Q2 2023 Claros Mortgage Trust Inc Earnings Call
Hello, everyone and welcome to close mortgage Trust second quarter 2023 earnings Conference call.
My name is Bruno and I'll be your conference facilitator today.
All participants will be in a listen only mode.
After the Speakers' remarks, your question and answer period during that presentation. You can register to ask a question by pressing star followed by one on your telephone keypad.
I will now hand over to your host Vice President of Investor Relations for Cloud was mortgage Trust. Please proceed.
Yeah.
Thank you I'm joined by Richard Mack, Chief Executive Officer, and Chairman of Claris mortgage.
Mike Mcgillis, President and director of Claris mortgage Scott.
And Jay Agora, Pmt's Chief Financial Officer.
We also have Kevin Cullinan executive Vice President, who lease originations and Priyanka Garg Executive Vice President, who leads MRI portfolio and asset management.
Prior to this call we distributed <unk> earnings release and supplement.
We encourage you to reference these documents in conjunction with the information presented on today's call.
If you have any questions. Following today's call. Please contact me.
I'd like to remind everyone that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in our other filings with the SEC.
Any forward looking statements made on this call represent our views only as of today and we undertake no obligation to update them.
We will also be referring to certain non-GAAP financial measures on today's call such as distributable earnings, which we believe may be important to investors.
Our operating performance.
For reconciliations of non-GAAP measures to their nearest GAAP equivalent please.
Refer to the earnings supplement.
I would now like to turn the call over to Richard.
Thank you Ron and thank you everyone for joining us for MTGE second quarter earnings call.
Most of the headlines this summer.
A consistent story.
2023 has been a challenging year for the entire commercial real estate industry.
Owner operators developers and lenders alike, Hey, Jeff business plan in an environment of higher rates and DARPA.
Sharply reduced bank lending.
This has resulted in very tight credit conditions unit transaction volume and continued asset value decline.
Reset.
Reflecting interest rate increases.
These conditions are exacerbated.
Office fundamentals and valuations as well conflicting signals around recessionary and inflationary risk.
Last month's inflation print registered inflation down broadly against the backdrop of strong economic activity and employment.
<unk> incorporated the data it suggests that we may be nearing the end of interest rate hike.
The chance of a recession is lessened.
Not surprisingly long bond and equity REIT stocks rallied.
Over the next several months inflation readings and economic reports will be critical to the third plan for the remainder of the year.
We expect volatility will continue to be the watchword as the market and the fed corporate and react to the data and determine whether or not more rate hikes are unnecessary.
Our view is that while inflationary forces of war stimulus and trade disputes will be with us in the short and medium term.
Long term deflationary forces of technology and globalization will eventually went out.
Rates will normalize.
However, the MTGE, we need to be prepared for an environment, where inflation and high interest rate per se.
Today, we are operating in an environment, where benchmark rates have reached peak level not seen in more than two decades.
While we would hope for the coveted soft landing and lower short term rates, we have to assume that we're facing are higher for longer rate environment and protecting and operate our business accordingly.
When we evaluate our portfolio in the context of a higher for longer rate environment and worsening of the market correct.
We believe our thoughtfully constructed portfolio defensively positioned.
As a primarily floating rate lender NPD has been in part positively impacted by rising interest rates.
We are generating historically high all in yield but.
But at the same time, we must acknowledge that the rapid rise in rate.
Green stress on borrowers and their borrowing costs.
That said generally our borrowers have significant capital.
And in most instances.
And you're going to see them do so.
We also need to acknowledge that work from home is continuing to plague the office sector and that we have just begun to see the threat in that sector.
What impact on office market downturn will have on the overall real estate capital market.
It's starting to become apparent.
As the industry is beginning to see resolutions occurring.
Institutional owners are starting to make difficult decisions regarding their office assets.
Borrowers are giving back these.
Many of whom have asset work, but then the debt outstanding and in a few cases transactions are closing in major markets at deep value decline to pre pandemic valuation.
As to our portfolio.
We intentionally constructed to have low office exposure.
We expect office to decline as a percentage of the portfolio in the near term.
Further a significant portion of our office is fully renovated highly in that or is the type of office space and in demand today.
Furthermore, many of our office loans are structured with additional credit support.
