Q1 2020 Earnings Call
[music].
Good afternoon, and welcome to the area its commercial real estate Corporation's conference call that Scott the company's first quarter.
<unk> and 20 financial myself.
As a reminder, that's conference calls being recorded on May.
2020.
I will now turn the call lever to Veronica.
Investor Relations.
Good afternoon. Thank you for joining us on today's conference call. We apologize for the short delays as we were experiencing a few technical difficulties.
I am joined remotely today by our CEO, Brian Donahoe, David Ross our pricing.
Thank you and our CFO and called Drake or had a public company Investor Relations.
In addition to our press release and the 10-Q that we filed with the FCC. We have posted earnings presentation under the Investor resources section of our website at Www Dot Aries CRT Dot com.
Again, I want to remind everyone. A comments made during the course of this conference call and webcast and the accompanying documents contain forward looking statements and are subject to risks and uncertainties.
Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects intend well should may and similar expressions.
These forward looking statements are based on management's current expectations of market conditions and management's judgment.
These statements are not guarantees of future performance condition or results and involve a number of risks and uncertainties.
The company's actual results could differ materially from those expressed in forward looking statements as a result of a number of factors, including those listed in its SEC filings.
Every commercial real estate Corporation assumes no obligation to update any such forward looking statements.
During this conference call, we will refer to certain non-GAAP financial measures. We use these measures of operating performance and these measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles.
He's measures may not be comfortable to like titles measures used by other companies.
And now I will turn the call over to Brian Dot Hill.
Thank you Veronika and good afternoon, everyone.
We wish everyone well during these difficult in challenging times and we appreciate you joining us today.
We hope you and your families are safe and healthy and our thoughts or with our first line responders and all those impacted by this virus.
I also want to thank the team at acre and the greater Aries platform for seamlessly working from home and working so diligently to drive our company forward.
We issued our earnings release, this morning, which showed relatively consistent.
Quarterly core S.
32 cents and a GAAP EPS loss of 54 cents.
Our net GAAP loss, primarily reflects the adoption of the current expected credit loss or Cecil accounting standard and does not reflect impairments to launch in our portfolio.
I'm going to put these results in context by walking you through our actions since the outbreak of Cobot 19, and Howard portfolio is currently position.
After my comments basic will walk you through our earnings liquidity position and impact of C.. So all on our earnings in more detail.
First let's discuss what we accomplished during the first quarter prior to the outbreak.
Supported by favorable real estate fundamentals and sound leverage levels, we originated $356 million in loans during the first two and a half months of the year.
We also raised $73 million net proceeds from an equity offering in late January completed at a significant premium to book value per share.
When the impacts of the outbreak became clear we curtailed new investment activity and work to further enhance our liquidity position.
We redeployed the team to underwrite each asset in our portfolio.
Through dynamic and constructive discussions with our borrowers we focused on the near term impact on cash flows and the long term impact on property values.
And we're pleased to say that we believe our portfolio is holding up relatively well with all of our loans paying or contractual interest in April.
As part of berries, we received great market insights from our investments in over 1500 companies and approximately 250 property investments across North America in Europe.
These insights and farmed out already cautious view of certain segments during the first quarter.
We consciously avoided investments in loans that were solely collateralized by hotels or retail properties throughout all of 2019 in the beginning of 20 Twond.
We strategically structured our portfolio to be comprised of 95% senior loans and highly diversified with 53 loans across 17 states.
Additionally.
The majority of our portfolio, it's hard to multifamily office or industrial properties.
That being said no asset or portfolio submission to the economic impact of a prolonged shelter in place order like we are experiencing today.
Our portfolio includes six senior loans on hotel properties that make up 14% our outstanding principal balance.
The majority of these loans are secured by limited or select service nationally branded properties portfolios of property.
And we're optimistic that these types of hotels will recover faster than certain full service hotels due in part to lower expense what.
In addition, we have a 10 million dollar equity position in the Marriott Hotel in Westchester New York.
This property performed ahead of plan in 2019 and is well positioned heading into 2020.
Since the outbreak we've been actively managing and creating a cost containment plant that will minimize operating expenses for this hotel until the recovery.
Well, we do not have any loans solely collateralized by shopping centers. Some of our multi use properties do have retail component and one has a hotel component.
We're working with each were borrowers that have expressed concerns around their ability to execute on their business plans in a timely now.
