or other such words.
We caution investors not to all the way on forward looking statements.
I'm quite risks and uncertainties actual results may differ materially from expectations.
Urge you to carefully considered the rest described in our filings with the FCC.
Which may be obtained actually she's website at <unk> dot so.
We do not undertake any obligation to update will correct any forward looking statements.
If later events proved to be an actress I'll now turn the call over to John.
Thank you, Chris and good morning, everyone. We would like to welcome you all and thank you for joining our first quarter 2020 earnings call.
Before we begin we sincerely hope that every once in their family from being healthy safe during these challenging times.
We also want to send her deep appreciation to all those who are at the frontline's battling this pandemic.
That's just health crisis first began unfolding we moved to ensure the safety bumping up or personnel and to maintain your business activities.
We were very well prepared from a business continuity perspective, and lots of thank you everyone across the organization for their preparedness and efforts to make sure. The company was ready for it but such as this one.
Since mid March we've been working there must be very effectively and her team as well connected and unified.
Bite working remotely we remain deeply engaged for all of our business Counterparties and had been operating efficiently and without interruption as we navigate these uncertain times end markets.
That's all that's communication given the dramatically change landscape due to the negative impacts will be called with Nike pandemic, all the outlook for the overall economy as well as commercial real estate markets.
We've been very busy and pivoted our efforts.
Well update you during the course of this call on the number of things, including the following.
First we rapidly shifted our focus to maximizing preserving liquidity, including cc, new loan origination and announcing the suspension of our dividends.
Second we have concentrated our team's efforts on intensive asset management.
Third we are proactively enhance the near term stability of our balance sheet two agreements with lenders.
And finally, we've been preparing more deliberate process and working closely with Evercore, that's our financial advisor to evaluate various longer term financing alternatives.
They will improve our liquidity and better position the company for the current environment and for the future.
That's always we continue to focus on preserving the value of our investments as well as furthering the franchise value we have built and ultimately expand your for the benefit of our stockholders.
Our first quarter results were largely unaffected by the pandemic other than our increased allowance for credit losses related to the adoption and application of the new Cecil accounting standards, which mark will discuss in more detail later.
As a reminder, this credit reserves, a noncash adjustment to our financial statements and its increase is predominantly driven by the cold Nike pad that mix impact on the macro economic outlook.
Yeah. It is not related to any specific loan losses were impairments at our portfolio.
He felt part will discuss our portfolio when investing activities a bit later, but in summary, we originated about 200 million of new loan commitments and funded about 80 million of loan balances medical <unk> million of repayments during the first quarter.
At March 31st the overall credit quality of our portfolio was strong with no woman permits for non accruals.
Our April interest payment collections were very strong with 123 out of 124 of our investments correct on their debt service.
Our business model is to be a direct originator of senior floating rate first mortgage loans on high quality commercial real estate located in attractive markets in the United States and backed by strong an experienced sponsors.
We employ a disciplined credit underwriting process focused on protecting against the downside.
We have remained disciplined and stuck to our meeting our portfolio is comprised of 99% first mortgage loans secured by Joe first pool of existing properties located primarily in the top 25, and generally up to the top 50 markets in the U.S. with 124 discrete investments.
We believe that the attractive diversification profile of our portfolio across geographies property types and sponsors reduces concentrated the bad risk and helps during times of economic and market to stress such as the current one.
Our overall philosophy, a fundamental value investing in high quality real estate to de risk position of the first mortgage loans. It's designed to protect you got sit outside.
Our portfolios initial LTV at origination of about 66% means the sponsors have significant equity in their properties, providing strong motivation to protect their assets a powerful support for our loans and in the aggregate for our company.
Our senior team has an average of over 25 years of experience successfully navigating various economic in real estate cycles as balance sheet letters and managers are proprietary a third party capital.
As we've stated many times before commercial real estate lending is fundamentally based on relationships on both sides of the balance sheet.
Having been in this business for so long we have to felt strong long standing relationships with many of our borrowers that's wells with our financing Counterparties, who have been supportive constructor food this unprecedented environment.
Well, we satisfied as previously reported our limited requirements to post cash collateral with respect to certain investments.
