Q4 2022 Blackstone Mortgage Trust Inc Earnings Call
Good day, and welcome everyone to the Blackstone mortgage trusts fourth quarter and full year 2022 investor call.
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Thank you and good morning, and welcome to Blackstone mortgage trusts fourth quarter and full year 2022 conference call I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and also companion Executive Vice President of investments.
This morning, we filed our 10-K and issued a press release with a presentation of our results which are available on our website and have been filed with the SEC.
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.
A discussion of some of the risks that can affect our results.
Please see the risk factors section of our most recent 10-K, we do not undertake any duty to update forward looking statements. 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.
Audiocast is copyrighted material of Blackstone mortgage trust, you may not be duplicated without our consent.
For the fourth quarter, we reported a GAAP net loss of 28 cents per share while distributable earnings for 87 cents per share.
A few weeks ago, we paid a dividend of <unk> 52 per share with respect to the fourth quarter do you have any questions. Following today's call. Please let me now with that I'll now turn things over to Katy.
Thanks, Tim.
<unk> of this quarter's earnings comes down to two key numbers 87 per share our distributable earnings and all time record for <unk> and.
<unk> 94 per share our net change to book value, reflecting the impact of our seasonal reserve increase given the more challenging credit environment.
But you are integrally related.
Primary factor pressuring credit performance is also driving record income for our business and that is the precipitous rise in short term interest rates 425 basis points over the course of 2022, the steepest tightening cycle in 50 years.
Theyre also integrally related for our company.
Our powerful earnings stream protects the lion's share of returns for our investors as we work through a credit cycle.
Our dividend is delivering a nearly 10, 5% current income yields well in excess of the three 5% impact on book value of our reserve increase.
That dividend is well protected 140% coverage this quarter, creating meaningful cushion against non accruals. It as recurring we've paid it for 30 straight quarters and when we out earn our dividend. The difference is retained as additional equity further offsetting the impact of increased credit reserves on our book value.
This interplay will persist rates are still increasing and the fed has made clear that they will stay high for some time it's.
This will continue to pressure our credit performance for the most challenged real estate assets at the same time elevated rates drive outsized earnings power and current return.
Our full hedge for businesses like ours.
The broader market has figured this out after a year of massive outflows from all sectors inflows into fixed income so far in 2023, our robust spread.
Credit assets are inherently defensive and floating rate credit is even better today.
This does not mean, we won't be immune from an economic slowdown few businesses can be.
But we believe our business is well positioned to withstand it.
We start with an asset base of loans made to best in class borrowers with significant subordinate equity.
With the benefit of insights gleaned from the far reaching Blackstone footprint. We then built up our defenses for a more difficult environment.
<unk> seen cracks in the capital markets, we shifted the X M T. It to a more conservative posture at the outset of 2022.
We raised the bar for our lending activity is focusing on our highest conviction themes and top tier borrowers we raised over $1 billion of corporate capital accumulating a deep well of liquidity and.
And we proactively worked with our existing borrowers.
Collect paydowns and recourse reaping the benefits of our well structured loans to enhance our credit question, while importantly, maintaining constructive relationships.
At the same time the impact of rates on carry costs valuations and market liquidity will continue to weigh on the most vulnerable asset.
This is an important concept the impact of the current economic and interest rate environment on real estate is uneven.
Growth in multifamily industrial and hospitality assets remains robust and supply had become more constrained due to rising construction costs, providing a longer term tailwind to fundamentals.
Capital demand is even more concentrated in the best performing assets, providing strong support to valuation.
On the other hand office is facing well known headwinds from post COVID-19 work patterns and a slowing economy.
But here too the outcomes are any of them.
The segment is not monolithic and basis and quality matter. There is scarcity in true class a office space as evidenced by record setting rents at trophy asset.
While commodity office in cities that were already experiencing slowing growth prior to COVID-19 are facing the sharpest headwinds.
Our reserves are concentrated in these assets as are the bulk of our asset management efforts.
The four loans with new specific reserves this quarter date back to well before Covid 2017 on average on assets that were well suited to their markets at the time.
