Q3 2022 Brightspire Capital Inc Earnings Call
[music].
Greetings and welcome to the bright spire capitals third quarter 2022 earnings call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host David Pollinate General Counsel. Please go ahead.
Good morning, and welcome to bright fire Capitals third quarter 2022 earnings conference call.
We will refer to bright aspire capital as bright spire E. R. S P or the company throughout this call.
Speaking on the call today are the company's Chief Executive Officer, Mike Madden, President and Chief operating Officer, Andy Wet and Chief Financial Officer, Frank Sarah.
Oh I handover the call. Please note that on this call certain information presented contains forward looking statements. These statements are based on management's current expectations and are subject to risks uncertainties and assumptions potential risks and uncertainties could cause the company's business and financial results to differ materially for a.
Discussion of risks that could affect results. Please see the risk factors section of our most recent 10-Q and other risk factors and forward looking statements in the company's current and periodic reports filed with the SEC from time to time.
All information discussed on this call is as of today November 2nd 2022 and the company does not intend and undertakes no duty to update for future events or circumstances.
In addition, certain financial information presented on this call represents non-GAAP financial measures the company's earnings release and supplemental presentation, which was released this morning and is available on the company's website presents reconciliation to the appropriate GAAP measures and an explanation of why.
The company believes such non-GAAP financial measures are useful to investors.
Before I turn the call over to Mike I will provide a brief recap of our results.
The company reported third quarter 2022, GAAP net loss attributable to common stockholders of $25 million or 16 cents per share.
Distributable loss of $24.7 million.
And adjusted distributable earnings of $32.3 million or 25 cents per share the.
The company also reported GAAP net book value of $10.87 per share.
And underappreciated book value of $12.08 per share.
September 30th 'twenty to 'twenty two.
With that I.
I'd now like to turn the call over to Mike.
Thank you David.
Welcome to our third quarter earnings call and thank you for joining us today.
During the past three earnings calls, we sounded alarms due to the fed's aggressive stance on inflation.
The current market situation has been substantially self inflicted as a result of the feds epic messages on inflation forecast.
Suffice it to say, we are experiencing interest rate increases and inflation levels not seen in 40 years.
Currently markets are pricing in a 75 basis point fed interest rate increase later today, followed by a 50 basis point increase in December .
We expect the fed to pause interest rate increases at the end of the first quarter of 2023.
Single family mortgage rates recently, hitting a 20 year high over 7%.
We like others are concerned the fed has a bias to overshooting, the mark and dealing with the consequences later.
Given this backdrop right spar expects the first half of 2023 to remain challenging.
We're presently over the course of 2022.
Spire has been preparing for the impact of rising rates and the current risk off investment environment.
To this end, we've been throttling back on loan originations and maintaining higher cash balances.
To this point our current liquidity as of today is 387 million of which 222 million is unrestricted cash.
All cautious views on market conditions are evidenced by the fact that our last few long commitments were issued back in early may.
Since that time, our pipeline for new all commitment has been in a wait and see pause mode.
For now our focus is on asset and liability management, maintaining liquidity and protecting the balance sheet as well as our bank lenders.
Furthermore, as we have said consistently joined the past two quarters, there's been a scarcity of lending opportunities as the demand for commercial real estate credit has significantly contracted.
On the capital market side, the CLO market continues to experience wide credit spreads and new issuance has come to a virtual standstill.
And the CLO secondary markets recently issued AAA rated bonds are now trading with dollar prices in the mid nineties with very attractive all in yields at over 7%.
However, secondary trading activity has been extremely thin and therefore, not a meaningful opportunity to invest a lot of capital.
We do not expect to see an improvement in credit spreads until the fed becomes more dovish and there was an ensuing risk on attitude among bond investors.
I would now like to address the third quarter was 57 million specific reserve associated with our two long Island City office blocks and Frank will later address in his comments the reversal adjustments to our general seasonal reserves.
