Q2 2020 TPG RE Finance Trust Inc Earnings Call
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Thank you.
Good morning, and welcome to TPG Real estate Finance Trust.
Second quarter 2020 conference call.
I'm joined today by Greater Guggenheim, Chief Executive Officer, Thoughtfully, Chief Financial Officer.
And Bob will share some comments about the corridor and then we'll open up the line for questions.
Yesterday evening, we filed our form 10-Q.
Sure the press release, where the presentation of our operating results.
All of which are available on our website in the Investor Relations section.
I'd like to remind everyone that today's call may include forward looking statements, which are uncertain and outside of the company's central.
Actual results may differ materially for a discussion of some of the risks that could affect results. Please see the risk factor section of our most recent 10-K and 10-Q reports.
We do not undertake any duty to update these statements and you should we will also refer to certain non-GAAP measures on this call and for reconciliations you should refer to the press release and our form 10-Q.
With that it's my pleasure to turn the call everybody Guggenheim Chief Executive Officer, TPG Real estate Finance Trust.
Thank you Debra.
Good morning, and welcome to our second quarter earnings call.
Well the equity and debt capital markets indicate we're in a recovery, we expect to continue to see significant volatility.
The time it will take for us to meaningfully recover is on no.
With U.S. aircraft, but a relative stand still and office attendance very low real estate you know our continues to have downward pressure.
Although we believe the trough is behind US we operate in an environment, where there is no clarity regarding near term economic conditions.
Additionally, there are numerous factors that will continue to affect the slope of the recovery period virus spread vaccine the election relations with China Tonight, just a few.
In this environment, we are defensively focused.
In particular, we're taking the following steps to best position. Our company first we have added to our senior management I am delighted to announce that Matt Coleman joined US This week as president of the right.
That's experience with TPG is real estate equity investing business prior work out experience during the great recession, and his legal and operational background brings valuable experience and perspective to our business.
Matt is very familiar with TRP as he has been continued continuously involved with us starting with our inception in 2015 through the IPO in 2017 into the present, we look forward to partner with him.
Second we're focused on liquidity a key driver of liquidity is the timing of loan repayments during the first half the year repayments were 321 million.
Repayments in the last two years prior to March generally occurred significantly earlier than we had anticipated or wanted driven in large part by the then continued spread tightening and borrower's ability to increase proceeds in a refinance.
This phenomenon has stopped.
Borrowers are not rushing to repay despite low lie bore in treasury rates is they expect you know why will improve as Cobra gets under control and the economy rebounds.
Despite this we are aware of several potential repayments in cases, where borrowers are in the process, a refinancing or loan or selling the underlying properties.
Our primary use of cash is to fund future draws for Capex.
Kinda improvement in leasing commissions and interest reserves on our existing book, we have only 15 million of construction loan future fundings under our one construction loan and the remainder of our deferred fundings totaled 420 million through December 2021.
As a reminder, we receive financing from our lenders to find that's up to approximately 65% of these future funding draws.
During the quarter, we decided to pay down our whole loan credit facilities by approximately 158 million or 8%. This reduced our advanced right on loans pledged to our bank lenders from 76% to 68%.
Our objective was to reduce risk in the portfolio given the uncertainty of the timing of an economic recovery.
Also we continue to evaluate parcels of individual loans or interest on loans, where we believe it makes sense.
Third we are zeroed in on asset management, our senior and junior origination teams have joined with our asset managers to form a single team to manage our assets.
Asset highlights include.
63 of our 65 loans our current on interest payments. This represents 97% of interest payments.
We are in the process of completing a loan modification that will bring this number of current loans to 64% in the <unk>. The number of current loans to 64 in the near term.
The one loan that will remain is not current it's alone on a portfolio of limited service hotels and although the operations are certainly feeling the impact of cobot and shut down. So it is in large part because of a dispute between the two owners that they have not come to the table with additional equity to effectuate a modification.
