Q1 2023 Blackstone Mortgage Trust Inc. Earnings Call
Yeah.
Good day and welcome to the Blackstone mortgage trusts first quarter 2023 Investor call. Today's call is being recorded if you require operator assistance at any time. Please press star zero at this time all participants are in a listen only mode. If you would like to ask a question. Please signal by pressing star one on your telephone keep.
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If you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. At this time I would like to turn the conference over to Tim Hayes, Vice President shareholder Relations. Please go ahead.
Good morning, and welcome everyone to Blackstone mortgage trusts first quarter 2023 conference call I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marone, Chief Financial Officer, and all companion Executive Vice President of investments.
This morning, we filed our 10-Q and issued a press release and a presentation of our results which are available on our website 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 for a disc.
<unk> had some of the risks that could affect 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 a reconciliation you should refer to the press release and our 10-Q.
Audiocast is copyrighted material of Blackstone mortgage trust, you may not be duplicated without our consent.
For the first quarter, we reported GAAP net income of 68 per share.
Distributable earnings were 79 per share.
A few weeks ago, we paid a dividend of <unk> 62 per share with respect to the first quarter.
Have any questions. Following today's call. Please let me now with that I'll now turn things over to Katy.
Thanks, Tim.
<unk> results this quarter and Didnt clear contrasts to the negative macro backdrop, we reported 79 cents per share of distributable earnings an increase of 27% year over year.
Our earnings covered our dividend by a considerable margin of 127%.
Our credit performance was steady with no defaults are seasonal reserve increase was therefore, a modest and more than offset by the earnings we retained in excess of our dividend maintaining our book value.
And we ended the quarter with a substantial $1 $6 billion of liquidity to insulate our balance sheet and capitalize on opportunities.
More than a year into one of the most aggressive fed tightening cycles in history. The resilience of our business continues to come through in our results.
With the outsized income across the 97% of our loans that are performing offsetting the challenges at the 3% that art.
We've taken our reserves up substantially to seven times over the last year.
The strong current dividend, we've delivered far outstrips the book value impact of these reserves for our shareholders.
On the current share price that return dynamic is even more powerful we're trading at a 14, 7% dividend yield and an 18, 7% earnings yield with significant downside protection given the deep discount to book.
Being a lender it's distinct from being an equity owner today, the divergence is particularly meaningful in the academic experience along the way.
As a floating rate lender our cash flows are growing and the interest we collect on each loan each payment date de risks arbitron amount of our investors with every passing quarter.
This is the power of current income a critical differentiator for any business in a volatile period.
And in addition to the significant cash flow generation of our portfolio as a senior lender, we start with a 36 point margin of safety.
Credit enhancement that insurance value declines our first absorbed by the equity before we feel any impact on our recovery.
Put a different way if the value of an asset is down 10, 20, or even 30%. The expected outcome is the same full recovery of our loan.
We are well aware of the liquidity challenges in credit headwinds in the market and they are not new in the last 90 days.
Proactively positioned the business to withstand them starting with our first principles of low leverage floating rates senior lending and a well structured match funded balance sheet and more recently with the conservative strategic positioning we adopted a year ago.
At the outset of 2022, we raised the bar on originations shifted our asset management strategy to reduce credit risk at every opportunity and executed on our plan to bolster liquidity ahead of the volatility raising $1 $2 billion of fresh capital during the year and terming out all of our corporate debt.
We will not be immune from credit impact, especially in the office market.
That is why we have booked significant reserves against our most challenged vibrated office loans over 20% of carrying value on average, implying a roughly 50% reduction in real estate value from origination.
We are realistic that there will be more challenges over the coming quarters, Hence our watch list, but our four and five rated office loans remain just 7% of our overall portfolio.
We've been extremely proactive in managing our office loans on many of our four rated office deals. We are in active negotiations for additional equity commitments something we have already achieved on 16 office loans in the last year, including two on the West Coast just in the last few weeks.
This quarter, we were paid off on 700 excuse me on $300 million of office on adding to the $1 5 billion of office repayments, we collected last year and reflecting the benefit of our basis and position as a senior lender.
25% of our overall loan portfolio is U S office.
Our pre Covid underwriting did not contemplate today's hybrid work pressures, we've always been deliberate and selective about real estate quality location and sponsorship.
As a result, we believe our office portfolio is meaningfully better position than the market as a whole.
Across the top U S markets less than 5% of office stock that's been built since 2015.
But our performing portfolio is nearly 50% post 2015 ground up are substantially renovated and new construction.
In contrast to the capital starved assets that populate the MBS market as a transitional lender our assets by definition have gone through recent Capex plan.
This makes them better positioned to compete for tenants, particularly as capital for renovation and leasing cost becomes more scarce.
And we have substantial concentration in Europe , and Sunbelt markets together, 48% of our office portfolio, where fundamentals are more stable.
Moreover, the office risks is deeply priced into our market valuation.
We're trading today at six four times book value.
To dimension the losses implies it equates to an impairment of over 90% across all of our four and five rated office loans.
Effectively a full principal loss on first mortgage loans.
This is extremely punitive and credit outcomes take time during which period, we benefit from current income for.
For the 500 office loans, we put on cost recovery as of the beginning of the year, we have already reduced our basis as we continued to collect interest across all of our loans, including the <unk>.