It has been awful law speech, you provide all constituents with high levels of transparency.
Along those lines, we have continuously disclosed details in our lives about certain loans in our public filings.
This disclosure is provided in order to allow investors to focus on assets that we as management have on our radar screens for various reasons.
We first provided long specific now we'd ever score to long Island city loans in the first quarter of 2021.
Both loans also carried a risk rating of four since the first quarter of 2020.
But now downgraded to a risk weighting of five just this last quarter.
Both of these loan borrowers have the same sponsorship in both loans consist of a first mortgage along with a mezzanine loan position.
The loans are not cross collateralized.
Despite the episode borrower, who until recently has come out of pocket to cover negative carry costs one of the long Island city loans defaulted in October .
This is low number 41, and our investor supplement.
Given this recent payment default, we engaged in asset sales advisor, who provided an opinion of value for both loans, which led to these two specific reserves.
I want to point out that the second long Island City alone LOE number 18 in our Investor supplement is still current and performing as of today.
While we cannot speak on behalf of the borrower the specific reserve on that second loan reflects the potential of a similar outcome in the coming months.
We are coordinating closely with all borrowers in an effort to resolve low number 41 in the coming months.
Given all I've sat here, we will of course consider current market conditions, you know resolution decision process.
We have not ruled out the possible outcomes could include providing financing or taking ownership of the underlying property itself.
Also please note this loan has already been removed from its financing vehicle in October .
And as reflected in todays liquidity numbers.
Please refer to our third quarter filings, where we have provided updated narratives on both of these loans.
Finally, there will undoubtedly be great lending opportunities that will arise from this market dislocation.
But to be clear over these past few quarters and then the very immediate future all.
All things equal our bias is that liquidity will generally take precedent over new loan originations and stock buybacks.
With that I would now like to turn the call over to our President Andy Witt Andy.
Andy.
Thank you, Mike and good morning, everyone. Starting in early Q2, the focus of the organization began to shift toward a portfolio and liquidity management for the reasons Mike highlighted.
As anticipated and previously noted the universe of actionable opportunities continues to decline.
Our priorities have changed the velocity of new originations are as follows during the third quarter. We closed three loans for a total amount of $91 million and at present, there are no new loans and execution.
During the third quarter, our loan portfolio grew slightly and currently stands at $3 9 billion and total assets of $5 3 billion.
Offsetting the decline in new originations has been a slowdown.
During the third quarter, we received.
$40 million in repayments across two loans the two parcels.
Once a quarter and five additional loans that paid off.
And we have received one partial pay downs for a combined total of 114 million given.
Given the macro economic environment.
We anticipate loan repayment volume will remain relatively low over the next couple of quarters.
At a certain point, we expect sponsors would like the old properties longer.
Patients have a better capital markets environment, even in cases, where meaningful value that's been created.
We also anticipate more modifications and loan extensions moving forward during the quarter and subsequently.
Or modifications for an aggregate unpaid principal balance of $283 million and three by write extensions for an incremental $126 million.
As interest rates continue to rise, we anticipate more loan extensions within the portfolio alter.
Alternative financing options will be less attractive our expectations across our loan portfolio is that repayments will slow.
<unk> increases as borrowers elect to extend.
Your expected repayments and an increase in duration in a rising interest rate environment bodes well for earnings in the short term. However, we recognize there is a limit to the amount of rate related increases that can be absorbed without partial loan pay downs from borrowers.
As of September 32022, excluding cash net assets on the balance sheet. The loan portfolio was comprised of 111 investments.
Gross book value of $3 9 billion and the net book value of $945 million or 84% of the portfolio.
The average loan size was $35 million and our risk rating is 3.1.
Changed from last quarter.
First mortgage loans constitute 97% of our loan portfolio of which a 100% are floating rate and all of which at breakfast multifamily loans represent 53% of the portfolio is in the interest rate backdrop inflation and volatility there's no surprise that new real estate.