The properties themselves are Marriott and Hilton branded a limited service hotels in six of the seven had been pipped in the last year current occupancy is in the 40% range, which was approximately breakeven you know why the properties are in dry two locations and are not dependent on corporate group convention business.
This acquisition was originated in 2019 with significant new equity invested.
In the second quarter, we modified six loans with a 458 million unpaid principal balance. These modifications resulted in an accrual of $551000 an interest in the second quarter.
Other than the one hotel alone I referenced Prefunds previously our hotel sponsors have contributed substantial equity to support their properties. Most other properties can support their operating costs from property cash flow.
Office property recruit elections are averaging about 90% in our diversified office portfolio multifamily rent collections bar bars have also been strong and average over 90%.
86% of the property securing our multifamily properties generally our non urban locations and or our low rise properties collections are strong, but we've seen a distinction between bars, who have embraced virtual tours and other non contact leasing strategies and those who have not.
We executed a nonbinding term sheet to provide acquisition financing for an office building in Brooklyn. This financing what we pay an existing TRT loan, which was the subject of the deed in lieu request, we disclose last quarter.
<unk> acquired this asset in perspective bar were under a new loan is an existing bar of T. R. T. Within we have a long successful track record. This is a very experienced office property owner, operator in New York City as well as other markets. The new long requires significant equity contributions from the borrower including cash.
Cash at closing and future guaranteed cash contributions.
[noise], our core earnings for the quarter is $17.5 million or 23 cents, a share which reflects an 18 cents per share or 13.8 million dollar loss on the sale of our 99.3 million dollar loan on a classic multifamily property in downtown Houston.
The primary purpose of this 50% loan to cost loan was to provide lease up financing and additional improvements since origination property stabilized to a 94% occupancy however, due to significant Rick can concessions in the market retail space vacancy and this property is higher than underwritten opex relative.
The newly constructed properties in art and in our view the low prospects for meaningful in a wide growth, we decided to sell the alone.
Well covered and the resulting economic impacts, including Laurel lower oil prices have not help the property our decision to sell the loan was not motivated by coated. This loan has been the subject of continued focus and we were able to negotiate a price, which we felt maximized value to us.
Bolstering earnings is our 167 basis point LIBOR floor on loans, which is 150 basis points in the money our asset whack is five point.
Zero six person that first our liabilities whack of approximately 1.86%.
To conclude we are committed to maximizing the performance of our loan book and continue to focus on maintaining an increasing liquidity in these uncertain times I'll now turn the call over to Bob.
Thanks, and good morning, everyone. A quick review of operating results for the second quarter, we generated GAAP net income of $42.9 million.
52 cents per diluted common share.
Net income available to TRG EPS common shareholders was 40.1 million also 52 cents per common share and core earnings was 17, and a half million or 23 cents per diluted common share.
Net interest margin was 44.2 million up 2.1% from the prior quarter.
We had no loans on non accrual at June 30.
Paid on July 14, the 43 cents per share dividend relating to the first quarter of this year and we paid last week on July 20 fours.
20 cents per share dividend declared on June 16th.
Book value at quarter end was $16.55 per share an increase of 49 cents per share.
Primarily to the issuance of warrants in connection with the series B preferred stock we issued on May 20, Eightth two a fund managed by Starwood capital Group and GAAP earnings in excess of art 20 cents per share common dividends.
Our second quarter results had seven several drivers first net interest margin.
NIM grew quarter over quarter by 2.1% due largely to the positive benefit of our in the money LIBOR floors on 100% of our loans.
Combined with non zero LIBOR floors on only 5% of our liabilities and that combination remains an important driver of our net interest margin.
All of our assets and liabilities are floating rate at quarter end, our weighted average LIBOR floor was 1.67%.
In comparison LIBOR at quarter end was 16 basis points.
We continue to explore strategies to cost effectively preserved as positive margin against fluctuations in rates.
Expenses were up 26% quarter over quarter.
