Q4 2022 Brightspire Capital Inc Earnings Call
Yeah.
Greetings and welcome to the final capital, Inc. Fourth quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host David follow My General Counsel.
David you know that they've got good morning, and welcome to bright spire Capital's fourth quarter and full year 2022 earnings conference call, we will refer to bright spire capital as bright spire, the RSP or the company throughout this call.
On the call today are the company's Chief Executive Officer, Mike Madden.
I didn't and Chief operating officer, Andy wet and Chief Financial Officer, Frank Sparacino.
Before I hand, the call over please note that on this call certain information presented contains forward looking statements.
These statements are based on management's current expectations are subject to risks uncertainties and assumptions potential.
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 February 21, 2023, 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.
Reconciliations 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 on our results.
The company reported fourth quarter 2020 to GAAP net income attributable to common stockholders of $4 $2 million or <unk> <unk> per share distributable earnings of $34 $2 million or 27 pence per share and adjusted distributable earnings of 35.
Million dollars or 27 cents per share.
The company also reported GAAP net book value of $10 77 pence per share and underappreciated book value of $12 and fixed cents per share.
December 31 2022.
I would now like to turn the call over to Mike.
Thank you David welcome to our fourth quarter and full year earnings call and thank you for joining us today.
Over the last year, you've been very vocal about the impact of the fed's aggressive tightening policies.
Therefore today I will keep my market comments brief and I will address current dynamics affecting the office sector, and then turn the call over to Andy who will provide more detail on asset management development and our balance sheet.
Early last year, we decided to not fight the fed.
Strategic pivot to a risk off mode with.
We substantially throttled back on loan originations in order to prioritize liquidity.
We turned inward to focus on asset management and engaging with all borrowers.
Made certain to apprise them well in advance of the significant increases in interest rate cap costs and the implications of rising rates on future loan extension tests. We believe that these early actions in 2022 helped us to get ahead of the curve.
Turning to 2023 bright spot as strategic direction will somewhat hands on how long the fed maintains its restrictive policies. The expectation is for the fed to increase rates. Another 25 basis points in March and again in May.
While the rate increases are substantially behind us. The number one question for 2023 is just how long does the fed mean, when it says higher for longer.
We believe that outside of a panic event higher for longer means through the end of this year.
And for what it's worth we also believe that the fed will need to change its 2% inflation target.
Therefore, as we navigate through this uncertain period of fed policy, we continue to emphasize maintaining higher cash balances and proactively managing our loan portfolio.
Regarding our liquidity.
As of today, we have $284 million in unrestricted cash and $449 million of total liquidity.
Now turning to the capital markets There've been some green shoots in the CRE CLO market, which has seen two securitization issuances, thus far this year.
Most recent issuance was met with significant investor demand and albeit while pricing improved from Q4, it's still wide and the transactions do not yet allow for a reinvestment period.
There has been continued tightening of credit spreads in both the corporate bond and C. M. B a securitization markets. Therefore, we expect to see more follow on improvements and CLO credit spreads and deal terms through the course of the year.
Now I would like to discuss the office property sector.
We believe this is a more significant issue in commercial real estate and high current level of interest rates.
While rates will inevitably come down and benefit all property types the headwinds in the office sector, all longer term and in some cases could be more permanent.
The work from home model with a full time or hybrid has become the new normal.
This is impacting all types of private businesses as well as federal and state government agencies. This is also having a concerning impact on city and state sales tax and transit revenues.
A major tracking tool for the industry, it's become office attendance data.
While slowly improving office attendance is generally tracking an average of only 50%.
There were also significant disparities well.
While cities in Texas are experiencing office tenants in the mid sixties, the San Francisco Bay area, and Washington D. C are both in the low forties.
In addition, the attendance rates are consistently concentrated midweek.
Even New York City is now considering a work from home model towards municipal office employees.
And all of this is even further complicated in certain large metro markets, where quality of life issues, along with higher income taxes and higher housing costs are adding to employee preferences to work from home.
And whereby home has too often become a completely different state than their employer.