Development single family home sales dramatically slow.
We continue to expect multifamily occupancy rates and replacement costs to remain high.
In addition, our loan portfolio composition includes 31% August the average loan balance of our office loans is $37 million.
With loan sizes, ranging from 13 million to $120 million most of the underlying properties that granular back walls and the weighted average occupancy across the portfolio, excluding the long Island city properties was 77%.
The remainder of our loan portfolio is comprised of 11% hospitality with industrial and mixed use collateral making up the rest.
Portfolio has minimal exposure to construction and.
75% of the collateral is located in markets that are growing at or above the national average growth rate.
We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across five primary banking relationships totaling $2. Two 5 billion. While the source of financing is non mark to market, we actively manage the portfolio for credit issues we remain.
In active dialogue with our borrowers and lenders regarding asset performance upcoming extension tests.
Pending maturities, which May result, in one modifications and in certain cases loan specific delever.
As of today availability under our warehouse lines stand at approximately 815 billion, which represents a 64% aggregate utilization rate. Additionally, we have two outstanding yellows totaling $1 6 billion at present, approximately 42% of our loan collateral has been.
Contributed <unk> 50.
55% is on a warehouse line at 3% is unencumbered and.
In summary, the third quarter produced solid results and we remain focused on portfolio balance sheet and liquidity management, given the uncertain market environment now I will turn the call over to our Chief Financial Officer.
To elaborate on the third quarter results.
Thank you Andy and good morning, everyone.
I'd like to draw your attention to our third quarter supplemental financial report, which is available on the shareholders section of our website.
Supplement continues to provide asset by asset details as does our Form 10-Q.
For the third quarter, our adjusted distributable earnings were $32 $3 million or 25 cents per share.
Third quarter distributable loss, which includes $57 2 million of specific loan reserves on the long Island city loans was $24 7 million or <unk> 19 per share.
Additionally, the third quarter, we reported total company GAAP net loss attributable to common stockholders of $25 million or 16 cents per share GAAP. Net loss also includes a $57 2 million specific reserves on the long Island City Wides.
During the third quarter total company GAAP net book value decreased from $11 26 to $10.87 per share Wow Unappreciated book value decreased from $12.42 per share to $12.08.
Decline is primarily driven by the specific loan reserves previously discussed and the FX translation related to our Norway office net lease asset partially offset by a decrease in our general seats a loser.
I would like to quickly bridge third quarter adjustable distributable earnings of 25 cents versus <unk> 24 cents recorded in the second quarter.
Increase is primarily driven by the rise in the benchmark interest rate.
Additionally, during three Q, we received a nonrecurring profit participation and loan extension.
Adjusting for these onetime items, our adjusted distributable earnings quarterly run rate, it's closer to 24 cents per share.
That's in the remainder of the year due to the rapid pace and level of deployment in 2020 one in the first quarter 2022, combined with the recent slowdown in loan repayments, we are well positioned all things being equal it's maintained higher levels of cash while continuing to produce adjusted distributable earnings that support 20 per share.
He did it.
Furthermore, our earnings continued to be directly correlated to in place to benefit from rising interest rates.
We provide more data in our supplemental financial report, but an illustrative 100 basis point increase in the benchmark rates from the September 30th spot rates would add roughly $8 5 million to our annual earnings or about seven cents per share. It is also worth noting that one month into the third quarter base rates are already increased by approximately.
70 basis points.
However, as Andy mentioned in his remarks, we are very mindful that there is a limit to the amount of rate related increases that our borrowers can absorb without making partial payments.
Turning now to our dividend given our adjustable distributable earnings performance for the third quarter, we declared a dividend of <unk> 20 per share unchanged from the prior quarter.
Moving to our balance sheet, our total at share underappreciated assets stood at approximately $5 3 billion as of September 30th 2022.
Our debt to asset ratio was 67% and our debt to equity ratio was two three times at the end of the third quarter up from 2.2 times at the end of the second quarter.
