Q2 2023 BrightSpire Capital Inc Earnings Call
Yeah.
[music].
Greetings and welcome to the bright spire Capital, Inc. Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. 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 and it is now my pleasure to introduce to you David Palomar with General Counsel. Thank you David you may begin.
Good morning, and welcome to bright spire Capital's second quarter 2023 earnings conference call.
We will refer to bright spire capital as bright spire.
S T or the company throughout this call.
On the call today are the company's Chief Executive Officer, Mike Masih, President and Chief operating Officer, Andy Wet and Chief Financial Officer, Frank Cerus Dino.
Before I hand, the call over please note that on this call certain information presented contains forward looking statements.
Eight minutes, which are based on management's current expectations are subject to risks uncertainties and assumptions.
Potential risks and uncertainties could cause the company's business and financial results to differ materially.
For a discussion of risks that could affect our 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 August back in 2023, and the company does not intend and undertakes no duty to update for future events or circumstances.
In addition, certain financial information presented on this call represents non-GAAP financial measures the company's earnings release and supplemental presentation, which was released this morning and is available on the company's website.
Reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors.
Before I turn the call over to Mike I will provide a brief recap on our results.
The company reported second quarter 2023, GAAP net loss attributable to common stockholders of $7 $5 million or six cents per share.
In addition, the company reported second cohort or 'twenty twenty-three distributable earnings of $21 $1 million or 16 cents per share.
Adjusted distributable earnings of $32 million or 25 cents per share.
<unk> also reported GAAP net book value of $10.16 per share and underappreciated book value of $11 53 per share as of June 32023.
With that I.
I would now like to turn the call over to Mike.
Thank you David.
Welcome to our second quarter earnings call and thank you for joining us this morning.
As mentioned we were pleased to report adjusted distributable earnings of 25 cents per share while our dividend coverage continues to remain strong.
Current liquidity as of today stands at 347 million of which 182 million is unrestricted cash.
During the quarter, we again reduced our overall leverage to one nine times.
This quarter, we recorded a 21 cent reduction an underappreciated book value, which currently stands at 11 53.
This reduction was primarily driven by a net increase in our general seasonal reserves. In addition to a specific reserve on one office loan which was already on our watch list.
Eddie will provide more details in his section.
As everyone is well aware throughout the first half of 2023 unprecedented market conditions have pressured commercial real estate borrowers across the board regardless of property type.
These strengths or unlikely to ease until the fed begins reducing short term interest rates, which is now expected to occur sometime in 2024.
With another interest rate hike just last week the fed is very near the end.
However, given the current strong economy, the fed will maintain a higher for longer interest rate policy, while continuing to reduce its balance sheet.
This remains the primary risk factor for the commercial real estate markets over the next 12 months.
Regarding our portfolio.
Overall performance of our underlying office properties during the quarter has remained steady.
In fact upgraded the risk weightings for two office loans, and we moved them from our watch list.
This is the result of these borrowers making significant progress in our leasing plans.
Given the increased focus on this property segment and in an effort to provide investors more information. We have included in our second quarter supplement package a description of our five largest office lines, which represents 35% about office loan portfolio.
Multifamily, which represents 52% of the portfolio has remained resilient.
We have experienced topline went to increases across the portfolio.
Which have exceeded our underwriting projections.
However, all property types, including multifamily have not been immune from the rapid rise in inflation and corresponding interest rate increases.
In some cases, the positive impact of higher rental rates is being muted by rising operating expenses, such as utilities payroll and insurance.
Additionally, in some select instances, we've seen increases in bad debt, primarily due to legacy tenet friendly COVID-19 policies in certain jurisdictions.
Ultimately, we expect these conditions will improve in the coming quarters as we work with these borrowers to execute the value add business plans.
In the meantime, this quarter, we have identified and downgraded three multifamily loans from Ace III, two or four to reflect specific circumstances that the property Andrew at the sponsor level.
Importantly, all three of these loans as well as the entire multifamily book, our current and debt service payments.
As we look at the second half of the year, our focus remains on managing our portfolio, while maintaining sufficient liquidity and lower leverage.
We are of course eager to get back on offense and make new investments.
Especially as we expand at many regional banks to shrink their balance sheets in the coming year.