We're evaluating each loan on a case by case basis, when considering certain modifications, including extensions of maturity dates and deferral and interest payments.
Well, we continue to actively manage our existing portfolio. We're also prepared to take advantage of attractive financing opportunities at the appropriate time.
We communicate on a daily basis with our real estate equity colleagues as well as the greater Aries platform to gain real time insights into consumer and tenant behavior.
As we look at a refreshed industry environment. We expect the continued focus on multifamily properties offices with long term leases.
Self storage assets as well as an increasing opportunity set in the retail in the industrial sector.
With that I'll turn it over to taste.
Great. Thank you, Brian and good afternoon, everyone.
Earlier today, despite the many challenges of operating in this environment, we reported consistent core earnings of 10.3 million or 32 cents per common share as 100% of our loans, where current on their debt service payments due to April 2020 payment date.
Our GAAP net income however was significantly impacted by non cat losses that we recognized due to the implementation of Cecil.
Resulting in an overall quarterly loss for the first quarter, 20, 20-F, 17.3 million or 54 cents per common share.
At March 31st 2020, we reported a book value 13, 95 per common share down from 14 77 at year end 2019 inclusive of the cumulative 96 cents per common share impact under Cecil.
I will discuss our implementation of Cecil in greater detail on a few minutes.
Part of mid March when we started to see the economic impact of Cowen 19, we closed seven new loans totaling 356 million in new commitments.
All these loans 132 million loan that was originated in the areas warehouse in the fourth quarter 2019 was purchased by acre in January 2020.
Total fundings for the first quarter 297 million, which included initial findings of 284 million under seven new loans and 13 million Empire existing loans.
With respect to repayments for loans paid off in the first quarter totaling 107 million in principle balance a number of which occurred in late March.
As of March 31st our loan portfolio included 53 loans, what total loan commitments of approximately 2.2 billion in an outstanding principal balance of approximately 1.9 billion.
Turning to our liquidity as of May 7th, we'd approximately 50 million in unrestricted cash.
In addition, we have 131 million an unfunded capacity under our ethanol three securitization and further capacity under the Aries warehouse line.
Both of which are available subject to respective lender and third party approvals.
If we're able to fully utilize both capacities. We believe me would generate approximately 20 to 25 million additional unrestricted cash.
Furthermore, we believe that we could also monetize certain loans without significantly impacting future earnings and book value.
Total if all of these options were fully executed our total cash position would be approximately 70 to 75 million on a pro forma basis, plus any no any net proceeds from the sale of assets.
Now, let me discuss our liabilities and financings.
As we have consistently stated in the past we are very purposely pursued a strategy of first diversifying both our sources of financing as well as the composition of loans that we place with each of our lenders.
And second our focus on natural funding our assets and liabilities.
With respect to diversification, our 1.6 billion in liabilities at quarter end were up 10 different sources of capital.
This means that we have six different warehouse lenders a separate working capital line with city National Bank.
Term loan.
Slide 11 notes payable with three separate lenders and our ethanol three securitization.
This allows us to spread our counterparty risk and make sure that no single lender as concentrations of loans that we financed with them. So.
So for example, as we mentioned in the recent announcement of the six hotels that we have three are financed with an F. L. Three and the remaining three hotel loans are financed with three different warehouse lenders.
Other word no warehouse lender has more than one hotel alone among the many other loans they are financing for us.
Also we have 10 different sources of financing.
Other than wells Fargo, and our ethanol Threesix securitization no. Other single financing source represents more than 10% of our borrowings at March 31st 2020.
As far as our strategy of match funding our assets and liabilities. We think it is important to note that none of our six warehouse financing facilities contain mark to market remarketing provisions that are based on changes in market borrowing spreads.
Instead, our warehouse our warehouse line every marketing provisioned based only on the actual credit quality of our loans.
And finally, we can't emphasize enough the importance of are continuing strong relationships that we have with each of our warehouse lenders both at the acre level as well as at the Iraqis management level.
We've been working closely with each of them, particularly over the past few weeks.
Since mid March 2020, we have not been formally asked to make any margin calls under any of our six warehouse lines and we are in compliance with all of our loan covenants.
However, we did a lot to voluntarily make asset its asset specific pay downs of less than 10 million in total during the past few weeks as part of our ongoing discussions and in light of our overall relationships with our lenders.
