Q4 2021 TPG RE Finance Trust Inc Earnings Call
Reading welcome to the TPG real estate Finance Trust's fourth quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the form of presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded and I'll now turn the conference over to your host Deborah Ginsberg. Thank you you may begin.
Good morning, and welcome to TPG Real estate Finance Trust conference call for the fourth quarter of 2021, I'm joined today by not Coleman, President, Bob Foley, Chief Financial Officer, and Peter Smith, Chief Investment Officer, Bob and Matt will share some comments about the quarter and then we'll open up the call for questions.
Yesterday evening, we filed our Form 10-K and issued a press release with a presentation of our operating results all of which are available on the 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 control actual results may differ materially for a discussion of some of the risks that could affect results. Please see the risk factors section of our 10-K.
Do not undertake any duty to update these statements and we will also refer to certain non-GAAP measures on this call and for reconciliations you should refer to the press release and our 10-K with that I will turn the call over to Mike Polen President of TPG Real estate Finance Trust.
Thank you Debra and thanks to everyone for joining this morning's call.
I'm pleased to be covering another strong quarter for TR T X and an excellent 2021 overall.
Before I dive into the specifics of our performance I first wanted to address the successful conclusion of our CEO search process.
We announced in late January we've hired Doug the card at the TPG partner and the CEO of TR T X.
Doug has spent his entire 18 year career up to this point at Goldman Sachs, where he most recently served as the managing director and head of U S commercial real estate debt and the global markets Division.
In this role he had oversight of the firm's commercial real estate debt origination activities, including securitized lending balance sheet lending and commercial real estate warehouse financing as well as commercial real estate securities issuance.
In addition to the strong background in real estate credit, we've gotten to know him well over the last several months and believe that he will be a great cultural fit at TPG Doug.
<unk> appointment is an important next step for TR T X and I look forward to welcoming him as the CEO of the company and of the TPG partner, what he formally joined the firm in late April .
Now turning to 2021 in Q4 performance.
Over the course of last year <unk> made significant strides across a number of dimensions. We grew our loan portfolio by nearly 9% realized interest collections in excess of 99% maintain an attractive 67% weighted average LTV and <unk>.
Closed $1 $9 billion of new originations across teams and strategies, demonstrating strong secular and demographic tailwind.
We also had important achievements in the capital markets front closing a $1 3 billion CRE CLO in Q1 of last year, followed by the issuance of nearly 200 million of 6.25% series C preferred stock, which we used to redeem in full our 11% series B preferred stock.
These accretive financings together with our investing activity drove strong earnings in 2021, allowing us to increase our quarterly dividend rate by 20% in the third quarter of last year.
Looking at Q4 of last year, specifically, we closed 10, new first mortgage loans with total commitments of approximately $650 million.
Consistent with prior quarters in 2021, our investing activity was concentrated in multifamily in life Sciences. Although we closed also one hotel and one traditional office loans, both in strong markets and with favorable transaction dynamics will continue to focus on those themes that we've articulated while also looking for video.
Some credit deals in other sectors that present compelling risk reward opportunities in.
In addition to our theme based investing strategy repeat borrowers and the strength of the TPG platform, where the strength we are distinctive competitive advantages for us in 2021.
Of our new loans more than $785 million and in excess of 40% were to repeat borrowers.
2022 originations have also gotten off to a strong start and our pipeline is robust since the beginning of the year. We've closed three loans with an additional six executed term sheets, bringing closed and in process origination activity to more than $543 million across nine deals.
Pro forma for these closings 47, 4% of our portfolio will have been originated post COVID-19 and.
And as Bob will further describe we closed a new CLO last week and a new credit facility yesterday.
Turning now to the portfolio performance continues to be strong with fourth quarter interest collections of 99, 3% with our la retail loan remaining our only non payer.
Also as a reminder, the Las Vegas land that we took back at the end of 2020.
It was comprised of two different parcels one towards the north end of the strip and adjacent to the Mccarran Airport.
In November of last year, we sold the south parcel of our Las Vegas land position to Mccarran International Airport for $55 million of total consideration.
Our $315 million per acre generating a $15 $8 million gain on sale.