Last week's merger of two West Coast banks, It's a great example of this.
This pullback by regional banks should create ample opportunities for private credit and non bank lenders like price spire.
However, in the near term protecting the balance sheet continues to remain job number one.
With that I would now like to turn the call over to our President Andy what.
Andy Thank.
Thank you, Mike and good morning, everyone throughout the second quarter the price by our team has remained focused on the asset and portfolio management. We believe the combination of our vertically integrated and internally managed platform, including a rated special servicer uniquely positions <unk> to navigate the current environment.
None of our loan asset management functions, our delegated to third parties.
During the second quarter, we received 162 million in repayments across two investments in line with expectation.
Alluded in the repayments for this quarter was the Berkeley hotel loan for 148 million.
We have received approximately $263 million in loan repayments and as previously highlighted we expect loan repayment activity to remain relatively low for the remainder of this year.
Our second quarter supplement now includes additional information on the <unk>.
No.
Our risk rated four and five loans or watch list loans.
Watch list office loans were relatively consistent with what we reported to you in the first quarter. One office loan was added to our watch list this quarter and as Mike mentioned, two office loans were upgraded and removed from the watch list.
During the second quarter, we executed deeds in lieu on too long Island city loans in cooperation with our borrower and if taken full control of both office properties. We are engaged with a third party property manager taking control of the properties have signaled to the market that ownership is now.
Stable and well capitalized.
This resulted in renewed leasing interest.
And we have already received unsolicited inquiries from prospective tenants.
We believe the reset basis and these properties will allow us as owner to better compete for tenants and ultimately stabilize the mix at the properties.
In terms of updates.
On the Washington D. C office, well, we anticipate taking control of the asset over the next few months after which we anticipate commencing a marketing process for the property.
During the second quarter, we placed the Oakland office loans on non accrual increase the risk rating from a four to a five and recorded an 11 million dollar specific seasonal reserve. Additionally, subsequent to quarter end, we executed on a deed in blue and have taken ownership of the property.
Lastly, we continue to monitor the Oregon Office Park Senior loan is it provided detailed disclosure on these investments and others in our MD&A contained within the Q2 2023 Form 10-Q.
With respect to the San Jose Hotel property last quarter, we noted that a sales process was underway for the hotel annexe tower comprised of 264 rooms during the quarter. A buyer was selected in terms have been agreed to the.
The borrower anticipates, the sale and a corresponding paydown of our loan to occur in the third quarter.
Loan remains risk rated four.
As of June 32023, excluding cash and debt assets on the balance sheet loan portfolio is comprised of 96 investments with an aggregate carrying value of $3 2 billion and the net book value of $917 million or 81% of the total investment portfolio.
Average loan size is 33 million weighted average risk rating of three one.
Our portfolio has minimal future funding obligations, which stands at $226 million or 7% of outstanding commitments.
First mortgage loans constitute 97% of our loan portfolio of which a 100% are floating rate and all of which have interest rate caps.
The multifamily portion of our portfolio consists of 56 loans, representing 52% of the loan portfolio $1 7 billion of aggregate gross book value.
Office comprises 32% of the loan portfolio consisting of 1 billion.
Aggregate gross book value across 31 loans with an average loan balance of $33 million.
<unk> of our portfolio is comprised of 9% hospitality with industrial and mixed use collateral making up the remainder.
With that I will turn the call over to Frank Sarah as you know, our Chief financial officer to elaborate on our second quarter results right.
Thank you Andy and good morning, everyone.
Before discussing our second quarter results I want to mention that we expect to file our Form 10-Q later today.
Our second quarter 2023 supplemental financial report is also available on the Investor Relations section of our website.
For the second quarter, we reported adjusted distributable earnings of $32 million or 25 cents per share.
Second quarter distributable earnings was $21.1 million or 16 cents per share it.
Distributable earnings includes an $11 million specific reserve on the one to watch.
Additionally, the second quarter, we reported total company GAAP net loss attributable to common stockholders of $7 $5 million of our six cents per share.
The GAAP net loss reflects the 29 million of total loan loss reserves, consisting of $11 million specific reserve and $18 million of general laundries.
Quarter over quarter total company GAAP net book value decreased from $10.41 per share to $10.