I would not like to provide an update of our implementation of Cecil during an adds up the first quarter 2020.
Our adoption our initial adoption of the new seats. So accounting standards resulted in an initial reserve of 5.1 million as of January 1st 2020, which was recorded on our balance sheet as reduction of stockholders' equity.
It is important to note that this initial reserve amount did not take into account the impact of totaled 19.
However, as we all know during the first quarter and most notably during the last two to three weeks of March 2020, the impact of Cobot 19 dramatically and adversely change the economic outlook for the U.S. economy.
In assessing estimated losses under C.. So we engaged a third party economic forecasting company to provide us with macro economic metrics, which we incorporated into our seasonal model.
In general macroeconomic forecast assumes significant declines in GDP LIBOR rate in commercial real estate values as well a sharp increases in unemployment.
<unk> as a result at March 31st 2020, we increased our C.. So reserve significantly by 27.1 million or 85 cents per common share for the first quarter 2020, which is included in our net income and resulted in our overall GAAP net loss.
Cumulatively at March 31st 2020, our CTO reserve stands at 32.2 million or 96 cents decrease in book value per share and represents approximately 1.5% up our loan commitment balance and 1.7% of the unpaid principal balance of our loan.
Yes.
It is important to note that well see so has a significant impact in our GAAP earnings and book value per common share C.. So reserves are a noncash item and Cecil does not directly impact our actual cash flows or liquidity position.
No further we have not incurred any actual losses or recognize any impairments in our loan portfolio.
And in addition, as we mentioned at the outset, 100% of our loans were occurring and made debt service payments through April 2020 payment date.
Or four loans, although they too are occurring and we did receive interested in April 2020 payment date, we made the prudent decision to placed on nonaccrual status.
These four loans totaled 105 million, an unpaid principal balance and represents 6% of our total portfolio and includes three loans secured by hotel properties and one loan secured by student housing.
We made this decision as we believe that the colder 19 Pan data may put particular pressure on these power and property cash flows.
And with that I will now turn the call back over to Brian for some closing remarks.
Thanks toxic.
You can see from our discussion today, we're incredibly focused on preserving liquidity during this period of disruption and the reopening of our economy.
Recognize it dividends are important to our shareholders and we believe there is a strong alignment of interest with shareholders, that's executives and employees collectively own approximately 11% of acre.
In order to have the most information available to us we expect to announce our decision regarding our second quarter dividends by mid June following the meeting of our board of directors.
This will allow us more time to evaluate cash and liquidity market conditions and loan performance amongst other factors.
Importantly, the silver lining is that we anticipate there will be an improved real estate market for investing as the economy starts to reopen and recover.
While we remain focused on preserving capital one acre we remain active through complimentary funds I meet your Aries real estate that platform, which we believe will lead to deal flow and future opportunities for acre over the long term.
At this point I'd like to ask the operator to open the line for questions.
Thank you.
We will now begin the question and answer session for any color you may have to press Star then one when you first and took the call I would like the assay. The please enter star then one again.
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Our first question today will come from.
Steve Delaney.
With JMP Securities. Please go ahead.
Thank you Hello, everyone I must be on what you'd say afternoon.
Basic the four loans on non accrual I did not find that into Jack I must have been I must have missed something is it can I find it into DAC or is that something it's in the 10-Q.
Oh sure Steve Thanks, again for being on our and our earnings call sure. It is a I think it is more detailed in the 10-Q. However, okay in the DAC or what do you will see is India appendix, where we list all of our loans held for investment shot you will see that there are you know there.
Our four loans plus there is one senior loan.
Under hotels that you will see that have identified with a dash effectively and a eight zero for unlevered effective yield so that we ship yeah Euro unlevered effective yield is because they are put on honest nonaccrual status and what you'll see is that it's basically made up of you know three loans at UBS.
Backed by hotels, a one back by student housing is I, just had mentioned and again, it's important to note that we actually did receive interests on these loans for the April payment date.
But these are certainly loans that we expect to experience problems going forward on potentially meeting current debt service.
Got it okay, Yeah, I did glance at the the list there for property types and I, just I didn't didn't pick up the zero spit. Thank you for point of view that just.
Just some obviously.
On the financing side I think.
Those of us on in air position as analysts, we we've really gotten a crash course, and the nuances that different types of.