Covid was not in the model and three of these loans are backed by office properties that are bearing the brunt of the post COVID-19 realignment in demand most notably a significant reduction in government tenant office utilization.
The loans also share the commonality of a material change in sponsor wherewithal towards the assets.
We are sober about the value declines impacting the most challenged of commodity office on average our reserves are 20% of our loan balance and imply asset value reductions of nearly 50%.
But these assets are not typical of our broader office portfolio.
54% of our office loans are backed by assets that are newly built our recently substantially renovated with an average vintage of 2021 and an average origination LTV of 60%.
34% of the office portfolio most of the remainder carries one or more significant credit enhancing qualities, such as particularly low leverage high debt yield location in high growth Sunbelt markets are material additional sponsor equity commitment in the last year.
Our four and five rated office loans round out the rest and represent only 5% of the overall <unk> portfolio.
Mall fraction, where we have meaningfully increased our reserves to account for the credit challenges we see today.
Our overall loan portfolio is 97% performing.
This year, we collected $3 $7 billion of prepayments nearly 50% of which were on office phones are borrowers contributed $675 million of incremental equity continuing to invest in their assets.
Captured nearly $350 million of partial paydowns or increased recourse on 17 existing loans primarily office.
<unk> and averaged 16% reduction in our basis.
We were able to negotiate this deleveraging because our loans carry many structural protection performance test cashflow sweeps guarantees and rate cap requirements.
And of course, the most important protection for a lender is leverage point.
Insulation provided by our loan basis should not be overlooked it would take lasting declines of 30% to 40% in real estate values for us to experience a loss at our position in the capital structure.
And because the vast majority of our sponsors remain committed to their assets and have contributed more equity along the way our basis has been further derisked overtime enhancing the embedded credit protection in our portfolio.
In 2020, we encountered an unprecedented disruption for the real estate market we.
We address that challenge much as we are addressing the delayed COVID-19 impact on office today.
Asset managing our loans, making appropriate risk rating and reserve adjustments negotiating for credit enhancement and providing time where appropriate.
It is our job as a fundamental investor to look past, the broad brush sentiment and judiciously and proactively manage our portfolio based on Blackstone's deep experience, taking the long view.
And what are the impacts of asset underperformance capital markets and sponsor behavior combined to create a workout dynamic we have the experience and the infrastructure as one of the largest owners of real estate in the world to identify and execute the best offer value preservation overtime.
A differentiator that will become increasingly important through the credit cycle.
At the same time, we believe the origination environment will become still more opportunistic as values adjust and new capital as needed.
We started the Blackstone that business in the GST and we are uniquely positioned to access the once in a cycle of capital relief trades that create outsized returns on well underwritten risk.
And the current market, we have found pockets of attractive regular way lending opportunities as well.
Amplified by our nearly $700 million of second half originations that were 70% industrial with yields 173 basis points wider than our overall portfolio.
But with transaction activity far below the norm the addressable universe of standard new originations is smaller and to stand up to the opportunity cost of our capital new deals today, it must be more attractive from both a risk and return perspective close.
Most importantly, the outstanding earnings power, we've been already established with our existing portfolio means we can well afford to be patient.
As we look ahead the market outlook is mixed we see some green shoots with the turn of the calendar to see MBS market has reopened with AAA spreads retracing, 50% to 75% from historic Wides in December of <unk>.
That market is active banks, having cleared their stress tests are fine.
Well I think long term rates create support for asset values and rational long term borrowing costs, an important dynamic that should lead to more liquid markets.
But there are still headwinds the accumulating pressure a sustained high interest rates geopolitical uncertainty and slowing economies around the world.
As a result, we continue to position the business to withstand a more challenging period, while continuing to capitalize on the advantages that supported our performance this year.
Well performing portfolio record earnings power substantial liquidity and a well structured balance sheet.
While the coming year may present challenges challenge creates opportunity and there is no platform better place to navigate this environment than Blackstone, where.
We are the largest alternative asset manager in the world with unparalleled information experience and relationships, we have afford decade track record of performance for our investors and all market cycles and here at <unk>, we look forward to continuing to deliver for our shareholders.