Following all those bank relationships and our extensive market experience, we proactively engage and productive dialogue with all departments.
Our financing facilities have no significant near term maturities are generally term match and predominantly have both capital markets Mark to market provisions.
Our constructive lender discussions have resulted in executed an agreed in principle the agreements with certain of our lenders on over 1.4 billion up outstanding borrowings on our repurchase facilities, which provides us with greater balance sheet stability and flexibility for a period of time in exchange for do you laboratory.
In the process, we have reduced borrowings on 100% of our hotel loans and almost all retail loans finance with our repurchase facilities with an agreement in principle for the remainder.
Having obtained greater stability in our liabilities and as I said earlier, we're working closely with our advisors thought exploring various longer term financing alternatives to further bolstered the company's liquidity position that well do these uncertain times and flourish beyond.
As with our lender discussions we have also been an active in productive dialogue with many of our borrowers regarding mobile applications on properties impacted by the cold Good my P. pandemic.
I have been centered on jointly ensuring that they can sustain their properties through the current disruptions.
Asset management as a key component of our overall this mitigation strategy and has been well continue to be a significant focus for us as we navigate this I'm certain market environment.
Well, we have tremendous confidence in our fundamental investment approach this noncredit not ready and overall quality of our portfolio, we do not expect to be unaffected by the impact of the cope with Nike.
Currently.
More than ever it is critical to have the skills and experience to actively manage our assets.
Our team has he skills and experience and as we previously reported in 2018, Charles Central joined Us to head our asset management function.
Charles is a key member of our senior team brings with him over 20 years of asset management and commercial real estate credit experience.
Moving previously heading in asset management credit Department at a major financial institution for many years.
Heading into this periods of volatility caused by cobot 19, the overall real estate market fundamentals and the economy were on solid footing.
Industry lending standards were generally rational with respectable levels up leverage liquid and balanced capital markets at your real estate transaction volumes and no significant oversupply or properties, which was largely not the case before the great financial crisis of 2007 to 2008.
As a result, we believe does it as we get passed this crisis the mill say transaction activity should return.
As there was a significant supply and demand for both equity and debt capital and U.S. commercial real estate, we'll continue to be viewed as an attractive asset class generating attractive risk adjusted returns.
In summary, I'm very pleased with Im proud of the strong performance of our entire team in response to this market environment caused by the cold with Nike pandemic, our seasoned team to successfully navigated multiple cycles and market disruptions each person in your told unique challenges this won't be no different.
We have the experience and expertise to handle whatever challenges our before us.
During both our assets and our liabilities in the fall away.
While focusing on protecting our investors capital.
On behalf of the entire team I would also like to thank our board of directors for their continued partnership and support as we are working together and navigating these unprecedented offense together, we will be able to position our company for future growth and success.
No I will turn the call over to Steve ballpark to discuss our portfolio and recent activities in more detail.
Thank you Jack and thank you all for joining our call. This morning.
Thoughts are with everyone affected by this global pandemic.
During the first quarter as the overall economy in commercial real estate markets began to experience the impact of the cobot 19 pandemic, we shifted our focus from new loan origination asset management and working with our borrowers.
Overall investment philosophy emphasizes and holistic approach to investing and managing our assets.
Rent a point the team that originates in underwrites alone is also responsible for asset managing it through repayment.
It's approach creates a strong sense of alignment and ownership.
Answers dialogue with our borrowers.
One thing in an active feedback loop also leads to significant repeat business.
Commenced the building a strong long term relationships.
We have a great group of high quality institutional borrowers ranging from well known global private equity firms vertically integrated owner operators with regional and property specific expertise.
You're already about borrower ownership structures include a private equity firm or other institutional capital partner.
Right on our relationships.
I've been actively engaged with our borrowers.
I think in analyzing the status of their properties are working hand in hand, with both our borrowers as well grow lenders.
Got it was with our borrowers have mainly centered on their plans to protect their assets over the next few months in quarters.
Grant a point can be supportive in that process.
Each of these discussions at highly customized to the specifics of the situation.
I'm going to general themes involving flexibility around reallocating reserves.
Short term deferrals over LIBOR floor.
The paired with additional sponsor equity.
With the objective to help navigate through the business disruptions.