Despite that.
The date of the office economy today, we all need to consider if any office exposure with too much at all.
And we expect that positive resolutions of office loans will require creativity and resourcefulness from both lenders and borrowers.
In terms of portfolio composition multifamily continues to be our largest allocation.
Electing one of our high conviction themes.
Multifamily fundamentals continued to be relatively strong even at elevated rates impact the asset class more broadly.
However, we remain optimistic as the supply demand fundamentals for the sector continued to be extremely favorable from.
From a lender's perspective, we've also been absorbing many of our borrowers demonstrate both the financial wherewithal and the motivation to protect.
Aerie their assets through this period of higher interest rates.
It's been driven to date by an optimistic forward yield curve by the healthy market fundamentals that we are experiencing with the exception of very few markets such as San Francisco.
Additionally, one consideration we believe will be a boon for our multifamily portfolio is fundamental Florida housing in the U S and how difficult. It is now to capitalize new construction looking ahead, one to three years, we believe that historically low supply and translate into higher rents, which could make our existing asset more valuable.
Mike will provide a more detailed discussion on our portfolio later on in the call, including additional color on multifamily office and hospitality exposures.
While we believe our portfolio is well positioned in the current market environment and remain confident that our proactive asset management will continue to help us identify potential concern early in the process or.
Our business is not immune to the pressures that the industry has been experiencing.
We expect the higher for longer interest rate.
Some select softening of asset performance, we will continue to stress borrowers.
In such an environment, some landlord may decide not to protect their assets.
Consequently, we anticipate that there will continue to be instances, where we will need to collaborate and or modify it load for our borrowers instances will be will want to exit our loans in instances, where we will want to take control of these assets ourselves.
In general we have strong conviction in the underlying assets collateralized our portfolio.
We manage our portfolio with a long term view and with an objective of maximizing returns and building book value for our shareholders over the medium and long term.
When our borrowers decide not to protect their assets.
Given the broader organizational capabilities of Mac real estate group, we are ready willing and able to do so.
Our broader platform experience as an owner operator and developer give us confidence that we have the necessary expertise to execute in a variety of scenarios. This is our type of market.
To take advantage of weakness when appropriate.
Leaders of our business have been here before we have seen the power of owning discounted asset and riding out the cycle.
We have the capabilities and market intelligence.
Prudent and disciplined when it comes to understanding value and being opportunistic.
Opportunistic requires investment capital.
And during this period of uncertainty.
Based in generation of liquidity will be essential to ensure that we have the appropriate resources.
Maximize shareholder value.
Long term.
Therefore, and as a normal course of business, our management team and board of directors will continue the dynamic process.
Reviewing all liquidity options available to us given the current market environment.
I will now turn the call over to Mike.
Thank you Richard I'd like to start my prepared remarks. This morning with our portfolio summary, then provide color on what we're currently seeing in the market.
Typically across the multifamily hospitality and office sector.
PMT would be primarily floating rate portfolio was $7 $5 billion based on carrying value at June 30th.
Portfolio is comprised of 98% senior loans and as the portfolio LTV of 68, 5%.
During the quarter, we made follow on fundings of $162 million.
Partial loan repayments of $49 million.
Looking ahead, we expect several loan to repay in the back half of the year across a number of property types, including an office construction loan.
The MTV portfolio composition remained relatively consistent quarter over quarter. However, we added an additional REO asset on June 30.
I'll touch on in a bit.
Multifamily comprised 41% of the portfolio as of June 30, representing our largest property type concentration.
Given that our loans are transitional in nature, which involved the repositioning of assets, we are continuing to see positive trade outs.
<unk> renewals and rent increases so rent appreciation has been moderating from the historical highs we had been seeing.
As Richard mentioned, the current rate environment has been challenging.
Many multifamily borrowers have been struggling with negative leverage and as a result, we anticipate instances, where we'll be collaborating with our borrowers to develop dilute them, while also protecting our position.
In aggregate, we like our basis and feel that we have the expertise to exercise their rights and remedies if needed.
To that end during the quarter, we moved four multifamily loans re risk rating.
Our risk rating.
Three of these loans are collateralized by act flowing multifamily asset located in Texas, and Arizona with the same operator and represent 2% of the portfolio carrying value of our $154 million.