Due primarily to nonrecurring kobin related expenses of approximately 2.9 million.
We continue to manage tightly our controllable expenses, but we recognize the need for professional services to help us manage the business.
The base management fee was virtually unchanged from the first quarter, we paid no incentive management fee in the second quarter, nor did we in the first and we will not until we earn back overtime. The law sustained in the first quarter.
No loss expense was actually a benefit or income during the second quarter of 10.5 million because the decline in our seasonal reserve of 24.3 million net outstrip the loss on sale of 13.8 million incurred from the sale of that first mortgage loan. The credit described in summary, the loans realized loss.
Materially less than its useful related loss reserve that we booked at March 31.
We held higher than normal cash balances during the quarter for defensive purposes, ending the quarter with roughly 300 million available liquidity.
Adding 173 million of cash on hand net of cash we are required to hold for covenant compliance 46.2 million of immediately available funds under our credit facilities and 81.3 million available for reinvestment from our second see yellow FL too.
It was a very busy quarter for us on the capital markets from where we raised 225 million a preferred stock.
Leveraged to aggregate borrowings under our existing secured credit facilities by 157.7 million roughly 7.7% of the Outstandings, we extended maturities on three existing credit facilities, while simultaneously rightsizing the commitment amount of two of those three facilities, we move certain existing loans.
Of course, yellows and borrowed and repaid regularly with our repo vendors in the normal course of business.
We issued 225 million of series B, 11% cumulative preferred stock and we hold an option to issue up to $100 million more before year end in two tranches that $50 million each there's capital buttresses, our capital base. During these uncertain times with size to address or expected capital needs and aligns us.
Starwood capital group, one of the strongest investors in commercial real estate space.
The voluntary de leveraging payments, we made in late may which totaled $157 million reduced our average advance rate on repo borrowings to 68% from 76%, which implies a lender look through LTV very modest 44%.
In exchange for these payments, we will have a holiday for margin calls for certain defined periods and our work continues to increase [noise] from 51% share of total borrowings that are non mark to market, non recourse and equal or longer dated than our loan investments.
We exercised existing extension options on our credit facilities with Morgan Stanley Goldman Sachs and Bank of America to add at least 12 months of term to each arraignment arrangement excuse me additional extensions are available to us with Goldman at Bank of America, we reduced the financing commitments to avoid unnecessary fees, but we did retail.
In options to increase each facility to 500 million at a future date.
The weighted average final maturity of our secured credit facilities is now 2.3 years and these facilities represent 49% of our current borrowings.
Non recourse non mark to market borrowings represent 51% of our borrowings are to see yellows represent almost 48% of current borrowings have final rated maturities of 2030 Gore and 2037.
But they're trying to maturity dates are tied to the repayment behavior of the underlying loans across both yellows. The weighted average extended maturity of the loans. So financed it's about 4.3 years.
During the quarter, we borrowed a total of 23.5 million from four of our repo lenders in connection with the funding of 62, and a half million of pre existing loan commitments to our borrowers.
During the quarter, we recycled 64.6 million of CLL reinvestment capacity generating 22.6 million of cash for to your TX net of debt repayment on the loans contributed.
That capacity was created by a partial principal payment the $15 million on one of our hotel loans and the removal in refinancing outside of course yellows of an existing loan.
This recycling will remain available to us until to see yellow reinvestment periods expire in the fourth quarter of 2020 for FL too and the fourth quarter of 2021 for F. L. Three all subject to loan repayments to create the capacity I just mentioned.
And finally with respect to leverage at quarter end, our debt to equity ratio was 2.8 to one which is consistent with our long term historical trends and comfortably below our financial covenants.
Regarding Cecil at June Thirtyth, our Cecil reserve was $58.7 million or 76% 76 cents per share a net reduction of 24.3 million over the prior quarter.