We continue to market and the north parcel and are pleased with the momentum that we're seeing in Las Vegas and the level of interest in this parcel we expect to have an update for you in the next couple of quarters and we'll update you when we have a definitive transaction.
There are also a couple of loans in the portfolio that we continue to watch first as we've talked about for the last few quarters, we're marketing for sale the assets securing our only retail alone that process is ongoing and we anticipate having an update in the coming quarters in.
In addition, we moved to loans previously risk rated as threes to fours. This quarter, both our office deals with business plans that are behind schedule and slower than expected leasing.
Neither is currently in default, but we're playing paying close attention to both.
As we reflect on 2021, we're pleased with the progress made at tier TX across originations capital markets and portfolio performance.
As we sit here in early 2022, we're excited about the strength of the business, our ample liquidity of more than $300 million and welcoming our new CEO .
The lending environment remains competitive but transaction volumes are high.
We are uniquely positioned with distinct competitive advantages to continue to grow our portfolio and our earnings.
I'll now hand, it over to Bob to cover our 2021 and Q4 results in greater detail.
Thank you, Matt and good morning, everyone.
We reported yesterday for the quarter ending December 31, 2021, GAAP net income of $44 9 million, which was up $15 6 million or 53%.
The third quarter of the same year net income attributable to common stockholders of $41 1 million or <unk> 51 per diluted share an increase of 58% versus the prior quarter and distributable earnings of $18 5 million or <unk> 23 per diluted share for the full year, our ratio of distributable earnings to common.
Dividends declared was one two to one.
A quick comment regarding two nonrecurring items that flowed through distributable earnings in the fourth quarter first.
Sale of 17 of our 27 acres of owned real estate on the Las Vegas strip generated a book and tax gain of $15 8 million or <unk> 20 per share.
We utilized a like amount of our $203 4 million of capital loss carryforwards to absorb all of that gain which reduced our taxable income and our dividend requirement accordingly.
The gain was not distributable.
We reduced distributable distributable earnings by $15 8 million or <unk> 20 per share.
Second we concluded late in the first quarter that $8 2 million of the existing 10 million specific loan loss reserve against our sole retail loan was uncollectible and we charged it off at year end.
The $10 million reserve was expensed in GAAP net income in the fourth quarter of 2020, but did not flow through distributable earnings at that time.
It's $8 $2 million charge off does not impact net income in the current quarter, but because it does constitute the realization of a loss previously recognized for GAAP purposes. It does flow through distributable earnings as a reduction.
Excluding that $8 $2 million charge offs distributable earnings from our core lending business were $26 7 million during the fourth quarter of this year or <unk> 33 per diluted share.
Our net interest margin decreased one 8% our weighted average loan coupon declined to $4, 49% from $4 six 2% and a weighted average floor of our loan portfolio declined to 1.1% from 133% from the prior quarter due to loan repayments and loan sales totaling 520.
$3 6 million.
And new originations with initial fundings of about $565 million with a weighted average rate floor of 10 basis points.
Our book value per common share increased quarter over quarter by 22 cents.
To $16 37 per share from $16 15 per share due primarily to the <unk> 20 per share gain attributable to that Las Vegas land sale.
We increased in September a quarterly dividend on common shares to 24 cents from 'twenty.
Which generates an annualized yield to current book value of five 9% and yield to our current common share price of 8%.
For the quarter, our credit loss benefit increased only slightly by zero point $6 million due to continued operating performance across our loan book loan repayments and sales totaling $524 million offset by general loan loss provision recorded in the quarter of $651 6 million for newly originated loans.
Yeah.
The write off of $8 $2 million of existing reserves I mentioned earlier relating to our nonperforming retail alone had zero net impact on our credit loss for the quarter.
Our reserve rate measured as a percentage of total loan commitments was 85 basis points compared to 103 basis points for the preceding quarter.
And our book value per common share before giving effect to our seasonal reserve was $16.97 versus 16 86 in the third quarter.
Yeah.
Super Bowl cost efficient flexible long dated capital is an essential component of our business model our cost of secured debt financing is among the lowest in our industry, which helps us compete for quality loans at modest LTV ratios in the markets and property types that are consistent with the themes Matt mentioned.