These dynamics are creating leasing headwinds and asset valuation uncertainties that have also culminated into a risk off environment by lenders, who become substantially frozen for making new loans on office properties.
In fact, most lenders are now focused on managing office loan exposures in their own portfolios.
Shifting to bright spire, we took into consideration. These work from home factors in a post Covid office loan originations.
We focused on drive to work markets office properties with diverse rent rolls as well as lower average loan sizes.
Portfolio granularity with a major consideration for our strategy.
Contemplated the liquidity and dry powder that theoretically might be required should there be a need to protect the balance sheet for larger multi hundred million dollar loans.
We believe that boxing and your designated weight class for loan size concentrations is a critical part of risk management.
Hence our average new office loan size was $32 million.
We further recognize that all loans are nonrecourse and that even large institutional borrowers how financial limits and then the yen will act in their own economic self interest.
In closing we are very pleased with our 2022 results, which reflect our team's ability to quickly pivot the business in a fast changing market.
We closed the year with both solid earnings and increased liquidity.
Bright spire is positioned to be opportunistic once we have better visibility in fact, some of the best lending opportunities will be in the office sector.
In the meantime, all things being equal our bias continues to remain toward maintaining higher levels of liquidity versus making new loans.
With that I would now like to turn the call over to our President Andy Witt.
Andy.
Thank you, Mike and good morning, everyone. During the fourth quarter. Our focus remained on asset liability management, we received $383 million in repayments and partial pay downs across 12 investments during the quarter compared with $40 million in repayments and partial pay downs across four investments in the <unk>.
Prior quarter.
While we are pleased with the increase in repayments and partial pay downs, we continue to expect loan repayment volume to remain relatively low for the next couple of quarters.
During the quarter, we executed on one loan origination which was done in conjunction with a wound recap and payout we closed on a preferred equity loan to support the pay off of the largest multifamily loans in our portfolio, which was 182 million and was originated in 2019.
This is paying off and recap resulted in a reduction in.
In total exposure and last dollar attachment point from $182 million to its current $22 million.
Our position with our last dollar attachment point of $144 million.
The senior loan was refinanced with a GSE agency lender and the balance of the payoff proceeds.
I am from borrower equity.
Repayment activity during the quarter resulted in loan portfolio decreasing to $3 5 billion from $3 9 billion last quarter total at share underappreciated assets currently stand at $4 9 billion down from $5 3 billion last quarter, a direct result.
Negative net deployment.
Subsequent to quarter end, there has been $69 million in repayments and partial pay downs across three investments.
Previously highlighted we anticipated loan repayment volume will remain relatively low over the course of the year. We expect sponsors would that two or have little choice other than to hold properties longer in anticipation of an improved capital markets environment, while continuing to execute on the.
Underlying business partner.
Subsequent to quarter end, we had a modification to $116 million office, while the largest office loans in our portfolio. This modification included the sale of one of the four underlying office properties, coupled with an equity contribution from the borrower, reducing our exposure to this loan.
$29 million the current balances alone post modification has been reduced to $87 million.
With interest rates at current levels and trending higher we anticipate more loan extensions and modifications within the portfolio.
As of December 31, 2022, excluding cash net assets on the balance sheet. The loan portfolio was comprised of 100 and reinvestment with an aggregate gross book value of $3 5 billion and a net book value of $977 million or 86% of the.
Total investment portfolio.
The average loan size was 34 million and our risk rating is three point too.
First mortgage loans constitute 96% of our loan portfolio of which a 100% are floating rate and all of which have rate caps.
The total portfolio has minimal exposure to construction risk and 74% of the total collateral is located in markets that.
<unk> are growing at or above the national average growth rate.
Multifamily.
Asset class Bright star has the largest exposure to consist of 59 borrowers representing 49% of the loan portfolio or 1.7 billion of aggregate gross book value.
The loan portfolio composition includes 33% office or $1 2 billion of aggregate gross book value. There are 32 office loans with an average loan balance of 37 million as Mike mentioned, we are acutely focused on the office portion of our portfolio given <unk>.
