Q2 2022 KKR Real Estate Finance Trust Inc Earnings Call
Okay.
Good morning, and welcome to the KKR Real estate Finance Trust, Inc. Second quarter 2022 financial results Conference call.
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I would now like to turn the conference over to Jack Switala. Please go ahead.
Great. Thanks, operator, welcome to the KKR Real estate Finance Trust earnings call for the second quarter of 2022 as.
As the operator mentioned this is Jack Switala.
Today I'm joined on the call by our CEO , Matt Salem, Our President and C O O Patrick Mattson and our CFO Ken <unk>.
I would like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor relations portion of our website.
This call will also contain certain forward looking statements, which do not guarantee future events or performance.
Refer to our most recently filed 10-Q for cautionary factors related to these statements.
Before I turn the call over to Matt I'll provide a brief recap of our results.
For the second quarter of 2022, we reported GAAP net income of $19 $4 million or 28 cents per diluted share.
Distributable earnings this quarter were $33 $1 million or <unk> 48 per share covering our <unk> 43 per share Q2 dividend by over 1.1 times on a per share basis.
Book value per share as of June 30th 2022 was $19 36, a decline of less than 1% quarter over quarter, which includes the cumulative Cecil impact of 49 per share.
Increases in our seasonal reserves impact to book value. This quarter were partially offset by the 1 million shares, we repurchased which generated <unk> and book value accretion.
Finally in early June we paid a cash dividend of 43 cents per common share with respect to the second quarter.
Based on yesterday's closing price the dividend reflects an annualized yield of nine 2%.
With that I would now like to turn the call over to Matt.
Thanks, Jack and good morning, everyone. Thank you for joining us today.
Okay. We're up has had a strong position to navigate this economic environment of higher inflation and.
And quantitative tightening.
Our portfolio is comprised primarily of first mortgage loans secured by class a real estate.
Owned by institutional sponsors.
Located in growth markets.
The favorable lending market, we discussed in our first quarter call.
Continued into this quarter.
And we're seeing real estate equity values.
The decline from this higher cost of capital.
And lower market leverage.
Our strong second quarter loan originations of over $1 billion.
Demonstrated our conservative investment selection.
With 100% of our activity in multifamily or industrial property types.
A low weighted average loan to value of 63%.
Multifamily and industrial loans now represent nearly 60% of the portfolio as of the second quarter.
While we believe this is an attractive market opportunity.
As is our DNA.
We are currently operating the company at higher levels of liquidity.
And lower leverage.
Since January we have been front footed and intentional.
Increasing our equity capital liquidity.
And non mark to market financing facilities.
Notably.
We've raised over $187 million of common equity.
$150 million of preferred equity at an attractive fixed for life coupon of six 5%.
And increased our revolver.
By $275 million, while extending its term to a new five years.
One of the challenges in this market is securing senior financing.
Our ability to leverage the broader KKR relationships and capital markets team.
Has enabled us to add approximately $1 5 billion of non mark to market financing capacity.
Including $450 million this quarter.
We have many avenues for financing.
And have historically access the CRE CLO market on an opportunistic basis.
This diversified approach to financing our portfolio is a strong differentiator and the current market environment.
This quarter, we had the opportunity to provide a $500 million loan.
On a cross portfolio of high quality, well leased industrial properties with.
With 97% occupancy.
Located primarily in strong, California markets.
With institutional sponsorship.
The properties have embedded mark to market upside across existing leases as they expire.
And a more stable market, but alone would have likely been securitized and a single asset single borrower see MBS transaction.
But that market is not fully functioning.
Our focus on larger loans to institutional sponsors that's left us well positioned to step in and Opportunistically.
Hey, Ralph.
Using its first in the waterfall position invested 50% for approximately $250 million.
Our ability to split loans allows us to originate large loans to high quality sponsors with favorable competitive dynamics.
And allows us to finance these loans more attractively.
All while creating diversification benefits within our portfolio.
In the second quarter, we received $444 million in loan repayments.
Kevin Q2's, strong origination volumes and modest repayments.
We grew the funded portfolio by $633 million.
In the near term.
We intend to continue to operate at a lower leverage with enhanced liquidity.
So we anticipate matching new originations with repayments.
Finally.
I'm also pleased to state that chaos distributable earnings are now directly correlated to.
And poised to further benefit from.
Short term interest rate increases.