We believe our borrowers have a strong desire to protect their assets given the level of borrower equity in these properties, resulting from our conservative underwriting and the relatively moderate leverage levels of our loans.
Oh portfolios outstanding principal balance at March 31st was approximately 4.4 billion.
My point 1 billion, including our future funding commitments.
The thing of 124 discrete investment.
These investments are broadly diversified across geographic markets property types and sponsors.
Got to markets going properties are primarily located in the top 25 and up to the top 50 M. assays.
We believe should help reduce concentrated event risk.
As the fallout from the Kobin 19 pandemic.
Well, we expect our portfolio's performance is likely to be affected by the impact of the pandemic certainly in the short term.
Just to exhibit strong credit characteristics.
Secular our portfolio had a weighted average stabilize LTV at origination of less than 64%.
On the 9% of our portfolio is comprised of senior first mortgage loans.
Yeah, no loan impairments were non accruals at the end of the first quarter.
123 out of 124 of our investments pay their interest in April.
Turning to our portfolio activity.
The first quarter.
We closed four new loans with total commitments of about 200 million.
And at over 187 million of loan balances.
Instead of 125 million of initial funding of new loans and about 62 million of fundings of our pre existing loan commitment.
For a lower first quarter originations compared to recent quarters reflects our capital being largely fully committed.
Well as our rapid shift to preserve liquidity because the markets began to experience more volatility.
Jack mentioned earlier, you were able to use some of our liquidity to obtain greater balance sheet stability for a period of time.
Well known to be closed during the first quarter have a weighted average stabilize LTV at 55% and a weighted average yield of LIBOR plus 381.
In addition, we realized about 108 million of prepayments and principal amortization.
During the current environment and lack of any meaningful transaction activity in the commercial real estate market.
Expect the pace of loan repayments to remain significantly lower in the near term than what we've discussed in the past.
We do not anticipate realizing any loan repayments during the second quarter and it is difficult to predict what may happen for the rest of year.
General market expectations are that as the economy reopened some transaction activity should return in the second half of the or and if it does we may realize some loan repayments in the third and fourth quarters for exact timing and volume are hard to forecast.
We expect that the funding of our commitments on existing loans should also slowed down.
Particularly those related to capital expenditures and leasing costs.
I mentioned earlier, we funded at about 62 million of such commitments in the first quarter.
Looking forward, it's challenging to predict when and to what degree transaction activity will return to the commercial real estate market and we would not be surprised to see some activity reemerge over the next few quarters.
As of today, we have no new loan commitments and we are largely focused on asset managing our existing portfolio, along with our liabilities and continuing our constructive dialogue with our borrowers and lenders.
We have seen some limited activity in certain areas of our market at all market participants are focused on price discovery and how to evaluate and price risk in this new environment.
Once market stabilizes and activity returns, we believe we will see wider loan spreads along with higher cost of funds and lower leverage probably resulting in somewhat higher returns to lenders.
When a point has a well established presence in the commercial real estate debt market and reliable lending counterparty to a strong roster of repeat borrowers.
On the capabilities of our direct origination platform evidenced by the strong track record of new loan origination since inception of our business. We're highly confident that we will be able to take advantage of attractive future market opportunities to the benefit of our stockholders.
I'll turn the call over to Marson for a more detailed review of our financial results.
Thank you Stephen Good morning, everyone. Thank you for joining us this morning.
But first quarter of 20 to 20, we reported GAAP loss 37.2 million or 68 cents per share, which included a 53.3 million or 97, 7% provision for loan losses.
Related to the application of then you see so accounting standard.
Our core earnings for the first quarter were 17, and a half million for 32 cents per share.
Oh, probably as of March 31st was $17.43 per share.
And then code at $1.31 cents per share aggregate impact of the adoption and application ODC. So standard.
Additional details regarding csos impacts on our financial statements can be found on pages, five and six of our earnings presentation.
Focusing on some of the drivers of our first quarter earnings away from Cecil.
Our net interest income increased by about $800000 versus last quarter.
Largely due to lower lie bore resulting in lower interest expense.
We also recognize other income over about a half a million dollars related to certain one time loan fees.
Despite the fact that our overall realized yield on our portfolio declined by about 30 basis points versus Q4.