With that I'll turn it over to Tony.
Thank you Pete and good morning, everyone.
I would like to start by unpacking, our financial results for the quarter.
The GAAP net loss of 28 cents per share.
Evil earnings or <unk> 87 per share.
He is up 16 cents from the third quarter driven by continued income growth from a 100% floating rate portfolio as well as a notable prepayment fee of about <unk> <unk> per share this quarter.
Excluding this fee.
Our regular way.
<unk> per share is up 13% from <unk> and 21% from the equivalent metric for Q of last year, reflecting the significant beneficial impact of rising rates on our portfolio.
We continue to see rising rates are a tailwind for our business with a 100 basis point increase in rates from <unk> level generating around five cents per share of incremental quarterly earnings all else equal.
The primary difference between our GAAP net loss in D C $189 million increase in our system reserve this quarter, primarily related to four loans with specific reserves as well as an incremental general reserves to reflect the broader market uncertainty and potential risk to our portfolio.
Our aggregate asset specific seasonal reserve now stands at $190 million or 20% of our five rated loans.
General seasonal reserve of $153 million represents 55 basis points of our total portfolio.
From 35 basis points last quarter.
Well these reserves will not impact D unless and until they are realized.
Also placed our loans with specific reserves on cost recovery status effective as of 12 31.
These loans received all interest payments due in the fourth quarter and generated about <unk> <unk> per share of interest income.
However, as we collect interest payments in the first quarter of 2023 and onward cost recovery accounting will instead apply the cash payments, we received against our basis swaps.
Ultimately should these loans fully recover all such deferred revenue will be recognized at the time of repayments.
The interim.
Headwind earnings will be substantially offset by the benefit of rising rates I mentioned earlier.
Continuing on the topic of credit.
Eight loans this quarter as performance for these assets continue to improve and downgraded eight loans inclusive of the four loans with specific reserves I mentioned earlier.
Our five rated loans with specific reserves represent only 3% of our gross loan portfolio.
And percent of our loans have a risk rating of four all of which are performing in current where we see the possibility of further stress economic conditions worsen.
The remaining 87% of the portfolio was rated three or better.
Can you just see business plans progress, including outstanding performance across many of our multifamily industrial and hospitality assets.
<unk> represent over half of our portfolio.
We've continued to collect 100% of all interest due under all of our loans.
Majority of our loans, 97% remained fully performing and recognizing income as usual.
Although loan repayments remain muted, we did collect $648 million of repayments this quarter roughly in line with our $690 million.
Okay.
Turning to our capitalization, we continue to run <unk> business with a focus on balance sheet diversification and stability.
During the year, we added $3 $6 billion of new credit facility capacity with our key banking relationships.
We remain an important customer for them during a period when banks are increasingly selective on credit.
None of our credit facilities allow for margin calls based on market based valuation.
And 64% of our total financings are non mark to market.
Either structurally immune from any form of margin call or mark to market provisions limited to defaulted assets only.
Our liabilities are term matched to our assets and we have no material corporate debt maturities until 2026.
In the fourth quarter, we strategically upsized, our term loan by $325 million effectively refinancing the $220 million convertible notes maturing in March.
Our corporate debt raised to $1 $1 billion for 2022.
This incremental term loan was leverage neutral as we use the proceeds to repay revolving credit facilities.
Over our reported debt to equity ratio did increase this quarter to three eight times from three six times as of 930.
This is not the result of increased leverage against our assets, but rather the result of our seasonal reserve, reducing the GAAP equity used in these calculations.
Excluding the impact of seasonal our adjusted debt to equity ratio is three six times in line with <unk> and the level, we generally expect to be stable going forward.
Incremental capital we raised this year as well as the incremental earnings we have been able to retain a grown our liquidity to $1 8 billion as of.
12, 31 of $1 6 billion net of our convertible notes maturing in March.
This capital provides us with plenty of resources to manage our business during a volatile period increased further stability in our balance sheet.
Similarly, we believe our 62 cents per share dividend will remain stable and is well supported by the cash flow generated by our business.