2021, and early 'twenty two included significant capital markets activity by our team in.
In 2021, we issued tier TX 2021 F L or a $1 $3 billion CLO with a two year reinvestment period, we extended existing credit facilities with Morgan Stanley Bofa and Goldman Sachs for periods of up to three years, we issued $201 3 million of fixed for life five year redeemable.
Preferred at a dividend rate of six 5%.
Proceeds were used to redeem 225 million of preferred stock outstanding with a dividend rate of 11%.
During the first seven weeks of this year, we extended the initial maturity date of our existing Wells Fargo secured facility for three years until April of 2025, we reduced its total commitment to $500 million from $750 million, but we did retain an option to increase the facility amount to $1 billion.
Last week, we closed T. R. T X 2022 F. L. Five a $1 1 billion dollar manage CRE CLO with a two year reinvestment period, an advance rate of 84, 4% and a weighted average interest rate at issuance of compounded sofa, plus 202 basis points. We also redeemed T. R T X.
2018 F L. Two.
Which in its post reinvestment phase and amortize down to an advanced rate of 74, 5% from 79, 5%, which in turn caused its weighted average cost of funds to increase roughly 45% of the S. L. Two collateral was refinanced in F. L. Five and the remaining 55% was financed on our balance sheet with an existing.
<unk> lender.
The absolute net roe's of those two transactions was between 11% and 12%.
Finally yesterday morning, we closed a new $250 million revolving credit facility with a syndicate of five banks led by Bank of America to provide short term funding of up to 180 days for newly originated loans and existing loans. This facility has a three year term and an interest rate of an arc compliant benchmark.
Plus 200 basis points. This facility replaces a previous $160 million of arrangement, we had in place through mid 2020.
Cumulative benefits of these transactions is to equip us with a low weighted average spread for our debt capital.
Reduced mark to market financing to approximately 24% of our liabilities and extend the weighted average life of our liabilities. We expect to further diversify our capital sources in 2022 to increase flexibility reduce reliance unsecured financing and further extend the tenor of our liabilities.
And our debt capital base with 74% non mark to market.
And pro forma for the issuance of <unk> five the redemption of F L too and the financings related there too the.
The ratio of non mark to market borrowings to total borrowings at year end was 76% slightly above our target of 75%.
During the quarter, we utilized $91 $3 million of reinvestment capacity in our CLO created by loan repayments to term fund six separate loans.
<unk> continue to offer cost efficient nonrecourse non mark to market financing for the bulk of our loan book syndication.
Syndication of senior Parry pursue interests and tailored term loans with or without a b note structures are financing techniques, we use and have used in the past to fund less homogeneous loans warehouse facilities allow us the speed and the flexibility to provide quick financing solutions to our borrowers while retaining the option to fund our investments.
By other means after closing.
Capital recycling continued in the fourth quarter via the sale at par the first of our performing first mortgage loan secured by a portfolio of seven select service hotels.
Generating $87 3 million of sales proceeds and the sale of that 17 acre land parcel at the southern end of our Las Vegas strip.
The sales price was $55 million it generated $54 4 million of cash for reinvestment, we registered a gain on sale of $15 8 million that sale recovered one point to three times the $12 8 million dollar write offs. We recorded in December of 2020, when we acquired this parcel and the related north parcel via a deed.
In lieu of foreclosure.
If and when we sell the north parcel, we intend to utilize a portion of our remaining $187 6 million of capital loss carry forwards to absorb any gains that might result from a sale.
These two transactions repatriated net cash proceeds of 92, and a half million dollars available for reinvestment and new first mortgage transitional loans.
Yeah.
The long anticipated rise in short term interest rates this year.
Historically rising rates benefit our net interest margin because of our high percentage of benchmark matched floating rate assets and liabilities as positive leverage to rates is temporarily dampened by high existing rate floors on a portion of our loan portfolio, which floor as it provided strong interest earnings since short term rates plummeted in early 2020.
The pace at which we returned to becoming fully and positively geared to rising rates will be determined by the results of the race between the origination of new loans with low rate floors, and the repayment of existing loans with high rate floors.