In addition, our liquidity today stands at approximately $387 million between cash on hand.
All ability under our bank credit facility cash on hand of 222 million is net of the financing pay down under defaulted long Island city.
With respect to share repurchases, we did not repurchase any shares during the quarter.
However year to date, we have repurchased approximately five 3 million shares totaling $44 million at a weighted average fights $8 31, Sir.
The only part while it may be attractive to purchase our shares at these levels and my Mike and Andy have both mentioned overall liquidity given the current environment is a key focal point it takes precedent over buyback.
That said to the extent, we have excess liquidity, we will evaluate the relative value of buying back stock.
Looking at reserves in risk ranking it's.
As Mike mentioned in his comments during the third quarter, we placed one of the two long island city loans on non accrual status.
The exception of this one long island city loan 100% of our loan book It for me.
As noted earlier, we took asset specific reserves on the two long island city loans totaling $57 $2 million.
In addition, our general Cecil provision was $28 9 million a reduction of approximately $16 2 million from the prior quarter.
Lower general seasonal reserve is primarily driven by the elimination of the general seasonal reserves associated with the long Island City works.
The combination of the asset specific and general seats over there at quarter end was $86 million, an increase of 41 million from the prior quarter.
Turning to rich rankings, both long Island city loan changed your shrinking from affordable five the risk ranking of one office one was upgraded from affordable three due to the sale of one of the underlying assets, thereby improving the credit quality would be investing.
Altogether, our average loan portfolio risk ranking at the end of the third quarter was 3.1 unchanged.
Unchanged from the second quarter risk ranking level.
That concludes our prepared remarks, and with that let's open the call up for questions operator.
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Your first question comes from Eric Hagen with B T. I G. Please go ahead.
Hey, everyone. This is Ethan saggy on for Eric This morning.
First question can you talk about how they're thinking of hotel in San Jose is performing after reopening under the new brand in the spring.
Alright, Thank you and thanks for joining us are the signaling a hotel is starting to do pretty well occupancy is up there are opening about 30 rooms per month, I think they're moving on to the second tower in terms of opening rooms. There are two towers at the hotel. So I think that we're expect.
Some positive cash flow coming on that long soon and I think our occupancy is as I said, it's been trending higher over the past couple of months, So we're expecting a pretty solid.
Our performance in occupancy in the fourth quarter.
That's great to hear and then last question just how are you thinking about the Cecil reserve going forward I know you said the general went down but specific went up because of the two long island city loans.
If you could just give more color there that'd be appreciated.
Well with regards to the long Island city loans I think as I said in the prepared remarks, we had an opinion of value done on both of them.
As we are potentially it's been anticipating that the second loan has the same result, as the first loan in the months are months ahead, I think we were very realistic there in terms of rates.
Rental rates and lease up time in particular, given the softness of that market. So now that loan is at a basis of under our 300 Bucks a square foot.
It's it's almost effectively one third of the capital stack.
Was there when the loan was originally done and I think with the equity in the deal about the $34 million.
The entire capital stack was slightly in excess of 100 million. So now we're down to about a third of that and we just want to be realistic with regard to the marked down in the second loan.
Low number 18 that loan has more occupancy than low number 41, it's about 30% occupied has some signage and common antenna income as well so that loan covers operating expenses almost breakeven. So the markdown on that loan was less it's also less dollars per square foot going and I think the basis on that long with.
With this with the new specific reserve is in the low two hundreds like 205 Bucks a square foot. So we want to be very realistic on those loans given current leasing conditions in the U S and the New York market.
Frank any.
The comments on the seasonal I don't think there's anything else there of note and the remaining Cecil.
Got it alright appreciate it.
I would also just point out that the Sydney alone. The hotel loan that you mentioned that loan is our only 50% levered on its on its borrowing today.
Great. Thanks.
Next question Stephen laws with Raymond James Please go ahead.
Hi, good morning.