<unk> per share.
Unappreciated book value also decreased from $11 and kept the core cents per share to $11 53 per share. The decline is primarily driven by increases in our seasonal reserves, partly offset by adjusted distributable earnings in excess of dividends the class.
I would like to quickly bridge, the second quarter adjusted distributable earnings of 25 cents versus the 27 cents recorded in the first quarter.
The change is driven by one repayment.
It was placed on nonaccrual during the quarter and lower one time loan modification income offset by the impact of rising interest rates.
Heading into three Q, our adjusted distributable earnings quarterly run rate should remain around current levels.
Turning to our dividend for the second quarter of week declared a dividend of <unk> 20 per share in line with the first quarter.
Our dividend remains well covered at 1.25 times.
Looking at reserves in births ranking.
As he mentioned in his comments during the second quarter, we took ownership of the two long Island City office property and place the Oakland office, one on non accrual and recorded a specific reserve issues.
This resulted in our second quarter.
But they are decreasing by $57 million 55.
Our general seasonal provision stands at $62 million, an increase of 18 million from the prior quarter.
In general sees Tau was primarily driven by economic condition as well as specific inputs on certain office and multifamily properties.
The combination of assets specific in general see some reserves at second quarter end was $107 5 million or expansion 12 basis points, how long can it.
As a reminder, these are point in time assessments that we evaluate each quarter.
Looking at changes in risk rankings during the quarter I'll review resulted in core loans moving to our watch list comprising three multifamily loans and one off as well.
We upgraded five loans during the quarter to a risk ranking up three and remove them from our watch list.
As Mike mentioned two of them were office longtime properties located in San Francisco, California in Baltimore, Maryland.
The other three upgrades included the Milpitas Mezz, a one hotel mezzanine loan at a construction loan.
Altogether, our average loan portfolio risk ranking at the end of the second quarter was 3.1 compared to the first quarter's average of three point Kip.
Our three risk ranked five loans represent approximately 1% of the total loan portfolio carrying value.
Seven loans equating to 14% of the total loan portfolio carrying value or risk Frank for while.
While all breast Frank where loans are current performing loans, we are seeing 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 underappreciated assets stood at approximately 4.5 billion as of June 30th 2023, our corporate leverage levels remain at the low end of the sector our debt to assets ratio was 16, 3% and our debt to equity ratio was one nine times.
Down quarter over quarter.
This concludes our prepared remarks, so with that let's open it up for questions operator.
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We ask that you please limit yourself to one question and one follow up thank you.
One moment, please while we poll for questions.
And the first question comes from the line of Sara Baack home with B T. I G. Please proceed with your question.
Hi, everyone. Thanks for taking the question I was hoping if.
You could speak to how you think about giving loan modifications and extensions to help sponsors get to the other side of this rate hike cycle.
First is just from moving those assets from the Bucks, realizing a loss there, but getting some capital back now to allocate elsewhere. How do you think about that generally.
Hey, Sarah how are you it's Mike.
I'll I'll start off with that and I'll, let Andy interject as well I mean generally we have a bias towards working with all borrowers where we feel like there is equity to protect borrowers should step up and do something to help cover shortfalls that could be either some pay down of the law we've experienced.
That buying the interest rate cap, which these days is expensive and some of our borrowers have definitely stepped up to do that as well as covering.
Interest rates shortfalls and building up the reserves.
Sometimes they ask us for lowering the hurdles for the extension the borrowers have a view hey, if we're putting money into the deal.
We'd like to make sure that we're not but we have an option of getting it out and that you you don't keep the hurdles for the next extension.
So generally speaking we have a bias toward working with all borrowers in this environment and in many cases. Many many cases all borrowers have stepped up and made capital calls to their Lps and have funded and unfunded some shortfalls there.
Andy yet any any additional thoughts on that.
No Mike I think you've covered it really at the end of the day, we're looking for a commitment from the sponsor of the borrower in the form of a financial commitment are operational.
And with that we're generally able to figure out a path forward and so that's a certain way past.
Number one the alternative patches as you outlined Sara.
The asset back and <unk>.
Subsequently addressing any issues with the asset and ultimately moving it off our balance sheet.