Our net interest margin expanded a bit other cost upon declines along with short term rights and we benefited from LIBOR floors in our loans.
At quarter end about 88% of our LIBOR floors were into money.
And as of last week that ratio increased to over 95%.
The combined increase in net interest income and other income over about two cents per share was more than offset by higher operating expenses.
Larger really related to higher professional and advisory fees, which drove the decline in our core earnings by about two cents quarter over quarter.
Turning to our balance sheet, our portfolio principal balance increased slightly to about 4.4 billion.
And it was 99% comprised of senior first mortgage loans.
We had about $99 million up cash at quarter end and about 83 million other Friday.
As Jack mentioned earlier over the course over the last several weeks, we use some of our liquidity to de lever certain of our assets and that's your greatest stability and flexibility of our balance sheet core period of time through our agreements what our lenders.
We ended the quarter with total leverage including than non recourse non mark to market siloed that of about three and a half times debt to equity and our recourse leverage what about two and a half times both of which also reflect the impact go see so on our GAAP equity.
In terms of credit performance, while our portfolio continues to exhibit strong credit carteret sticks with no impairments non accruals or much limited default.
And the first quarter, we downgraded risk ratings on over $670 million of total committed loan balances largely related to the impact of the covert 19 pandemic.
Among those downgrades, we moved to where they saw loans, what a combined committed balance of over $55 million.
So at risk category waiting for.
We are actively actively monitoring the credit performance of our assets.
And made further adjust our risk ratings in the future, we believe that additional new facts worn such adjustments.
Finally, I'd like to conclude my remarks, what an overview of our c., so methodology and some detail around our current reserve for credit losses.
As a reminder, diesel became effective wouldn't you PMT and other similar public companies on January 1st 20 twice.
Requires lenders to record an estimated lifetime or reserve or credit losses, I guess all investments in our portfolio.
As disclosed in our form 10-Q, given the lack of loan losses or specific loss reserve since the inception of our business.
In connection with our employment they send an application of the seasonal sander.
We elected to use a probability of default and loss given default and political model combined with a subset of historical log data license from trap LLC.
In addition to the 18 and a half million for 34 cents per share they want impact from adoption of C. So on January one.
Recorded as a reduction of equity.
We also recorded a provision for loan losses, or 53 point, threemillion or 97 cents per share and our income statement.
Towards related to the application of C. So in Q1.
Our cumulative impact of book value of our total six hours or 71.8 and plan or $1.31 cents per share and it represents approximately 140 basis points of our total on commitments as of March 31st.
Our provision for loan losses recorded in the first quarter is largely related to change and macroeconomic conditions and projected impact of that covered 19 pandemic on the outlook for the economy and commercial real estate market in general and is not specific to any loan losses or impairment that I'll portfolio.
Further discussion of the C. silk topic, please refer to our thank you.
Thank you again for joining us today and now I will ask the operator to open the call to questions.
We will now begin a question and answer session.
Asking question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Steve Delaney of JMP Securities. Please go ahead.
Good morning, everyone and glad to hear that you are all well.
I'd like to start with the C. So reserve a Morrison you mentioned that they've been no impairments as well as noted on accruals. So that tells me the entire 71.8 million that you have we should consider that to be a general reserve without any specific reserves am I interpreting your comments correctly.
<unk>.
Good morning, Steve. Thank you for joining US yes, that's how Marseilles <unk>, It's a general reserve Ross, Yes, Oh.
Okay, Great and just looking at page six in the deck certainly understood as you break down you know the the reserve impact.
<unk> Securities of course, but you have other liabilities, but the 5.7 million dollar Mark can you clarify that for me. Please.
Sure. That's that's related to the unfunded commitments were required over to Booker reserve for both funded and unfunded. So this is the unfunded piece.
Makes perfect sense, Thank you and I knew that but I wasn't for some reason not focusing on liabilities and that's exactly where you would have to put it.
Okay, Great and there was talk of I guess, Steve Albert They were just talk of de levering certain who tell once your financing on certain hotel loans. Just generally can you comment on post that de leveraging can you offer us some type of a range of.
What your advance rate on those hotel on the financing or there was hotel loans might look like after you have de levered.