Our D E covered our dividend, 116% over the course of the year and 140% this quarter.
US ample dividend coverage and a wide range of price scenarios.
For example.
Onerous downside scenario, where all of our five rated loans and all of our four rated office loans stopped paying interest.
<unk> earnings level would still cover our dividend with a healthy cushion all else equal.
Of course, we're not expecting this scenario to unfold.
Highlights the inherent resilience of our business and our ability to maintain dividend stability.
We look forward to continuing to deliver consistent reliable current income for our stockholders and we maintain our focus on stability and downside protection amidst a more challenging environment.
With that I'll ask the operator to open the call to questions.
Just to remind everyone. Please press star one to queue up for questions. We would like to ask you to limit your questions to one question and one follow up question Alright. Thank you.
And the first question is coming from Doug Harter with credit Suisse.
Please go ahead.
Thank you Oh, Kitty, hoping you could talk a little bit more about the four loans that you put reserves on you know kind of what what specifically kind of occurred in the quarter that kind of led to that yeah, the downgrade and in our specific reserves.
Sure.
So the the loans that we added specific reserves. This quarter were three office loans and one very small rent stabilized multi alone.
Previously had them on the watch list and talked about a few of them last quarter as areas of concern.
They we've had general sponsor support of sponsorship behavior and as Tony mentioned all of these loans have been paying interest, but we're in a dynamic environment and the performance of these loans have changed over time.
Some of the office loans, which are the lion's share of our in some of the most challenged markets do you see long Island City Orange County, and I think also worth noting the quality of these buildings that's quite distinct from the norm in our portfolio are generally more commodity buildings, we made the loans knowing that at low leverage points, because they were relevant to a specific niche of the market.
That has now changed materially.
So the setup. It is balloons became more challenging in the post Covid World and then that combined with the impact of higher rates on carry costs and liquidity combined with some upcoming maturity has created a decision point and we made the decision to move those loans to five and take the specific reserves.
We're actively working on these loans to resolve them and bring them to a conclusion and as a reminder, the loans, we downgraded our only two 4% of the overall portfolio and really represent a different paradigm than what we're seeing in the most of the portfolio.
Just on the maturity point Katy I'm, you know I guess, what are the kind of the final maturities or what would be or extension dates are good kind of trigger the next decision point from the sponsors.
So I think we're already in that conversation.
The office loans have their maturities this year and so that's really part of what is is resulting in these reserves and the conversations we're having so there isn't another sort of impact or or relevant timeline.
Great. Thank you.
And our next question is coming from Johnson Daddy with Wells Fargo.
Please go ahead.
Okay.
Okay.
John We can't hear you maybe you're on mute.
Hi, Katy.
Can you talk a little bit about how higher rates are pressuring borrowers and can they handle much more if the fed continues to raise and you know were you able to give modifications in that type of thing to manage through that.
Sure. So I think that clearly higher rates and especially the accumulating impact of higher rates for longer create pressure for borrowers. They may carry cost more expensive they make the option value more expensive for assets that are already challenged they change that the perceived cap rate and certainly at a higher <unk>.
And the overall fed tightening is having a very material impact on liquidity.
So those impacts are happening I think it's important to note that even with that we still have a 97% performing portfolio. So our assets are withstanding those impacts, which we have been felt for quite a period of time now and I think that's a testament to the equity value in the assets and our sponsors view about the long term value of the assets, which we share.
Sure.
I think the other dynamic that you brought up and that's really important and I mentioned in my script is that the impact of higher rates. It creates pressure on assets that were already more susceptible but for the lion's share of our portfolio. It creates very substantial excess earnings and that creates installation in our business in terms of our ability to retain those accessories.
And book value, our ability to cover our dividend and our ability to work with borrowers if they have a viable business plan and it's really just the significant increased interest costs, that's causing the pressure we have some flexibility there to put the asset on a better path.
Allow it to manage carry costs, a little bit more reasonably and get to the other side here and the fact that having much higher rates and the result of that on earnings in our portfolio gives us substantial margin to be able to have those conversations in a lot of optionality in terms of putting these assets on the right foot to.