A couple caused the decline was the sale in early June I mean, 99.3 million dollar first mortgage loan that created a realized loss of 13.8 million the removal of that loan from our portfolio and its related Cecil estimates of loan loss reserves resulted in a reduction in the seasonal reserve of 24.8 million.
The net impact of these offsetting factors.
[noise] plus a net increase in the general Cecil reserve about half a million dollars was to increase our net income by 10 and a half million dollars.
Expressed in basis points against the total commitment amount of our portfolio. The seasonal reserve was 104 basis points as compared to 144 basis points at March 31st.
On a same store basis, our C.. So reserve is slightly higher than the 101 basis points at March 31, which reflects our continuing caution regarding the co that into coping impacted economy and its impact on commercial real estate performance and values.
We independently as fast one of our 65 loans, which is a hotel loan the credit described earlier because it met the GAAP guidance for doing so this collateral dependent loans contribution to the seasonal reserve was less than $2 million and was estimated using discounted cash flow analysis.
The macroeconomic assumptions embedded in our Cecil analysis remained very conservative.
We're three months deeper into this coded crisis, but our analysis assumes where no closer to a recovery.
We do expect quarter over quarter changes in the <unk> Reserve may continue to change materially in responses to cover the macroeconomic assumptions observe transactions in the investment sales and loan sales markets and the actual operating performance of our loan collateral.
Our weighted average risk rating measured on the amortized cost decline quarter over quarter to 3.1 from 3.2, reflecting the sale of Onefive rated loan classification to five from four of the hotel portfolio loan ready described and the upgrade to two from three of them multifamily loan based on performance that exceeds underwriting.
We modified six loans during the second quarter to allow among other things borrowers to it grew 50% of interest due for up to six months at June Thirtyth, we accrued approximately 551000 of payment in kind or pick interest.
Interest collections during the quarter were strong and we had no nonaccrual loans at quarter end.
Future performance will depend on many factors, especially the pace and the strength of the reopening of our national economy and with that we'll turn the floor excuse me will open the floor to questions operator.
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One moment, please well we pull for questions.
Our first question is from Stephen laws Raymond James. Please proceed with your question.
Hi, good morning bread and Bob.
Bigger first Greg you could talk maybe a little bit about the the cyclone modifications.
You know.
Well that's those discussions go you know what the give and take SAR.
I would assume the existing wide work floors will remain in those those loans as it goes through the through the new duration, but could you maybe provide a little bit of color around that.
You know.
How big how many more modifications from here I know you mentioned, one a in process, but but additional color on those conversations will be great.
Sure I have the loans that we modified and the second quarter.
Which we mentioned there were six of them or involved some element of deferral of interest and then no case was the deferral of interest greater than.
50% of the monthly service do and no pace was the period that we allowed any deferral of interests greater than six months in many cases. It was significantly less these were all hotel loans into in two of the six have no deferral of it.
Interest and they each required the sponsor.
Making significant equity contributions to the property.
Either upfront or on an ongoing basis to cover all the other costs and expenses associated with the hotel plus of course, the the 50% or up to 50% of deferral of interest.
And in the <unk> in one case that bar were contributed equity representing 13% of the loan amount.
Of which two thirds of that went to pay down the loan and the rest of that went to a fund in interest reserve a and in the and in other case and in many cases.
The the the flags of these hotels have allowed the borrowers to access FF any reserves to cover operating costs in debt service.
And we allowed that that is well pursuant to these modifications.
Oh, we we are working on as we mentioned one modification and we have completed a couple of modifications up it you know post the end of the the second quarter and these are generally for hotel properties, which are you're not having the most.
Yes.
Great appreciate the color on that Red Oh.
I guess switching property. It's for most would tell you mentioned all hotel loans to two office you know your largest property type exposure can you give us any color just started discussions with borrowers.
However, you would like to dissect it whether it's gateway city versus non gateway or maybe central business district versus more you know.
Outside the downtown area of business office complexes can you talk maybe a little bit about.