Work from home dynamics are greatly impacting certain markets.
Despite these headwinds during the fourth quarter of certain borrowers many critical leasing progress in markets, which include two office loans in San Francisco proper.
And one office in Baltimore, Maryland.
Our office loan portfolio is granular with loan sizes, ranging from 12 to.
$116 million, which we view as a meaningful risk mitigate.
As stated earlier the $116 million loan was reduced to 87 million subsequent to quarter end approximately 58% of our office exposure was originated post COVID-19 and adheres to the characteristics Mike highlighted.
Assets located in high growth right to work markets with granular rent rolls and in place cash flows the weighted average occupancy across the portfolio is 72%.
The remainder of our loan portfolio is comprised of 12% hospitality with industrial and mixed use collateral making up the rest subsequent to quarter end bright spire made progress on our hospitality exposure through restructuring of mezzanine investment, which included a partial pay down.
Of the senior law, reducing price fires last dollar attachment point separately one hotel property is currently being marketed for sale by the borrower.
For your convenience our 2022 Form 10-K filing includes enhanced loan table aggregations by property types. So investors can more easily review our loan data by asset class.
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.
Two and a quarter billion as of today.
Availability under our warehouse lines stands at approximately $940 million, which represents a 58% aggregate utilization rate.
Additionally, we have two outstanding CLO totaling $1 5 billion at present, approximately 42% of our loan collateral has been contributed to <unk>, 53% is on our warehouse lines and 5% is unencumbered.
In summary, it was an active fourth quarter, particularly related to asset and balance sheet management, we increased liquidity and address some of the largest loans in our portfolio, while increasing earnings quarter over quarter going forward, we will remain focused on asset management and <unk>.
Maintaining higher than normal levels of liquidity with that I will turn the call over to Frank Sparacino, Our chief financial officer to elaborate on the fourth quarter results.
Thanks.
Thank you Andy and good morning, everyone.
Before discussing our fourth quarter and full year results I wanted to mention that we expect to file our Form 10-K later today.
Turning to our fourth quarter results, we reported adjusted distributable earnings of $35 million or 27 cents per share and distributable earnings of $34 2 million or 27 cents per share.
Additionally for the fourth quarter, we reported total company GAAP net income attributable to common stockholders of $4 2 million or <unk> <unk> per share.
Quarter over quarter total company GAAP net book value decreased from $10.87 per share to $10.77 per share and unappreciated book value also decreased from $12 eight to $12.06 per share.
The decline is primarily driven by a net increase in our general seasonal reserves, partially offset by distributable earnings in excess of dividends declared and the FX translation related to our Norway office net lease assets.
It's important to note that while the FX translation did at.
The book value of 12 31, the knock has since increased in value and would have added only two cents using today's foreign exchange rates.
Additionally, we sold our remaining C. N V S. B piece investment for $36 9 million during the quarter, a slight premium to carrying value.
I would like to quickly bridge, the fourth quarter adjusted distributable earnings of 27% versus 25 cents recorded in the third quarter.
The quarter over quarter increase was primarily driven by the increase in the benchmark interest rates and higher prepayment income related to loan repayments.
When adjusting for the full quarterly effect of fourth quarter repayments as well as the beneficial impact of rising interest rates continue to have on our portfolio. Our adjusted distributable earnings quarterly run rate closer to 25 cents per share.
We provide more data in our supplemental financial report, but in illustrate a 50 basis point increase in the benchmark rates from the December 31st spot rates would add roughly $4 3 million. So our annual earnings or about three cents per share.
It's also worth noting that halfway through the first quarter base rates are already increased by approximately 20 bps.
Turning to our dividend in 2022, we generated all year adjusted distributable earnings at <unk> 98 per share and distributed 79 per share or 81% payout ratio.
Looking at reserves in risk rankings are specific reserves ending the fourth quarter was 57.2 million.
No change from the third quarter.
Our general she saw provision ending the fourth quarter was 49 5 million an increase of $26 million from the prior quarter. This.