And all else equal are highly attractive dividend would remain covered by day, even if we place all of our four rated office on cost recovery as well.
Across the overall portfolio, we are seeing strong performance from.
For multifamily hotels essential retail and many other segments of the real estate market cash flows are robust.
So rent growth has decelerated in some areas absolute rents are still well above levels that origination.
Rising costs and capital markets and liquidity have significantly reduced the new supply pipeline.
And as a result, we see business plan progress as well as repayments despite the highly liquid environment.
We had 10 upgrades this quarter, primarily multifamily and hotel loans.
This included a four rated New York City hotel, reflecting its strong cash flow growth over the last 12 months.
We see the same recovery story across many of our four rated hotel loans as well as in the 1% to three risk rating segment of our portfolio.
Our upgrades also included one of our largest office loans Burbank Studios, a Frank Gehry designed trophy Newbuild asset where construction is substantially completed and Warner media took occupancy.
Unsurprisingly given the environment, we saw some downgrades as well primarily office loans in New York and San Francisco.
Altogether, our weighted average risk rating has moved negligibly in the last year, reflecting improvement across many assets balancing the deterioration we see in some segments of our office portfolio.
Today, one and two rated loans represent 29% of our portfolio the highest level since before COVID-19.
Nearly 600 million of loans repaid this quarter with more than half in office and the remainder of virtually all in retail and hotel.
Well, we continue to expect the absolute levels of repayments to be tempered the diversification of our portfolio makes them likely to continue a pace.
New originations will also be measured a result of the much slower transaction environment as well as our preference for maintaining maximum optionality in this environment, which we can well afford to do given our robust earnings power.
As a balance sheet lender our earnings are not dependent on the pace of new originations, but rather on the interest income we derive from our well invested portfolio.
And that income is at near record levels.
There's no doubt the coming quarters will continue to be challenging we expect short rates to remain elevated the failures in the regional banking sector will likely tighten the regulatory environment for all banks.
While long term rates are lower recession concerns are driving sustained dislocation in the capital markets.
But for our business, we have not lost sight of the opportunity on the other side of this storm.
Direct lending is tailor made for this environment.
Many banks will have less money to lend and their capital will be more expensive.
With quickly changing markets and more opaque underwriting conditions fewer platforms will have the real time knowledge to skillfully assess opportunities.
Available lending capital will become more scarce and command a higher return.
While the transaction environment is subdued at the moment the passage of time will eventually push deals into the market.
We started the Blackstone real estate debt business in the aftermath of the global financial crisis stepping into the void of a similar realignment of the bank regulatory framework.
Since then we have built a $60 billion AUM platform with truly differentiated information expertise relationships and investment talent.
On the other side of this turmoil is a singular investment opportunity for our business and no platform is better equipped to capitalize on it and Blackstone.
With that I'll turn the call over to Tony.
Thank you Katie and good morning, everyone.
This morning, <unk> posted another quarter of strong earnings providing clear support for our stable dividend and a compelling return for our stockholders.
Our <unk> GAAP net income of 68 per share up considerably from last quarter's GAAP net loss of 28 cents.
No significant seasonal reserves running through our results this quarter.
Our distributable earnings or <unk>.
Remained strong at 79 per share for <unk> roughly in line with the earnings we generated in the fourth quarter. Excluding the notable <unk> prepayment fee. We received in December and highlighted on our previous call.
This consistent level of <unk> reflects the continued performance of the vast majority of our floating rate loan portfolio.
<unk> benefit of rising rates, which added about <unk> <unk> per share to where want to your earnings.
This was counterbalanced by a handful of loans on cost recovery status, where the interest we collected this quarter about <unk> <unk> per share.
Generate earnings.
<unk> reduced our basis in these loans.
Similar to last quarter, we continue to collect all amounts due from our borrower borrowers, including these costs recovery ones.
Lastly, our book value per share of $26 28.
Slightly up for the quarter I don't believe you retain earnings outpaced our modest once you see some reserve.
On the topic of seasonal.
According to a net reserve increase of $10 million this quarter, primarily related to asset specific reserves.
Our general reserve was up slightly quarter over quarter. After a significant increase in <unk> to reflect the more volatile macro environment.
In terms of asset specific reserves, we recorded one new impairment against the small office loan in Brooklyn, which we also move to cost recovery accounting.
It was significantly offset by a seasonal reduction driven by incremental cash flows collected from one of our previously impaired loans.
Our total asset specific reserve of $197 million represents about 20% of our five rated loans.
Harry in aggregate $352 million.
Our $2 four per share total <unk> reserve as of 331.
This reserve reflects our quarterly bottoms up loan by loan analysis to identify impairments and risk in our portfolio as well as the impact of broader macroeconomic conditions.
Our <unk> risk review also resulted in seven loan downgrades content upgrades, reflecting the migration of our portfolio away from your typical three rating.
Certain loans remain challenged while others advance their business plan and improve our credit position.
Continue on credit we added an additional metric to our reporting this quarter net loan exposure to facilitate understanding by investors on where credit risk may lie in our business.
This is Patrick takes our existing disclosure of gross loan portfolio and excludes our senior syndication Cesar reserves, resulting in the net credit exposure rehab to each loan.