Not specific lives or some kind of a general range.
Yes, you are asking what they they are advanced rate on the hotels would be after the de leveraging up we'd probably yes, the borrowing the borrowing advance rate on the hotels, yes, Sir.
Right, we prefer not to get into specifics on that but I will say that we voluntarily paid them down in line with what our discussions with the lenders.
We agreed or reasonable levels and that they feel comfortable with.
Okay I can understand that thank you. So the I'm just curious if you right now I understand building liquidity de levering. Our is it's very important at some point I know you have to consider your re taxable income for the full year and we're.
Classifying your dividend currently is being suspended drilling related to the first do you can you share any thoughts about when you feel the board Mike we address the issue of a GAAP cash dividend.
Hi, Steve It's Marty again, how much like I think its you're right you're correct as we said in our press release, we suspended the Q1 dividend to preserve liquidity given kind of what's going on under world.
We're on a constant dialogue with our board, we will be discussing the second quarter dividends and going forward lot later in June.
So obviously, there's a lot of different factors that go into that but yes, well ill discuss that with the board and done well I'll come back to the market with a with our next steps are on that.
Well obviously.
We'd like to we do we the animals the investment community I think would would love to see want but not at the at the risk of hampering liquidity liquidity and <unk> operating flexibility with it would seem to be the paramount need at this time. So thank you. Thank you each for your comments.
That's it from I guess there.
Thank you.
Our next question comes from Jade Rahmani of KBW. Please go ahead.
Thank you very much with the stock trading at 27% of book value have you given any consideration to the prospect of selling loans or even at discounts to par and using proceeds to then pass any repo funding those loans and then that equity to buy back shares yeah.
27% apart you believed the assets are generally money. Good you know even at 27% of book value him a that might be a highly accretive.
[noise] to up to a book value on a go forward basis.
Hey, Jay this is Jack a good to speak with you and thank you for your question. So.
First I'll say contrary to some press reports that have been out there we've not.
In fact been actively engaged and selling portfolios of loans just want to set the record straight on that we are closely working with evercore as our financial advisor to explore various financing alternatives.
And as we said that's to improve our liquidity position and you know those alternatives can take a variety of forms and we will not exclude loan sales, but we're not actively selling loans at the moment. So I just said I will that as part of an asset management decisions about the unusual just strategically celso baskets, depending on it.
Variety of different circumstances relating to particular asset, but we are aware that.
It sounds like along at par or close to par when you're trading at a very low <unk> book value would be helpful. So that's part of our overall analysis as we look at our.
Financing alternatives.
[noise], Thanks, very much I think it's worth noting that in.
The past cycle coming out of the financial crisis. There were a couple of mortgage rates that were able to do such actions and ended up.
Putting a floor under their stock in helping provide a path to recovery I wanted to ask about.
The April collections, you mentioned, a 123 out of 125 loans are current and what percentage of the April debt service was funded out of reserves.
Oh, Hey, Jay Good morning, it's Steve. Thank you for for joining us today. It it really varies by by asset you know somebody's loans are or paying debt service at a cash flow and some of the loans are paying debt service from a built in reserve. So it's really a mix.
You can make the assumption that.
On a lot of the hotel loans that are close is being paid out to reserves.
And on a lot of the multifamily office and industrial property, just coming out of cash flow, but it really varies a lot deal guilt deal to deal.
Okay, and if you adjusted for the original structure of the alone.
Much sort of negative migration wasn't there towards loans that had been funding debt service out of cash flow to loans funding out of reserves and generally speaking what percentage of the loan balance is the reserve a when you make when you make an origination.
Again, it really varies deal by deal I wish I could give you more specific answer so.
For loans that when we originate them or cash flowing loans, there may not even be a need for reserve at all for typical bridge loan a you might expect to see a debt service reserve you know built into the alone while the property is in the ramp mode. A and then just depending on where that loan is in its business plan a lifestyle.
Michael will dictate whether or not there is existing reserves and most of these loans are built with a replenishment obligations Ah. So what we're having very constructive conversations with our borrowers you know these loans are generally fairly low levered Oh, there's a lot of equity built into the loans in the bar with them a lot of equity.