This mainly reflects an increase in the general seasonal for some office and mezzanine loan, partially offset by along with payments and lower reserves on certain hotel.
Our overall loan portfolio is 99% performing.
Two loans are residential mezzanine loan and an office senior loan move from a three to a four risk ranking.
Altogether, our average loan portfolio risk ranking at the end of the fourth quarter was three point to an increase in the third quarter 3.1 risk ranking levels.
Our risk shrank five loans represent 3% of our gross loan portfolio.
Two are the long Island city office loans with specific reserves taken in the third quarter.
The third one is performing 12 million dollar hotel loan that was modified during the first quarter of 2023.
The fourth alone relates to the L. A mixed use mezzanine loan, which was written off in 2020 one.
Nine loans with an aggregate commitment amount of 17% have a risk score ranking.
For our office loans and to our mezzanine loans.
While all are currently performing we see potential for increased risk and accordingly are closely monitoring these investments and working with sponsors to ensure the best possible outcomes.
Moving to our balance sheet, our total at share unappreciated asset that is approximately 4.9 billion as of December 31 2022.
Debt to assets ratio was 64% and our debt to equity ratio was two times at the end of the fourth quarter down from two three times last quarter.
In addition, our liquidity as of today stands at approximately $49 million between cash on hand, and availability under our bank revolving credit facility.
At present, we believe the $284 million of cash on our balance sheet. In addition to the proceeds available under our revolving line of credit provide us with the liquidity and flexibility to manage that.
This concludes our prepared remarks and with that let's open the call for questions.
Operator.
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Polling for questions.
Yeah.
We have our first question from the line of Steve Delany JMP Securities. Please go ahead.
Good morning, everyone. Thanks for taking the question look very solid quarter and are obviously challenging market. So a.
Good job.
Keeping keeping it keeping a job heading down the right way.
I'm just curious your heavy repays, that's always I think in this market. That's a good sign frankly because of liquidity, but 383 million can you comment Frank in terms of the magnitude of prepayment fees associated with that 383 million. Thank you.
Sure I can't give you that number if I can find that handy one second if I can have the chance of total prepayment fees.
For the quarter.
I'm not going to find that have you seen them. They have to get to you actually I had a 1.1 point $8 million of people.
Okay, great. Thank you that's helpful and Mike just my follow up question is to you, obviously really strong dividend coverage, where you are or 35%.
You made it very clear about the need for liquidity and building liquidity.
We would all agree that's necessary in this market.
What has your conversations been with the board in terms, Okay, we're going to keep the dividend where it is but we need to recognize their stock's trading. This morning at like 60% of our U T B D.
Any thoughts about buybacks and remind me if you do actually have a buyback authorization in place. Thank you.
Hi, good morning, Steve.
We've said before in terms of buybacks, where we're prioritizing.
Defending the balance sheet first and foremost as someone who's worked in credit for my entire career, it's not the type of message you want to telegraph.
Two our warehouse lenders that we're buying back stock at this time in the market I think it is much more important that we're telegraphing that we're protecting.
The balance sheet. So that's priority number one in terms of in terms of the dividend we have a.
A pretty a pretty solid buffer.
On the dividend I don't think right now that Theres, a conversation going on about raising that dividend I think that.
We understand that a lot of that has to do with rising interest rates with.
With rising interest rates a lot of our brother and talk about that's great for E. P. S. I have a more sober view of that and that rising interest rates put more pressure on properties and more pressure on borrower liquidity and there's growing credit risk as interest rates continue to go up so we're going to continue to emphasize our.
Emphasize liquidity, we you know in terms of raising the dividend in stock price right now all of the market is substantially below their book values in the market, where you are you, saying that theres an issue regarding credit we want to make sure we understand the credit profile.
Been a lot of movement Oh, along the sector in terms of seasonal reserve increases a lot of questions about the office sector. So right now I think the price is really reflecting credit and managing the balance sheet and protecting the balance sheet before it's looking at are you going to increase your dividend.