Well first of all are you guys really focused on asset management liquidity in your prepared remarks I. Appreciate that can talk about you know maybe some details on your asset management group you know how big is it how involved will you be you know at what point do you get involved is it at a four rating is it before that you know maybe a little.
More color on you know.
Focus of asset management team over the next six months.
I would say Hum substantially involved in every asset we stay very close with our head of capital markets, who works with our banking relationships and our CLO financing in asset management, which is in house along with the special servicing we have people located in a number of cities around the country.
Our hands on talking Tomorrow's everyday that information flows directly into our head of capital markets, where he was able to correspond with the banks to keep the banks abreast of what's going on at the at the properties.
On a daily basis, when we had a previous question about the Sydney alone I speak to that borrower directly are often to get updates on what's on what's going on there. So active we've always been very active in our management side of the assets and taking advantage of in house asset management, we do not outsource any of that.
Externally.
And and and and and and when you're in this when you were in the mortgage REIT business and you're you're running at 75% leverage.
Every asset has to be looked at and the banks want updates and expect that information to come to them quickly on every asset whenever they ask questions and should have to be prepared and stay ahead of the banks. It makes sure that youre, giving them information real time, when you were getting at.
Thanks, Mike I appreciate the color on that process moving to to the loans you know it was mentioned in the prepared remarks, maybe more than once that borrowers do see some stress from continuing to higher rates with higher payments. You know can you talk about you.
Caps, how many of the loans have caps in them and maybe what whether theyre in the money or weighted average strike I know some other.
Peers have provided some color around that and I'm just curious kind of at this point of increases from here how much of that increase in payments absorbed by the borrower versus somebody counterparty of the caps.
Why don't we turn that over to our president Andy Witt, He's very working very closely with a lot of loan modifications and extensions that are going on today.
Yeah, Andy Thank you.
To answer your question on accounts.
Some of our our senior mortgages have rate caps and.
Condition for extension is acquiring another rate caps. So that's something that we're very focused on on the onset and then on a go forward basis in terms of the modifications that we've seen.
In the recent quarter those have largely been.
Then.
As a result of not meeting extension hurdles and we have a number of those cases.
Provided relief.
Or and in exchange for pay downs of the loans are obviously acquiring another account and.
And then working with the borrower to to effectuate a business plan to exit.
Or extend them alone.
Worth noting that with.
The modifications in the recent quarter.
A fair bit of that about 65% is associated with one loan that we expect to get to.
A positive resolution on here in the coming quarters.
Thanks, Andy and as a follow up on that on the months are there any terms that that when you're modifying. These do you guys look to improve but you know what I mean can you can you modified move a LIBOR floor that was maybe 50 basis points up to three or 300, plus that gives you some return potential.
In the out years I mean, how do you think about the terms youre willing to give on and what's your asphalt modifications.
Yeah, it's really a holistic approach so when when we're looking at a modification where we're looking at you know what what makes sense for us what makes sense for the borrower what's acceptable for our banking Counterparties. So you know that may include an increase in rate.
<unk> really everything's on the table, when where we're discussing a potential modification.
Great I appreciate the comments this morning.
But let me just add you know back to the two to connect us to the asset management question. We are as we said on the call we're working with borrowers.
Quarters in advance we are anticipating that despite their intention to potentially pay off the loan we're anticipating that that likelihood is getting worse and so we are preparing those borrowers for what they would need to exercise an extension with us.
Whether it be partial pay down of the loan the rate cap.
As Andy mentioned replenishing reserves things like that so we are working with those borrowers well in advance of of these dates.
Next question comes from Chris Chris Muller with JMP Securities. Please go ahead.
Hey, guys. Thanks for taking my question I'm on for Steve Today, So looking at your 2022 2023 priorities.
Can you talk about how youre thinking about fine tuning the liability structure in this environment. So obviously cielo is aren't going to be in that in the near term at least suggest that the types of things you look out would be helpful. Thanks.