The borrower has been impacted by the negative leverage dynamic I just spoke to.
Continued to contribute capital to carry the asset.
Turning to hospitality as of June 30, hospitality represented 20% of the portfolio.
The industry is experiencing downward pressure on top line growth.
While occupancy upheld ADR has been impacted by a number of factors.
Domestic leisure demand post Covid has abated the.
The relatively strong dollar has motivated consumers to opt for European destinations as opposed to traveling domestically.
Additionally, corporate group travel has not recovered to levels seen prior to the pandemic, which has resulted in fewer opportunities great.
Compression period.
The overall performance of our hospitality portfolio its been holding steady in light of these dynamics.
At our hospitality assets are performing in line with expectations and generally outperforming their peers and their relative submarket.
Office comprised 15% of the portfolio at quarter end.
As Richard mentioned, the Opex sector continues to face headwinds.
And managing our office portfolio, we are being creative in developing solutions for our four rated office flow.
In most cases borrower demonstrating convicted in their business plan and they are tend to be long term owners.
Requiring borrowers to contribute additional capital has been part of our discussions around loan modifications.
They will discuss the office loan that we placed on non accrual this quarter later in the call.
Before turning the call over to Jay I'd like to take a moment to speak to the assignment in lieu of foreclosure we completed on June 30.
As mentioned on our previous earnings call. We identified it in New York City mixed use load that we are working towards taking the deed on June 30, we completed the transfer of the property via an assignment in lieu of foreclosure.
And with the transaction, we recorded a principal charge off of $67 million.
We are now carrying the property on our balance sheet at a base of $144 million.
We believe that our sponsors variant.
And our operator and developer will be key in generating long term value in this property.
Theres been a what we consider low hanging fruit, we believe their EBIT opportunity to reposition the property and improve NOI.
The Great example of where we feel comfortable being in the ownership position in terms of taking on the execution risk.
Maximize shareholder value.
I would now like to turn the call over to Jay.
Thank you Mike.
For the second quarter of 2023, we reported distributable earnings excluding net realized losses of 45 per share.
Including net realized losses distributable.
<unk> per share.
Your line is now comprised of $67 million.
Push there.
On an assignment.
Sure.
The New York City.
Any that Mike spoke about.
Offset by $2 2 million.
Gain on extinguishment of debt.
Again, it's at a discount.
Million in face value.
B due August 2026.
The performance of our New York City hotel portfolio quarter over quarter, primarily due to seasonality.
Earnings for the quarter.
We reported GAAP net income.
Okay.
Impacted by the addition of two loans.
Total loans held in a joint venture and accounted for under the equity method.
The non accrual status.
Each of these.
The first is that it hasn't got a subordinate notes of which we also reported 900 or.
100%.
Equilibrium.
Yes.
Senior loan secured by.
On a non commodity.
Box office property in San Francisco.
Yes.
2 million loan secured by a hotel.
In New York City.
No specific reason.
Recorded again.
Last two loans placed on non accrual.
This is Nathan economic and higher rate environment continues to impact the <unk>.
Our industry.
Thanks Ben.
We also increased.
On three loans.
One nine.
The $19 million.
Five rated multifamily investments in San Francisco.
Are you seeing a carrying value of 100 and London.
This represents a 27%.
<unk>.
The second is a $900000.
Early.
And lastly.
$25 million.
In EMEA with city mixed use property.
Bringing the carrying value of the loan $244 million at the time.
Simon.
Okay.
This represents a 32%.
Hello.
The cumulative.
Brazil.
$7 million.
The New York mixed teams.
And then last one assignment.
Yeah.
As a reminder, mid tier company is comprised of offices.
Well Lee.
And the times square Submarket.
On the asset.
Unlevered without any financing.
Our agenda.
One 1%.
$80 million with quarter end.
Two 6% reported in the.
<unk>, 6% on the remaining loans.
Turning to the balance sheet.
We continue to maintain a conservative leverage level.
Like the quarter over quarter from $2.
Done.
32.
Two three times at June 30.
The weighted average advance rate on loan.
Thanks.
58%.
This can be further bifurcated into 75% advance rate on multifamily mode.
3% everything else.
Yes.