Okay I appreciate those comments and as a follow up I was hoping you could talk about the extent to which you used cash to buy loans out of CLO during Q2.
Were any of those mountains watch listed and could you just generally talk about liquidity needs coming from bright spire on loans that you're looking to delever in the coming months, just given the expectations that you spoke to during the prepared remarks for lower repayments this year.
Okay. You know on on that question about buying out of the CLO. We have Matt has land with US who runs our capital market markets, Matt Why don't you give an update on what we did this quarter on the Clo's sure. So thanks in Q2, we bought out two loans from our 2019 CLO.
One of those was in exchange the other one was a cash purchase.
So total loan balance that was removed was about 98 million. Our total cash that was used to purchase those two out was about $77 million.
So the CLO is even though we're past the reinvestment period. There are there is criteria in a CLO, where you can make a potential substitution for a loan and so one of the loans that came out we were able to to substitute another alone and which helped the the liquidity there going forward sorry, it's it's managing that.
That liquidity around any potential defaults in the CLO, we have to buy out alone or any potential buyouts on warehouse lines that we're watching.
We're watching very closely and I think we try to articulate that and I'll Watch list policy, we have and we've said this on earlier calls I think I've addressed this question with you before.
The policy. We have is we really we really want to avoid surprises and that really is alone going from a three to five where it's non accrual and so we have a bias toward.
Moving loans into the watch list on a four basis all the loans that we moved onto the watch list for this quarter, our current loans and we can work through those issues with those borrowers and liked the loans that were upgraded off the wall off the watch list. This quarter, we can see the same happen there, but we have a bias toward.
Putting the loans on the watch list. So that if something does go awry that investors and analysts such as yourself have been given a heads up.
Along those lines you know, we we think that.
With the Oregon law, which is a four we're in dialog with that borrower right now and I think that there is a decent shot that that that loan does does move to a five and they are in the next quarter.
And then with regard to other loans that are on the watch list as I said, the new loans that went on are all current and and glancing at it now all the loans.
On and risk for our our current loans are we.
We are working very closely with the borrower.
On the San Jose Hotel.
That loan is current and then the disclosures in the MD&A are this quarter, we describe how the mezzanine was there was a mezzanine class behind us that mezzanine class was upsized.
By about 4 million Bucks to.
To make future debt service payments as the hotel tries to reach stabilization, we mentioned in the prepared remarks.
That despite the fact that a part of that hotel is under contract for sale that could affect the credit credit positively we're keeping it as a risk weighted for until that transaction is consummated. We think that is a September or October a potential close and from what we understand the owner may maybe in the <unk>.
Market are enquiring about potential for the sale of the entire hotel so if that were to.
To occur sometime in Q4 or early Q1, you can see the biggest loan on our watch list for move, but we're watching that very closely.
The hotel is not yet stabilized, we're very happy with the new flag in place and that's the mezzanine is protecting.
And and that will be a big move for us in terms of liquidity because that loan as we've said on previous calls.
I think only levered about under 50% I think it's like 47% leverage. So we have a lot of liquidity tied up in that loan. So a sale of that one tower and potentially the sellable entire hotel would have a huge benefit for us.
Liquidity wise.
Great. Thanks for all that detail.
And the next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
I appreciate all the details on each of these assets are Andy I wanted to follow up on to that you mentioned.
You know first on the long Island City Office, you know you talked about that.
Initial interest you're seeing now now that you guys are in control can talk about it.
Timeline there.
When you look to stabilize and sell the asset you know kind of what metrics are you looking to achieve for for stabilization.
Let me, let me lead off with that I'm going to lead off with that Steve because.
I'm very I'm very proximate to that our day to day.
That that there was one building that that Andy was mentioning that we had leasing inquiry on that was the Paragon building.
That building is unique.
I don't mean to say that our buildings are better than New York office buildings, we know what's going on in the office market.
But that building is unique because it sits right on top of the subway station in a row of rail station and a block away from our major subway lines. So we've gotten a lot of inquiry on that we're finding is that.
When you do a short sale process, you're you're attracting.
You're attracting low bids because they they sense the buyer a sense distress and rightfully so I don't begrudge them that.