I think what we'd like to see is just some stabilization of the market. So what we are trying to do is right now warehouse as much cash as possible in anticipation of needing to move assets around for instance, the long Island City asset number 41 is now unencumbered, we removed that asset from its financing.
So right now we're trying to look out over the next few quarters to try to anticipate what assets made me too and what capital may be needed to maneuver.
Maneuver that asset.
In some cases, partially pay down loans or unencumbered loans should they should they go sideways. So right now the game plan over the next few months is trying to get visibility on how much capital we need much more.
To do that we think right now we have more than enough adequate capital to deal with all of this based on our planning, but as that does begins to settle and we get a handle on where the market is then we can start to more confidently deploy.
Deploy capital into two new loans, but right now I would say for the next couple of quarters.
We're probably and more of an asset management mode and if there are opportunities that come up they there's a pretty high high bar.
To try to get the capital from us so.
So as I said going forward next few months more asset liability management is working closely with the banks all borrowers to make sure the portfolio is stabilized.
Yeah. That's helpful and then on the the loan extensions would you characterize that as more as borrowers waiting for a better market to sell into are there delays in business spend still going on there.
Antibody ticked up.
Sure.
You know, it's really a combination of both some some are behind on their business plans as a result of various factors and looking for additional time and as we move forward.
We think that certain borrowers may delay the refinancing of their loans or where any capital markets execution. So we see it we see a combination of both.
Okay. That's helpful. Thanks for taking the questions.
Next question comes from Matthew <unk> with Jones trading. Please go ahead.
Hey, guys on for Jason what are your guys' expectations for cap rates upon exit of some of these loans and where they moved from last quarter.
I think generally speaking you know cap rates are probably up 102 200 basis points, it really depends on market and asset and office assets. That's that's become very squishy.
The market.
It is in a pretty uncertain place in terms of how to value them.
The finance office assets, so I think really going forward.
Youre dealing with your office portfolio.
That is gonna be a consequence of the multifamily assets.
We're in markets, where there's growth and you can grow out of this with the short term nature of that nature of those leases over the next year or two as long as extend its really how you deal with the the office assets in one of the things I'd point out is that you know roughly <unk>.
Half of all less than half of all loans and office are pre Covid, maybe I think it's like 11 loans for a half a billion dollars that are pre COVID-19 loans in the balance of the office loans about 20, plus loans or roughly 600 million. So the average loan size there.
For the post Covid loans is under $30 million or average loan size and in the office sector is $35 million, but long island city loans are really kind of one concentration same borrower the assets or a block away from each other for 130 $538 million for but what the total loan amounts were there that's a large.
That's a large concentration for us so we have a very granular portfolio and I think in terms of your cap rate question really it's gonna be a it's going to be the office market.
That is gonna be a very difficult market in the coming year or so in terms of work from home impact and valuation of those rent rolls and the ability to finance those assets.
Got you that's helpful. And then you mentioned a high bar on committing to new originations, what what does that look like is it multifamily and in growing areas or something like that.
It'll be the same M O that we had before yes multifamily and growth areas. It is plausible that we do other assets and we can get returns that require a lot less leverage are.
We are making note of the fact that the CLO AAA market.
Is yielding roughly 7% with the discount and where bonds are trading right now, but as I said in the prepared remarks, we we really don't view that as a huge opportunity because of that.
And the ability to buy bonds. There you might have to buy to put out 100 million Bucks you might have to buy seven 810 bonds. Each one of them consisting of a roughly 30 loans ended up watching 300 loans on your balance sheet behind these securities to deploy what could be 25 to 30 million Bucks of equity. So we don't really look.
At the CLO market secondary as an opportunity and are you now in terms of the returns we need we need to punch way above 11, we think we can get there with less leverage but right now as I said buying back stock and making new loans is is is falling behind preserving capital for the next two quarters.
Gotcha. Thank you.