Yeah. No question I think people are more worried about dividend cuts then I think you'd be you know be wasting your two or three cents to increase it in this market with the skeptic says I'm just about the economy and about real estate values.
Both of your comments.
Thank you.
Yeah.
Yeah.
Thank you we take our next question from the line of Eric Hagen with <unk>. Please go ahead.
Hey, Thanks, Good morning, good to hear from you guys, maybe a little bit more fleshing out the liquidity.
Just how do you think about the liquidity relative to the size of the seasonal reserve like what would what would drive you to hold.
Even more liquidity from here like the reserve has gone up but it's still relatively modest as a percentage of your total assets. It looks really manageable. So I'm just trying to square up like how you think about it.
The approach to your liquidity relative to the size of you know what you're reserving for it.
Okay. So thank you for the question. This is Mike Let me give you a little clarity on AR on the reserves, we have 107 million.
Total and reserves roughly about 82 cents a share of that.
$57 million of it was taken against the two long Island city assets, both of which we've got cooperation agreements with the borrower the same borrower on both assets both of which will be we've hired a sales advisor and both assets are being marketed now and a short sales structure in terms of the.
Balance of the AR reserves are roughly.
33 million I believe is in the risk weighted risk ranking for category of which a substantial amount of that or a good chunk of that is against one asset.
An office asset.
In D C. I can't give you the amount exactly but it's a more substantial reserve.
In terms of liquidity going forward.
It would be unreasonable for anyone in the space and our real estate lending space to say that they don't anticipate some future credit issues going forward, we do anticipate that there will be.
Some movement in risk weight, five or three assets potentially for that that's just not it's not an unreasonable thing.
To think but it really maintaining liquidity is about moving assets around.
And potentially delevering assets and protecting the balance sheet and that is just an unknown right now and I think it's very hard to sit here over the next 12 months and say we know what the fed is going to do we know when they're going to give relief, we don't and that's being reflected in the market today, So I I think holding onto more caching.
We see that visibility is less to do with with write downs there more to do with just maintaining liquidity on the balance sheet to maneuver assets.
If if they need to be moved around about that point and that's why we stress.
The granularity of the portfolio, we don't have any battleship size lungs, and as I said in my prepared remarks, we we stayed within our boxing weight class, meaning we look at our loan size is relative to our shareholder equity and make sure that the concentrations never get so large that if you.
Had to move an asset.
That was not performing up to its business plan that it would not.
Affect the entire balance sheet of the company and so we have we've made sure that our average loan sizes were small enough and granular enough. So that we could move loans around.
We do have stuff that is still weighted.
And risk ranking four and five we do expect to see some movement there in the future. We we have some assets that are in the risk ranked five a mezz loan on a hotel in New York City, that's actually doing quite well right now so we'll see some migration.
In an improved rating there theres, a large hotel loan and our second largest hotel loan in the portfolio where.
It was it's been in the market for sale for quite a while and we believe I can't speak for the borrower, but we believe that that hotel is now under PSA to be sold and we expect that that loan to be paid off and we also did see some some good leasing and some of the risk rated a.
For office loans as Andy said in his prepared remarks in San Francisco believe it or not and in Baltimore believe it or not we got very good leasing on some of those assets that brought them.
It's almost a 100% occupancy in San Francisco and.
I think low eighty's and and Baltimore, So the 72% average occupancy that Andy throughout I think his prepared remarks, you'll see some improvement there and then in that occupancy is probably skew down by the fact that the long island city out of assets, one of which was in the office space and substantially vacant as I said those are up for sale.
Sort of I've been long winded here I apologize I think there'll be movement and the risk rankings and I think all liquidity really is not about reserves, it's about making sure you can protect the balance sheet.
Yeah. That's helpful perspective, thanks for Flushing that out I appreciate that.
A follow up here I think he noted the Carlsbad office alone was partially paid down and modified it sounds like there were.
Maybe three more assets in that portfolio is the plan to get additional pay downs from asset sales, what's the outlook. There just just generally in that one credit.
Andy would you like to address that.