We remain focused on liquidity and reported $407 million of liquidity at June 30th.
This consists of cash.
And approved and Undrawn credit capacity.
We also have significant unencumbered assets comprised of $404 million in senior notes.
The $144 million mixed used property.
Additionally.
For the quarter.
The majority of all financings.
Largest.
In July of 2026.
I would now like to open the call for questions operator.
Please go ahead.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your shelf full key pad.
Thats Star one on your telephone keypad.
To withdraw your question press the Star followed by two and please also remember too and mutual microphone when is your turn to speak.
Sure.
We have our first question coming comes from Don <unk> from Wells Fargo. Dan. Your line is now open. Please proceed.
Yes can you talk a little bit more about the multifamily properties that were moved from three to four.
I think you mentioned negative leverage and.
Just more broadly in multifamily our borrowers handling higher rates.
Cap rates moving up.
Yes, Hi, Dan it's Priyanka and thank you for that question.
We took a very proactive and transparent approach there. So those four loans that we moved to a four they are.
Where sponsors have asked us for rate release. These are the only loans in our backward borrowers approached us asking for rate relief during the quarter, which is why we downgraded them. It does not mean that we're going to agree to it in fact quite the opposite we felt very good about our basis in those loans and we don't anticipate significant modifications really made the shift to provide transparency.
Nancy.
Again at work with the borrowers on paths forward if needed, but we're also willing to take title and our basis.
The other point I would make is that although all the cash flowing loans are current on debt service borrowers are contributing capital.
But they did approach us and so again, we wanted to be transparent in this very dynamic market.
Yes.
Okay.
Just more generally and multifamily or U S.
Seeing borrower pressure with higher rates.
Yeah.
Yeah, absolutely of course.
And that's exactly why we made that shift in credit ratings on those four properties because we have a huge multifamily exposure we are very focused on.
Monitoring all of those and making sure that borrowers are being successful in.
Sorry, I meant where they have negative leverage.
They are all doing the right thing they believe in their thesis theyre, putting in additional capital so.
We have yet to see cracks in their business plans, because we are a transitional lender, we're still seeing NOI increase generally across the board. So we are.
Sure.
Optimistic that that the borrowers will be able to refinance this out over time, but we are monitoring it very closely and again that was the reason for the migration on the handful of loans that we moved to a farm.
Got it and then real quickly we've seen some other companies selling office loans or are you looking at that option as well.
I'll I'll start and then Richard you might want to jump in here.
<unk>.
We're going to look at all options available to us as Richard said in his remarks.
We're gonna be moments, where we're going to say, okay. We want to exit the loan they're going to be months, where we say, we like our basis.
That example, being the Oreo asset in New York that we just took on June 30th which has an office component, but we like our basis, there and we think we have a great business plan, but there are going to be either.
There might be other.
Loans, where we're going to say you know what we we don't think that it makes sense to try to take ownership of all that we don't think we can add value specifically and in which case, we might look to exit loans, but nothing on our radar as we sit here today.
Richard.
Let me just add as a general statement that.
Everything that we own is for sale.
And so we are constantly looking at.
What is the value going forward that we think we can create.
And.
If we think of sale is better or we're going to sell and if we think we can create value and really in this environment equity like returns holding an asset.
We're taking it Oreo and we will.
Thank you.
Our next question comes from <unk> Abraham from UBS Nicholas.
Your line is now open. Please go ahead.
Hey, everybody. Thanks for taking the question.
Can you talk a little bit more about liquidity trends cash was down quarter over quarter also also quarter to date.
Any color on what specifically driving that how much of that is maybe.
Posting additional collateral to.
Financing Counterparties and then maybe in that context, if you could also touch on the dividend and how you feel about it.
In the context of some of the liquidity pressure. Thank you.
Okay.
Sure <unk>.
As Mike Mcgillis, yes.
Yes in terms of the liquidity trend.
Obviously, we paid our second quarter dividend.
Mid July we've also continued to.
Reduce leverage in the portfolio.
So those are the primary drivers of.
Of the movement in liquidity. However, we do have some significant.
Loans in various stages of expected repayments over the remaining course of the year.
Representing about an excess of $600 million whether.
The current environment current market environment, whether they happen or not is always always a question.