GAAP treatment of loan syndication.
Sometimes accomplished through sales and sometimes synthetically.
<unk> nonrecourse term match loan structures.
Areas, depending on the legal structure of each transaction.
Some structures remain on our balance sheet, while others do not have all accomplished the same economic outcome limiting our capital at risk to our net subordinate position.
Our net loan exposure creates parity among all syndication structures and properly reflects the credit risk we have sold for the senior portions of these loans as well as where we have already taken loss reserves against our portfolio.
Our 10-Q also increased net loan exposure at 12 31 to show how our portfolio is migrating from <unk> on an equivalent basis.
Turning to the right hand side of the balance sheet, our capital structure remains well insulated from market volatility with stable asset level financing long dated corporate debt and ample liquidity.
While our financing activity was light in <unk>, given the slow transaction environment.
We continue to benefit from our deep banking relationships as part of the Blackstone franchise and the structure of our financing none of which allow for margin calls driven by market based valuation.
Further 63% of our total financing are fully non mark to market either structurally immune from any form of margin call or the mark to market provisions limited to default assets only.
Our liabilities are term outs for assets, eliminating the risk of duration mismatch.
And following the $220 million repayment of our convertible notes this quarter, we have no corporate debt maturities until 2026.
Our adjusted debt to equity ratio of three five times down slightly from $3 six last quarter, reflecting the benefit of <unk> retained earnings and $150 million of net principal cash flows from our portfolio of.
$594 million of repayments outpaced $444 million of fundings under existing loans.
Mission to partial deleveraging.
<unk> contributed to a $1 $6 billion of liquidity at quarter end consistent with our effective liquidity at 12 31.
At a level, we have we have established to manage our business through period are generally less liquid capital markets and stress in the banking system.
Our liquidity is composed of cash on hand, and immediately available undrawn borrowings under our revolving credit facilities.
Concentrated with top global banks with no exposure to credit Suisse signature bank or other high focused banks.
We believe the strength of our portfolio, our defensive posture with respect to our liquidity and capitalization will allow us to continue delivering consistent reliable current income for our stockholders as we continue to navigate a more challenging macroeconomic environment.
That I'll ask the operator to open the call to questions.
Thank you as a reminder, please press star one to ask a question.
Please limit yourself to one question and one follow up question to allow everyone an opportunity to ask a question.
Well go first to Steve Delaney with JMP Securities.
Good morning, everyone and thank you for the question.
Prepayments $600 million it looks like represents only about a 9% annualized rate.
And then just on the surface would appear to be low on loans with a with a three to four year life expectancy.
Katy I was just wondering if we're sort of been a shocking all moment, maybe here and with the bank failures et cetera.
Looking out through the balance of 2023 and into early part of next year, where do you expect prepays to kind of settle in do you expect them to be a little higher than what we saw in the first quarter. Thank you.
Thanks, Dan.
So certainly we saw a slower pace of repayments this quarter, which I think we expected and have been talking about for a while it's the natural impact of the capital markets Illiquidity, and everyone's sort of going to the sidelines, obviously, our portfolio remained well invested where we're able to sort of match the repayments and make sure we keep a well invested.
Portfolio and strong earnings power I think looking ahead. There is a couple of elements. One I agree with you that I think as the market sort of settled then we will see a bit more we have a lot of loans in the portfolio that are stabilized and certainly available and in a good place from their business plans to be repaid sold reified et cetera, I think the other element is looking at.
The five year and the tenure, if obviously come down quite a lot and stabilized. So I think that when you think about liquidity in the fixed rate market, whether it's the agency MBS insurance.
All markets that we're seeing much more active I think thats going to result in more turnover over time I think from our perspective, though what's really most important and what we've seen in the history of our business is that origination volumes and repayments are certainly lumpy. We have periods. When they are very high we have periods when they are lower but they tend to be very well.
All correlated and we expect that to continue as we look out for the balance of beer.
Great I appreciate that and my follow up.
5% of your portfolio is in Ireland, including your large one excuse me 1 billion dollar office portfolio loans could you talk a little bit about leasing conditions, there and the Dublin market. We know there is some political unrest picking up again unfortunately.
And the.
Work from home W. S. H is that similar in Europe and in Ireland as we are experiencing here in the states.
Sure. So I would say as a general matter when we look at Europe , and the office markets there.
See a lot more stability lower vacancy rates more.
More positive dynamics on rents those markets on the office side historically have had a lot less in the sort of leasing concession amenity war dynamic and so the economic experience of owning an office building in Europe , especially at our new quality High ESG standard office building is quite different than what we see in the U S. I would say.
As far as doublet in Ireland, particularly the portfolio. We have there. The large one is actually across the portfolio of office and industrial the industrial has been extremely strong the office had been very stable well leased long duration leases with multinational tenants. So from our collateral perspective, we're in a very stable place.
As the market at large there's obviously more tech exposure there I think that will take time to play out but the dynamics that make Ireland has strong long term market cost of living well educated population Inc.
English speaking part of the Eurozone, we feel good about those dynamics over time and as far as the near term performance of our collateral we see a lot of stability there as well.
Great I appreciate those comments and I do note that.
Thanks.
We'll take our next question from Sarah Barcomb with BTG.
