Q1 2023 BrightSpire Capital Inc. Earnings Call
Greetings and welcome to the bright spire capital, Inc. First quarter 2023 earnings call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host David telling my General Counsel. Thank you. Please go ahead.
Good morning, and welcome to the bright spire Capital's first quarter 2023 earnings conference call, we will refer to bright spire capital as bright spire, our SP or the company throughout this call.
On the call today are the company's Chief Executive Officer, Mike Madden, President and Chief Operating Officer, Andy Witt, 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 and are subject to risks uncertainties and assumptions potential risks and uncertainties could cause the company's business and financial results to differ materially.
A discussion of risks that could affect results. Please see the risk factors section of our most recent 10-K 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 May three 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.
<unk> earnings release, and supplemental presentation, which was released this morning and is available on the company's website presents 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 first quarter 2023, GAAP net loss attributable to common stockholders of $4 $1 million or three cents per share.
Distributable loss of $11 $5 million or nine cents per share.
And adjusted distributable earnings of 34 $25 million or 27 cents per share.
The company also reported GAAP net book value of $10 41 per share an underappreciated book value of $11 74 per share as of March 31, 'twenty two 'twenty three.
With that.
I would now like to turn the call over to Mike.
Welcome to our first quarter 2023 earnings call and thank you for joining us this morning.
Conditions, and our near term objectives.
Andrew will provide an overview of our asset management development and then Frank will discuss our first quarter financial results.
Starting off with some financial highlights for the first quarter, we reported adjusted distributable earnings of 27 cents per share.
Importantly, our loan book, which is 97% floating rate continues to benefit from higher base rates and our dividend coverage is now at 1.35 times.
Our dividend yield on current market pricing is approximately 14%.
While share buybacks would be highly accretive we continue to have a strong bias toward maintaining liquidity and reduce leverage during this uncertain period.
Over the past 12 months, we have reduced leverage by approximately 15% from 2.3 times to the current level of just two times.
Our current leverage is among the lowest in our public peer group.
This quarter, we recorded a 32 cent reduction and unappreciated book value, primarily driven by net increases in our general CFO reserves as well as several specific low level reserves.
Andy and Frank will provide more details on this.
In terms of liquidity as of today, we are at 424 million of which 259 million is unrestricted cash.
We expect to utilize a portion of this cash in the coming quarters as we shift certain loans from their current financing arrangements.
In the coming quarters, we also expect to pick up liquidity as a result of certain asset pay offs and resolutions.
During the quarter digital bridge completed a secondary offering of their remaining holdings are stuck.
We thank them for their support as shareholders and for their assistance and leadership and the internalization of management of the company.
This sale not only we moved a significant overhang, but was also very broadly distributed with over 50 institutional investors participating in the offering.
Many of whom are new to the price for her name.
The transaction has also led to a substantial increase in our daily trading volumes.
Now turning to the capital markets since our last earnings call market conditions have certainly gotten more complicated.
The credit markets continue to be challenging.
And that will have additional turbulence from the recent failures of three significant U S banks as well as credit Suisse.
While most of US were more focused on the TARP money center banks very few appreciated the extent of the uninsured deposit bubbles and asset liability mismatches that existed at some of the larger regional banks.
Given these recent bank failures. It has become clear that the regional banking system had significant exposure to both deposit flight risk and long term fixed rate assets.
These issues had been exposed and exacerbated by much higher yielding U S thresholds.
We are witnessing hundreds of billions of bank deposits moving at record speed to higher yielding money market funds.
Going forward, many regional banks will need to reinforce their liability and capital structures.
Uninsured deposits have proven to be an unreliable source of long term funding.
At the same time regulatory oversight is going to become more restrictive as bank examiners focus on what went wrong and how to prevent it going forward.
The culmination of all of this means that many regional banks will not be expanding credit lending, but will rather be looking to shrink their balance sheets.
The repercussions of this will be a meaningful pullback in credit.
This will certainly be the case with commercial real estate lending.
Especially when you consider how regional banks have substantially increased their exposure and we sit in years along with deposit growth.
For example signature bank became one of the single largest lenders in New York City.
And currently there are local community banks, which are some of the largest commercial real estate loan portfolios in the U S.