But those those payoffs would generate.
In excess of 400 million of liquidity to the balance sheet.
So in terms of your other question I mean, we're constantly reevaluating.
As a management team along with our board of directors.
Where are we where we stand with respect to earnings where we stand with respect to liquidity.
Make dividend calls with our.
With our board on a quarterly basis.
Yeah.
Okay.
And on that.
Any any liquidity, we do have is really going to be deployed to maximize long term shareholder value that is that's our critical focus in everything we do.
And then are you.
Property do you plan to keep that.
On an unlevered basis or would you.
Put put any financing on that given the quality of the collateral there.
Yeah.
Hi, its priyanka I'll jump in there, we're definitely going to look at potentially putting on financing, it's really going to depend on leverage levels and pricing, but we're also very optimistic about creating value. So the question is going to be do we.
Encumbered with financing now or wait until there was additional value created.
Okay and.
Maybe you can answer this one on.
On maturity defaults at around 400 million or so and thats outside of the kind of an official non accrual bucket.
So that is kind of unchanged I think quarter over quarter, just how do we think about that balance and just where do we go from here on on those.
Yeah, that's a that's a great question.
Why don't we talk about a lot internally.
Our view there is we are we're going to be as patient as we can with our borrowers. So long as we feel good about our basis and we feel comfortable stepping in if we have to but our goal is to allow borrowers to execute on their business plan and.
And monetize when they can.
We.
Of the $400 million, you mentioned half of those loans are actually under transaction, some sort under term sheet or LOI and part of the number that.
Mike just referred to where we might see some repayments in the back half of the year.
It's a very uncertain environment, we don't know where that will end up that were.
We're going to monitor those and in the interim we're coming up with plans B C and D. In terms of other various rent pass to resolution. So we're at we're highly focused on it.
But yeah.
At the end of the day, it's all about the basis and then are we comfortable stepping in or not which the answer to all of those is yes.
Yeah.
Okay.
Richard.
Last one.
For me for you you touched on this a little bit.
Opening comments in terms of transaction volumes.
In terms of general posture between buyers and sellers as there been any compression in the bid ask spread there.
Between now and say six months ago or do you feel like we're just kind of in the same place.
And people are still waiting for more development in.
And interest rates.
Yes. This is.
This is Mike rich.
Richard Unfortunately got dropped from the call. He is trying to get back on.
But.
Yes, clearly what we've seen is for high quality.
All of the assets there continues to be demand.
Although transaction volumes are down.
In terms of our visibility through our equity business, we continue to see a lot of transactions, we continue to see.
What we think are very.
Various <unk>.
Reasonable pricing on high quality assets, such as multifamily industrial et cetera.
The buyer pools are up obviously a lot smaller so the in terms of the.
The bid ask you you're not seeing prices being pushed up as much because of multiple parties bidding, but we continue to see strong pricing.
And the multifamily and industrial and even.
The hospitality markets as well so.
But the volumes are way down.
I think some kind of falling in the capital markets will clearly bring bring people back into the marketplace. So.
That's my view and I think Richard Thank you for taking all.
All my questions.
And Richard.
Just had.
Yeah, Let me just add.
We are active.
And trying to buy assets and while valuations.
Have moved down you see still see tremendous competition for the few assets that are out there, especially in the multi space.
We're seeing assets trade at.
Higher values than we would've expected so while values are down there's still plenty of capital on the sideline thats showing up.
So, it's a pretty interesting dynamic and.
I think price discovery is going to be ongoing.
But there is liquidity.
It's quite interesting market.
Thank you.
Our next question comes from Richard Shane from Jpmorgan. Richard Your line is now open. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning.
Sorry, and I apologize if some of this has been covered it a little bit of a chaotic and crazy Morgan for US. If we look at the end of the first quarter. There was a $60 million of specific reserves.
This quarter you realized.
Losses, just about $67 million.
Yes.
Was all of the loss.
During the quarter associated with the specific reserve on just wanted to get a sense of sort of execution versus where the reserve levels were set.
The other thing is that if we look at.
The overall reserve levels have come down the general reserves come down a couple million Bucks.
Appears that would essentially have to replenish.
The specific reserve by about $38 million is that right and should we.