What those borrowers are seeing how those discussions are going and and differences in the demand and maybe how you expect performance to be.
Inside that property type.
Sure well it.
See you did the I guess the city's people are most concerned about that the urban cores and in New York City, we have.
Two main office properties and well really 311 is classified as mixed use because there is a component of retail but the primary use of that property is office and of these three <unk> for the purpose of this call up refer to them as office I'd. These three office Park.
But he is one is 100% leased to like very strong tenant for 15 years or the other is 100% leased and 50% of of the tendency or 47 to be precise is leased to.
One of the most successful online streaming movie companies.
For a long period of time, and it's doing quite well that that tenet and then we have one that is a mixed use property Oh, we have really one mixed use a property in Manhattan that has more of a diverse tenant see it happens to be institutionally own by one of the.
Top three largest insurance companies.
And a very very strong office focused you know private equity operator of the of the property. So that's really our New York exposure, we don't really have downtown exposure in some of the other major cities that people are focused on like like San Francisco Los Angeles.
Chicago.
Our our properties are pretty diverse a we have some.
We have some properties in sort of Silicon valley outside San Francisco that is one one loan that is life science, we have one outside San Diego that fly science.
But I would say that it's pretty diverse markets and not a tremendous amount of of the you know cities that people are concerned about.
<unk> locations in at least the in the urban core I.
I don't know if that helped you.
That's helpful quite a lot of discussion seem to be taking place on the office or category and location clearly being at the center that discussion Oh, it but I, but also I'm sorry to interject, but I think you asked how the discussions are going with these borrowers and and really the bar. These the as I mentioned the the.
Office rent collections are up in the 90% range in our office borrowers have not really theirs. They haven't come to us like our hotel borrowers have asking for some type of you know interest deferral or other types of modifications.
That's great color appreciate the comments.
But the risk of asking a question that may need a call, but so cecil and the assumptions behind that you know clearly you. The reserve in March was a a bigger number for the loan that was sold and then what was realized on sale.
Can you can you talk about those assumptions is that simply conservatism did something change from March to made or March to the sale that makes it a unique situation.
Or is there likely conservatism across all the assumptions.
In seasonal so maybe no that's very general broad question, but any color there would be great.
Sure Good morning, Stephen lets if we can't break that down into.
Two topics and take the second one first I I would say that the the results of the sale of alone when compared to the Cecil reserve in our view largely reflect.
The team's ability to identify a buyer for that note that had a materially Roes are Rosie your view of.
Houston and of CBD, Houston multifamily than we did.
So in that regard, we found the outlier and executed with yet.
With respect to our views on.
You know the conservatism conservatism of our.
Economic assumptions.
And everything else all the other judgmental factors that are involved in the Cecil Reserve you know we came out of the box in March.
On a conservative bent.
You had prepare to schedule in your research that lined up reserves measured in basis points across the space and you know ours were near the high end of the range frankly.
This quarter end, none of the loan that was sold it appears that our reserves are you know more in line.
Relationship wise with our competitors.
But we were conservative out of the box you saw that we had we downgraded some higher levels to for all but one of the hotel loans in our portfolio at March end and risk ratings from an important driver of loss reserve estimates, so I think that quarter over quarter.
We remain very conservative in our macroeconomic assumptions.
But I think the market should evaluate our c. So reserve in the context of us having adopted a very conservative stance beginning in March.
That's helpful. Because you're you're you're correct. The reserve level, certainly are pretty wide range across all the sector.
Last question I think a quick when the loan that went from four to five non accrual or how much interest income did that contribute in Q2 that we I assume going forward, we'll go to pay down the <unk> about the carrying value of the law.
Yeah, and generally speaking we use the cost recovery method.
GAAP permits.
Different different approaches.
And we can come back to you on on the precise amount, it's not material in comparison to the Companys NIM as a whole.
Right fantastic. Thanks for taking my question, both Youve grown up.
Thank you.