Next question comes from Matthew Howlett with B Riley. Please go ahead.
Thanks for taking my question just on the outlook on the dividend rate in the core EPS that I know you don't provide guidance, but just how do we think about covering the dividend nicely. How how important is it is it to you might keep that dividend payment where it is continuing to cover it.
But we think it's very important and which is why we haven't raised the dividend. Despite the coverage that we had to date you know our expectations are that given the prepayments slow down. Despite the fact that we're not originating new loans. The prepayments slow down is going to help sustain or our dividend for a while there and we.
We also have.
You know, we're earning now who would have thought 4% on our money all.
Cash, which was unheard of even a year ago. So I think that all our expectations are we have some stability in earnings.
In the in the near term.
In the coming quarters I think the issue is as as Andy pointed out is that you can't just say interest rates up 100 interest rates up 200, and not expect some sort of.
Deterioration in the underlying portfolio. That's why it's very important that we work with borrowers quarters in advance to make sure if they extend loans they require a partial pay down to put the loan into a better coverage perspective, if they require a new rate a rate cap and refunding of reserves, we want to make sure that we maintain the stability of the ASP.
The portfolio portfolio as rates are going up but overall, we are right now we don't anticipate moving the dividend, but we kept it at a conservative level over these past quarters as I said early on we were talking about the fed in Q1, and what they were going to do with rate rises and <unk>.
Knowing that we kept the dividend where it was to make sure that we wouldn't have to move it backward.
I appreciate that and then just on <unk>.
Cash and where you would free up I mean, you have a net lease portfolio.
And a securities portfolio are there any levers you can pull to sell some you know some sort of high priced assets that maybe coming off a few cents or something real estate securities.
To free up cash.
You need to create liquidity delever.
Okay. So right now we have to.
$222 million of cash we have an undrawn credit facility. So we feel like we have ample liquidity.
To do anything here, we have to do in terms of moving around loans, which is why I emphasized earlier that we were especially with the loans that we've done pre COVID-19.
There was a high focus on making sure that the loans relative to our shareholder equity size, we're not out of balance. So we were not doing.
Nine 900, a $100 million toward a million dollar loans relative to our 1 billion five of shareholder equity. We made sure that the portfolio is granular enough, where we can deal with loans and moved them around.
The Albertsons equity.
Windows, we own that at a seven cap.
We have no idea what happens with the merger with Kroger that's way out in 2024, if that were to happen perhaps the.
They're waiting on the credit will go to investment grade as I said that could be a year and a half from now yes. So we have there is interest in that asset. It's a triple net lease long term 2038 lease are very financeable, we can pay off the C. M B S.
With minimal defeasance at this point so that is something that we can tap for capital if we need it but right now that's not something we think we have to do.
Great and then just the last one just on the long Island City. You said you know once in the fall what did it one isn't it.
You've written down to the value of is there any preferred sort of you know I mean, what would you want to foreclose I mean, you're a senior position there just curious in but you know a workout could look like or the <unk>.
What's the best exit here is from from here.
So out of respect to the borrower or the low number 18 is current and paying and so right.
That's all I'll say, there, but we did say that we are anticipating a potential similar outcome.
And that's just from our perspective, not I'm not speaking on behalf of the bar with regards alone number 41, both of the long I'll see loans have a small mass component.
Right now on the on the defaulted loan we all working with the bar what to see if theres a joint exit of the property that we can potentially do but we are not ruling out the possibility that we pursue all remedies under our UCC mess foreclosure that's possible, but we're not at that point, yet but that is passed.
That would allow us to move more quickly because we have the mezz.
What we do with the property thereafter.
It depends on how we see the market right now it is not an ideal time to sell anything.
Any financial instrument and we are aware of that that's why I said in the prepared remarks, we will consider market conditions, and our decision, making and that may ultimately and tell us owning the asset. It's that's not that's not something we're rolling out.
Got you all the way for more disclosures day. Thanks, a lot I appreciate it.