A 150 basis point increase in short term rates.
Since June 30th would represent <unk> 30, a share increase and distributable earnings on today's portfolio.
On an annualized basis.
As a reminder.
Base rates have already increased by approximately 50 basis points.
With that I'll turn the call over to Patrick.
Thank you Matt Good morning, everyone I'll focus today on our efforts on the capital and liquidity front and provide a brief update around our watch list.
This quarter with the help of our partners and KKR capital markets. We continue to successfully increase our non mark to market financing capacity.
Sits at 77% of our.
Our outstanding secured financing as of quarter end.
Specifically, we entered into a new $350 million term lending agreement.
And a new $100 million asset specific financing facility.
Both of these facilities provide matched term asset based financing on a non mark to market basis and allow us to match, our recent equity growth with new liabilities.
Equally important these facilities also give us access to attractively priced financing at a time when spreads in the CRE CLO market have increased significantly with.
With corresponding impacts being felt in the broader repo financing markets.
In addition, our two existing clo's with over 12, and 18 months of remaining recycling period, respectively.
Provide us with a fixed cost of funds to continue to pursue high quality assets as we receive repayments in each of these previously issued managed transactions.
This quarter $123 million of our repayments were in the Clo's.
In terms of equity capital this was an active quarter.
In early June we completed our largest follow on equity offering to date.
7 million shares were offered.
Consisting of $2 75 million primary shares and four point to 5 million secondary shares from our manager KKR.
We expect the offering allowed KKR to reach its anticipated long term hold position of 10 million shares.
Or approximately 14% of K Rev shares outstanding today.
We believe this is the highest ownership percentage held by a manager in the mortgage REIT sector and demonstrates continued meaningful alignment between KKR Mek RAF.
In the middle of June the broader equity markets declined in response to the May CPI print and a corresponding read through to more significant rate hikes from the fed.
With commercial mortgage rates impacted.
Hey, Ross trading below book value, we began open market share repurchases to take advantage of the attractive price.
Beginning of June this year and subsequent to quarter end, we repurchased approximately one 4 million shares.
At a weighted average price per share of $17 three two.
For a total of $25 1 million.
The share repurchases have been accretive to book value per share by over four cents.
Of which approximately <unk> was recognized in Q2.
I would also highlight that K RAF was one of the first in the space to implement share repurchases at the onset of Covid.
For example back in the first quarter of 2020, we repurchased around $19 million in stock.
In times, where we feel that theres been a dislocation and our shares are undervalued.
We've been proactive in a meaningful way on the repurchase front.
And feel that we have been best in class on that front.
As Matt mentioned, we were operating at the low end of our target leverage with total leverage ratio of three five times as of quarter end.
We expect to keep leverage in the mid threes in this market environment and.
And we look for opportunities to deploy capital.
Our liquidity position remains very strong.
And record liquidity exceeding $790 million as of quarter end.
Which included over $118 million of cash.
And $610 million and Undrawn corporate revolver capacity.
In addition, unencumbered senior loan assets grew to $416 million at the end of Q2.
Yeah.
I also want to provide an update on our watch list.
Our current portfolio has a weighted average risk rating of 3.0 on a five point scale relative to 2.9 in Q1.
Driven primarily by the pay off of a large one rated loan Cup.
Coupled with our new originations.
Today, 96% of our loans are risk rate at three or better.
Quarter over quarter, our watch list exposure has decreased by a net $37 million on a principal basis.
To Philadelphia office loans remain on the watch list.
Both are performing with in place occupancy and strong sponsors.
But these loans remain on the watch list to reflect softer office leasing velocity.
Within the Philadelphia MSA.
Regarding our New York condo inventory loan.
Three residential units remained at quarter end.
And subsequent to quarter end, one additional units sold.
Recent sales for the units have been made well in excess of our basis.
And as such we have upgraded the outstanding loan to a three rating removing it from the watch list.
In summary.
<unk> finished the quarter with a record 7.9 billion total funded portfolio.
Which has grown by approximately 40% on a year over year basis.
We originated 11 senior loans.
In Q2 for over 1 billion and grew the funded portfolio by $633 million.
We completed our largest follow on equity offering to date for approximately $137 million in proceeds to both K RAF and our manager KKR.
Added to non mark to market financing facilities.
And upsized, our revolving credit facility to a total of $610 million.