Your next question is from Steve Delaney from JMP Securities. Please proceed with your question.
Good morning, Grad, and Bob and Matt Welcome I look forward to meeting you.
If I could start you mentioned that there was a impact on court T.S. from the Houston loan sale I apologize that I wasn't writing fast enough to keep up with that.
Yes.
The loss on that was there a realized loss was $13.8 billion, which impacted core earnings by 18 cents.
18 cents, Okay, and and I think this is correct as far as the impact on core we should always just focus on realized losses, rather than anything that's going on within c., So whether that would be general or specific is that correct.
Yes, Okay, great and you highlight for us I guess age each quarter.
When when you actually have a realized loss okay. Thanks for the clarity there.
I guess on LIBOR floors, you know really helping helping out a lot for the group as we as we you all work so hard to work through these credit issues, but you know 167 basis points 15 cents it sounds like a impact quarterly earnings.
You are sitting down maybe beyond just start till you get a you're describing how you met with your hotel borrowers and work through modifications, but just a broader general sense.
Should we assume that part of that the asking on behalf of a borrower, whereas you're going through discussions for modifications should we expect that you'll be getting you'll be receiving requests to either lower remove LIBOR floors and as we roll forward do you expect that weighted average floor to.
To decline say over the next six to 12 months.
And none of our modifications have we change the the interest rate for the floor.
On on our loans.
Interesting.
Okay great.
When we think the spread goes up if you like some of the negotiations maybe can you give us some relief on the extension test right that we have in a year and a half and if we may trade that off for a more spread it certainly try to get as big a pay down that's the priority as we can as much as we can't as the priority, but it's.
Some cases, we might actually increased the spread.
Interesting, okay that makes sense the loan sales it sounded like Houston situation was was sort of a one off and that youve found the strategic local strategic buyer that market.
Intel, but just more broadly is there or would you consider further loan sales I guess just to maybe take a lower your asset management burden do you expect the market will will develop a secondary market will develop their given what we read about all these probably.
At equity funds.
Raising distressed debt money.
Well <unk>.
We would consider ourselves so yeah, we would look at <unk> a share if someone approached us too to buy alone at par regarding our hotel loans out. We don't feel now is the time to be selling hotel exposure. We think most of the distressed that's going on.
With hotels is co that an economic shutdown related and <unk> and you know our hotels occupancy really is is is varied across the board. We have one hotel that is not reopened that we'll open up supposed to be opening within the next 30 to 60 days.
I haven't seen though the latest that they didn't it it may be sooner than that but it was scheduled to open in July and then I believe that got pushed back to August.
And so it has zero percent occupancy on the other into the spectrum. We have a hotel that has 77% occupancy and then a lot in between in general for limited service hotels breakeven occupancy is around 35% to cover operating costs and you know if it you have a year.
One hotel and in an urban market like New York City, which we don't happen habit.
That would be up the higher extreme maybe 50, 55%.
Occupancy but.
We we don't believe <unk> now is the time to be selling these hotel lends because that people are using the discount rate today in looking at an IR our that reflects the uncertainty regarding the timing of the recovery. So once that uncertainty diminishes through a medical achievements for a batch.
I mean are through actually Yeah. Then the then we believe the discount rate and that investors would require a drops materially and you'll realize a better result for myself.
Makes sense well. Thank you both of your comments I appreciate it.
Thank you Steve.
Your next question is from Rick Shane win with JP Morgan. Please proceed with your question.
Sure. Thanks, guys for taking my questions. This morning, Oh, Yeah, it's interesting comments related to incentive see and I appreciate that.
You know you guys have high watermarks and that's fair for investors on I am curious how you guys think about that given the difficulty in a given just sort of the nature of economic Oh.
Oh regaining that high watermark, any incentive and the ability to capture the incentive fee going forward.
How do you think about that and then he can reuse the work.
From an incentive perspective, I do think it's a good saw him a welcome Matt that TV gene has you know is reiterating they're committed to the vehicle, but I do wonder the challenges with incentive.