Hi, everyone. Thanks for taking the question.
So you spoke to preserving.
Liquidity in the current environment, and we didn't see any new.
Originations I was hoping you could.
First talk about <unk>.
Some of the spreads that you saw in any deals that didn't cross the finish line relative to the previous quarter.
Also the attractiveness of maybe buying back stock and debt versus new originations going forward.
Sure So I think on the.
The investment environment that spread dynamic we're seeing is certainly still attractive from a absolute perspective, I mean spreads are certainly wider than they have been base rates are obviously higher I think the challenge is from an origination perspective. We're also very focused on credit and higher spreads higher base rates means more interest burden.
And we're very focused on the SCR, making sure the deal standup to the return we want but also the risk profile, we want and also not compromising on the quality of borrowers and an investment.
Collateral that we target and to bring all those things together.
We have not seen a ton of deals that meet that bar again really because the transaction environment is so slow I think transaction volumes were down like 50% year over year.
And even more so in sort of larger assets.
Very slow environment.
But we continue to look at things and I think that spreads are wider for deals that we see theres also other interesting investment opportunities that are starting to crop up, especially the potential to buy seasoned portfolios at a discount where you have legacy lower spreads.
Buying them at a discount so the return works for a lender, but the SCR math is a little bit easier. So I think we're starting to see that but really the position. We're taking is maintaining that maximum optionality. Because we think the more interesting investment opportunities are really to come we haven't seen a lot of them, yet and we really want to have the dry powder.
To address those very compelling investment opportunities that we think might come.
I think as far as looking at various parts of the capital structure and buybacks certainly we think that the way the various parts of the strict capital structure are trading are not reflective of the risk profile I spoke to that a bit in my script.
And so we always look at that but I think we're also again really focused on maintaining that maximum optionality for our business too.
To address what we think may be a very interesting environment ahead.
Okay, Great and then I was hoping for a little bit more detail on that new five rated New York office loan could could you talk about what was happening on the ground there.
Sure. So that's a very small loan in our portfolio. It's an asset that we have reduced our base sustain over time, but ultimately sort of hitting a decision points around maturity.
It was time for us to put it on five rating and take what we think is an appropriate impairment and we're working with the sponsor and I think we both expect to bring it to you.
A close over the coming quarters, it's it's a well located asset.
Maybe has an alternative use away from office, but overall small loan and not particularly impactful to the overall portfolio.
Great. Thank you.
We'll take our next question from Doug Harter with credit Suisse.
Can you talk about.
<unk> loans, you have maturing in the next 12 months and how those conversations with with.
With sponsors is going about maybe needing to put additional equity in.
In order to get an extension or to or to recommence.
Absolutely. So we don't have a ton of maturities over the next 12 months of 2023 or the number that I have 7% of the total portfolio.
18% of our office portfolio.
I'd say as we look ahead at the maturity due really fall into a couple of categories. There are a number of loans, we've already addressed we've gotten significant paydowns from sponsors.
<unk> reduced.
Reduced our basis and put the loans on a stable possession theres other loans that we have clear path to repayment. So under offer refi et cetera, and I would say, especially on the office side. The rest of the sort of 2023 maturities that don't fall into those two categories. We've already put on the watch list. So we really don't see a lot of additional risks.
And that segment of the portfolio and I think that as far as the conversations with the sponsors. The tenor has been very good I think one of the benefits of having the types of sponsors. We have is they have a lot of capital and obviously they also have to see equity value to protect over the long term you need the ability and the desire to.
To protect the assets, but having sponsors that have plenty of capital makes the conversations work better and we've been very successful over the last year getting pay downs on loans from well capitalized sponsors and putting them on stable footing to get through this period I think in the last year, we got about $500 million of incremental equity Jos.
On office loan, which I think is again just a good indication of how we're able to negotiate with our sponsor is the quality of our assets the basis, we have in the equity value of our sponsor's feel they have to protect.
Can you just remind us on your typical loan are they recourse back to the sponsor or is it like see MBS, where if they don't see equity though.
Yeah, I'll kind of hand to hand, the keys back to you.
Yeah, I'd say, it's in between we are primarily a non recourse lender. So we don't have a lot of principal payment guarantees in our loans, but we do have a lot of very thoughtful other structure, whether that's carry guarantees completion guarantees equity contribution guarantees or other forms of structure in the alone.
That allow us to along the way improve our credit positioning as we go through these conversations with our borrowers. So that's the approach we've taken and I think that we've found over the last year that these structural elements that we've always baked into our loans, which really didn't come into play for a lot of the last 10 years have pre.
Even to be incredibly valuable in terms of being early warning signs and allowing us to have those positive credit outcomes early not necessarily have to wait until maturity too.
Touch our loans and improve our credit position.
Great. Thank you David.
We will take our next question from Stephen laws with Raymond James.
Hi, good morning, Judy.
Good morning, all and I guess.
To start I wanted to follow up really on Sarah's question, but.
Liquidity is and defensive positioning as a party here, but.
Given your comments in the prepared remark about the disconnect between valuation.
And what that implies on loss severity across parts of your portfolio that seem to be unrealistic.