To protect Ah. So what we're seeing is that to the extent that a the wasn't reserve and there is a need for reserve. We're seeing that borrowers are stepping up you know typically to replenish that.
Thank you and in terms of the unfunded commitments, which total about 760 million how much would you anticipate to be funded in 2020.
From Twoq through year end.
Thank you Steve again.
So the timing of the fundings is is very variable and it depends on market conditions, you know when I'm in a bull market when loans are.
Get every fendt real refinance before they mature.
Its likely that I'm not all future fundings will be drawn in the current environment needs. A lot of these loans are likely to extend and we would expect that the pace of future funding I would likely flow and be funded over a longer period of time.
And then the specific feature fundings are always gonna be highly dependent on the specifics of each property and then another point just to make for liquidity purposes, we assume that all future funding will be drawn as if the assumption that we make and then what typically responsible for about 25% about a mountain and we tend to finance the you know the rest.
And we are we are meeting all of our future funding obligations as far as your specific question as to how many will be drawn by the end of the year its really a function of out of the pace of business plan.
[noise]. Thank you for taking the questions hope, you're all doing well I'm I will try to get back into queue.
Okay.
Our next question comes from Doug Harter of Credit Suisse. Please go ahead.
Oh thanks.
I can talk about.
Various financing alternatives I was just wonder if you could sort of talk through you know big picture, but what some of those alternatives might be.
Sure Hi, this is Jack Thank you and good to speak with you I can you hear me okay.
Again.
Okay. Thank you you don't where were in extensive discussions about the financing alternatives and it's it's early to speculate as to which types there might be and Ah I would say that oh.
Approach is we have very specific ideas about.
How we might like to proceed but our approach is to engage with the market and they priced and structure discovery process.
And optimize adds to the best benefits.
Through that process. So because it's early now to go into any detail, but we're working closely with evercore to look at those.
Oh.
Understood and then it's just wondering.
You know on that on the de leveraging you talked about with.
With your lenders I guess is is all of that de leveraging kinda captured and in your current liquidity and then if you could just talk about you know what you might have received back from the lenders.
Is there a standstill as far as margin calls and just just any and kind of they give and take that you had there were two lenders sure Oh understandable question. So first as we said in her prepared remarks, we reduced other borrowings on our hotel loans that are financed on the repurchase facilities and so.
I'm really done so with our retail properties retail property loans. There's a couple that are agreed in principle that we expect to document and finish.
Next day yourself.
We.
The dollar amounts are not the flows for the remainder of the agreed in principle. The dollar amounts are not included in the cast position, but I will say, we'd expect those to be modest and not dramatic movements at our cash position in the single digit billions <unk>.
We have limitations on Mark's Oh with respect to the 1.4 billion that we mentioned and on the other lines will that we've we've.
Jason with our.
Lenders on those are asset specific.
Pay downs that wasn't thought.
That would be paying down the full line so across the board Oh, we're.
[laughter].
What we received an exchange was the limitations on the market for a period of time those run from 90 to 120 days a week. Our view is that hits given ourselves time to deliver terribly explore longer term financing alternatives to improve liquidity.
And we've been very satisfied with the response of the banks and their support.
Great. Thank you Jack.
Thank you.
Our next question comes from Rick Shane JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions and I hope everybody is well look you guys are an interesting position.
In a lot of ways and you provided a lot lot of detail on your conversations with the banks and in your financing.
I'm curious.
About your conversations with the sponsors and owners of properties. A we had a call. This morning for one of your peers I think you probably listen Dan and they talked about what is effectively a strategic default.
And Ah you know deed in lieu I am curious given the diversity of our owners are your types or property of your properties what conversations you're having it has no odd they're going to behave in terms of strategic default or financial resources gene.
Buffalo properties in the short term.
Oh, Hey, Rick its Steve Alport Hope you. All this morning. Thanks for joining so I would say look we have a very active portfolio management process.
When the when the pandemic hit a we're in active dialogue with our borrowers are those conversations I would describe as being very constructive we're not seeing what you were just describing.
Hum from the prior call.
So I would describe those conversations as productive a were in conversation with a number of our borrowers.