Next question comes from Jade Rahmani with K B W. Please go ahead.
Thank you for taking the question I'm sure. The other analysts on the call are getting.
An avalanche of questions on office and I wanted to get your thoughts on what's playing out right now.
We're seeing a spike in seasonal reserves driven by specific office deals that are coming to maturity do you think that primarily reflects liquidity lack of liquidity in the market or do you believe it also partly effect reflects.
The impact of remote work and longer term issues in the office space.
I think it I think it reflects both more immediately the maturities are certainly an issue and if you have some very very large assets that require.
Institutional capital. There are are there are some liquidity concerns are with regard to that.
I can only speak to our portfolio our portfolio generally is pretty granular as I said earlier Jade, we have 11 loans pre COVID-19 for about half a billion dollars that includes.
The two long island city assets and we have some we have some positive things that may result in some bigger assets there in the coming in the coming quarter with regards to that office segment of the portfolio and with regards to what we did post COVID-19. We have 22 loans I have the exact number now 630.
<unk> 4 million in the average loan size there was 28.
Our exposure is mostly drive to markets and we look for very diversified rent rolls in markets, where they will open for business and the work from home was having less of an impact we do have some pre COVID-19 loans in New York sell one loan that's office, it's really mixed use in Williamsburg, It's we.
Retail, which is leased it's apartment, which is leased and Scott office, which is only partially at least we do have some small loans in San Francisco One has got a full LOI for the whole building and one is one is still struggling with some some leasing are those two loans at up to 50 million Bucks. So we have.
A very granular.
Loan portfolio in office and it really is a city by city loan by loan, but we think given the size of those loans that we have.
The ability to work with borrowers to get loans pay down we don't see any major major moves in C. So we think the long Island city as I said that was the biggest office exposure that we had the two assets combined so we think that's the biggest seasonal adjustment you'll have going.
Going forward.
And the follow up would be do you think that the trends playing out and coming to.
You know our visibility right now in the office is the tip of the iceberg for commercial real estate and we're going to see.
Cascading.
Loan defaults and other asset classes like multifamily or do you think it's primarily in.
In office issue right now.
I think it's primarily an office issue and I think it's primarily an office issue and some of the major C. V. D's that are still having very low office attendance rates, New York City subway ridership is still 65%.
During the week office attendance is still about 50% during the week San Francisco is worse. So we really think this is primarily New York San Francisco issue, but major major C. B DS we do have some exposure in L. A quite frankly, we did some some smaller lease ups post cold.
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Which are going very well and are in our office portfolio and and in L. A we have some exposure in San Jose two office buildings out 400 million those are substantially leased there's a lot going on with expansion.
And and and growth in that market. So we really kind of look at this is its primarily our new York and San Francisco issue, but I do think that the chilling effect that that is having on the office market at large is substantial and I think banks are concerned about how do we how do you land at all.
When you really can't predict what the rent roll is going to do our tenants going to contract Theres been a tremendous amount of leasing in New York City, but there's a lot of those tenants are moving around.
From other from other places and there's going to be a lot on the sublet market that comes on so I think we're just at the beginning of of what's happening in the office market. I think this is gonna be a trend that is going to be talked about a lot more often in the first half of 2023.
Thank you very much I think the other market I think other markets short duration.
And and and with interest rates at 7% single family housing market is slowing down development is slowing down we still have housing shortages I think anything with short duration leases will continue to do well and the office market is spotty, but as I said, you know long Island city is our largest and when you look at our port.
We have some issues absolutely there are some things that we're watching very closely but it is very very granular. My concern is who's going to buy the $500 million office building who's going to buy the $250 million office building.
That can really start to shrink.
Thank you very much appreciate it.
Yeah.
I would like to turn the floor over to Mike Murphy for closing remarks.
Well. Thank you all for joining us today and thank you for your support and we will see you on the fourth quarter call in February .
Have a great holiday.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
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