Lastly, we completed accretive share repurchases in June and July for approximately $25 million.
Thank you for joining us today now we're happy to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your touch sensor.
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At this time, we will pause momentarily to assemble our roster.
Good morning, first question will come from Stephen laws with Raymond James. Please go ahead.
Hi, good morning.
Hum.
Strong origination quarter in and Matt I think in your prepared remarks, you talked about attractive lending opportunities you know looking at the <unk> originations looks like.
No.
Be coincidence, but looks like lower Ltvs on June and then maybe in April can you talk about how the market has changed over the last three to six months.
Whats Youre looking for now whether that's wider spreads lower attachment points other covenants and talked about the <unk>.
<unk> landscape and what that enables you to do it in this market.
Yeah.
Sure Steve It's Matt Thank you for joining and thanks for the question.
I guess the point I think youre trying to highlight is the market continues to evolve in.
In terms of in terms of the opportunity set in the lending environment.
Really at the beginning of this year.
We were.
Thinking the market could potentially tightened and spread just given the increase in base rates and then obviously, we got into geopolitical volatility as well as.
Some of the inflation plants and the subsequent quanta.
Quantitative tightening and fed hikes.
And so the market has evolved I would say from.
Our leverage point call. It at the beginning of the year and I always look to the multifamily segment of the market because it's a highly transactional.
About half of our half of our portfolio. So it's a lot of what we do but we were probably in the 70% loan to value context, maybe high sixty's at the beginning of the year.
By March we were certainly getting into the Ukraine.
The one that Ukraine into the mid <unk> and then.
That's probably in the very low sixties.
Loan to cost today, so leverage has come down quite significantly and in lending market.
And at the same time <unk> seen spreads.
Widen out call it.
100 ish basis points I would say again, it's not apples to apples because theres theres different leverage in the market available, but I would say spreads are 75 to 100 basis points wider than that.
I think it can easily be characterized as a lenders market today. So all the terms are are better than the market.
So we like the market is certainly very attractive.
You are probably seeing the most weakness in two segments of the market. One is in the larger loan segment, just given the weakness in the capital markets and some of the <unk> execution.
Part of the market that's weak is in the transitional lending segment because of the weakness in the CRE CLO market in the end the follow through on that into the repo providers.
So if you think about where we sit.
The market is certainly playing to our favor from an opportunity perspective, we focus on large loans and we focus on transitional lending and.
A lot of our competitors.
That haven't diversified that don't have as much diversified financing as we do our having our <unk>.
Finding finding it difficult.
Two.
Finance their new their new originations because again, either the repo market or the CRE CLO market is just not not priced attractively, whereas I think we've been able to as Patrick mentioned in his remarks really diversify that financing over the last few years and so we're still able to create some pretty interesting returns.
On that on that better lower lower leverage higher quality higher quality credit.
So we're pretty excited about what we're seeing in the market and certainly reflected in our activity in the second quarter.
That being said we're not totally.
Sure.
I guess.
Immune from or we're still have a cautious view on the overall market environment and so that's why when you hear in our remarks.
Things like running at lower leverage and higher liquidity.
Certainly not fully leaning into the opportunity set because we don't know exactly what the future holds as the fed continues.
Okay.
So tightened in.
Raise rates, so I think from a company positioning perspective, we're going to continue to operate at this leverage level until we see a little bit more stability and then of course, we can revert back to what historically has been our our leverage our market leverage in the called the high threes versus the mid threes that theyre running at today. So.
Certainly like what we're seeing and I just have one other difference.
I would comment is.
The pipeline is still big it's not like the beginning of the onset of Covid, where you had these markets shut down and there really wasn't a lending opportunity in April or may or June of that of 2020. Our pipelines are very big right. Now there's plenty of lending there are acquisitions happening, there's a lot of refinance activity with the capital.
Markets weak youre seeing a lot come out of that market into the balance sheet lenders. So theres lots to do in todays market. So I feel confident that we should be able to.
Reinvest as we get repayments it again.
We see a little bit more macro stability, we can certainly grow the portfolio through a more normalized leverage within the company.
Thanks, Pat helpful comments, and your answer covered my follow up question I appreciate it thanks Steven.
And the next question will come from Jade Rahmani with <unk>. Please go ahead.
Thank you very much I'm looking across the yield curve.
Tenure in particular has declined notably of late how it.