Therefore, as the year progresses, the next shoe to drop will be credit issues arising in these regional bank loan portfolios.
This only further validates the more conservative approach, we apply spire adopted over a year ago to substantially reduce our loan originations and maintain higher levels of cash liquidity.
In closing I believe our prudent and conservative approach to managing our leverage and liquidity will position us well for when the tide turns.
When the fed starts to ease and the capital markets stabilize we will be in a strong position to deploy capital and what would be an extraordinary lending and borrowing.
With that I would now like to turn the call over to our President Andy Witt Andy.
Thank you, Mike and good morning, everyone throughout the first quarter the bright spot our team remained focused on asset and portfolio management. We expect this to be the case for the foreseeable future. The combination of our vertically integrated asset management team and high touch approach gives us the ability to identify and address potential.
It's early.
Our team has deep experience working with borrowers dating back to the great financial crisis. When this team was responsible for managing portfolios of CRE debt acquired from the FDIC and other financial institutions.
As an example throughout the course of any given year, we have interim maturities, which require the borrower to purchase an interest rate cap and in many cases meet certain extension hurdles. We believe the best outcomes are derived from timely and open communication.
For 2023, we are in the fortunate position of always having four final maturities accounting for approximately 4% of the total portfolio.
During the first quarter, we received $101 million in repayments and partial pay downs across four investments. This was in line with our expectation as we expect loan repayment volume to remain relatively low for the next couple of quarters.
Now I would like to highlight if you updates within the portfolio.
Office real estate sector has experienced persistent work from home dynamics as we discussed during our last call a significant portion of our office assets are located in high growth drive to work markets with granular rent rolls and current in place cash flow.
Challenges, we have experienced within the portfolio today.
<unk> been confined to a pre COVID-19 loans and major central business districts, where office attendance remains low vacancies and sublet space are at record highs.
During the quarter in cooperation with our long Island City borrower, we marketed two office properties for sale.
New York based signature bank.
That process, while discussions are ongoing we are preparing to take back the property for that reason in April we placed the second of our two long Island City office loans on nonaccrual status and increase the specific reserve against those loans.
With regards to the Washington D. C office alone. The fact that federal government employees have not returned to work for is profoundly impacted the office sector. This property is 51% waste.
In addition to vacancy issues. The property has known vacate at the end of 2023, when certain tenant leases expire.
Therefore after cum participations with borrower we have commenced foreclosure process. During the first quarter. We placed this loan on nonaccrual status moved the risk rating from a four to a five and recorded a specific reserve.
The most probable outcome for this asset is a conversion to residential.
The final update within the office portion of our portfolio was discussed on the fourth quarter call. During the first quarter. We completed the modification of the largest office loan in our portfolio, which reduced our exposure by 39 million to $76 million for this long.
Now turning to hospitality the portfolio has exposure to three significant northern California loans on two properties. The Berkeley Hotel investment, which consists of both the senior and mezzanine loan is now under contract to be sold.
We are expecting a full payoff within the next 30 days and as a result, we have reduced the risk ready from a for two or three.
The San Jose Hotel property performance continues to improve but not without its challenges.
City of San Jose Office attendance rate is among the lowest for major cities nationally. The 805 room property consists of a main hotel tower and the second expansion annex tower.
At present.
<unk> is in the process of marketing for sale the hotel Annexe tower, which was comprised of 264 rooms.
A buyer has been selected and terms have been agreed to this perspective sale has the potential to meaningfully improve the credit profile of our remaining investment for the time being but loan remains risk rated four.
Lastly in April we effectuate it a restructuring of the Milpitas development mezzanine loan.
Pretty development was delayed due to Covid and is now complete it consists of 213 residential units and ground floor retail residential units are now substantially leased.
As part of the restructuring the loan was bifurcated into a meze MSP to facilitate the new money equity contribution by the borrower. The terms of the extension is coterminous with the senior loan which was extended as part of the restructuring to March 2026.
In connection with this restructuring we moved the risk rating.
Five from before recorded a specific reserve and in April place. The Mezz B note on nonaccrual status.
For your convenience additional information is available as part of the M. DNA contained within the Q1 2023 Form 10-Q.