Bank provided financing go to see how close are Robbie assist to you know the terms of this yellow, but this concept of non mark to market lending facilities versus revolving or other types of loan facilities. I'm. Just curious if there are only a limited number of.
Lenders that will actually do non mark to market, maybe such as your life co lender and when you are negotiating those types of facilities is the cost materially higher and possibly the leverage lower on a non mark to market facility.
Sure No excellent question and again I think it's important to differentiate you know the different types of mark to market, our non mark to market type facilities, right and I generally put that in two categories.
One is that a lender can do a mark to market re margining other facility based upon changes in borrowing spreads right right away. If you have alone finance with them in your alone a pace L plus 355 under different market conditions, maybe that market bonds.
For a similar type alone has increased from L. Plus 350 to outlaws 550 and in that situation you know a warehouse line or get say Youre War. Your alone is worth less than par and therefore, we're going to remark them loan and our point is we don't have that type of mark to market provisions in.
Any of our facilities the second type of Mark to market versions that we talked about is is that if you have a deterioration in the credit of the underlying collateral. So let's say of alone backed by an office building an apartment building and those assets in particular suffer an actual.
Credit deterioration so they lost a major tenant.
There was a problem leasing those assets and there was a significant drop in cash flows and so if there's an actual credit deterioration and therefore, the lender believes that the alone is worth less because the LTV has gone up the de Fcr has gone down whatever the right credit metrics are they can then reassessed the value of the.
Alone and re margin alone in that situation and those are common I would say and those are certainly the type of re margining mark to market provisions that we have under our various warehouse lines.
Right well that's good to know it does not is not appear that but all of your peers have had before we did spread based marks from from best we can tell so thanks for confirming that.
And then just lastly from me things have changed and I was wondering if you could give us an update on your repayment outlook.
Just to use 30, 35% of year, but I guess, we should expect more extensions in this market. Thank you.
Sure and maybe I can start with that and Brian certainly to extent that you have other thoughts on those but I would tell you that for our cash planning purposes. You know, we have taken a pretty conservative viewpoint and assume for cash planning purposes that.
Little to no repayments will occur over the next or call. It six to eight months throughout the rest of 22 point you know obviously, we do have contractual maturities coming up we are working very closely with each of the borrowers like just given the challenges or the capital markets. We have assumed again.
For cash planning purposes.
We do not receive any repayments, but again I think the important thing is we are working with each were bars, we certainly expect a slowdown.
But I think I don't think the reality is that there would be none, but I do think for cash money purposes that it's the prudent assumption to make.
Okay, and I guess, if you ever multi yes, Brian isn't the only thing I'd add there is.
With respect to we have a large portfolio of multifamily assets and as one of the bad actors that will go into.
Repayment velocity is the availability of replacement capital obviously.
With respect to cash flowing multifamily assets, which comprises 25 plus percent of our portfolio. The attractiveness of the GRC financings in the continued liquidity in that space may induce.
Probably higher repayment velocity that in some other asset classes. So we'll be well served by that subset of our portfolio.
Sure Walker and Dunlop would <unk> be glad to take the loan off your Hanson and give it to Freddie [laughter]. Thank you both very much for your comments.
Great. Thank you see.
Our next question today will come from Doug Harter of Credit Suisse. Please go ahead.
Thanks.
Can you just help put that cash balance you haven't contacts you know what you might expect from future funding.
Future funding needs and just you know again, just kind of what normal cash balances you would hold or just so we can confirm that liquidity balance.
Sure Doug.
Good for your question so to maybe answer your second question first I mean, clearly prior to mid March a you know we looked at cash as an important part of our balance sheet. However, having cash on our balance sheet meant that we weren't putting as many dollars to work in terms of our GAAP earnings and our core earnings.
So our strategy was to maintain liquidity, but try to maintain as minimum of a cash balance as possible. So that whenever we had cash balances we would use the pay down our various revolving credit lines in our warehouse line. So historically, we try to maintain it little cash as possible I think like most of our peers.
Right now clearly cashes, Paramount and we want to make sure that we maintain you know at very very sufficient level of liquidity in the form of immediate cash.
At the same time I think we want to make sure that you know, we do maintain and we anticipate needs of cash but that we don't over you know over react and put too much cash on balance sheet and really strain both our earnings and other important aspects of the.