To manage through this period.
Got it thanks.
Yeah.
And our next question is coming from Steve Delaney with JMP Securities.
Please go ahead. Good morning. Thank you good morning, everyone. Congrats on a strong import obviously a difficult environment.
Curious on the.
80 cents of distributable EPS, excluding the <unk> and Prepays I mean, it was very strong at eight to 10 cents above consensus and your own third quarter number of 71 was there anything other than obviously higher average LIBOR was there anything unique or one time in.
That number such as maybe.
Record recognition of some.
Accrued interest that had been deferred just to help us. If there is if you're really I guess my question is did Tony and <unk> is the 80 cents a reasonable run rate for distributable EPS in the near term. Thanks.
Sure Steve.
Short answer is as you you highlighted the <unk> is really the unique sort of one time sure <unk> that is the earnings power of the business. It's the impact of rising rates on the portfolio.
And the full performance of the portfolio.
Can you talk about run rate I'd say, the two things to bear in mind, which I highlighted on the call on the one hand, we have some of the loan is going to cost recovery that will cut against that on the other hand, we have the benefit of further rising rates that'll be a tailwind those happened to roughly offset but if youre thinking about the go forward. Those are the three things that I would think about is the 8% baseline and then those two variable.
Going forward.
Thank you Tony and on the dollar 10 boost to the seats reserved <unk> 10 per share about 180 million can you clarify how much of that.
I think there was certainly the specific you mentioned the ones that had been a four five loans that had been put on the cost recovery, but is there a material increase in the general reserve include embedded in that dollar Tien.
Sure. So the general reserve went from 35 basis points of our loans to 55 basis points.
This is about.
Like 13th so its majority is did the change in the impaired loans.
But.
Excuse me, it's about 30 I misspoke.
So the majority is the move in the in the five rated loans, but you do have the general reserve growing as well.
Yeah, No I think that's important because we at least.
Have some.
Hope or expectation down the road and improving market that that's some of that.
Maybe Robert to book value. Thank you very much for the comments.
Thank you.
The next question is coming from Jade Rahmani with gay BW. Please.
Please go ahead.
Thank you very much I wanted to ask about multifamily were seeing negative new lease rent growth slowing demand.
So it's a matter of time before renewal rents catch up.
The magnitude of growth.
And in addition to that 1 million of multifamily units under construction, so a massive increase in supply.
Well, we'll pressured multifamily fundamentals this sector had the lowest cap rates are low.
Lot of deals done even below 4% cap caps.
And many of those deals have challenges with interest rate caps that are coming up. So what are your thoughts on multifamily and how exposed you think VX M. T is to any credit issues. There over the next 12 to 24 months.
Sure. Thanks, Chad.
I would start by saying you know what we're seeing on the ground in multifamily is perhaps a little bit distinct and it may speak to the quality of the markets and the assets that are in our portfolio and more generally at Blackstone, while we do see some deceleration in the growth of rents. We are still seeing positive re leasing spreads and I think you alluded to it a little but it is really.
Critical to focus on the fact that the loss to lease and the rent rolls is still very significant so even if you see a topline market Reds decelerating or flattening out there is still significant loss to lease that will create positive NOI growth going forward and that's what we've seen I think the other important thing to notice if you look at the vintage of origination.
And have a lot of these loans. The real question is where's the NOI going to be relative to when we originated these loans and theres still a lot of growth between those two things, which supports our basis I.
I think the other thing to focus on it and again support the SCR and other cashless. The other thing to focus on is there's a tremendous amount of capital that is focused on multifamily there's been new capital formation focused on filling some of the gaps in the capital structures that may be caused by interest rates or rate caps rolling off or other needs and <unk>.
Generally I think multifamily owners are very positive about the long term prospects that their assets. The market in general is supported by the agency financing market and I think as a whole you know the combination of continued positive, albeit to your point probably somewhat less quick are decelerating growth by continued positive.
Growth combined with the fact that there's a lot of capital markets interest and support for this asset class. It makes us as a lender feel very good about where our loans are relative to the NOI and the value of that would be about that there will be a little bit of a pop near term and supply but beyond what's already in the ground. This year the supply pipeline is really <unk>.