During 2021, we materially improved our rate profile.
Between Jan one and December 31, the share of our loan book with rate floors of 50 basis points or less grew from zero to 33, 7% and a weighted average rate floor declined from $1 six 6% to 1.1%.
Consequently, the risk to our net interest margin from a rapid rise in rates is steadily diminishing.
If the forward curve is accurate and our current internal projections for loan originations and repayments hold true. We expect those measures at year end to be 71, 9% and 53 basis points. Further we expect the crossover point when short term rates exceed our weighted average rate floor could occur in mid 2022.
A few words about credit loan originations in the quarter of $651 6 million reflect our two primary investment themes multifamily and life Sciences. Both in top 25 markets located in high growth low tax states, primarily in the southeast southwest and Western United States.
At quarter end, our loan portfolio weighted average has as LTV was 67, 1% as compared to 66, 4% for the prior quarter.
This measure has remained remarkably consistent since 2018 when the as is LTV ratio was 66, 7% a.
Our risk ratings improved slightly quarter over quarter to three point O from 3.1.
With the exception of about one nonperforming retail alone 100% of our loan portfolio or 68, or 69 loans are current cash pay loans and none are picking.
Due to strong originations and healthy loan repayments, we registered net growth in earning assets year over year of $394 6 million or eight 7%.
At year end 37, 7% of our loan portfolio was originated after March 31 of 2021, which improves the sensitivity of our net interest margin during a period of rising rates.
Finally, we have substantial investment capacity for growth and ample liquidity for offense or defense.
And we held available cash of $245 6 million.
We had available undrawn borrowing capacity of $63 million in unencumbered loan investments and real estate of $128 1 million our debt to equity equity ratio was 236 to one.
Our target remains $3 75 to one.
And with that we'll open the floor to questions operator.
Thank you at this time well be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
<unk> will indicate your line is another question too.
Press Star two if he would like to remove your question kind of a tale for participants using speaker equipment and may be necessary to pick up your handset before pressing the taxable one moment. Please poll for questions.
Our first question is from Stephen laws of Raymond James. Please proceed with your question.
Yeah, Hi, good morning.
First I want to touch on the Las Vegas has a little bit I know, Matt and Bobby both mentioned this but.
You know when we we look at the gain recorded.
Should we look at the math similar I mean can you talk about this asset compared to one that sold and you know are we looking at a 20 or $25 million gain.
That would be realized this year or kind of what do you think the timing is on that.
I think it's I think it's a little hard to say Steven.
<unk> asset.
Some ways.
The center of development in the center of growth has shifted has shifted north.
So that's a good thing we liked the location here Convention center adjacent across the resort World, we like the momentum that we're seeing in Vegas.
It's very different.
The airport, obviously ended up being a strategic buyer for the south.
That's not the case here.
At the same time.
We don't have some of the land use restriction from the north that we would have being airport adjacent so I think we're very optimistic about.
Robust per acre values in the north, but it's a little hard I think to handicap timing.
We've said we don't.
We do intend to be.
Value maximizes here, but we don't intend to be long term holders. So I think we're hopeful that over the coming quarters here, we will have a more definitive update for you.
Great and then shifting over to the origination side, you know life Sciences is up to almost 10% certainly a significant increase from low single digits a year ago at this pace in your pipeline, how big do you see that that getting I mean, the you know four or five quarters from now could we'd be at 20.
Plus or kind of where do you see that settling.
Yeah.
Yes, it's a good question and it has grown and it's grown purposefully because it is it is one of those areas, where we believe that there is something secular happening in that space.
And it's also an area, where we do think we've got some pretty distinct advantages, we've got real synergies with TPG as health care group, We've got a very talented senior advisor working with US who used to run Tpg's biotech business.
Other real estate private equity side, the TPG, where big owners, a top 10 owner in the United States of life Sciences properties and so we believe that we've got some real competitive advantages here.
That being said we're there.
Gonna look to maintain portfolio balance these deals as with any deal are not without risk.
Conversions require real expertise, we're very market picky.
We've done this only with the most talented sponsors and this is an area where our repeat business has been exceedingly high.