You know you could assume it's a lot of the hotel and retail borrowers Oh, we're talking to folks that are you've heard you've heard described the type of bar was that we have a high quality institutional borrowers are relatively moderately leveraged loans lots of equity to protect and again I would describe those conversations is very can.
Stockton.
Got it great. Thank you very much take care guys.
Thanks.
Our next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, good morning.
Appreciate once you've covered so far in a couple of follow up questions. I guess first Jack thinking about the management structure can you.
Can you give us any idea of both.
How we should think about expenses looks at what's the run rate expense lender internal structure and how much of the incremental advisory fees.
Ah contributing right now to the to the operating expenses that that we see I think kinda coupled with that with regards to evercore or are they advising on the internalization as well are they looking at other strategic options that that look another things with the manager can you provide any color there great.
Hi, <unk> I'll pass it on the marson here in a minute to talk about the.
Advisory piece and the like.
First and as we've discussed in our press release from March 2nd.
Any details relating to the internalization and process.
We'll be announced at a later date when they become available and when it finally agreement definitive documentation are expected to be delivered so I can't make any more commentary or comments about that in trouble say some process.
This time I would.
Pass it onto marson to answer your questions about the expenses.
Hi, Steve and good morning, Thanks for joining US again as Jack mentioned, you know, we're where we had ready to talk about the expenses related to the internalization.
Evercore is working with us on exploring various financing I'll try this to provide more stability on out it out to our balance sheet that involves a lot of different options as you can imagine.
I will take this opportunity to address expenses since you have since you asked about it just in general for.
Our earnings and kit to a in Q1 I think it too as I said in Q1, we had some higher expenses in Q2 I would also assume we will have a couple of million more organic so operating expenses related to all the different advisory fees that were incurring.
But beyond that as well, but would like to not common beyond that.
And the clarifies that a couple of million more than Q1, or just a couple of million more than the run rate, we fall through last year, which is more of a normalized level.
I would assume it's incremental sort of first quarter level.
Right and to move up the income statement I appreciate the disclosure on the LIBOR floors are certainly that's going to be a benefit and will make some adjustments to offset with lower repaying origination fees, but can you talk too.
Financing spreads should see a benefit from lower LIBOR as you renegotiate. These financing facilities are you, giving up some up some of that benefit and paying a higher spread to LIBOR or a that we need to consider as we forecasted net interest income number.
I would say so far Oh, we haven't seen a much in change of Oh financing costs I think that's not to say that may not change as we continue our discussions with whatever financing or providers.
And in our earnings obviously, we have pretty much most most if not all of our LIBOR floors right now into body. So we should benefit from that obviously, there's a lot of moving pieces around.
Of net interest income what will happen sort of I sit here and what potential other alcs financing alternatives Oh, we have options to use so.
Great and a final question more centered around the the leverage covenants and the financing facilities.
I was reading a little bit Q and appreciate the disclosure there.
Can you talk about the impacts equals having their theres another big write down there just because the economy deteriorates, it's again non cash.
Is it tied to GAAP equity and you potentially have issues there or do you have waivers for these counterparties to adjust your equity to up to add back your non cash Cecil reserve.
It is it is based on a GAAP equity and as you can imagine you know things like that's all this would be part of our discussions with our lenders going forward.
Okay, well I appreciate the comments you guys were making its good to hear from everyone Hope all are doing well. Thank you.
And I hope you're doing well thank you.
Our next question comes from Aaron Cyganovich of Citi. Please go ahead.
I think on the internal risk rating a you know I was just looking at at the migration there and what wasn't I guess clear to me is that.
There's about 1.1 billion of hotel and retail loans.
But the risk rated three and four are only about 738 million, which I guess would imply.
320 million and be ready to which is kind of like your I think you haven't listed as average.
Average risk.
Why why wouldn't those be put into a lower risk category or higher risk.
I should say I in this environment.
Hey, parent, it's Steve plus.
Okay well.
As you noted we constructed art ranking system, establishing score to is average risk for our portfolio.
And their system is highly quantitative.
And it takes into consideration or range of variables, including sponsorship.
Pretty quality market.
Property cash flow, both in place and perspective and loan to value and all of those factors are taking into consideration when we risk rate loans.
Quarter over quarter.