<unk> significantly falling off and so I think people will also see through an.
Interim sort of short term delivery of some of the assets that are under construction and understand that over the next couple of years after that theres going to be very little new supply.
Thanks, very much on the office side as I go through the.
The portfolio Theres, many markets, where we're seeing pressure.
It's extremely widespread including markets like Austin.
Nashville.
Parts of Dallas.
And then the other.
The other obvious markets. So how confident are you that your fourth quarter seasonal reflects.
Broad a broad view of the office exposure and that we shouldn't expect material degradation in credit on that portfolio in the coming quarters.
Yeah.
Yeah, I think a lot of it comes down to quality I mean, we're in a dynamic environment. So we look at the data and the trends, we see today and that informs what we do with our reserves and our overall risk rating process.
Identify the five in the fourth where we see more susceptibility, but I think in particular with some of the markets you mentioned.
Theres really a difference in the dynamic between San Francisco and in Nashville, Theres still growth in Nashville, It may be coming down a little bit and you think about rents in mark to market of where those assets were renting out historically versus today and overall fundamental long term dynamics combine that with the quality of assets, we're focused on in Austin.
Our large office there is going to be the newest office building in the market. It's a mixed use project, 62% of cost with an outstanding sponsorship and it's really going to be the most premier asset in the market and I think that that's part of why we feel good about the overall office portfolio is really looking at quality and we're seeing in most markets is just this.
Continuation of an accelerating flight to quality and so you'll see the larger market statistics and certainly they they have challenges in our portfolio is not immune from that that's why we have the fourth and five but by and large the very high quality assets in the markets. We broke our sort of new and recently constructed at 2015 vintage.
Those assets are seeing very different dynamics theyre seeing good net absorption growing rents are five to 10 point differential in availability and while the overall market is slowing those assets. We think are going to continue to outperform.
Thank you.
And the next question is coming from Eric Hagen with <unk>.
Please go ahead.
Hey, Thanks, good morning.
How would you describe your approach to reserving and even potentially modifying loans because of the fact that price discovery is so weak in the market right now and like how do you how do you handicap for that.
Where do you think.
There could be more meaningful discrepancies between where do you think value sits and where.
Sort of the unknown of where it could realistically transact.
Yeah, I think for office, we are in a very illiquid market, there's not a lot of transaction activity that's going on the small amounts of transaction activity are generally in the more distressed category and so I think it's fair to say no one can be perfect in that context, but that said we have an extremely rigorous process, we do a full deep dive underwrite.
In coordination with our broader real estate team using all of the best available information we have on our assets on the market all of the constant information flow, we have coming in so Blackstone both transactions that have occurred in transactions that have not occurred and we inform that all through our process, which has been thoroughly vetted by our senior leadership.
The reserves also go through an audit process. So there is a third party auditor element to it and so it's an extremely rigorous and detailed process that we think reflects the appropriate level of reserves that we see today.
Great. Thanks, that's helpful and how would you maybe describe the outlook for sponsors to capture NOI growth as a result of the capital investment or the business plan that they are pursuing that would you say that your sensitivity has changed with respect to unfunded commitments or construction financing in general.
So I think it certainly depends on the asset class, we still feel very good as I had mentioned about the prospects on the majority of our portfolio of multifamily industrial and hospitality. Some other segments that are seeing good growth on the office side. The majority the vast majority of the future funding is a newbuild office and as I.
Mentioned earlier, the Newbuild office elements of the portfolio, which is naturally where most of the future fundings are those assets continue to see very strong growth. There has been just recently in the last month, good leasing coming out of Hudson yards, including at the IRA which is our largest office loan.
As I mentioned seeing continued very strong rents on newbuild offices across markets and so I think when we look at and think about our funding's going into Newbuild office buildings, which are also just because of the way we make construction loans tend to be lower leverage on average than the rest of our portfolio and again by definition the best quality asked.
That's coming into the market, we feel good about continuing to invest capital in those assets.