What are the thought process around stock repurchases or debt buying back debt. When you do decide it's time to lean out I mean, how do you think about the repurchase or opportunity versus a return on new investments given the current valuation of the stock.
Yeah, I mean, I think it's a constant evaluation I mean, we're obviously looking at all the different opportunities both within the portfolio outside of the portfolio.
<unk> opportunities that we think are coming and again maintaining that optionality. So I think it is it is all of the elements I mentioned and it's a constant evaluation.
We certainly see the value of the various parts of the capital structure.
Spend time thinking about it but again just looking at all of those different options and I think optionality at the most valuable right now, but as we see things play out some repayments in our portfolio et cetera, It's certainly something we consider.
Thanks, and then as a follow up I wanted to maybe follow up on Doug's comment on your answer them, some structural protections and loans, but.
<unk> seem to have a lot of discussions about interest rate caps I'd love. It if you could talk about.
Any color on how many of your loans have those when how long are they in place do they started origination date or where some of the loan setup with springing caps, which would change the timing so maybe.
Maybe it's the other structural protections in the loans or things that you think.
Really enhance the interest collection ability of borrowers to pay but love some comments around that.
Available thanks.
Absolutely I think over time, we've been really successful in maintaining the credit protection on the interest coverage in our portfolio. We continue to have 95% of the portfolio with either rate caps carry guarantees are very significant interest reserves and so I think that's one of the reasons why we continue to see $100.
Interest collection in our portfolio and obviously that cash income coming in Derisking, our return Derisking our basis.
We anticipated and we were very disciplined on in terms of structuring these loans going in and I think that it's proving out over time.
<unk> the way they usually work as they they followed the maturity schedule of the loans that we have had a lot of conversations with borrowers at extension to extend the rate caps and I think that 95% number sort of tells you what you need to know in terms of how those conversations have gone.
I think that other structural elements, we have in our loans I cover some of them earlier, but we have a lot of hurdles leasing hurdles extension past cash flow sweep. So when we see cash flow is moving in the wrong direction, we start sweeping cash right away and a lot of cases, and that's proven to be different is making in some situations.
So.
It's really the function of being a thoughtful transitional lender when we set these deals up we really thought carefully about how we were going to put guardrails into our loans to be early warning signs and really just keep us out of the danger zone.
We saw things moving in the wrong direction not perfect. We obviously have some loans that are that are challenged and where are we sort of exhausted all of those remedies I will say in a lot of those cases the structure. We had along the way has mitigated our basis on those loans. So whatever the ultimate outcome will be we benefited over time from.
Deleveraging or other credit enhancement over time and that will mitigate our exposure when we ultimately come to conclusion on these loans, but I think that it's really been a hallmark of our business to think carefully about how to keep ourselves out of the danger zone as much as possible using those structural protections from origination.
Great I appreciate all the color on that JD. Thank you.
We will take our next question from Don <unk> with Wells Fargo.
Okay.
One of the challenges in this environment, it's just the Lumpiness of reserve build.
If you look at your reserve reflects the risk as you see it today. So would you be surprised to see like a meaningful reserve build in Q2 as you sit here today.
Well I think as we sit here today, obviously, our reserves reflect what we see in the market, but I think that it's absolutely appropriate to know that we're in a dynamic environment conditions can change over time in either direction. We obviously had a reserve release this quarter on one loan, but I think it's certainly possible that we could see.
More reserves over time, I think when we think about it though looking at that watch list percentage of our portfolio, particularly the office loans are four and five rated office loans or 7% of the portfolio. So thinking about the potential for reserve build you know I think as we see it today its really within that universe.
Assets and a lot of them were working on.
Positive Mas as I mentioned with our borrowers more capital coming in et cetera. We also have many examples of four rated loans over time, either repaying being upgraded or staying as performing loans for quarters or years.
So I think that.
The environment is dynamic we go through a rigorous process. We've obviously raised our reserves quite a bit over the last couple of quarters.
But we don't have a crystal ball it is a pretty illiquid environment and things could change, but I think big picture the universe of where we see challenges in the portfolio.
A small portion of the portfolio the materially higher earnings, but everything else is really a very significant offsets and to date. The performance has been very strong at 100% collection no default.
And the challenge in the portfolio really limited to a pretty small overall percentage.
I think in the prepared remarks, there was mentioned that the discount to book markets applying.
Significant 35% type discount what do you think the disconnect is where investors sort of don't appreciate your office risk is it just the kind of new class a high quality like where do you think the disconnect is.
Well I think that in this environment, where it's really sort of a risk off environment Theres a lot of broad brush going on in the market and people sort of trading themes and thinking about the <unk>.
Big picture versus spending the time to really dig in to each individual business and its positioning I think you can see that from the fact that a lot of the sort of most recent challenge in market training performance came with the regional bank failures, which was an overall challenge in the market, but obviously not directly impactful to <unk>.
Our business or really many of the others in the space, but clearly we felt that in the <unk>.
Trading performance. So I think it's really just a broad brush approach to being risk off on commercial real estate as a whole obviously broader office concerns and perhaps just less sort of deep dive underwriting of what's going on in each individual portfolio.
Okay. Thank you.
We'll take our next question from Jade Rahmani with K B W.
Thank you very much.
First question would just be.
Squaring, the very modest seasonal reserve levels with.