We moved slightly over 670 million loans down one risk rating level, which does represent almost 15% of our portfolio.
So.
We think what we've done is appropriate given given all the characteristics of all loans in the portfolio.
Okay, and then in terms of the specific reserving a in the future you do have you know a few loans that are rated four.
Yes that is that expected whenever you know one of these bonds would move into non accrual is it only if you then look at the collateral value underneath and you see the probability of a lifetime. How are you thinking about in terms of.
Ah specific reserves for any of your loans.
Yeah, Hi, and its marson, thanks for joining us I think I think you're thinking about it right way, you know conditions where to deteriorate.
From here as well as we get more information or potentially about what's going on where these properties. That's one callaway would move promote more specific reserves, so particular assets.
Okay.
And then have you received any loan modification of quest, yet or exercise to any for any of your borrowers.
Hey, it's Steve Yes, we you know.
Robust asset management process, you've been very proactive with our borrowers.
We are in discussions with a number of them.
And it's I mentioned earlier, it's very.
Focus right now on our hotel <unk> hotel lumpy.
We don't have a lot of retail loans, but it's a few retail loans were talking about also.
And it's been a pretty quiet I would say with office in warehouse and multifamily being someplace in between but there's not a lot of conversations right now on multifamily units, but mainly been on on the hotel for us.
Okay all right. Thank you.
Our next question as a follow up from Jade Rahmani of KBW. Please go ahead.
Thank you very much just circling back to 'em Steves question about covenants or how much room is there on the tangible net worth covenant [noise].
The 80% advance rate against that.
[noise] plus so so we have a couple of different covenants the tangible net worth covenants.
Obviously at the 75% or of our capital roughly so.
That's a little bit separate from the leverage covenant the leverage covenants is at 80% and I think we were.
That's seven eight and a half of the ended the quarter.
So there's this go obviously some room there about obviously this is something we're monitoring closely and as we are managing a liabilities and discussing things with or without lenders. Now. This is something we are paying attention to.
[laughter] and can you give a range of what the magnitude of anticipated de leveraging is over the next two quarters.
[noise] [noise], it's Jay this is Jack sorry about that I have my phone on mute.
Actually prefer not to give a range on that and I will explain why are they the tightened structure of the longer term financing alternatives will walk through the impact or what other and be extensive any other further de levered. He said it will be pursuing so it's really pretty much.
<unk> to go there now and I'll just say, it's it's an iterative process the capital raise.
Discussions the financing alternatives discussions for liquidity and the.
Discussions with our banks [noise].
[noise], Okay, and I guess big picture question.
You've all been in the industry for a very long period of time and have added business models in different aspects, whether it be CMBS coming out of the RTC days or Mezz lending how does the the pressure from repo costs given caused any rethinking of the business.
Model do you ultimately think that the best or relative value is first mortgages levered on repurchase facilities or would you consider post crisis, assuming company survives and things come back would you consider more of a mezz lending model with off balance sheets financing, but.
A lot of asset management control, the asset button, but no margin call risk.
So ah thanks for the question Oh This is Jack again Oh.
Try to answer that.
Very early days, but Oh do my best to.
<unk> first yes, I think the assumption should be that we're going to survive and so we've had been giving a bought two hour.
Future and we believe that senior first mortgage loans, we'll continue to be superior investment opportunity or to profitably deploy capital significant amounts of capital.
We do have as you point out a broad experience across a whole variety of oh market structures and.
Forms and it's difficult to just.
Dick just now what the market will look like after our whole country gets through this crisis, but we'd like to keep an eye out for ways to exploit the more structural changes that results and one thing. We do believe is that there will be a either for first mortgage loans.
Well, we're pursuing other types.
Uh huh.
Okay, <unk> investment structure that there'll be a rethinking busby.
Home community of lenders, whether their commercial mortgage Reits or debt funds about the use of the financing world that's available to.
Thanks very much.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Jeff Taylor for any closing remarks.
Thank you very much and we thank everybody for being on the call with US These are.
Very very challenging times, we are delighted in here.
And it's community friends.
Finally, well.
Call with us.
We look forward just speaking if you cancel and to give you further.
<unk> reports on how we're doing.
We wish everybody good health and safety through this period of time. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.