The company. So what we have done is you know we have put in place plans to raise additional liquidity on top of the 50 million of cash that we have to make sure that we will have the liquidity needs for things like future funding.
And so for future funding for example, you know if you look at the total you know there's about 275 million a future funding that we have so if you look at the difference between our commitment and our funded amount at <unk> at March 30, Onest is about a 275 million different obviously all of that is not.
And to become immediately called a in the short term a plus there are different uses of that future funding. Some is for continuing the progress of the investment a lot of it is for what we call. Good news money in the sense that yeah. This is for tenant improvement dollars. This is where at least income.
Visions, when new tenants no new rent paying tenants come on board, but you know we are managing both our cash position. The 50 million additional sources of liquidity. We mentioned the 20 to 25 million that we got from further leveraging our cats L. Three and our ears warehouse line. In addition.
On to that you know we have you know we have additional assets that we could look to monetize and so we're balancing our cash position with the potential uses of capital, including what we think will be call. It 55 to 60 million a future funding over the course of 2020.
Oh, Great and then it's if you could just talk about kind of how do you for non accrual loans kind of fit into this whole reserve.
I'm just.
Kind of how that was contemplated in a fair amount you <unk>.
Right.
Sure. So in terms of the out in terms of the C. So reserve so even the four loans ever placed on nonaccrual were part of our seasonal reserve.
Just to clarify that you know nonaccrual does not mean impairment or specific reserve. So that the four nonaccrual loans were part of our overall Cecil reserve.
It's also important to again reiterate that before nonaccrual loans did in fact made their interest payment.
You know for that April 2020 payment date.
But we believe that these four loans you know we identified as ones, where we felt that the financial condition of the asset the direct impact.
That cobot 19 is having on these for borrowers and these were assets you know were particular, a and we felt that it was a prudent thing to do to put them on nonaccrual status again, despite us actually having received received the cash.
And so I think that's you know that's really the the Genesis and background. So again. They are included in our seats or reserve, but we thought in addition to a higher level C.. So reserve that putting it on nonaccrual status was the prudent decision at this moment.
Oh, Thank you did.
Thank you Doug.
Our next question today will come from Rick Shane of JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions and I I basically three different topics I'd like to cover.
In the student lending portfolio.
I'm curious, how we think about the underlying equity.
Who are your Counterparties generally are these universities or are these more typical private sponsors.
In our portfolio it's it's.
Not directly on campus affiliated with the University. So its private owners with access to additional capital in most cases.
Got it and the.
Nona urge you mean, the student loan that you have on non accrual is that really a function of the pending maturity.
That's correct, Yeah, I mean, there's a lot of factors, obviously that go into that designation, but what was unique about it was obviously some of the unknowns that we have with respect to student housing.
Many of our assets were performing.
Very well year over year, but given the maturity of that specific asset as taste like pointed out we made the conservative and prudent decision to move it to nonaccrual.
Got it okay that that's that's helpful and it certainly makes sense in light of what we're seeing.
Second topic, you do show in the multifamily portfolio to me maturities. There's significant they are fully accruing Oh, that's obviously a good side should we think of those two loans as a source of liquidity.
D. given their status and the timing on them.
I'd say I.
I think overall, we view the multifamily portfolio as I said earlier as a potential source of liquidity I can't comment specifically on that situation, but given the consistency of performance.
And the secular growth in the apartment sub sector I think we feel good about using that as a liquidity sources in certain instances, but I can't really way and specifically I'm on those two assets.
Understood I I appreciate that I get asked the question, though total <unk> topic, [laughter] well last topic.
You know on the three non accruals I am curious because I think.
Our view is that.
We're moving through three stages and the second stage is going to be largely about sponsors buffering properties for the short term issues and the three non accruals what are the conversations you're having with the sponsors and in specifically I'm cure.
Yes, do you see these as either sponsor sort of a little bit of Brinksmanship with you do you see these the sponsors who were strategically willing to walk away because those particular properties are so underwater or the sponsors who just may not be in a position in order to.
Provide that buffer that I'm describing.
It's a good question I think what I'd point to is one we've had very constructive dialogue with with each of our sponsors and we're trying to work as I think we've seen the edict from government or similar entities of trying to just get through what we're seeing as the near term liquidity crunch.
That we're seeing at a macro level, but specifically as it relates to lodging and I guess secondarily retail assets.