So I think for those reasons Stephen this may be capacity constrained.
Some degree because our criteria our strict around what we will and won't do as we as we think about the risks that we're taking on and so my guess is that when we layer on those those criteria that we think 0.2 attractive deals.
This will by nature end up being somewhat size constrained so I don't.
I don't see this.
I don't see this quadrupling in exposure size I don't think that's what we're talking about here. We found some very distinctive areas, where we can express a theme that we really believe in with really attractive risk reward and as long as we can find that we will continue to do it but we're not going to compromise those criteria just to grow in life Sciences.
Great I appreciate the comments this morning that.
Our next question is from Ken head of BP Angel. Please proceed with your question.
Hey, good morning, guys and congrats on getting the <unk>.
A new CEO in place.
Can you outline your top goals and strategic initiatives for the upcoming year and I'm. Just curious if you think you can continue to grow while maintaining the same risk adjusted returns and.
The underwriting that you feel comfortable with and also just if you could put into context I know downtown on the call to speak for himself but.
Given that he has an extensive background in it.
And CRE debt outside of just senior lender.
Lending.
If theres anything else that you can see me.
Making its way strategically into into TRT acts that hasnt historically been there.
Yeah. It's a good question, it's a little hard to articulate the strategic vision for him, but we obviously got to know them well during the process and let me, let me try even with that caveat.
First and foremost Doug buys into exactly what we're doing and the strong team that we're doing it with and the investing philosophy that we've developed at TPG and that that brings.
The earnings growth to this company that <unk> seen over the last year.
So I think theres real alignment of strategic vision here, obviously, Doug as Doug Scott.
Real estate view on credit and talents.
That are extensive and.
That can weather that is expressed in an actionable strategy or not that can only inure to the company into the firms benefit. So those are those are characteristics of dogs that we find attractive.
I would I would caution against thinking at the outset without Doug having a chance to even be in the one day. This hiring represents a strategic shift.
If you if you look at what we've done over the last year. We think we can do more of that Bob talked about the capacity that is resident within our existing capital structure, we're going to keep executing on the capital markets front. We grew the portfolio last year, it's certainly our intent to grow the portfolio with our existing strategies. This year. We think we can continue driving earn.
Ultimately driving dividend growth.
And those are those are the things that Doug is going to help lead this company to do I think as to Doug strong our broader strategic vision.
Those will be question's better asked of him over the coming quarters, but I would just leave you I think with this notion that he buys into what we're doing the way we're doing it and of course, you'll have new ideas and new insights.
And new ways of leading that we're all looking forward to seeing an option.
Yeah.
Definitely makes sense and look forward to getting to know him better and hearing his vision. Once he officially is on <unk>.
Boarded but.
You said that you think you can drive earnings and dividend growth.
And I don't know if there is any timeframe around that I don't know, if that's 2022 or just.
Broadly going forward, but.
The dividend is.
If you look at kind of run rate earnings of 33 cents I know theres a lot of different variables, the headwinds with growth expectations and rates and potential credit hiccups with a couple of loans you have your eyes on save a lot of moving parts, but you know.
Really strong in place dividend coverage now if you think you can continue to grow earnings and dividend growth I'm. Just curious how you think about the dividend in the short term with some of these potential headwinds and what you would need to see to make a recommendation to the board to continue increasing from the current level.
It's a good question Tim.
I'm not sure that I would characterize the situation that we're in now is facing a lot of headwinds, but we've got a we've got essentially a fully performing portfolio. We've got the one retail asset that we've talked about we've got interest collections in excess of 99% where we were.
As Bob said, if our repayments the forward curve and our repayments forecasts hold and those are those are both big assumptions.
We've become positively levered to rising rates here in a quarter or two.
We've got plenty of dry powder.
We've got a good stable of talented borrowers were developing new relationships and expanding our network. All the time. So I think I think we're actually quite bullish about our ability to continue to grow the portfolio.
Drive earnings over the course of this year.
As you know of course, we don't give dividend guidance and ultimately this will be a decision for the board.
But we're.
We're cognizant that we paid the special dividend last year.
It does not generally I think our aim to be paying special dividends.