Numerous banks have reported thus far this quarter it does seem.
Disconnect it seems out of trend with.
Many of the CRE concentrated banks are reporting with an average seasonal reserve on there overall.
CRE loan books of two 5%.
They should have lower ltvs more stabilized assets than the commercial mortgage Reits. So.
Yes, just an overall question about how you think about to see some reserve in context with a $25 billion portfolio that has a predominance in office and is transitional.
And the right sizing of that reserve.
Thanks for the question, Jason I guess the first.
Comment I would make is that we are.
Are you comfortable with the level of our reserves.
As I mentioned in my remarks, and just goes through a detailed grounds up loan by loan process and a sox controls environment thats subject to audits. So first and foremost we believe our reserves are totally appropriate.
When you think about comparing us to the banks.
We're running at about one 5% of our portfolio in terms of our total seasonal reserve I think it's important to differentiate our business from the banking model right. We don't take deposits, we do not have any kind of leverage they view.
Not regulated the way that banks are seasonal.
Seasonal rules came out excuse me.
Theyre very analogous to the CCAR reserving that banks have to do for regulatory capital purposes, and a lot of banks leverage their CCAR models or in some cases just use their CCAR models for seasonal that is a much more macroeconomic statistical top down view, which I think is appropriate if you're.
Our national Bank with hundreds and thousands of loans that you can't necessarily go through loan by loan as we do for our 199 loans.
So I think theres, a little bit of a procedural difference in terms of how banks approach seasonal and how we do.
And then your comments on the composition of the portfolio.
We are a transitional lender, but Katy mentioned in her remarks, we are benefiting from that business model, where the assets that collateralize, our loans are able to pursue business plans and improve their cash flows and in many cases improve our credit position and although we do have a focus on office.
Which may be outsize relative to some comps in our space or in the banks.
If you take out the European component of that which we covered earlier a fairly different story youre left with about 25% of the portfolio in U S office and about half of that in sunbelt or newbuild.
Office collateral so that leaves a relatively modest portion of our portfolio that is probably more comparable to the generic office portfolio you might see if you were just looking across the market in general.
Thank you as a follow up I was just wondering if you could comment on a few of the downgrades.
The San Jose Office, the San Francisco Office, New York mixed use.
<unk> office and I think also.
If I recall correctly in New York multifamily can you comment on some of the downgraded loans and the outlook there.
Okay.
Yeah.
I think the New York multifamily was from last quarter, but as far as the recent downgrades you know I think you hit it there all office loans, primarily New York, San Francisco area, where liquidity is particularly challenged right now.
Certainly looking ahead as I mentioned at the start of 2023 maturities decision points.
But engaged in very constructive conversation on a lot of them I think it's also worth noting at this point when we look at our office with near term maturities and that sort of non newbuild assets. We have in these markets. There's not a lot that we haven't put on the watch list because for obvious reasons, we're focused on the prospects of what's going on with these types.
Of assets.
So I think that they reflect the risk we have talked about in our portfolio. They really are they do stand apart from a lot of the rest of the office, which as I've mentioned and Tony mentioned.
50% newer substantially renovated since 2015, a lot of Europe , and Sunbelt, a lot of new equity coming into our deals.
Low basis loans, and so we've tried to identify where we see the challenges, but the composition of that part of the portfolio is pretty distinct from the rest.
Thanks.
As a reminder, star one if you would like to ask a question. We will take our next question from Rick Shane with J P. Morgan.
Thanks for taking my questions. This morning, Katie you mentioned that 95% of the loans have rate cap.
I Didnt catch did you mention how long the weighted average remaining life of those campuses.
Yes, so its 95% with rate caps or other carrier guarantee reserves.
Reserves et cetera, the duration really varies I think that a good expectation would be that it ties to maturities.
It's really granular across the portfolio, but I think that when I look at it.
That 95% number plus or minus as long as we've been tracking this statistic, which has been probably the last year or more and so there's been a lot of maturities we have encountered over that period, a lot of conversations with borrowers in a lot of success maintaining those caps I'd also say with the shape of the curve.
Well, we can all debate, what's going to happen with the fat and sort of how the interest rates are going to change, but at this point in thinking about whether we have caps going out three years I think it's probably like a less relevant consideration and looking ahead 123 quarters.
Cap dynamic is pretty consistent.
Got it.
What I think I'm trying to understand here is you say that they are tied to the maturity.
There is an initial maturity and there is a maximum maturity and when you look at the maximum maturity to kind of say, okay. Most loans have a two year extension option on them are they tied to begin initial maturity or do these caps actually have.
Or do they have firm pipe the maximum maturity.
So it's a pretty significant there for the catalyst.
Yeah, no absolutely and the caps are tied to initial maturity, but the caps are required to be renewed as part of a condition of extension tests, and that's where I get at the fact that we have been very consistent and successful in getting those caps renewed at each point, where they come to <unk>.
Engine test.
Understood I'm, assuming that as borrowers look.
Suzanne those caps for.
Have gone up way had gone up.
And in terms of cost at this point.
So.
To date, the impact of the floating rate portfolio really hasnt been zero sum between you and the borrower it's been eurostar between view, the borrower and the counterparty on the cow and presumably the <expletive>.
Perhaps mature as you go through it.