As of March 31, 2023, excluding cash and debt assets on the balance sheet. The loan portfolio was comprised of 100 investments with an aggregate carrying value of $3 4 billion and a net book value of $926 million or 87% of the total investment.
Yeah.
The average loan size is $34 million and our weighted average risk rating 3.21st mortgage loans constitute 96% of our loan portfolio of which 100% are floating rate and all of which have great caps.
Portfolio has minimal exposure to construction risk at 75% of the total collateral is located in markets that are growing at or above the national average growth rate.
The family the asset class bright spot or has the largest exposure to consist of 56 loans, representing 49% of the loan portfolio or 1.7 billion of aggregate gross book value.
The loan portfolio composition and includes 32% office or a $1 1 billion of aggregate gross book value. There are 33 office loans with an average loan balance of $33 million or office loan portfolio is granular, which we view as a meaningful risk mitigate the weighted.
Average occupancy across the office portfolio for 77%, excluding the risk rated five loans.
The remainder of our loan portfolio is comprised of 13% hospitality with industrial and mixed use collateral making up the rest stepping back we believe the composition of our portfolio, including the average investment size property type and regional diversification a strong defensive attributes.
That position us well in a volatile and potential recessionary environment.
We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across five primary banking relationships totaling 2.25 billion.
As of today availability under our warehouse lines stands at approximately 968 million, which represents a 57% aggregate utilization rate. Additionally, we have two outstanding CLO totaling 1.4 billion.
With that I will turn the call over to Frank <unk>, Our Chief financial officer to elaborate on our first quarter results Frank.
Thank you Andy and good morning, everyone.
Before discussing our first quarter results I want to mention that we expect to file our Form 10-Q later today and that our first quarter 2022 supplemental financial report.
Your presentation are available on the Investor Relations section of our website.
For the first quarter, our adjusted distributable earnings were $34 5 million or 27 cents per share.
First quarter distributable loss, which includes $55 million of specific loan reserves on three loans was $11 5 million or nine pence per share. Additionally.
Additionally for the first quarter, we reported total company GAAP net loss attributable to common stockholders of $4 1 million or <unk> <unk> per share GAAP net loss also reflects the $55 million of specific loan reserves.
Quarter over quarter total company GAAP net book value decreased from $10 77 per share to $10.41 per share.
Unappreciated book value also decreased from $12 six to.
So $11 74 per share.
The decline is primarily driven by increases in our sheets all reserves net stock award activity and the FX translation related to our Norway office net lease asset.
This decline was partially offset by a one time gain from the dispute resolution proceeds related to our Los Angeles mixed use project and adjusted distributable earnings in excess of dividends declared.
The first quarter adjusted distributable earnings at 27% was flat in the fourth quarter.
We earned higher than expected modification income during the first quarter and also benefited from the increase in the benchmark interest rates.
When adjusting for repayments nonaccrual loans mentioned earlier as long as the beneficial impact of rising interest rates continue to have on our portfolio.
Our adjusted distributable earnings quarterly run rate is closer to 24 cents per share.
Turning to our dividend for the first quarter, we declared a dividend of <unk> 20 per share in line with fourth quarter dividend.
Dividend remains well covered at 1.35 times.
Looking at reserves in risk rankings.
As Andy mentioned in his comments during the fourth quarter, we placed in the Washington D. C office loans on non accrual.
And in April we placed the med D related to the Milpitas development mezzanine loan as well as the second of the long Island city loans on non accrual status.
Our specific szeto reserves ending the first quarter were $112 2 million an increase of 55 billion from the fourth quarter. The increase reflects the three assets Andy discussed earlier, the Washington D. C office alone the little penis development mezzanine loan and one of the long Island city ones.
Our general seats, a provision of $34 1 million a decrease of 15.1 billion from the prior quarter.
Lower General Sea Salt is primarily driven by the elimination of the general seasonal reserves associated with two long connection to Buck.
Putting these two loans are general seats will increase by approximately $8 million.
The combination of asset specific and general seasonal reserves at quarter end.
$46 2 million, an increase of $39 6 million or 37% from the fourth quarter 2022.
As a reminder, these are point in time assessments that we evaluate each quarter.