The conversations on these loans is no different weve, it's been constructive at the appropriate attachment points were seeing would be ability of sponsors to reinvest in certain circumstances.
We're working through the unique attributes of of each situation, but fanatically, there's nothing that I could point too as uniform among the three assets that were discussing here.
Okay, great. Thank you. Thank you for taking my questions and I really hope you and your families are all well.
Great. Thank you Ryan Thank you.
Our next question today will come from Jade Rahmani KBW. Please go ahead.
Thanks, very much nice to hear from all of you and hope you're all doing well.
Wanted to ask about the amount of cash that you are targeting to hold on the balance sheet.
Sure Jade Thanks again for your thanks forget for your participation question. So.
I mentioned, you know we want to be anticipatory of how much cash will be necessary to meet all of our uses whether that's future funding, whether that's rebalancing any loans, whether it's for any other any other reason.
You know right now we feel we have that adequate amount of cash.
Having said that you know, we absolutely want to be anticipatory and so we have lined up a number of options to raise more additional cash you know if and when necessary. Obviously, we're not going to wait till the last moment in anyway, but at the same time, we don't want to overreact.
And do things that longer term, you know would not be beneficial to the company. So just a mentioned a few things out you know as I mentioned in my prepared remarks, we do have about 20 to 25 million of additional cash that we're currently working on to free up a in terms of utilizing capacity we have in F. L. Three which is very.
An important as well as our Aries warehouse line.
In addition to that you know as Byron mentioned, you know I think we have a very strong focus on senior multifamily loans and if you look at our portfolio snapshot at March 31st.
You'll see that we have about 13 loans totaling over 500 million of unpaid principal balance and we do believe on a relative basis, you know senior multifamily loans, probably do offer the most liquidity.
If and should bad time come to potentially monetize some of our assets and the maybe add a little bit more color you know that 13 loans totaling a little more than 510 of those.
Again towing little more than 400 million of unpaid principal balances are not in our F. L. Three securitization in other words, there finance with different warehouse parties and so they would be relatively easy to.
You know get out of those warehouse facilities I forget if we were to look to potentially monetize those loans in some way and then also in addition to that or you know we have about nine loans and they consist of eight mezzanine positions and one senior position odd that are not finance on.
Under either F L three or on any of our warehouse lines.
Again, the balance on these eight positions at about 116 million and again, they don't have any specific warehouse dad or at the health refinancing associated with it. So that would again you had another source of liquidity, if and showed that need arise. So.
To answer your question you know, we have 50 million today.
We're very focused on liquidity, we're very focused on anticipating capital needs. We want to make sure. We have all of the options at the table, if and when they are needed, but we don't feel that we want to pull the trigger too early.
If those needs don't arise. So you know we are very anticipatory, we're ready, but we're going to do it you know if and when the right moment rises.
Thank you.
Turning to repayment expectations.
What are you expecting as sort of minimum levels of of repayments are you expecting any repayments, let's let's arrange to think about and a related question would be whether you were talking to any borrowers about any discounted pay offs.
Sure, maybe I can start and.
Brian Please please chime in so.
So in terms of again anticipated repayments of loans.
You know, we certainly do have a number of loans that have maturity dates coming up in 2020 and those are loans in particular that we're working very closely with the borrowers to you know to see what their specific situations are.
Because we mentioned we do think that in the multifamily sector without getting into any particular alone you know we do have.
A number of loans that do have 2020 maturity dates.
And we do believe those are loans that we will be working most closely with to see what their refinancing and or sale process would be to a you know to meet the maturity dates of the loans. Alternatively, we could again as we've talked about you know.
Sell any of these loans as well again as a way to you know monetize monetize the value. We have in these loans. So again I don't think I have a specific answer for you in terms of is there a minimum pay down.
As I mentioned before for liquidity planning purposes, we're making the very conservative assumptions that essentially little to no repayments occur in 2020.
That is obviously very conservative viewpoint, but we think one that's prudent to take in this environment. So that when we plan our liquidity over the next a you know eight months that that's the underlying assumption that we're making but having said all that we're working very closely with each of our borrowers to make sure that if there are able to refinance.
Even if it's not under ideal terms, but they are able to finance that they produce but that that they pursue those strategies to make that happen.
Unless it last thing I'd add there Jade and tickets.