Mishel maturity a lot more of the cost of higher rates is actually going to be borne by the borrowers.
Yeah, that's right and I think that the fact that we have maintained our interest collection and maintained the top experience in our portfolio into.
Indicates how that structure has worked and at the end of the day the borrowers have to pay the interest on the loans.
And whether that comes in the form of a lower strike price rate cap or a higher strike price rate cap that they then deposit the difference in an interest reserve or Theyre, just putting the growth look forward interest amount in an interest reserve. There's a lot of thoughtful ways, we can cut it but at the end of the day I think we're benefiting from the requirements we.
Have in our loans and the ability to.
Ensure that our interest is.
<unk> sourced whether its from any of those areas that I mentioned, it's really just comes down to the fact that we can get.
Effectively a prepayment of interest in one form or another when we hit these extension.
Okay. Thank you.
<unk>.
<unk> off and then try to get back into queue. Thank you.
We'll take our next question from Erin <unk> with Citi.
Thanks, Yeah, I just wanted to follow up on the maturities question you have two that are maturing.
This quarter, one actually I guess already matured it was an $84 million rated five office loan.
April and then Theres one it looks like next week $345 million, that's four rated.
What are the conversations like on those two specific ones.
So I think that.
As I mentioned the near term.
2023 maturity office loans really fall into two categories, either we have very clear visibility on near term repayment or we've watch list.
And I think for the ones. We mentioned I mean, the five rated loan is five rated where as I mentioned, where we're engaged in active dialogue with the borrower to.
Bring that loan to a conclusion, if we see liquidity in the market I think both us and the borrower will be happy to move on from it but at the end of the day all of our remedy conversations are about maximizing value for our shareholders and so we're going to evaluate all the options too and we have been evaluating all the options to make sure we maximize value.
It's a cooperative conversation the borrowers are not willing to put more capital in the deal Thats why its a five we've taken an appropriate reserve and as I mentioned, it's a small loan I think well we'll move on from it in the relatively near term. If we can on a larger loan you mentioned that is a very well capitalized strong long term borrower and that falls into the category of the.
The loans that we're having very constructive dialogue with our borrowers on about getting the loans into a place of stability.
For the coming years.
Thanks, I guess.
The smaller alone it had the original LTV of 64 or you talked about.
The fact that there is all of that equity, helping protect your loan but I.
I guess, that's the thing that surprised me thus far so much in this.
Early parts of the cycle is it.
You have folks that are willing to walk away. So that's a significant amount of equity that they are walking away from them because they essentially see the values.
At least my perception the values below that right. So that's that's a really big drop in terms of of office.
Office to value.
And I guess just.
It's hard for us on the outside to say.
While that one wasn't good but.
These other ones are better.
Whenever there is that you guys can do to provide.
I guess clarity in terms of where we're seeing that and I think that's what reflects the discount and your shares right now is that kind of unknown relate.
Related to that.
Yeah, No I think that makes a lot of sense, we obviously talked about that a fair bet on last quarter's call I think when you look at the new five rated loan and the ones. We downgraded previously they really do share a commonality and that is older vintage loans in a non core location. So the new <unk>.
In Brooklyn, our previous downgrades, we've had outer boroughs, Washington D C.
Assets that targeted relatively niche demand base that has really changed so we as we mentioned last quarter GSA being amongst common one from that perspective.
And in some cases.
Sponsors who are at the end of their fund lives or may otherwise have other considerations away from the deal but of course the value of the deals impacts there and I think as I mentioned in the script. We are very realistic about the value of certain types of office, having declined significantly, but I think that it.
It is really important to note that it is not monolithic it's not across the board and what we're seeing from the fundamentals for newer build high quality office is positive net effective rent growth of 10 point differential in occupancy level pretty consistently across markets.
<unk> net absorption much less sublease space all of those fundamental dynamics that really do make a difference on individual assets or the real estate market.
Every asset is its own underwriting its own location its own dynamics.
And I think that that's sort of core to how we've approached this business.
And so when we look at sort of the composition of the portfolio. We've tried to be very clear about where we see most susceptibility to risks and it's in those older vintage more challenged markets and where we see less susceptibility to risk and that really comes down to your flight to quality better quality buildings and markets that.
Have less of a challenge from a fundamentals perspective like the sunbelt like Europe .
Thanks, and then just last question on <unk>.
A lot of questions about risks to liquidity and repo counterparties.
Maybe you can just talk about whether or not there's larger covenants that your firm has to adhere to relative to these.
Repos do you have.
Standing and then.
How does it work on I guess, an individual loan basis. So if you have a loan defaults.
Presumably you have to pay that debt counterparty back fairly quickly on that because they don't want to have.
Loans in default on their book.
And does that impact your ability to borrow on that.
Relationship whenever you have those kind of dynamics going on at the same time.
Sure happy to jump in there was a few questions there I'll try to hit.
At all of them.
To take the first one.
As far as covenants. So we do have uniform covenants across our credit facilities and our corporate debt.
They're described in some detail in the Q, but there are the typical things you would expect around tangible net worth and minimum liquidity things like that we need them there is not particularly pressure on them.
From a covenant perspective, I would say, it's not something that.
There is.
As fairly start very dynamic.