These upgrades reflect the migration of our portfolio as certain loans remain challenged while others either advance their business plan or improve their credit position.
Altogether, our average loan portfolio of this ranking at the end of the first quarter was 3.2 flat with the fourth quarter's risk ranking levels.
Our branch Frank five loans represent approximately 4% of the total loan portfolio carrying value to our the long Island City office loans. The third is the Washington D. C office alone in the fourth relates to the Milpitas development mezzanine loan.
Nine loans equaling, 13% of the total loan portfolio carrying value of risk ranked four five or office loans to our hotel on a tour of multifamily loans.
While all our current performing loans, 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 on depreciated assets stood at approximately $4 8 billion as of March 31, 2023, our debt to assets ratio was 16, 4% and our debt to equity ratio was 2.0 times, both flat to last quarter.
In addition, our liquidity as of today stands at approximately $24 million between cash on hand, and availability under our revolving bank credit facility.
At present, we believe the $259 million of cash on hand. In addition to 165 million fully undrawn corporate revolver provides us with the liquidity and flexibility to manage the business.
This concludes our prepared remarks and with that let's open it up for questions operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time I'll confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue. We do ask participants to please limit themselves to one question one.
Follow up and then re queue for any additional questions again that is star one to register a question at this time.
Today's first question is coming from Sara barcode a P. P. I G. Please go ahead.
Hi, everyone. Thanks for taking the question. So first of all I appreciate that you see quarter over quarter risk rating comparison in our presentation. So thanks for that I'm on the topic.
Our risk ratings, we've seen some discrepancy among the peer group with respect to risk rating migrations in the corner and some companies are applying a one or two on their more stable loans versus standard three mm.
That you and some other peers typically apply them. We're also seeing a you know again relatively stable ratings, despite higher rate fall in credit uncertainty during the quarter and model modest see silver reserve increases.
Ted could you just take some time to talk about the bright spire philosophy toward risk ratings and see silver served migrations.
Yeah.
Hi, sorry. This is Mike sure. The operator is cringing when she heard you say it takes some time to.
My answer to that question, so I don't want to be too long winded on something like that.
First of all I think the the watchword for US is to work to avoid surprises.
We do not want to see loans golf from a swing to a to a default and we think that in this market, especially a tough market credibility is king and I'll wait up partly establish credibility is through your risk ratings and your disclosures because that's the best way.
To telegraph to investors.
What they need to basically underwrite.
And you're right the company.
Unexpected negative outcomes that a car that even we will be surprised that you need to have earned credibility.
In order to get a paas when those things do occur.
And as he said likes like some others.
We provide risk ratings and the changes on our risk weightings on every single loan we do not utilize summary tables, we do not give you the risk ratings on the top 15, and a summary of the next you know 50, we'd give you a risk weighting on every single loan and as I said, we know and acknowledge that others in the peer group.
Do you do that.
We are on the side of being more conservative in our wish list rankings.
And as we said in my prepared remarks this quarter.
We had three performing loans that we felt there was some increased risk around and we downgraded those loans through for all of those loans are current and each one of them could have a positive outcome in the coming quarter, but we felt given the increased risk profile. Some borrowers are behind on their business plan. Some.
When they asked us to look at potentially a modification waving extension tests or things like that and the key is that we don't want to see alone. If we're wrong and the loans have a substantially more increased risk from here, we don't want to see a surprise.
So in doing that we also provide the narratives as Andy said in our 10-Q, we will go there and well list alone and we'll talk about what is occurring so you could get some insights as to what we are seeing and we use the MD&A to communicate what we're talking about during.
During the quarter regarding the risk weighting buckets wanting to sell.
Some use different definitions, we acknowledge that we don't utilize anything in that bucket we.
We basically feel that if a loan is a one or two if a loan is outperforming its original underwriting when we took the loan and then we expect the loan to pay off and so we think the next train stop from a three is a pay off and we think that when you have ones and twos. It distorts the average risk.
And we think that you all and our investors really don't look at the average persuading we think they're highly focused on the fours and fives and worried about what loans are ranked three that can go into default and so we are really focused on making sure that we are conservative around around.