So we felt like taking these assets over to demonstrate that they are in stable hands and more importantly that leasing brokers are going to get paid.
And that's the case, so now that we own. These properties we are getting in Korea now.
I think for an extra on that we'd have to start to see some level of stabilization. Some leasing activity, where if we have LOI is in place that are strong and we have maybe tenant improvement program. So that tenants are up and running where I buy a prospective buyer can see that the property can at least.
Sustained its operating expenses and the negative carry on that is less I also think that.
We said this in the prepared remarks, this higher higher for longer or is affecting everything this rate environment. So if you get to a point, where the fed is telegraphing lower rates buyers can see potential lower cost of capital we get some leasing traction. There I think then we would we really want to move the asset we don't want to hold an asset.
Until it's fully occupied and stabilized we really prefer to get the liquidity back so it'll be like a crossover point, where we think we can get the maximum value for where the state of the asset as well. We are very pleased that now that we own the asset and have a third party manager in that we are getting incoming phone calls, but I do think it will take at least a couple of quarters.
As we're several quarters for that to surplus our way through.
Great and then somewhere on Oakland assets, you know was the Ari a deed in lieu and the and Q3 are you know is that when you look at how quickly or is that one that will go through a similar process.
We hired a third party manager that asset is an older asset.
We're very glad that it is a low balance asset that's that's the silver lining on this I don't have positive things to cut it to <unk>.
Telegraph at this point in time, given that we just got control of the asset I do think there needs to be some capex that goes into the asset.
That the owner neglected doing off obvious reasons, telling that the asset was changing changing hands. So nothing really to report on that at this point.
Great and lastly, any update on the Norway asset. Thanks.
No no update there.
Great I appreciate it.
And the next one comes from Matthew Howlett with B Riley Securities. Please proceed with your question.
Hey, guys. Thanks for taking my question first I mean, congrats on continuing to Delever. It.
Focus on liquidity, just any update with the bank lending group and the dialog that you're still.
Is it still cordial and obviously a lot of availability under it.
Just any update on the dialogue with the banks.
Yeah, Matt you want to address that yeah, I mean, obviously, we've been working with our banking partners for a number of years here dialog is very positive.
As Mike mentioned, you know we've been working through some amendments, which involves you know sponsors putting cash in and buying new caps. So we obviously work very closely with our banking partners on all of those changes assuming those loans are on the repo lines.
And they've been extremely supportive and in line, having a very similar view to what we have on those deals where you know seeing sponsors contribute equity.
Didn't really step up and support the assets allows us to.
To continue to finance them in the banks continue to finance us. So we're very aligned and conversations have been very positive to date.
Yeah, they've been very constructive.
They've been very they've been very constructive and supportive and I could probably that's probably the case with with most of our peer group and as long as you're you're giving them total transparency and they feel like you've got credibility with them, which is which is primary with us.
Where we're getting that we're getting that support from them.
That's great to hear and I know, you've got a lot of availability in lines and it's great to hear that they're working with you guys on on some of the.
On the portfolio second question, one thing about like Matt Let me just add one thing about that but you know when we when we project liquidity, we talk about cash.
And we really think that there needs to be a distinction between us and some of our peer group are doing a good job at making this this this this characterization, there's a distinction between availability and European reinvestment on Clo's.
Some some of our peer groups state that they have liquidity because they have assets that are under levered, but they have pre approval to increase that leverage we view that as liquidity, but just saying that we have capacity on our warehouse line, we have capacity for 800 million on our warehouse lines, we do not.
Telegraph that as as liquidity, we believe liquidity as cash on the balance sheet.
In place unused capacity on our revolver or untapped capacity on our warehouse line as preapproved. So right now we do have capacity to land, we have 800 million of capacity at our warehouse lines that will tap with our available cash as the haircut. If we if we go on offense anytime soon.
Yes, I'm glad you pointed out and you almost have double almost double the line availability to do a lot of different interesting things when you're ready to go on offense. So it's great to hear I figure I'd ask that question because he had been very supportive with you guys and it's great to hear that Youre standing by your second question, Mike on the Triple net lease property in Norway any headway.
On the getting the distinct.
Pension fund is trying to kind of get to renew and eventually refinance that debt.
Now the status of that is not has not changed.