So we'll put all of those things together and all of those factors and continue to closely monitor this with the board.
Yes.
Yeah, sorry, Matt if I'd use the word headwinds I think variables was really what I was trying to get at so I'm, sorry, if I kind of wasn't giving you guys credit for a lot of the.
The things that are moving in the right direction, right now, but but that that all makes sense.
And I appreciate the comments this morning, I'll hop back in the queue. Thanks.
Thanks, Tim.
Our next question is from Steve Delaney of JMP Securities. Please proceed with your question.
Good morning, Matt Bob and we look forward to meeting Doug on the on the first quarter call.
Wanted to ask start with F. L. Five if I could end two questions.
Bob you mentioned, 11% to 12% or a week.
Was that and you mentioned it about both the new CLO in the old CLO help just clarify that for me maybe what is your target or are we on the new CLO is that would be I think the most the most.
A significant thing thanks sure good morning, Steve I apologize if I was unclear in my commentary, but the point I was trying to make was that the returns on.
F L five.
On a truly net basis that is to say net of all expenses corporate overhead et cetera et cetera. He is 11%.
And the loans that had previously been in F L too right.
And which we refinanced.
Along two paths some of those loans went into F. L. Five and the rest of them stayed on our balance sheet, but were financed in a different way.
Are the returns if you looked at those loans on a standalone basis.
Or also in excess of 11% again on a fully loaded triple net basis. So it's not that's not a gross Roe or IRR that's.
Absolutely.
Alright, that's helpful and the advance rate and this might help explain your mixing and matching with loans I mean 84, 4% I mean that sounds like a lot of multifamily in the ER and the collateral mix and am I thinking.
Right there because that.
84, four gets you over five times leverage on that particular initially.
That's right on that particular pool in CLO for us are an integral part of our financing strategy.
Poland.
And they are a very efficient way for us to finance segue.
The segments of our portfolio, especially loans that are pretty well I'll call homogeneous, which frankly most of ours are.
I think the people on the phone understand how we think about credit and how we underwrite.
And so you know.
Multifamily is an important theme, it's one of the two principle themes that Matt discussed earlier on this call and which we have discussed.
Consistently on prior calls and so there's this transaction F. L. Five had a had a pretty significant chunk of multi family in it. It also add office and other property types as well.
One of the themes that fixed income investors.
Frankly like about.
US and about our financing strategy at least as it relates to CLO is that because these are corporate finance tools for the company as a whole.
The composition of.
Portfolios of loans that constitute individuals' clo's look unsurprisingly very much like the portfolio of the company's portfolio taken as a whole so that from their standpoint, they don't feel like there's any adverse selection electric cherry picking.
Right. So yeah, there were a lot of multifamily loans in the pool I expect there will continue to be as some of the loans in that pool repay and are replaced by other loans that we originate because we expect to continue to be relatively active in the multifamily space.
<unk> family.
Statistically has lower loss severities and default rates than other types of commercial property and therefore, all else being equal.
Heavy multifamily pools result in better subordination levels and higher advance rates.
Yes.
Okay. One final thing if I could thank you for the explanation of that.
The tax loss and importantly, the you know the need to run that $8 million through.
10 cent per share through distributable EPS, even though it wasn't this wasn't really a current period event.
To cite the.
The shares are down about 5% or so I think as the analysts as we can get our notes out will be very.
Clear that this was not a <unk>.
So much of an operating you know miss versus the prior quarter, but more just sort of a onetime thing right apologies, but it wasn't when we first went through the materials.
We didn't pick it up exactly you know.
As specific as you explained it on the call. So we will we'll do our best to kind of get that clarified.
Related to that though these are of course these are capital losses right associated with the Covid disruption in your securities portfolio.
Just curious you've got a ton of this left.
Are there any strategies going forward any investment strategies that could impart be designed to try to utilize utilize that that tax benefit.
Yeah, Great Great question Steve.
We do have considerable unused capital loss carryforwards remaining that number's about $188 million.
As I mentioned, if and when we sell the north parcel in Las Vegas, and if it results in a gain we would certainly use.
A portion of those.
Carryforwards to to absorb that gain in terms of.