That that potential Oracle this quarter as I said, we downgraded several performing loans each of which could have very well have a positive outcome and resolution and getting getting them back on track.
Loans ranked four do not have to end badly.
And as Andy mentioned, we had the Berkeley hotel, La which is $145 million combined first mortgage and Mezz as a great example that loan was risk ranked four since COVID-19 and.
And we held it out a form and the hotel has been performing better every quarter.
And.
That hotels went up for sale and a process for six months, we were notified about a contract and a hard deposit three months ago, but a lender who was not yet identified so we kept alone out of four and then very recently the deposit was again substantially upsized and that is a hard contract deposit and we were notified by the borrower.
There's a closing date that should occur this month, they actually gave US a day and so we felt that that that launch will be upgraded from a four.
Two or three.
We do expect.
Some other upgrades, we have that Baltimore office long, which is now substantially leased.
We're holding it out of four because the borrower needs to perform on getting the Ti is done so that tenant can be in place in fact that tenant asks for more space just recently, but we'll keep it out of four it'll have a turn that you hope, but when that borrower gets substantially along with completing the G is to put that tenant in place will probably migrate that long.
On a two or three and we think there'll be others that will improve.
For upgrades in the coming quarters. So we are priced flyer, we're really not focused on long celebrated wanted to we will air on the side of a loan downgrade and we will deal with the headline consequences and the effect on the average risk rating, but.
Again, we use the risk ratings as a way to telegraph more transparency as we're focused on avoiding surprises and hopefully in doing so we can build some credibility I hope that answers your question.
Yeah, I really appreciate all the all the color there and I agree that the the loan by loan risk rating. It's much more important than you know a weighted average number on the portfolio.
And then just one more quick follow up for me on a different topic. So you recently announced that new $50 million stock repurchase program could you talk about your thoughts with respect to stock repurchases at the current valuation discount on our common stock.
Yes, as we said in the prepared remarks, we've said this previous quarters, we had a secondary offering by digital Brexit we were asked to participate in that to.
To assist with it and we have held firm we believe that for the same reasons. Our stock is attractive at this level are the same reasons why you need to hold on to cash and while it's very alluring and could be one of our best investments to buy back the stock.
So far below book value and.
And the implied losses are just epic in terms of what the market is computing at the stock price current level.
It is very compelling but at this point, we still feel given the uncertainty in the market and all the things that we've said in the prepared remarks about the regional bank sector right.
Right now protecting the balance sheet and being disciplined around around that and not being impulsive around buying back stock is more critical than the minor accretion you'll get by spending that money on buying back stock.
Thank you.
Thank you.
Okay.
Thank you. The next question is coming from Jade Rahmani of K P. W. Please go ahead.
Okay.
Thank you very much for taking the question wanted to ask you know what you're hearing from the banks warehouse line providers repo providers make them extensive comments around the regional banks, but I just wanted to get an update as to what you're hearing there.
Ah, we're getting telegraphed that those banks are in business.
They want to see.
You see new loans, they want to grow that business, they get very very favorable treatment in that business as well the warehouse business its been a relatively safe business for them based on the haircuts that they get on these loans and so they are opened the problem is.
I think for them is they're not seeing a lot of activity in fact, what we're hearing back is that the.
At the same the same bank that may have warehouse lines with several.
Mortgage rates or opportunity funds that funds, they're seeing the same loan.
From multiple sources.
And and and they they sense that there's a dearth of activity in the market by the fact that many of many up there. Many many of their constituents to focus on the same deal. So there's really not that much out there I think that's frustrating for them, but they're open for business and it's been us and the market or our desire to be more conservative and maintain.
<unk> cash balances and the fact that Theres, just a dearth of activity out there. So despite the will that they have to be in the business and grow the business, even though the CLO market really isn't effective right now.
There's been very little activity for them to benefit from.
But so far very positive.
And so as the cycle unfolds as they see some credit pressures grubbing do you anticipate that.
That house providers, the repo lenders to protect themselves to become more defensive.
Require a margin call and are you surprised we haven't seen that as yet.
First of all getting back to almost like the comments I made with sallow transparency with your line lenders. This is so critical.
Your line lender feels as though that someone who is trying to.