Sort of anticipate in the near term that $38 million of specific reserve manifesting in charge offs.
Yes.
Jason I'll take the first one is first on the.
Specific to reserves, we did charge off $67 million like you mentioned.
Of that $42 million was observed.
Previously this isn't.
Square mixed use property.
And we added another $25 million to bet.
$38 million for the quarter like I had mentioned is comprised of $25 million for the times square property.
$19 million for the multifamily spend just go asset and just under $1 million for putting a subordinate loan.
So thats in the specific reserves on the agenda reserves.
You are correct that it went down slightly.
I would say two things one.
The seasonal model as it is a very.
Duration sensitive model.
So as our loan portfolio has been.
Unchanged for the most part as we are closer to the.
90 days closer to the maturity dates the season is that it should come down and some of that is now offset by worsening macroeconomic conditions, but net net I see some of the volumes did reduce a little bit.
The last thing I'll say there is we do disclose the component of the agenda reserves, one point to 1% broken out between 40 loads and then loans that are even better than before.
So once you break out of that one 1%.
Sure.
Three 6% on supported loans.
60 basis points from three instead of it in loans.
Least intellectually feel good about the three 6%.
Yes.
Got it and obviously the portfolio is a little bit smaller as well, which also has an impact in terms of the general reserve.
Exactly.
And in terms of.
Migration from.
Specific reserve to.
Loss.
Again it.
Good news is that there is not.
There's not a ton of data.
Within your history.
Can help us sort of do pattern recognition, but when we look back at the times, where you have had losses.
Generally speaking it looks like the specific reserves had turn fairly quickly.
Hum.
Realized losses.
Which is frankly the way it should work and we use that.
$38 million as a.
Sort of near term and I would describe near term as sort of next one to two quarters.
<unk> on what we could see for realized losses.
I'll start with it.
It's a very case by case basis.
So not every asset is different.
So it's hard to draw some parallels.
Parallel to what happened to that one would happen with other assets.
Okay.
I'll add more on where specific reserves could go in terms of <unk>.
Charge offs.
Yeah sure. Thanks, Thanks, Rick for the question.
Yes.
That's related to the San Francisco multifamily properties and the.
The additional reserve that was put on it was really just due to migration of cap rates in the San Francisco market. You know, it's no surprise that that market has been challenged and as it relates to that loan we are exploring all of our options and we'll determine how we whether this is a long we ultimately end up exiting or if we think we should own it or not.
Based on the framework that Richard has already gone through but in the end or on the assets are generating enough cash flow to cover operating expenses were entirely focused on protecting the asset value as we determine the right path to resolution here.
Got it okay. That's very helpful. Thank you guys.
As a reminder, if you'd like to ask a question. Please press the star followed by one on your telephone keypad.
That's followed by one on your telephone keypad.
Our next question comes from Jade Rahmani from K B W.
Your line is now open. Please proceed.
Okay.
Thank you very much.
One of your peers reduced their dividend by eliminating the supplemental dividend today and.
That's about a 6% impact and when you said dynamic process of reviewing all options and Mike gave some color around that.
I assume that's meant to signal a dividend reduction so are there any parameters or framework for thinking about that that you might.
It might be able to talk to.
For example earnings distributable earnings excluding all items was about 35.
The portfolio is going to be going down and.
Value based on the repayments you've identified and Theres also probably some carrying costs associated with the New York mixed use so directionally it would be lower than the 35.
And then I also assume youre, not just going to reduce it by one or two cents to save liquidity it would be more.
Thankful than that so any commentary would be appreciated. Thank you.
Jade, it's not there's no comment on the dividend.
I think.
The way that we think about distributable earnings were 35 cents excluding fees.
Net realized gains losses this quarter.
There are.
Catalysts to increase distributable earnings in the form of higher benchmark rates.
And the.
In the form of future fundings on our <unk>.
Existing portfolio, which are at a higher spread than the weighted average portfolio at this time.
We have a number of liquidity.
Events and process high payoffs on existing loans.
Loans that can be redeployed.
And ways to enhance returns.
Yes.
Including deleveraging neises existing portfolio.
Would be accretive to distributable earnings.
No.
We look at distributable earnings.
I would just say that there is.