Yeah. That's helpful. Thank you guys very much.
The next question is coming from Derek Hewett Bank of America.
Please go ahead.
Good morning, everyone kind of following up on some earlier questions could you provide any update or color on the ltvs for the risk weighted five loans.
Well I think that the best indication and where are we sort of see that today is really around our reserve levels and as I mentioned in the call scripts.
We're we're pretty cautious and pretty sober about where we think values are for the most susceptible or sort of the most vulnerable commodity office assets, we've taken 20% reserves on those assets reflective of asset values down 50% that is specific to the assets that we have.
As most challenged older vintage markets that are really tough.
Situations with the individual assets, where they were addressing a segment of the market.
That has really changed the government tenant segment being the most significant.
So I think that's really how we think about the metrics on those assets.
Okay. Thank you and then I realize that the REIT is principally an owner of real estate, but is there any investment overlap between B X M T and B REIT.
No it's a totally separate vehicle.
Okay.
Thank you.
The next one is coming from Stephen laws with Raymond James.
Go ahead.
Hi, good morning.
Katy can you talk about that.
What do you expect a resolution path to be for the five rated loans and how we should think about the timing.
Of those specific reserves moving into realized losses through the through distributable earnings.
Sure.
I think that with these loans and the benefit of what we have here in the platform being the largest owner of real estate in the world. We are really taking a deliberate and thorough approach. These loans do generally cash flow as Tony mentioned, they all paid interest in the fourth quarter there on cost recovery.
We continue to see cashless coming on which will apply to our base.
And in the meantime, what we're doing is assessing the various potential outcomes, whether it's you know what.
Our sale in due time as structured solution, taking them and we're going to make the decision that we think is most beneficial for long term value preservation for our shareholders.
That's a process that's going to take some time, because we really want to be deliberate about it and make the right decision and these are a very small part of our portfolio that are supported by the tremendous earnings power. We have throughout the rest of the portfolio and so our goal is to preserve the most value. We can on these assets over time using an ownership mentality.
Thanks, and as a follow up to that Katie can you talk about how these loans are currently financed and in the event that there on facilities that have credit Mark exposure can you just give us an update on how those discussions go and kind of what the options are for for financing these loans.
Yeah, absolutely so theyre finance consistently with the rest of our portfolio, which is a mix of different asset level financing I would say generally our conversations with our all of our credit providers are extremely constructive they recognize the same thing we see in terms of our ability to preserve and create and enhance value over time and then ramping.
It's how responsible we've been with managing views and all of our assets in terms of creating deleveraging putting ourselves into a better credit position. They know that we're going to act in the best interest for the long term preservation of value of these assets, which of course, a nurse to their benefit and they also have the additional credit enhancement of these generally being in cross pools with a law.
Sort of credit enhancement. So we have a lot of flexibility there com, we need to keep them comfortable in and they are well aware of all of these situations and you know it's been a very constructive dialogue.
Great I appreciate the comments thank you.
Our next question is coming from Rick Shane with JP Morgan.
Please go ahead.
Okay. Thanks for everybody for taking my questions.
<unk> you.
Talked about the fact that higher rates are driving higher.
That totally makes sense, but.
To some extent.
That is ultimately zero sum it puts more pressure on your borrowers to the extent yields are going up I realize that so far a great deal of that has been offset by rate caps.
I'm curious as we see scenarios, where loans are extended either because of execution or because of unattractive takeout financing how are you.
You can think about those rate caps does that where you continue to have the same level of coverage if the portfolio fully extents.
Yeah, It's a great question and I think rate caps are one of the really important tools in our tool kit that allow us to have conversations with borrowers and sort of right size our credit exposure on these loans.
It really starts with the borrower's equity value in terms of what they have to protect and to your point in a higher interest rate environment, clearly that eats into some of the equity value, but most of our borrowers still have a lot of equity value to protect even if it's less than what it was in a zero percent interest rate environment. So that's a really positive backdrop.
And then we have the right cap conversations our portfolio is still 95% covered by rate caps or interest guarantee is we've had a lot of loans come on those conversations in the last year. So that gives you an indication of our ability to preserve that structural protection.