Smooth the rough edges out on alone that could end to a very bad results. So we have a tremendous amount of dialogue with our line lenders almost on a daily on a daily basis and this market yeah loans tend to deteriorate and the reason for holding onto the cash is to make sure you can just add loans and as I set it up.
Prepared remarks in this coming quarter, we expect to move loans off of some financing arrangements.
You have the cash to do so we also expect more liquidity to come into the firm based on resolving loans. We have already all of that will hopefully resolve we have loans that we think are going to in fact pay off Andy mentioned that one of our large hotel loans. There is a prospective buyer for one of the towers at the property, which could lead to a substantial.
Pay down.
On that partial pay down on that loan. So we think will be coming into more liquidity, but yeah. I think in this market you've got to be budgeting for that potential outcome.
And that's why when we go back to the question about buying back the stock.
We are refraining from doing that because we want to make sure that we are prepared and have enough cash to defend the balance sheet, if we need to reduce the leverage on loans or move loans off of their current financings into cash before the resolved.
Our next question last question for me would just be on the net lease portfolio. The owned real estate portfolio. What are your updated thoughts there is that that source of value do you think that the carrying value is in line with market values for there and is that a source of capital.
Or do you think it's a meaningful.
A contributor to earnings than something you want to keep longer term.
Well they vary so we have some some small net.
Oh, not at least but real estate that we own office buildings that are incredibly well leased in very good markets throwing off very high cash flow.
It's something like six cents a share combined for the two assets that actually have almost zero book value against them. So that's one example, that's very good then we have.
The larger one which is the the albertsons a.
Warehouse distribution centers that we lay out and a lot of detail in our Q.
We all know is that circa seven cap they are potentially emerging with kroger and so there could be an upgrade in that rating to investment grade.
In the coming year.
That is a source of liquidity.
One point in time, it probably was a source of a game, but given where the market rates have gone.
Defeasance is more than offset by by the interest rate in effect on the value of the property, but theres still a very good source of capital that we can tap into probably anywhere between.
Close to maybe $100 million of capital that we could tap into if we sold the albertsons equity portfolio, but that is one right now that.
We do not have on the radar screen. The last one the other big one is as we documented that.
In great detail for over two years now in our MD&A filing and that is the Norway net lease deal to the state oil company of Norway and the issue. There is nothing to do with the credit. It's a it's a it's a great credit to double a credit.
The oil company of Norway. So it is the driver behind everything that is Norway.
But the issue is that the term of the lease versus.
Versus the the the maturity on the debt the debt matures in 2025, the lease expires in 2030, we're in dialogue with the company on hold waiting for them to respond to us about what their intentions are about remaining at the property and the value of that is dependent upon what the tenant wants to do hence why.
We gave substantial disclosure on that I think over two years ago Frank.
On that deal so investors can look at that and understand the risks that we see and the renewal of that renewal of that asset we do not have that risk and the other real estate that we own or the albertsons deal quite frankly, the opposite that leases are incredibly long term lease we wish that lease was a lot shorter and they and the Norway transaction the issue.
Is the remaining lease term relative to the mature EBITDA only five years lease term remains when that debt matures in 2025 and that's the issue.
Yeah.
Thanks for taking the questions.
Thank you. The next question is coming from Matthew Howlett of B Riley. Please go ahead.
Thanks, Good morning, Thanks for taking my question.
First on the.
On the liquidity that you're preserving to buyout loans of financing are you referring to the master purchase facilities. The banks were the two clo's.
I'd say I would say both I really don't want to comment on the CLO is because they are securities that trade in the market.
So I would just say generally to buy back I really don't want to comment on public securities.
But actually I want to add to that the fact that you know when people when those of the peer group, we refer to non mark to market financing.
I will say that you know in some cases CLO gives you a lot less flexibility than all warehouses and this connects back to a question that we heard about our warehouse lenders warehouse lenders give us a lot of flexibility in what we have to deal with loans. If you want to reduce the coupon. If you want to do in 18 out. So you can have that conversation with our warehouse lenders. So cielo is much more of a.
Strict it and so when those referred to we have C&I was outstanding and this is non mark to market I would say, except in a low default and a low default you're buying that loan back in full at par and so this whole notion about cielo is being nonrecourse non mark to market. That's not the case, if you ever want to issue a CLO.