Other <unk>.
<unk> I can assure you that the team here has spent quite a bit of time since.
Mid 2020.
Exploring that it is a complex.
Situation, it's a potentially very valuable asset.
Although the code sharply circumscribed the circumstances in which you can utilize them clearly they have to be used against capital events and lenders generally speaking don't have a lot of capital events.
But there are strategies, we have explored and continue to explore them all of them will need to hold true to the the basic investing precepts that Matt described earlier, so I think there's more to come on that but it it said valuable potentially valuable off balance sheet asset.
And I'm certain real estate equity ownership would be one of those one of those asset classes that would likely meet the tests I would think anywhere. So thank you so much for your comments.
Yeah.
Thanks, Steve.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Kyle.
For Clinton.
Sorry to pick up your handset before pressing the stifle.
One moment, please while we poll for additional questions.
Our next question is from Don <unk>.
A wildfire Cowen. Please proceed with your question.
Yeah.
Bob can you talk a little bit about the two office loans.
Slipped to four ratings and what your sort of comfort level is.
The book is protected on those assets.
I don't know if that's maybe just like a lag after the pandemic, but just wanted to get your thoughts on that.
Sure I think there are a couple of levels of response to that let me go first and I think Matt and perhaps Peter might have some.
Helpful commentary as well.
First we we review every loan in our portfolio every quarter as we have discussed previously and we assign or reassign. The risk ratings that we think are appropriate based on our current understanding of the situation.
I think you'll recall in early 2020, when Covid arrived we immediately downgraded every hotel.
In our book independent of its.
Performance because we've been doing this for a long time and we knew that hotels would be adversely impacted if you look at the performance of those hotels since it's been pretty impressive strongest in the resorts.
Wrong in the.
You know in the select serve in fulltime business traveler segment and pretty good but a slow in the group segment, where we have at least one hotel. So we're not shy about being.
Aggressive slash conservative about how we write our loans. So in these two particular instances.
Both business plans are behind.
Business plans in the transitional lending space are often off track, sometimes they're ahead, sometimes they're behind that in and of itself doesn't give great cause for concern I think that we have a view about office that is still well. We our view is that the office situation is still developing.
We will take some time to ripen and so in any instance, where where we see signs that business plans are a little bit slower really going it again and that process concluded in us downgrading. These two assets and Matt Peter can talk in more detail about that in terms of.
Or do we feel like we're fairly valued.
Our seasonal reserve is intended it each quarter and to.
Provide.
Now an adequate cushion or loan loss reserve cross the portfolio taken as a whole and.
Frankly, that's an assertion that Matt and I signed two at the end of each quarter and we did yesterday afternoon before we filed our 10-K last night.
But each of them and all of the loans in our portfolio frankly get a lot of attention from us, but but these two in particular and we have a relatively small number of four rated loans, but they.
They garner more attention because they probably deserve it Matt.
No I think you said it well, but I don't have a lot to add in let's Peter Wood.
Yeah.
I guess, Bob here, where those loans what markets.
Now can you just give us a little color on when they started deteriorating on the business plan is that something that just happened this quarter or has it been kind of.
Building on a kind of a little more intense.
No I think what one one is in New York and the others in Philadelphia.
And I think that.
In each instance, I mean in each instance.
Looking not only at what's happening with our collateral, but also what's happening in those markets and there are some broader themes in office generally.
That that may impact.
It may impact either one of the loans.
<unk> has a fairly near term.
Maturity and the borrower is working to refinance it.
The other loan.
Involved are more.
Extensive business plan.
And the leasing market for the last number of quarters has been.
He has been slow.
And that's not unique to New York and it's not unique to the sub market, where this property is located it's.
You know, it's fairly commonplace across the office.
Terrain nationally.
Okay. Thanks.
Yeah.
Our next question is from Rick Shane of J P. Morgan. Please proceed with your question.
Hey.
Bob Hey, Matt Thanks for taking my questions. This morning.
Look Steve Delaney explored a little bit what I wanted to talk about which is a.
S L five.
Obviously, the spreads had wider there.
And we've seen a very very active CLO market in the first part of the year.