Sure thing. Thank you Mike So as you noted we had a pay down.
The business plan going forward is to release well one of the remaining buildings and otherwise it's substantially leased and then.
Borrower will look for liquidity, whether that's through the sale of additional single asset single properties or through a refinancing or sale of the remaining three asset so.
That's that's the current plan.
Got it thank you very much.
Yeah.
Yeah.
Thank you to take next question from the lineup Jade Ramani with K B W. Please go ahead.
Hi, This is actually <unk>. So she adjacent snapshot on show. It was my first question no. We're starting to see a few cases of what looks like strategic defaults from borrowers in order to extract concessions from lenders. Since you know they know lenders don't want a foreclosure on their hands I'm for example, there's a large.
One multifamily deal that had special servicing.
So are you seeing that that dynamic in your portfolio at all.
Well I'm not going to comment on Blackstone, we have a lot of respect for that organization, but as I said in my prepared remarks.
These are nonrecourse loans.
And we expect when we make these loans.
Then every borrower at the end will act in their own economic self interests there are.
Borrowers, who want to protect brand and rec and name recognition, but in a market like this.
Well, you've got such a dislocation in interest rates is affecting the entire market and issues around the office sector.
We expect those borrowers to feel like they have a hallway paas regarding brand, having said that every borrowers going to act in their own economic self interest. So this notion that.
And we've heard this many times.
We have institutional blue chip deep pocketed.
Or is that that to me is always in my career I've been a fallacy in the sense that.
If the if there's equity to protect they will act in their economic interest and protect it and you have to have eyes wide open when you're making them alone.
You have to have eyes wide open when you asset managing the loan as to what you think those borrowers will do so in terms of strategic defaults.
We just think borrowers are going to act in their own self interest and you are really not prepared lender if you're not on the other side of that expecting the borrower to do so to game theory out.
The outcomes are we've got a number of situations here for instance in long Island City, where we have cooperation agreements with the borrowers to work with them on a on trying to use them and how they are assisting us in their knowledge of the asset to have a more seamless sales. So we will cooperate with the borrowers and then maybe just maybe some concession.
<unk>.
That you make with them in doing so, but that's all part of the it's all part of the alignment and trying to maximize our financial returns. So this whole notion that people are doing that just to to see what the the lender will do I honestly think that in some scenarios.
The most scenarios. This is reality some lenders are unable to get refinancing and Theyre looking our borrowers are unable to get refinancing and they're looking to their lenders are for assistance and I think that's going to be the case for the next 12 to 24 months.
Got it. Thank you so as a follow up to that just more generally speaking about the market are there any particular asset types or geographies, where you're particularly concerned about credit other than office, which has really been at the forefront.
But you know I've been listening to the calls that kind of happened prior to us in and and Jayde has.
Made reference to certain markets, where we're finally, starting to see development going on in these southern markets that have experienced some neck breaking rent growth and while we do recognize that.
That they're they're all rents that are potentially going slightly downward in areas like Phoenix for instance.
When you look at when you look at markets like that.
Multifamily in Phoenix, probably has roughly 40000.
Plus or minus 50000 units under construction right now.
But they've got a population growth that is surging still and right now population in the larger Phoenix market is probably 455 million and it's expected to grow over the next several years to something like.
7 million.
So when you look at the number of units under construction versus the population Serge.
We still think that those markets are better markets to lend into albeit while there is some supply coming and albeit some softening of rents temporarily.
On the other side of that there are markets that we would avoid.
And you know I hate to single out.
But we will not lend in the state of Illinois because.
Hi, it's reaching a tipping point in terms of corporate real estate and personal income taxation and the services that the state is offering is certainly the city of Chicago that offering or diminishing in our in the light of a shrinking population and growing tax burdens and so it becomes very difficult to make alone.
Well when you're looking ahead five years, you're saying the population is going to be several percentage points lower and.
And taxes and property taxes, particularly R&R known so there are states like Illinois, and New York, and California, and New Jersey, which become difficult having said that in California. We've had some good experiences in San Francisco, We've got good experiences in Los Angeles, we haven't.