So again.
So we will be moving loans out of the arrangements, it's well anticipated and.
And we will utilize cash for that but as I said in the prepared remarks and earlier, we do expect more cash.
Cash to come in through some assets that we are expecting payoffs on and resolutions on.
It'll just be some timing difference.
And you said you had a $200 million of of the unrestricted cash the rest is probably what restricted cash didn't see all those.
That makes a difference when we don't we don't yeah. That's another that's another misnomer.
When we refer to liquidity, we refer to cash and we referred to our revolver and we always tell you, which one is which.
This whole notion about capacity in a CLO that is not liquidity.
You can't take money out of CLO and use it to pay down our warehouse line you could only originate alone will have a loan that's an another financing vehicle go into the CLO. So you could have a loan that's financed at a 70% haircut.
70% advance rate with a warehouse lender and alone pay off in a CLO with different loan. They may have had an 80 plus percent advance rate and if that loan on a warehouse line is eligible for the CLO you can move that into the CLO and net you'll get 10% more cash but to refer to CLO reinvestment capacity.
The city as liquidity is just false.
Right.
Well, what I'm leading towards is.
Yeah.
Are you willing to let the company from a shareholder perspective, I think they were quite happy with you just deleveraging and at some point buying back stock right I would say, it's highly accretive at this discount to NAV.
The most accretive thing a mortgage REIT can do is buy back stock, 50% below book, but when you look at how much you're willing to let the company Delever and at what point you know what what do you need to see to start originating again would you start you out there with with rate cheap still talking to people.
Just talk to me about where you think the portfolio how much you could go down before you feel comfortable enough and at what point would you start originating for buying back stock.
Okay, So I would say that.
And this type of market, but the management team of a company's first Judy is absolutely unequivocally to defend the balance sheet.
I don't think anyone has seen market conditions quite like this where we've had bank failures foreign and domestic and other banks, who are trading very poorly.
And a debt ceiling coming up in June which is more frightening than the debt ceilings that we've had in the past there's a tremendous amount of uncertainty. So I think in this market any management team's number one priority I would say number one to number five priorities are defending the balance sheet, how far will be let the deal.
Leveraging a car will let the deleveraging of car.
As long as needed to defend the balance sheet now practically speaking I would say that as we migrate through the year and we get to the end of the year and we as I said in the prepared remarks, where we see the fed is starting to telegraph rates coming down hopefully they don't do so in a panic situation, but rates coming.
Down and we see the capital markets start to stabilize and we feel that we've gotten in a very good place where.
We've gotten through a lot of loan modifications as needed or warehouse lenders have been addressed and we feel like there's some certainty around it the mean for cash I think at that point in time, our first goal would be to deploy capital into new loans. If the stock is continuing to trade at this level, yes, I think we would absolutely consider buying.
Back.
More stock at that point in time I would say these things are probably more kind of fourth quarter, not second or third quarter.
Second or third quarter events are we watching very closely that as we delever.
What if what the effect will be on our dividend coverage. We are do we know that a dividend coverages have been boosted across the board because of the decrease in rates absolutely. So we're planning for that that's one of the reasons why we did not increase the dividend from 80 cents, we held fast when we have the capacity to do so and now.
We have a 135 times dividend coverage. So we do expect that over the course of the year certainly into next year. So you can see an erosion of that coverage, but we don't think the dividend will be challenged.
Quite frankly until 2024, unless we have unexpected.
A myriad of low defaults that occur that affect our income so to summarize defend the balance sheet, one probably not look to redeploy capital until we get certainty and we don't think that certainly comes my guess is at least until the fourth quarter of the year.
Okay.
Very well that earlier as we said earlier you know all line lenders are telling us that they're seeing the same loan from multiple lenders. So right now there's really a scarcity of lending activity.
I think others have telegraphed that they've done a couple of loans at some very nice spreads to so far we think the amount of business out. There is is it a single percentage of what it was in a normal market. So we don't think we're really missing any big opportunities at this point and we think given the what's going on with the contraction in <unk>.
Regional bank lending that will occur, we think there'll be plenty of space to operate and when we reopen maybe Q4 Q1.