The tenant.
<unk>, which is the the state oil company of Norway.
Until 2030 on that lease as we say in the disclosures the debt matures in 2025, we have the lease payments hedge.
We were able to put out a three year hedge when we did it.
In 2021 that goes to May of 2024.
But until we are engaged with that tenant to get a possible extension.
The status quo is not changed.
Can I ask if he's approached them with maybe offering.
Extend early you give them a discount and that way you get the debt refinanced.
Some of the property and many that makes that the strategy that youre looking at.
I've been to Norway, we've had face to face meetings that I would say all of the above were put on the table. They have the benefit of being in the state.
Well a company of Norway. So they have a process that they go through and we have to observe that process in terms of how they assess their real estate needs. We are in contact with them as frequently as we can be a we were told that they may have a decision in June that's been postponed till September .
So we are waiting for that and again, if they'll invite us to go to Norway, we'd be more than glad to go but all those options.
Are on the table absolutely.
Great and then just last question I mean.
Any green shoots in the rates are up obviously here again today any green shoots in and just your general CRE market in transactions I mean, some of the REIT stocks have been rallying back up now that you have.
Lines have been horrendous, but but is it over it could be overdone.
Any green shoots you're seeing Mike Thanks, and thanks a lot.
Alright, so generally.
I'd say, we would we would trade earnings on an EPS basis.
Well that had been that because rates are up we would trade that for better credit any day. So we're looking forward to rates coming lower because we think as I said in our prepared remarks.
It's causing distress and it's probably the number one risk factor.
Across real estate, regardless of property type office has its own idiosyncratic issues that are big I don't mean to understate them, but higher interest rates are affecting every asset class in credit.
Particularly office the Green shoots are.
The as I said in our prepared remarks.
The retrenchment of the regional banks there are probably there are over 100 regional banks and probably something like several thousand to 4000 community banks out there I think we were all somewhat surprised too.
You see the amount of commercial real estate being done there because its spread out so far among all these banks, it's very hard to detect unless you are an expert in following that market. So we're.
We're seeing that retrenchment of car.
And we think that that's a positive for all the the non banks in the credit funds, they're far more community banks and regional banks and there are commercial mortgage Reits and debt funds. So we think that that will be a huge green shoot for us and we are seeing inquiry origination team to <unk>.
Try to fill that void, we're not ready to step in yet we want to maintain a certain amount of liquidity, but we are seeing some interesting transactions. We haven't executed on any of them yet as I said, but we think that's the big green shoot in the market. The retrenchment of the of the banks is going to be a huge positive, but first thing we want to see is we want to see.
The fed starts to telegraph a a.
I'll pull back and in rates.
I appreciate the update.
Yeah.
And the next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question Hi.
Good morning, everyone. Thanks for taking my question Frank in your remarks.
I wrote in my notes that you said there were three risk rated risk ranks.
Five loans when I'm looking at page 14, I see the two five rated office loans D. C in Oakland, but I don't see a third operated loan did I just hear that wrong.
I know there are three loans you may recall last quarter, we reported on a a property in Ms. L. P. This step was split into a mezzanine a mezzanine dee.
And we took a full reserve on the mezzanine b and that remains adverse ranked five loan.
Okay. It's just not it's just not in the deck is that what you're saying.
Good evening, Hi, Yeah, that's right it's not in there it's written off and that's why that's correct. Okay. The exposures are okay. Okay got you. Thanks, that's that's that's helpful clarity.
And then.
What were the issues I noticed and Mike referred to this that you had three I believe multifamily loans that you took to four in there now on the watch list is there any common theme there into what was going on with those properties and the operators that caused you to push those three.
Multifamily used to afford it looks like they're all out west somewhere I.
I don't know if that's a common theme.
Yeah, they're all those laws are current Andrew do you want to.
And so this.
Sure Mike So.
They're these are all <unk>.
Loans in in different and distinct markets with them.
In certain respects different things going on but I would say generally across multifamily, which where our portfolio has about 52% exposure to.
The asset classes performing rather well.
We are seeing is an uptick in the expense side. So G&A is up and then if you look at certain markets you'd property tax insurance and even down at the municipality level utilities can be up so.