This book is also comprised primarily of loans to bridge the improvement of the underlying asset so as assets have gone through their lifecycle and our borrowers and our capital has has provided.
The cash in order to improve upon these assets and that's in many cases resulted in improved leasing to either.
Improve occupancy and multifamily assets or in certain instances get credit tenancy with long duration leases as was the original business plan.
So as that those investments come.
Through the normal course of their lifecycle and mature.
Those sponsors also I realize on the value that that they've created and while capital markets may not be perfect across the board, we still see liquidity for credit tenancy and we still see liquidity for multifamily assets and while difficult to predict we do believe in certain instances that wasn't just repeat.
Thanks, I wanted to ask one last question sort of a high level question.
But just touching on acres historical focus you expect number one a secondary markets to come back faster than gateway cities based on less density and being quicker to move beyond Lockdown secondly.
What gives you confidence that multifamily credit will hold up this cycle, where in the last cycle. We had access homeownership, that's built back into the apartment space and.
Boasted occupancy that.
[noise] with respect your first question regarding Gateway cities, I think you've got a little bit of a push and pull and which capital flows have historically the towards and been more consistent in those cities, but obviously the population concentration given what's occurring today.
It could potentially run counter to that I think that that thesis that we've always had at acre and we'll continue to have is that we don't expect to be an index of property values in any given market worth throughout the broader landscape and we think that we've selected and we'll continue to select assets that will outperform again.
Markets, whether it's a gateway city, where secondary I mean, if you've seen where we've invested over the previous quarters. It's largely been in areas that will benefit from tax migration, so lower cost areas and that was a response to that secular shift in the population and the company.
Is that are better tracing that population movement.
And also just the fact that those gateway cities were also price to perfection and in many instances. So we've we've been moving away from them historically, and we would expect that to continue.
Thanks for taking the questions.
Of course.
Our next question today will come from Stephen lots with Raymond James. Please go ahead.
Good afternoon.
I'm glad to hear from everybody, who hope all are well.
I will start maybe with I think with paid sick when the data a with a LIBOR breakout appreciate the color on the LIBOR floors.
Can you maybe help me think about obviously, there's been a tremendous benefit there with with the LIBOR declined since quarter end, but you know on the opposite side takes it how do we think about the the recurring nonrecurring items origination fees the repayment fees, how much of Q1 was from that or how.
How how much of a declined we expect with that largely Norway and how much if any will be offset by modification fees that you you may charge and any modification.
Sure Steven Thanks.
Yeah. Thanks for that question.
No I think a number one I think our LIBOR floors have served us well in a very volatile LIBOR environment, a and one that you know right now has been very beneficial to acre in terms of maintaining very strong overall unlevered effective yield a again.
By you know very challenging conditions.
In terms of you know in terms of origination fees as you mentioned you know clearly that's been.
Nice part of our earnings stream in the past and the way we recognize origination fees is that we amortize it over the expected life at alone. So if we receive or a one point origination fee on a three year alone we're not going to recognize that upfront, we're not gonna recognize a whole 1% up.
Prime we're gonna recognize it and amortize it over the three years and so you'll still see the benefit of origination fees of originations that we have done in the past.
Come through.
Through our earnings you know similarly, I would say that you know if you look at our our financing costs our financing costs a when we borrow money is from our you know our lenders. We also pay origination fees on those loans on those liabilities and again those are also amortize over.
Were you know I do you expect the life of those financing facility. So in many ways from both a cash perspective as well as from a earnings perspective, both GAAP and core.
Those two tend to not exactly certainly by any means but those two into you know offset each other to to a pretty good xtampza ER and therefore, I don't think origination fees or origination.
Expenses that we would have are going to be a meaningful differentiator between cash flow versus our earnings.
Great appreciate the color on that shifting to the hotels and.
You know looking at the ones that are you're still accruing interest for so pretty unique locations across the board. So I guess a couple of questions here just trying to get a gauge on this so this asset class and your exposure you know what is your feedback from those more borrowers that are that are still paying given there's citic locations and what they're experiencing.
You know any modification discussions you're having with them and on the on the other side I know you in your prepared remarks, you talked about no one counterparty epic has more than one hotel alone.
I do need to modify one of these loans do you already have approval from your Counterparties to do so if so what are some examples of what that encompasses I'm trying to get idea of where are the ones are still accruing interest for our performance standpoint, and what's your option bar to address it if there and stressed environment.