Look I really appreciate how you are positioning the company in defending a company for shareholders. Thanks for answering that Michael.
Thank you.
Once again that is star one for any questions. The next question is coming from Matthew <unk> of Jones trading. Please go ahead.
Yeah. This is Matthew on for Jason. Thanks for taking the question could you talk a little more about the D. C office in the foreclosure process I guess as much as you can disclose there.
And then the probable outcome of converting it to residential or are you guys planning on getting rid of it in a sale or taking control of it.
Andy would you like to take that.
Or you want me to appeal.
Sure sure. So so we are in the process of foreclosing on the asset.
And that's obviously a public process in terms of converting to residential we do think this particular property has the potential to convert to residential as a result of.
The physical plan.
And the way the building ways out.
It's a it's a question as to whether we are the right.
<unk> to participate in that conversion process or rather sell the asset to somebody who may pursue that as a business plan. So that that is a little bit of.
No.
To be determined outcome.
We think generally there's a good opportunity for a conversion to residential for this property.
Well, let me add to that.
Just to add to that.
We take very seriously that we we had two loans that we.
We had.
Taken reserves against.
One in long I'll see D. C loan we did that in the previous quarter and then we did it again this quarter and I want to make sure that we telegraphed that we we we do not like a death by a thousand cuts in terms of how you're reserving for loans what happened on the D. C loan as we market to appeal. He is an author.
From a I think 56 million to $39 million in the first train stop and as we did more work we realize that despite the location of the asset and a very good area Street in D. C are the Destiny is an office building was very bleak.
The vacancy rate for office in that market is eye popping and we began to do more work on this and we realize that given the asset has small floor plates, it's a corner asset windows on three side with the creation of Windows on the fourth side very easy and we started dealing with those in the market that we're doing these types of conversions.
We want to be clear very few office buildings can be converted to multifamily apartment residential very few maybe single digits. This one is on a good quarter and a great location, but the next train stops so that valuation was basically land plus concrete. So that is currently marked at about 150 Bucks a foot.
And that's where assets are trading for development into apartments. So we went from the first train stop 39 from 56, because we evaluated at the low end or the P. O V range for office and a quarter later as we spent time in the market. We said this is not going to be an office, you're not going to invest capex in this property and run the risk that you're going to lease that property.
And what's a 40% vacancy N P office space.
So we think this is we've done work with architects we've done work with us.
Some operators in the market that are doing these very types of assets and we are engaged in conversations with someone that could result in a partnership or a sale of the asset once the foreclosure was completed and that will be to an apartment conversion.
That's helpful. And then speaking on that same asset is there a timeline that you would expect it to convert to an office or I guess two years or so or what's the the general expectation for converting these.
In that sense.
And the pricing is because anybody who does this will take a year, if youre able to do it as a matter of like 8% of the square footage would be dedicated to affordable. So it has to get factored into your potential rent income on the on the asset once converted and how many units you can get out of the asset.
And then from there on there was about a year's planning process part of that is not to get entitlement as a REIT, but really because we're in a historic zoning district. So there is some way and by Silver City Council as to what in fact, you're going to be doing with the property and that could take us about a year's worth of planning and so anybody who buys this is gonna be funding. This.
Asset for a year before they go out and get a construction loan and then recapitalize it as a development deal. So that one year period, just affect the valuation, which we we think we've put into this 27 that we have today.
Thank you.
Thank you at this time I would like to turn the floor back over to Mr. Masih for closing comments.
Great. Thank you well in closing I want to again.
Bank Digital bridge and give a special thanks, and shout out to our Marc Ganzi, the CEO and Jackie Who's the CFO for their support and leadership there one floor above us we hope.
And this building, we hope to see them, often and we thank them for what they've done for us over the.
The past years, we also want to again welcome our many new shareholders that took part in that secondary offering and digital sell the stock and we look forward to having many more one on one meetings. Please do not hesitate.
To reach out to us, especially if you're a new shareholder we'd like to meet you and understand what your goals and objectives are we know that one of them is we want the price of the stock to converge with book value. We understand that thank you for joining us on today's call and we'll see you next quarter.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and enjoy the rest of your day.
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