Important of a signal is that with respect to the outlook for commercial real estate is that a primary driver of the transitional lending market in terms of flow through impact to <unk>.
Loan pricing and Securitizations.
And so if the 10 year Treasury holds in this range would you expect improvement in spreads in the back half of the year or do you think that their risk off reasons driving the tenure currently.
Yeah.
Hi, Jay This is Matt Thanks for the question I'll.
Preface this statement, which I'm not a rates trader.
Yes.
I do think that.
Transact real estate equity transaction volumes are certainly coming down.
And I think that's a function of.
The uncertainty in the market.
And.
Your cost of capital and the impact on valuations and some of that is just trying to understand what is the final resting place in this rate environment and I think that the long end of the curve to your point.
Is pretty meaningful in terms of how real estate.
Is valued.
And how a lot of it is obviously financed.
Yes, I do think that having a if people.
If the market can understand kind of where we're going to end up on the 10 year.
That can cause more transaction activity to happen in kind of a little bit of a reboot on the equity side and more clarification on on values.
That being said to your point I think this most recent rally is probably more around fears of a recession and the impact from quantitative tightening so not necessarily a good thing but.
It is a good thing if we can get some market stability and in interest rates. So that real estate transaction volume overall can increase and get a little healthier.
Thank you very much you mentioned do you expect to match origination volumes to repayments is there a range or level of.
Volumes in repayments to think about something similar on the repayment side to the second quarter.
Or any other color you could provide there.
Yes, we look at our repayments.
We look at our repayments every.
Every quarter when we go through our quarterly review. So we're the primary goal as a credit assessment and a risk rating.
But one of the outputs of that exercise is as repayments.
I will caution you that it is always difficult to predict repayments on these loans don't know exactly when they're going to go and given that we have larger loans one.
Whether it repays.
One month versus another can throw off some of the quarter quarterly numbers, if we look out over the course of the year.
I think we're predicting repayments in the context.
Of what we received this quarter.
On a quarterly basis, so I think we're looking at roughly that.
$4 million to $500 million a quarter of of repayments.
But again that can kind of be that can kind of be chunky and.
And a lot of it depends on how.
How this market environment evolves and whether you see a little bit more stability clearly that will that will lead to more repayments as well.
Thanks, I have a few more but I'll get back in the queue I appreciate it thanks Jay.
The next question will be from Don <unk> with Wells Fargo. Please go ahead.
Hi, it looks like the pretty large provision in the quarter took the allowance up to maybe around 30 to 42 basis points.
Can you talk about what youre thinking on the provision going forward.
The allowance.
Right and then secondly can you provide any updated thoughts on the office market in terms of your appetite there.
Hi, Don This is Kendra I'll take your first.
Question on seasonal so.
As you mentioned, we did take up our seasonal reserve to 34 million at the end of the quarter, which is about 46 steps of principal balance.
Israeli inherently difficult to predict.
We use a third party model historical loss rates that are refreshing refreshed each quarter.
And again it is a very quarter end driven process. So as Matt referenced earlier, we conduct our own internal loan reviews, we get updated historical loss data from third party database providers.
And then it's heavily dependent on the macro assumptions at the time, so including evolving views on recession unemployment at policy.
I will say that we have consistently used a macro assumption that's on the conservative side, but I don't really think that we can kind of play.
A precise number or a percentage in terms of where we think it's going to go I mean, if the macro economic outlook continues to deteriorate I think by virtue.
Logically it will increase and if it stabilizes I think as we've seen in the past several quarters it would probably kind of.
Well at this level.
Okay.
And then maybe I'll add ons.
Matt. Thank you again for the question.
On the office market.
So specifically as we're positioned at K RAF.
Our focus as you can see in the first.
And our originations this quarter are really on where we're seeing the most growth.
And the most identifiable growth I mean, it's a market where.
Like I mentioned sit lenders market.
And you can you can really focus on the easiest loans to underwrite and property is located in the best markets. So that's why we have been.
Focus on industrial and multifamily I would put life science in that category as well in terms of the demand that were demand that we're seeing so we're really focused on those major growth areas in terms of office I don't think our views have changed from the last quarter and I think theyre generally consensus if you have it.
Quality asset if you have any class a asset whether.
It's certainly in our portfolio, we're seeing momentum in leasing.
And and.
And then I'd say, there's a little bit broader range of.