Oakland asset that's very small low leverage office asset that's that's struggling in terms of its leasing but generally speaking as I said in my prepared remarks, we are recognizing the fact that in all lending that not only is there a work from home issue with office, but there is a migration shift and a lot of that has to do with <unk>.
Not just taxes and work from home, but also quality of life.
And we're seeing that net net I would rather land at a low cap rate in Arizona than land at a very high cap rate in Illinois, all things being equal because I think that ultimately.
Population can bail out a mistake that you may have made in a in a in a state like Nevada, Arizona, Texas versus.
Illinois, where the headwinds are just against you.
For the life of the loan.
Got it got it thank you very much.
Yeah.
Thank you.
Again, if you wish to ask any question. Please press star followed by one on yet that stalled for now.
Do you have a next question from the line up Jason Stewart with Jones trading. Please go ahead.
Hey, guys. This is Matthew on for Jason. Thanks for taking the question. What are you looking for in terms of opportunistic development more visibility in the portfolio or from the fed.
And then given that where do you think the opportunities will be in the expectation for going in and exit cap rates.
Okay. There's a lot there to unpack in terms of and I may have to retrace that question with you to make sure I address it in.
In terms of opportunities as we said in the prepared remarks.
When you get a shake out like this are the goal as you make it to the other side and you have liquidity on your balance sheet and you can start lending again and.
As we said, we do think that given the dislocation that could occur.
In the office sector and continued uncertainties, we think some of the bigger opportunities will be to land on a to lend in the office market and there may be a new dynamic in terms of.
How to price that right right now that's still in a state of flux. Most lenders are on the bench and kind of frozen out of the market, but we do think that the cost of capital in the office sector is going up and that's going up largely driven by the leverage leverage will become more conservative.
Leverage will be lower.
Not necessarily it's not necessarily about the weight the rate may stabilize but the leverage point will probably get a lot lower requiring more equity and thus putting our weight on equity returns for that leverage amount, which can drive cap rates up. So we do think that cap rates in the office market will have a bias toward.
Increasing in the face of this uncertainty even as rates come down as long as this work from home environment that we've discussed continues to persist, which we anticipate it well.
Is there anything else in your question I don't think I address the whole thing is there anything else that you want to go back on specifically.
Yeah, you just the first time pretty well, but the the second part was kind of going in and exit cap rates. So I guess, where would you guys look to enter in at and then where would you look to exit add on some of these opportunistic offices.
Yeah, that's really I I I I hate to say this but that that's almost not really answerable right. Now. It is it's so dynamic it depends on the individual office asset its market as it always does but then in terms of where rates are where the CLO market is all going to be big driving factors. So.
I'm going to try to bring that back to a more concise answer that is why today that market is substantially frozen and the transactions youre seeing really cannot press.
<unk> for instance, there was a C M. B S securitization recently done with an office portfolio with.
Where the where the debt yield was like in the in the high teens I I'm going to I'm going to throw out 18% is the number that sticks in my head and like a sub 40% loan to value.
That type of lending is going to happen in this market, but those situations are gonna be needles in the haystack and not representative market. There's also some balance sheet lending that's going on in the office market, where assets are being lent on it basically land value and that is really a complete derisking and not representative of where we think lending will be in.
The future so we think well.
What's going on today is a sensibly due to our market being frozen in a state of flux and as the dust settles over the next year year and a half we think those loan to values that may have been the 70% may kind of pulled back to 60% of value and then what value is at that time will be based on where the 10 year settles out my guess.
Is that we're not going to see a 10 year rate. That's a one handle again, if we do things are really bad, but probably gonna see 10 year rates somewhere in the 333% handle so you'll probably see that yields are somewhere in the low double digits.
Thank you that's helpful.
Okay.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the floor back over to Mike Mezey for closing comments.
Over to you Sir.
Thank you and thank you for joining us today and.
And we look forward to our quarter one call with you early may.
Thanks, again and have a great day.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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