Being would use probably burberry.
Well.
Rick It's good question from an analytical standpoint.
The provisions of our management agreement, which is you know our.
Very very similar to those of everyone else in the publicly traded space.
For us to be into money on the incentive fee or the mi industry to be in the money on the incentive fee and put it would be to be obligated to pay it.
Several tests need to be met.
One of them is that humility of core earnings needs to be positive as measured over the.
Preceding 12 quarters.
So the simple math, there would be could take a look at what our cumulative.
Core earnings were assuming that last quarter, the first quarter was to equals zero.
And then divide that by what you think our run rate core earnings are going forward and no. It's it's not immediate but it's it's close enough that I think that TPG.
And the employees of the managers or can see it and they know that it's there and they know that no by doing the work that credit articulated earlier with some cooperation from the macro economy that.
We can we can get there, but in the interim our duty is to our shareholders and to maximize the.
The value of the company and that's largely about a ensuring that the credit outcomes on our portfolio RF is positive as they can be and we continue to maintain a strong.
Liability and liquidity profile.
But anything that you'd want to amplify.
I think you covered it very well thanks.
Yeah look and I appreciate that obviously.
We've all known each other for a long time and I.
And highly highly aware of your.
Individual personal commitments and integrity work around that so it's an interesting question in terms of motivated.
Sort of the next level of managers and employees.
And it's certainly an important considerations.
He is being supported a which is good.
Yeah, the last point, Rick I'm, sorry to interject, but I think it warrants emphasis.
You know T. R. T X is strategically it remains a very important part.
Of the larger TPG investment.
Platform, we are not the only a permanent capital vehicle that the from his sponsor CSL ex the.
You know the business to business lender, the BDC type lender.
He is very important in a very successful platform as well.
No, but this is an area of true commitment and emphasis by TPG is a global firm.
Of that all of us can assure you and everybody else on the call.
Great. Thank you Bob <unk> I do appreciate that and the other thing I just wanted to circle back on this last quarter you guys had discussed.
A property where the sponsored it.
Presented to you didn't get the notion of a deep.
And that loan is still on the books exactly the way was carried last quarter I'm, assuming that those conversations have taken a different of course, but I am curious is your in conversations with your sponsors keep your finding any other sort of surprising scenarios that was.
Alone, but at least on paper looked like a really good situation on a relative basis and I'm. Just curious if your final strange incentives are motivations that are driving.
Unexpected conversations.
I.
We're not seeing that in the portfolio that was.
You're correct that this one was not something we anticipated.
And you know I think it it was related to perhaps divergent views among the ownership.
But yeah. This asset is is the one I mentioned in my comments that is being acquired.
By <unk> <unk>, a bar that we've had.
Experience with and that is quite capable and in operating office properties and turning situations around we <unk>. We we the only other property I think that would come to mind would be the one that that is we write it number five that is the only.
Hotel property.
That the borrowers have not come to us a lot to with a meaningful a proposal for a modification and it really surprises us because we think that these being limited service and drive two locations that it would be in their economic best interest to enter into a modification on this on this property is.
Opposed to letting it go past due for three months, so that would be the only other one that I would call surprise the rest of the portfolio. So far you know no no unexpected a news.
Great Yeah that that definitely sounds like the the sort of prototypical idiosyncratic situations that that's a good example, thank you so much guys.
Thank you.
And again as we might lose you have any questions. You May proceed star one telephone keypad to answer the question Q.
And our next question is from George I'm on these from Deutsche Bank. Please.
Please go see what's your question.
Hi, Good morning gotten Bob question wanted to follow up on on Stephens earlier question regarding loan modifications.
As you think about the well beyond the next six months or they agreed upon period between shared checks and and the bars that you've been having discussions with more recently.
You should there be a need for an extension.
The modification yeah, yeah I agree on period.