Positive activity when you get into the growth markets.
Certainly in some of the southeast markets Youre seeing that carried through beyond just class a and potentially into some of the class b space as well.
And then when you get into some of the markets that don't have that same growth projections.
Or demographic trends.
The class B segment of the market becomes pretty challenged.
Thank you and then our next question will be from Eric Hagen with BTG. Please go ahead.
Hey, Thanks, good morning, so as we look at the Ltvs in the portfolio. The credit coverage more generally is there a debt service coverage ratio that one can think about for the overall portfolio either currently or on a fully stabilized basis.
And then maybe for the for the origination of the refi loan on the industrial assets in California over the last.
Last quarter.
Can you talk some more about the use of proceeds in the refi like did the sponsor cash out any equity from the capital structure.
And to that point, maybe you can just talk about the attractiveness of it.
Loan growth at the expense of more leverage at the sponsor level.
Eric Good morning, It's Patrick I'll take the first question. Thanks for thanks for asking that so in terms of.
Coverage and LTV I think as Matt had indicated we're definitely seeing leverage come down in the market and specifically on the loans that we're quoting and you didn't even see a little bit of that it's hard to read too much into the data set I guess when you were talking about a handful of loans each month, but.
Certainly the leverage in June was lower than the leverage on the loans that we closed.
In April .
In terms of coverage.
We're certainly underwriting to an exit stabilized level, we think about probably that yield first and foremost.
But can translate that into a.
Debt service coverage ratio.
Obviously, a lot of the loans as were initially making them our transitional and are not at a one times coverage and so those loans are structured with upfront reserves and ongoing reserves too to mitigate that shortfall.
But when we think about exit them, we're certainly thinking about.
That yields in this environment that probably are a touch higher than where we are we're certainly want to underwrite to a cushion relative to where we think the exit cap rates are and with some uncertainty on.
On the on the take out uncertainty on what that ultimate exit cap rate is I would say we're.
Erring towards the side of being a bit more conservative and so slightly higher debt yields obviously, when we're thinking about that.
Debt yields that are in.
Six seven plus percent context.
Again, not a crystal ball on on sort of rates, but given where we expect rates we feel like coverage is certainly adequate.
Those take out levels.
That was really helpful.
My second question was around the origination of the refi alone on the industrial asset in California, and the use of proceeds in the capital structure there. Thanks.
Yes.
No.
It was basically a financing to take it off an acquisition facility.
So we're almost like a recapitalization that that was just occurring going from short term financing to.
Obviously to our to our bridge loan there.
And.
Again, I think the opportunity set was really driven by.
The.
How expensive the capital markets are today and the single asset single borrower see MBS market in particular.
So.
<unk> of leverage I mean, we're at Ralph mid sixties leverage on that on that portfolio, which.
Valley there is not.
It's not a big cash out to the sponsor in this particular case.
That being said.
Just given the run up in values and the tremendous demand that we see for industrial space.
We certainly have done loans in the past, where you are providing cash back to the sponsors on these really high quality.
These high quality markets in the industrial segment of the market.
That's helpful. I appreciate it guys. Thanks.
Thank you.
And the next question is from Rick Shane with Jpmorgan. Please go ahead.
Hey, guys, one pretty specific question and then one more general question.
We look at the LTV distribution, there was a tick up from 7% in the 75% LTV buckets of 10% and it looks like it was driven by a pickup.
In Minneapolis alone.
From 69% to 77% the balance didn't increase.
The loan has a maturity of less than half of the year and its category too.
So it looks like a good credit I just wanted to make sure we understand what's going on here because in some ways that LTV.
Disc.
Description doesn't match with how you guys feel about the credit quality and I suspect.
There's something there that we want to understand.
Hey, Rick Patrick I will take the take the question. So I think the point I guess I would highlight here just the way that we.
Look at the Ltvs.
So we.
When we closed the loan we've got initial balance and we have an as is value. That's typically the LTV that we're gonna show for the life of the loan. Obviously these are transitional loans, we expect as capital is being put into these assets as they are leasing up that the value is improving and so they were they they should stop.
To migrate toward a stabilized value.
We don't in fact, then adjust our LTV lower to reflect what.
What we think is probably an improved asset at that point, we keep with sort of the static LTV that we initially had.
The only exception to that is if we do do a.