Did we meet the covenants and we have a healthy amount of space to meet them.
As far as if we had.
An issue under a particular loan and whether that impedes our ability to borrow under the credit facility.
I'd say.
Probably the simple answer is no. If you think about a credit facility with a given counterparty. If we have let's say five assets pledged under there there.
There is an availability for each asset.
And if something happens with asset a whatever the resolution of asset might be if we're able to borrow $50 million against the asset be and have not in fact borrowed all $50 million of that.
Could then still borrow against the asset.
Although there are crossing a downside scenario provided we resolve asset.
Our avail, our access to be available borrowings under the credit facility.
Would remain.
So that liquidity would be preserved.
And then as far as your question on <unk>.
What would happen in a downside.
Yes, if there was an actual defaulted.
Asset.
<unk>.
The banks would have an ability to call us up and asked for remedies. There I mean it would be.
Pending on the credit facility and the specific mechanics, there, maybe more or less of a conversation there.
I'd say to date, we havent faced that issue.
And we continue to benefit from the broad relationships that we have with these banks and so I think.
Theyre, not particularly acts to make their first phone call to us and try to push collateral off but that is one of the reasons, we have $1 $6 billion of liquidity, if we do need to resolve some of these assets as they go as we look further into the cycle, we have the capital available to handle that.
Thank you.
We'll take our final question from Jade Rahmani with K B W.
Okay.
Thank you can you comment on two loans one is.
The Chicago alone.
Total $310 million.
It's one south Wacker.
And can you comment on the Woolworths.
Building, what is what's going on with those two loans.
Well versus obviously historic but.
Not.
Well it needs to be repositioned then reconsidered.
Please comment on those two loans. Thank you.
Sure.
So I think on the first one.
Both of those lines as you can see from our.
Portfolio overview, we have put on the watch list natural given the locations markets liquidity. They both have been pretty strong performers.
Sponsors who are very actively engaged.
One of them does fall into that category as I mentioned actually both of them part of the category as I mentioned with we're very constructive comment dialogue with sponsors in terms of more equity in the deal and Theres been recent leasing momentum in both of them as well so they're appropriately watch listed.
Given their locations and.
The overall dynamics of assets of that type, but we have seen continued performance at one south Wacker is in an a plus location and the sponsor has done a really strong renovation great amenities.
And Woolworths has been a pretty steady performer it fits its market.
Given its location and strong value proposition for the time.
That use that asset.
We see stability in those assets, but we're obviously.
We're engaged in dialogue on them and they're appropriately on our watch list.
Thank you on the liquidity side.
So you have over $500 million in cash.
So the remaining liquidity is it primarily undrawn repo capacity, what exactly is it and to put new loans on repo requires repo lender approval correct.
Sure Jade.
Jonathan So correct on your last question, but that doesn't relate to the liquidity point so.
The way.
I would think of it as you said is correct is the basically the rest of the balance is availability under our credit facilities, but that is not conditional availability. The way I would think of that as we put $100 million loan on our credit facility get it approved by the bank. It's pledged its locked in we can borrow $80 million against it.
Once we have that approval for $80 million, we can revolve that balance up and down just like any other revolving credit facility you might have so we paid down $40 million, because we had excess cash sitting around we call. It the banking at the other $40 million back basically the next day and they don't have any approval mechanics, so the $1 1 billion or so of liquidity.
We quote which is the availability under the credit facilities is that dynamic I, just described where it's basically as good as cash in 24 hours.
The availability under the credit facilities to post incremental assets, which would require approval of the banks that is not in our $1 6 billion that would be upside if we actually had new assets put on unapproved.
So in an environment of declining asset prices, which we are in clearly.
The repo lenders won't require updated appraisals.
The underlying collateral since they've already previously approved it.
No generally no they don't and we don't face.
Valuation base capital markets margin calls on our facilities. So that's that's not really the dynamic that we face.
And how generally are they speaking.
To you about their exposure I see that the advance rate on your term loans on your asset specific financings in cielo is as close to 80%, but much lower on the repo side are they I know youre, leaving cushion.
Liquidity available, but the repo lenders concerned at all about.
The underlying value of the collateral.
I think the general comment I mean, we maintain extremely active very constructive dialogue with our lenders we talk to them daily weekly they're completely up to speed on everything in our portfolio and it's really important to note. These credit facilities, they're cross credit facilities.
They represent a cross section across our portfolio as I mentioned earlier, our four and five rated office is 7% of the overall portfolio. The rest of the portfolio is performing very strongly and their credit facility credit reflects that diversification.
Also have very deep relationships with us as a firm they trust our ability to manage this collateral in the best way possible using all of the resources, we have here and they appreciate our level of dialogue and.
Ongoing discussion with them about the very strong performance of the vast majority of their collateral.
Those construct those conversations have consistently been very constructive.
As Tony mentioned.
<unk> ability to revolve up and down as completely separate and apart from the credit analysis and on the credit analysis side.
Ben.
We have had very good dialog and very good treatment from the banks reflective of the track record of our portfolio and their comfort level.
Thank you that will conclude our question and answer session. At this time I would like to turn the call back over to Tim Hayes for any additional or closing remarks.
Thank you operator and everyone joining us today, please reach out with any questions.
[music].
Yeah.