Could we see further loan modifications at that point or is it likely that those loans would be put a two cents sort of default process I'm just kind of curious to what your thoughts are kind of beyond the agreed upon period ideally.
The longer and better shape, then, but just wondering what what that might look like.
Well you know that that is ER that is the key question and and that is why we highlight how uncertainties time SAR and due to the fact that we just don't know the pace of the recovery and when I travel will.
Improved to help these properties. However, the modifications that we've entered into have required very very significant equity contributions from the borrower. So.
I think since they are still contributing their own cash to these properties are each month to keep them open to pay debt service and cover operating costs and and any other property related expense, we would like to think that they will continue to support the property that's usually a good.
Indicator of future behavior is how their oh.
<unk> treating the property presently in terms of cash contributions. So if this if if the virus spread continues and this current a decrease in and the rising cases reverses and case rises you know start increasing.
Yes, I think it's quite possible there'll be a need for further modifications and we will work with borrowers who continue to support their properties.
Understood and imagine I would just acquiring them additional and a cash <unk> on their part you know what maybe some scenarios that you could think a hypothetical situation if we're able to show.
Well I mean, what we've been willing to do to date is to differ.
Up to or a total of three months interest I mean, the way we get there as we defer a 50% interest over at most six months and in many cases it is significantly less than that Ah theres other reserves a available to the borrower to to such that.
They don't need us to defer the interest payment, but so I would expect them to be similar to that I.
We we believe that these properties will you know recover with the economy, yes corporate business trip.
Hotels will will rebound less quickly.
It'll take a longer for a recovery, but are our leisure oriented properties are limited service oriented properties, which is the majority of our properties a that secure our loans, we think well recover you know as quickly as.
As you know it with the economy. It broadly speaking, we do sense at corporate business travel may be affected.
Long term if not permanently I think people's attitudes to travel has changed a bit but time will tell how a lasting that sentiment is.
Great. That's helpful color credit appreciate that that's it for you today my questions have enough Walter.
Thank you George.
And our next question from Stephen laws.
James Please proceed with your question.
A couple of follow up.
I don't mind, I'm glad I guess first.
What's your borrowers.
How many are have been able to receive some type of funding either to Peru employees or or something that they are leaning on do they need additional.
Support from the government or are these largely borrowers that really don't qualify for anything under these programs. You know can you provide any color around that.
Well most most of our hotel bars did qualify for the PPP funds in and have already received it I don't know with their qualify for additional future funds <unk>, we haven't heard of them receiving more funds up but the rest.
Our borrowers were not aware of them.
Taking advantage are benefiting from the governmental programs many of our borrowers are our large institutional type entities.
And have not <unk> frankly have not needed this isn't it.
Fantastic.
And then lastly on the Starwood capital Group I know, you've got the second and third options.
How should we think about that I'm guessing, it's unlikely that would be drawn down for office of reasons. So I mean is there a.
Threshold, you're willing to share or some color or as you think about you know what what would prompt you to look to take now and that that second.
Round as it is that liquidity under balance sheet as something that portfolio is that a shift in the long term outlook, maybe what's the thought process that would go behind drawing down the second and possibly third options on that.
Yes, we renegotiated to have those you know because of the tremendous amount of uncertainty and opaque nisone in health. This economic recovery will will pan out and you know it at this point, we haven't made any decision.
To draw it or not to drive, but as you pointed out it would not be for offensive reasons. It would be for defensive reasons. If we found the economy.
Taking a really severe turn.
To the negative you know, it's there to help us but at this point you know we haven't made.
Made a decision on how we're going to proceed with that.
Great well, certainly a viable option so not take the dilution or the high cost of financing unless you. We feel like you need so a great. Thanks for taking my follow up questions.
Thank you.
We have reached the end of your question and answer session and I'll now turn call over to ready to lead time for closing remarks.
Well. Thank you all for joining us today, and we look forward to another eventful quarter and speaking with you.
At the end of third quarter.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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