We take a thoughtful approach well well over we have rate cap requirements will require that if we think that's the right thing we may also CIT.
Trade it for an interest guarantee more passionate an interest reserve or whatever we think is the best alignment for us and for our borrowers. We have 25 people on our asset management team that are working through all of these decisions and discussions with our borrowers everyday and really always just looking for a way to put our alone and the asset on the most.
While Pos going forward. So no I think it's it's it's been a great sort of dialogue with our borrowers we have been able to preserve a lot of this protection and be able to <unk> been able to pick up more sort of credit enhancement in the form of guarantee is an interest reserves potentially along the way and we will continue that approach.
Got it it's a very helpful answer and thank you very much.
And the next question is coming from Erin <unk> with Citi.
Please go ahead.
Yes.
I was wondering if you could just talk a little bit about the office market in how much of this is driven just by you know rates in required cap rates versus the actual fundamentals obviously.
Folks are going to offices less and using less office space.
I'm, just kind of thinking about what could turn to surround.
So really its or or do you really have to see a dramatic change in the fundamentals of folks in the offices themselves.
That's a great question and it's it's really a combination I think that there are assets that are outperforming and doing fine even in the context of higher rates, whether that's you know.
In the multifamily our industrial sectors or Newbuild office, where we continue to see good leasing at strong rents there are assets that have real secular issues assets that just targeted a component of the market.
Government tenancy as I mentioned that just really is not a growing significantly.
Significantly shrinking part of the market going forward commodity obsolete physical quality office thats been something thats been challenged for years.
Long before Covid and so there is a continuation of the trend and then there are assets in the middle of that cash flows perhaps were not growing or not.
Not as substantial as they once were but they work okay in a low interest rate environment and less so in the environment that we have today. So you know I think interest rates become a decision point for assets. Some assets that were experiencing some challenges, but not really sort of permanently.
<unk> issues and so as rates fall you may see some of those assets crossover, but theres certainly.
Number of assets in the market and a few in our portfolio that were just built and.
Targeted at a part of the market that has had a lasting change and I don't think rates are certainly a contributing factor, but I'm not sure that lower rates are are really going to change for some of those assets, but again, that's a really small part of our portfolio.
Okay. Thank you.
And our final question is coming from Jade Rahmani with Ww. Please.
Please go ahead.
Thank you very much just wondering if you could walk through liquidity post the convert repayment what are the primary sources of liquidity as Jeff Undrawn and available borrowing capacity and you.
Do you expect to issue any form of capital to potentially replace that convert whether it would be a preferred securitization or something else.
Sure I'll start with the second.
Part of your question. So we think of the term loan that we issued earlier this quarter is effectively the replacement for the convert we thought that was a good time to issue that in the market and so that was a bit of a pre refinancing. So we would not expect at this point that we're going to handle the convert.
Sure the other than paying it in cash as far as the sources of liquidity.
We always keep some cash on hand, but the majority of the liquidity is under our credit facilities and those are revolving credit facilities, where we can as of right borrowed that money in 24 hours that is not some sort of contingent availability that the banks need to approve or you can prove asset. So it's really as good as cash we just don't keeps cash drawn to manage these.
Interest expense.
No plans to issue a CLO.
In the near term I think Katy you did talk about some of the improvement in spread that we've seen in that market.
Yeah, I mean, we're certainly tracking the CLO market and its nice to see some additional liquidity in that market. If we issued a CLO. It would really be a factor of our sort of opportunistic management of our balance sheet as we've talked about in the past all of our you know our asset financing is designed to be term matched the CLO is we really do if we see it as an operating.
Mystic reify that improves our pricing our structure.
I'm way that we think is better than the in place credit facilities that we have and certainly if we see that opportunity in the market will take it.
But I think the market is not quite there yet, but certainly the momentum is moving well and while we will be tracking that.
Thanks, so much.
Yes.
Okay.
There are no further questions in the queue. So let me hand, it back to Tim Hayes for closing remarks.
Thank you operator and to everyone joining us today look forward to catching up shortly.
Yeah.
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