There have been challenges and then additionally, as Mike highlighted in his prepared remarks, there has been certain properties an increase in bad debt as a result of COVID-19 kind of leaning in policy and so that's gotten in the way of the borrower's ability in certain cases to clear out bad debt to take.
Physician of certain units and make the improvements and execute on their business plans. So that essentially is elongated period of negative cash flow.
We looked at the use for it.
Investments and felt like they were behind our business plan and that's as evidenced in this quarter's brisk ranking movements. We've seen you know.
Positive movement in certain assets, so that could certainly be the case here, but as Mike highlighted we want to be upfront with these potential issues and make make sure. There are no surprises so.
So those are kind of.
General themes.
Yeah, that's great.
I will I will add that what we are seeing is we are seeing good rent growth. So yes on the top line. Despite some of the headlines in our portfolio kind of on a same store basis, we've seen year over year about a 6% increase and so that's taking out the units that have been rented.
Those are obviously receiving much higher premiums. So we are continuing to see good rent growth.
Got it that's helpful. Yeah, It doesn't sounds like being in a an.
An apartment rental managers a lot more challenging these days than it may have been in the past so.
We certainly understand with the Covid changes. Thank you guys for the comments and good job.
Yeah.
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And our next question comes from the line of Matthew <unk> with Jones trading. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the question.
So with the expectation that the San Jose Hotel loan pays off next quarter.
That goes through would you be willing to originated some of these higher yields to boost the overall coupon of the portfolio kind of jump back into the market test the waters and start originations again.
If so do you guys have a current pipeline that youre looking at in areas that you'd want to target. Thanks.
Okay.
Thank you for the question I, just wanted to clarify that on that San Jose Hotel asset.
There is under contract one tower there two towers at the hotel. The second tower was built subsequent to the first that tower is under a PSA for sale that has been since the spring and that buyer is really not a it's a nonfinancial buyer that buyer as we were.
<unk> that to close.
Some time as I said in September October so that the proceeds from that sale would go down would pay down the first mortgage we do believe that the buyer. The owner is exploring sales options are for the entire hotel, but we can't really speak to that.
At this point, we think that they're making that inquiry, but we don't have any details to report that's very early we can't say that'll occur having said that.
Any any delevering that we would have in that hotel would produce liquidity because we have such a low advance rate on it. So I just wanted to be clear on that and the answer is I think to get back on offense.
We are really looking at two things not just that but we're really looking at our overall liquidity in the portfolio needs. So as we get over the next quarter.
A quarter or two more visibility as to what liquidity, we need to protect the portfolio that'll be the number one sign that we have for getting back into the market that timing probably also occurs with the fed starting to.
Say that they're going to where they can see easing going forward. So as we get toward the end of the year, we think that the prospects are playing on offense.
Or are increasing dramatically and that will have the cash to do so given the leverage of the firm as we set a new <unk>.
Remarks is one nine times leverage we think we're one of the lowest levered.
Mortgage suites and the pure in the peer group in terms of opportunities as I said earlier.
The regional bank pull back I think it's going to be massive.
It's very difficult to understand how much they were doing because they were just so many banks in the market literally thousands of them, making loans, so where banks I've never heard of that we're doing loans.
And in areas well outside of their region.
So we think that those will present big opportunities in terms of sectors.
Obviously, given all office exposure today, and what's going on in the office market, we would be hyper selective in office, but in terms of multifamily hotel industrial other property types, we'd be absolutely open to doing that including doing some construction loans, because we think that the regional banks, we're very heavy and construction led.
So we think there'll be good selective opportunities.
To do construction loans and that that'll be a product story very well need it but we think overall for the market to start to move not only on the on the on the supply side with the.
The regional banks pulling back, but we also need to see an increase on the demand side.
For credit and we think that's not going to happen.
Broadly until assets start to trade.
And until we start to see weights on the short end coming out.
Yeah.
Thank you that's helpful.
And there are no further questions at this time and I would like to turn the floor back over to Michael for any closing comments.
Great well. Thank you all for joining US today, please as always feel free to reach out and contact us if you'd like to have a one on one meeting and we'll try to accommodate until then we will see you in the third quarter call in November and have a great rest of summer. Thank you.
Ladies and gentlemen that does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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