Excuse me.
The market feedback.
On CLO execution.
And how you think about.
Your hassle approached two assets given what the CLO market.
Ricky you cut out a little bit, but I think you are asking.
How does <unk> fit into our financing strategy in the face of.
Widening spreads.
Yeah, and and just basically how how youre going to approach things. If there are signals CLO market that are going to impact your approach to originations.
Sure well I guess the first the fundamental premise is we don't originate for the CLO market or for any other market for that matter.
We're a transitional first mortgage lender and we hold our loans on our balance sheet and so we make investment decisions.
That are driven.
By the factors, Matt described earlier, whether its location property type quality of sponsorship quality of collateral et cetera, we make investment decisions.
And then we you know.
We have a strategy for the company in terms of what's the.
The most effective way to finance the business and that gets to issues like term of our liabilities cost of our liabilities stability of our liabilities.
The absence of recourse the absence of mark to market provisions.
The need in some instances to be able to move quickly to help solve our borrowers you know financial needs quickly, which is why we do use we continue to use mortgage warehouse facilities, even though they typically only represent about 25% of our liability structure.
So all of those factors figure in the CLO market.
For the last you know we were a very early entrant.
When the CLO market revived in early 2018, we've issued five transactions since then.
We have found it to be.
Good place too.
To finance a portion of our portfolio.
What we're seeing in the market right now and the liability side was expected.
We've seen spreads widen in all financial liability categories, including CRE, CLO and honestly, we've seen widening in the mortgage warehouse.
<unk> market as well.
So that was not unexpected.
And our view is we're building a capital structure for the long term.
For the last I'd say 24 months.
We and our competitors, who also access the CLO market.
Frankly, we're the beneficiaries of a situation where the CLO market was actually.
A less costly place to borrow on a nonrecourse non mark to market basis, then was the mortgage warehouse market, which is typically a crossed pool with 25%.
<unk> and <unk>.
Mark to market provisions of some sort.
And it feels over the last three or four months like that.
Relationship has reversed and frankly, it's returning to what its normal equilibrium is in our opinion.
So I don't see that what we're experiencing and others are experiencing in the CLO.
CLO market in and of itself.
We'll have a meaningful impact on our investment strategy at all and I know, you're a careful observer of the fans from financial markets.
Spreads have continued to widen.
Since we probably star transaction several weeks ago.
And closed last week.
Got it look at it it's a fair point, you don't want to make up that long because you can get good financing on it you don't want to pass on a on a good loan because it's a little bit more difficult to finance, but at the same time.
Your the left side of your balance sheet doesn't exist in a vacuum from the right side.
<unk>.
Percolating through the market are you seeing better pricing discipline from on the origination side from your competitors.
Well, it's I seldom speak about our competitors, because I only want to speak well about them.
But you raised two good points the first is.
This is a huge ecosystem that were all part of and when the cost of capital and some part of our ecosystem changes the cost is going to change in another part and there is a feedback loop and it sometimes takes a little bit of time for it to be fully realized but is the cost of equity <unk> debt capital increases at some point in time the cost of debt to property.
Owners will increase and that's just going to reverse through the hole.
Through the whole ecosystem. So that's the first point and so the answer is we are seeing some of that sort of adjustment and Peter and his team see it every day.
In the market. The other thing that I would add is that the.
The CLO market has been a pretty attractive place to finance assets, but it's not the only place to finance and it's certainly not the only place we have financed assets.
We have and we continue to syndicate loans, we've done private bilateral term loan arrangements.
And we've done note unknown financings and that's just on the secured side of the world doesn't even touch whats available and potentially available to companies like <unk> on the on the quasi unsecured and unsecured corporate side.
Okay very helpful and I feel the same way about my peers. So I appreciate that comment as well.
Yep.
We have reached the end of our question and answer session I will now turn the call back over to Matthew Hoffman for closing remarks.
Right.
Thank you Hillary.
As you heard this morning, we're pleased with our 2021 accomplishments and the positioning of <unk> as we head into 2022.
He looks forward to speaking with you again next quarter. Thank you.
This concludes today's kind of thing you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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Yes.
Yeah.
Yes.