Sure. Thanks Steven.
Again, it's tough to point to.
Any overarching theme other than obviously, the economic downturn and lodging being somewhat tepid disappear for their risk that we're seeing overall, though as I pointed out my prepared remarks. These are generally a limited or select service hotels and the reason that's important as the expense.
Slogan, a full service hotel specifically and.
Some of the Gateway cities, we mentioned earlier, we'll have a very high expense load. So beyond just debt service operating expenses will create a pretty significant holding that and the income statement that we'll have to be filled somewhere so the fact that we've invested one and certain portfolios. So.
That diversity, just within our specific investment and the Optionality.
In terms of the way you potentially restructure those types of transactions and the limited drag from ongoing expenses.
I think is an important factor to take into account.
With respect to your question regarding correspondence or how we them work with our senior lenders.
Not to speak about any thing specifically, but to the extent that were agreeing a sponsor to have restructured and anyway and that's done in concert with our senior lender and as you know we've got a whole capital markets team to manage that communication and the overall relationships that we had and the fact that were very forthcoming.
Communicate regularly with our partners on the finance side positions us very well, there, but specifically to the extent we were to extend the maturity date of alone for instance that might be done in concert with a payment from the sponsor guidance a pay down of sometime in the like and to the extent that was the case than that.
Would be passed won in many instances to the senior lender.
The kind of go along with that restructure but all of those conversations to date have been extremely constructive.
Great and then to tie that back to the first question. If you were to do that and extend the duration would you then slow down the amortization of the original origination fee because it's now over a longer period of time.
We would yes, yes, but we thought that the.
Yeah, we thought the loan what's going to extend a and in fact is particularly if we modified alone. So that it doesn't in fact extend a we would amortize the original remaining balances he over the long longer time.
Great and then my final question appreciate the time to pre funding facility or something unique that others don't have can you maybe give us.
You know any detailed I mean it.
I know it was there to help manage cash flow and availability at what point do you see liquidity or is there a leverage level are you get comfort around a pay off that you start to prefund loans on that facility is that all of a Maxwell linked you can leave them. There could you go out and do a bunch L. Plus 15 loans now and pulling down in six or 12 month you know.
And then you know from a risk standpoint Gotta go the other way if you have financing problems in your portfolio can you can you go backwards and and move along by back their temporarily or is it simply for prefunding only or any color around that would be great. I do think this is unique feature baker that others don't.
Sure no. Thanks for thanks for putting that out Steve and Yeah. We do think got the Aries warehouse line is an incredibly important an advantageous tool that we have that acre and certainly one of the huge benefits that we at age or get from being managed by Irrs management or is there is warehouse on the we have.
You know traditionally and certainly the primary purpose of the areas where outline what to do you know what you stated Stephen which was to allow us to originate loans that exceeded the balance sheet capacity of acre at that moment.
Put that on the Aries warehouse lines, so that when a loan paid off within acre or other liquidity I was available and acre there would be a readily stable of loans that we get pulled down and not incur that drag of cash on the balance sheet that was not deployed having said all that.
I do think we are.
Looking to if you want to call it reverse engineered the U.S. So that if acre is looking for more liquidity rather than trying to I'm trying to invest its liquidity you're trying to create more liquidity a there is a possibility.
Reversing a direction so that a balance sheet loan that acre holds directly today could be sold to the Aries warehouse vehicle and thereby free up capacity and free up.
Liquidity with an acre so that is certainly a possibility and certainly something that we are absolutely looking into.
Well, that's great color by up and wondering if that was potentially an option and it sounds like it's something you guys have been working on or at least considering so that's good to hear and.
Some point coming out of this I feel it's gonna be really attracted to chip to off that so I think that roll off.
You don't allow you guys do a faster than others, even if your stock valuation may be lagging that terms. So thank you for the comments and have a good weekend.
Sure. Thanks, so much.
Showing no further questions. This will conclude the question and answer session. At this time I'd like to turn the conference back over to Brian Donahoe Classic remark.
Thank you and I want to thank everybody for joining the call today and I also want to thank the team an acre that's working so hard to best position us moving forward.
I'm very proud of the team.
Tom view, we appreciate your continued support of acre throughout this unprecedented disruption.
And we look forward to speaking you get to you again soon on our next earnings call or in the interim Thank you all for joining.
Okay.
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