Subsequent new appraisal for example, we're contributing the loan to our CLO and we have a scale appraisal then at that point, we will update the LTV for the current balance and the new as as value. So I think what you're really seeing is just a reflection of.
Tail LTV number.
And that's why you might have a disconnect between what we're thinking about as.
Our real world value.
And what the legs.
Legacy LTV was.
So essentially what you're saying is that that loan was reappraised during the second quarter, presumably as you're approaching maturity, but I'm also assuming that that level two rating reflects conversations with the sponsor and visibility on are strong.
Exit because otherwise it would be a tail.
It's a combination of.
Expectation for exit four for take out and then just performance of the loan are.
Clearly your sponsorship conversations.
Play a part of that but a lot of it has to do with <unk>.
Our own underwriting of the asset and in view of value.
Got it okay.
That actually dovetails into the more general.
General question that I had alluded to which is that.
You know again, we can sit here and look at all of these numbers on a page, but what we've learned over the years is that each one of these loans is idiosyncratic and that LTV in G O.
Theory means something but it doesn't in real world based upon.
<unk> priorities and liquidity when you are speaking with sponsors right now how do you feel about their liquidity position their ability to hold onto properties. During this period of transition and their commitment.
To do that.
I can jump in on that one.
It's Matt.
I would say we feel.
Very good about our existing portfolio, especially as it relates to the sponsorship.
Historically, that's probably been our highest bar and one of the distinguishing factor.
Features are factors within our.
Within our portfolio and how we make credit decisions.
The vast majority of our sponsors are institutional.
With a lot of financial wherewithal.
To carry these properties.
And we are in segments of the market where there is.
A pretty strong outlook for real estate, where in this world now, where we're thinking about real estate values because the cost of capital has gone up in <unk>.
Because there is uncertainty of the economic environment. However.
Look on the ground and a lot of the portfolio that we have youre seeing.
Really big rental increases and very strong performance and.
These markets are structurally full.
So I think that our sponsors are very sophisticated and have a lot of again a lot of financial wherewithal to carry this carry this through but the large part they are in the right sectors and they like the I think they like the future.
In terms of the performance of the individual assets that they own.
Great.
Thank you guys and I will say I really appreciate it.
The way you guys disclose the Max remaining term, it's very helpful, particularly as we're sort of in a period of greater uncertainty for everybody to understand the portfolio. So thanks.
Thanks, Rick.
The next question is from Steve Delaney with JMP Securities. Please go ahead.
Good morning, everyone and thanks for taking the question I wanted to go back to our loan pricing briefly Chris found the table on your 11, new loans in the 10-Q, and we're seeing you know 2.7% to 3% type of a type of pricing over LIBOR and Matt I want to try to reconcile that to your comment there.
Credit spreads have blown out 75 to 100 basis points should we when we think about the first quarter should we consider that the commitments on those loans and the final term sheets may have been done is as early.
We use fourth quarter early first quarter before we got all the rate volatility and just to tie it in so you want me to answer one.
As we look into the second quarter and the third quarter should we expect your loan spreads even on these very high quality assets to to move higher.
Thank you.
Yes, thanks for the question, Steve I can jump in.
And that was I think there's various due to to notice that it is a couple of things one is timing to your point our loan closing processes take six to eight weeks and so a lot of the deals that we closed in the second quarter closed in April and those would have been.
First quarter effectively first quarter term sheets.
Now keep in mind.
While those spreads look tight versus todays market. They were also financed at tighter spreads so from an ROE perspective.
Still really accretive, but it's not like we were financing.
We were making loans and then and then financing them in today's market environment. So we are matched.
I think generally speaking those are financing like the mid one hundreds.
No.
Very accretive from that from that perspective, that's one part of it the second part of it as we had gravitated to more stabilized loans.
And so even if you think about us being able to lend on on portfolios that could have access to the MBS market that tends to be more stabilized.
Outside of the CRE CLO.
Base that tends to be more stabilized assets. So we shifted our posture you may not see it in the LTV, but.
We certainly see it in terms of occupancy and cash flow. So we've shifted a little bit more too.
I would say more conservative within the transitional loan segment of the market. These are more stabilized than historically.
Historically, so that's the other.
A component of it and then finally, yes, I think that new loans that we originate.
Gonna have today's will have today's market spreads, which are substantially wider than what we saw in the first quarter as I mentioned earlier.
And I think from all the comments, we've heard with respect to your capacity within your term facilities your revolver and reinvestment in the CLO. It sounds like there will you will be looking to take leverage up and grow the portfolio over the second half of this year, even though it's pretty obvious at least currently.
CLO market is not not receptive to to help you accomplish that growth is it is it safe to say my assumption that youre going to be marching forward. The next couple of quarters with some loan portfolio Greg's growth, regardless of what happens in the CLO market.
The new issue market.
Yes, I think that we do not feel beholden or tied to the CRE CLO market.
We've always thought about that market on an opportunistic basis and it can be really attractive at times and when that happens and we will go issue a CRE CLO and we we like a lot of the features of it we like the term financing of it we like the fact that it has.
The reinvestment period.
So there are very very favorable.
Features within that.
However, it's never been our primary strategy to two.
Issue of series C. Although we were in business a number of years before we even a handful years before we even did before.
Before we even did one so we've always been more of the opinion that we want to create more bespoke non.
Non mark to market credit facilities for our portfolio.
And part of that is just what we do for a living we do bigger loans and they don't fit.
They don't.
Diversified CRE CLO model. So we've had to go break that and find other ways, but part of it's also do that with that size comes a lot of quality real estate and quality sponsorship and and Theres a lot of financial.
A lot of financial intermediaries that want to participate in that kind of origination on the <unk> on a senior basis. So the number of factors that play into that.
In terms of how we're thinking about portfolio growth.
I think right now despite the fact that it's a very good market and we have access to senior financing at accretive levels, we're going to try to keep the portfolio about where it is until we see a little bit more stability in the overall.
And then just the broader market, it's about the fed get through a little bit more of its tightening and.
We're just trying to be prudent.
And manage the company at a high very high levels of liquidity, we would record liquidity right now and lower leverage and then to the extent, we see that macro start too.
Clear up a little bit we can obviously.
Trying to take advantage of some of the things we're seeing in the market, but in the near in the near term here will be predominantly recycling capital from repayments.
Got it well. Thank you very helpful comments. Thank you.
Thanks, Steve.
Again, if you have a question. Please press Star then one.
The next question is a follow up question from Jade Rahmani from <unk>. Please go ahead.
Thanks on the new deals you're currently looking at what do you see as the incremental Roe.
Okay.
Right now I would say.
Four we were solving for or the market was offering.
11 to 13 range I would say today's gross ROE IRR.
I would say in today's market Youre seeing things.
200 ish basis points, why do that on an ROE basis, something in that context.
Teens low teens returns.
Thanks very much in.
In terms of the outlook for transaction volumes it seems likely they won't be many series CLO was issued.
Do you expect that.
Development to cause spread tightening on the funding cost side in the back half of the year.
Yeah.
Sorry, Jay just to make sure I understood. Your question the WAC of CRE CLO as well well just caused more demand in the market for and caused spreads to tighten.
Yeah, as well as securitization issue a relative reduction in securitization issuance should potentially allow for the supply demand dynamic between those bonds to improve thereby potentially leading to spread tightening.
I see.
I guess.
Yes, marginally I would think that.
We want to put capital work over time, and if theres not supply the market will tighten.
Accordingly.
To some extent I think about it.
Opposite way.
And that.
Spreads are going to tighten.
When there is a healthy capital markets and I think what Youre describing is the first thing that happens like you have a dearth of activity and then there's pent up demand and things tightened to a level, where it makes sense for issuers to take to access the market.
I understand that part of it but really let's think about when spreads are really tightening it when the market is healthy.
And when it Hasnt sea legs, and when Theres a lot of capital markets activity. So.
I think what youre describing starts it but for us to like really have a lot of spread tightening in consistent spread tightening youre going to need.
Youre going to need a lot of transaction activity and a lot of Cra's yellows and SaaS I mean, I think it's I'll start on the <unk> side right on the startup and single asset single borrower side as my Gosh, that's the most.
Transparent part of the market.
One of the most liquid parts of the market certainly on the floating rate side. So I think my guess is it would start there and that markets. All these markets are still active and theres still functioning its just they are expensive.
So I think when you start to see more and more activity come back.
That's really what we'll start to see most of the spread tightening.
Thank you.
Thanks, Dan.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Jack Switala for any closing remarks.
Great. Thanks, everyone for joining the call. This morning, please reach out to me or the team here. If you have any questions take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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