There is a number of items that could enhance that and to the extent. There is additional nonaccrual loans that are added that will.
<unk>.
The.
On the New York mixed use asset that is that is has leases in place.
Does generate.
Roy.
So.
And then the broader picture is from a liquidity standpoint.
We're constantly looking at that across across the business.
As a management team and with our board and.
And we're going to do what we think maximizes value and the.
Over the longer medium to long term for our shareholders.
That's.
I'll leave it at that.
Mike let.
Let me add a few things I think in my comments.
Everything is on the table.
And we own Unlevered assets.
We are looking at selling assets.
We're trying to be opportunistic.
And make those moves that we think are going to create the greatest long term shareholder value.
And that's what I was trying to get at.
Thanks very much.
Just wanted to ask about the New York mixed use project I saw in the 10-Q the discount rate.
Seven to seven 5% I believe an exit cap rate, 5% to five 5%.
Just wanted to ask about the basis for those assumptions.
And you know.
What your thoughts were.
Yes, hi, its priyanka Gino I'll jump in there.
So we I mean that those assumptions are based on certainly what we observe in the market. We also had a third party appraiser involved in and these were all about it by our.
Our auditors so.
But it is all gas I suppose in this in this kind of market environment, but we are we're very optimistic about the path forward. There just given it's in our b assets in our backyard and our firm has deep ownership experience and relationships, where we can really add value here and we want to particularly highlight to rich Hill.
Three of the asset in order to.
<unk> the building and so we think theres a lot of low hanging fruit that is both strategic and operational and we had a former owner here that was not really paying attention to the asset.
We're optimistic about growing the NOI on that asset just as a data point the other our REO hotel portfolio that we have.
When we took ownership NOI was significantly negative and now here, we are with NOI, that's very close to pre COVID-19 levels. So it's hot.
We're seeing a similar story, which is why we chose to take ownership of that asset if we see an opportunity we're going to take it because of the experience and the team that we have to execute them and we see that opportunity in that in that asset.
And lastly, just the Virginia land hospitality asset I think last quarter. You said there were bids for the debt above your basis.
Perhaps bid for the property is that still the case and I noticed there's no seasonal reserve there and its related risk for just some commentary on that would be appreciated. Thanks a lot.
Yeah.
Of course I'll.
I'll take that so.
The commentary last quarter was there had been bids that the debt.
That were provided to the borrower prior to our ownership alright, yep, sorry prior to that default and so the.
Those beds were out there obviously it was a very different capital markets environment. So while we think this is a very attracted to the elements side. It's just not the right time to monetize the investment that said, we think the basis makes sense and that's why it continues to be rated a four.
We're going to work.
We continue to evaluate the paths forward with or without the borrower and our path is going to really be driven by the goal of maximizing shareholder value in the long term there, but this is not the right moment to monetize that opportunity.
Thank you.
Our next question comes from Sarah <unk> from BTG Sara Your line is open. Please go ahead.
Hi, everyone. Most of my questions have been answered, but I did want to mention that we've heard from some of your peers that they've taken a look at amending some of their covenants given the pressure coming from this rising rate environment.
Could you speak to how you're feeling about meeting those covenant on a go forward basis.
If you look to make an amendment there.
Hi, This is Jay yes youre.
Youre right with the rising interest rate environment.
Active dialogue with our lenders and we actively monitor our covenants.
We are comfortable that we are going to.
Meet our finance and governance and to the extent, we need to be proactive about.
Modifying some of those we will go ahead and do that.
Okay.
And I was also hoping you could speak maybe more thematically on what you're seeing on the ground in your construction book.
As the labor market. There are you seeing more projects get certificates of occupancy.
Any color you can get on the ground up exposure.
Yeah, Hi, Sarah it's Priyanka I'll take I'll take that one.
We're really I'm.
Really.
Happy with our construction exposure in fact this quarter, we shifted a number of loans.
From construction status to operating status in light of achieving their certificates of occupancy and so.
So that has brought down our construction exposure and of those assets that have recently become operating assets too.
Two out of eight of them are working on its sales and refinancings and the others are really going through lease up process right. Now. So we've we've been really happy with that performance and we've always liked our construction exposure.
Really for two reasons one our sponsors are going to have best in class real estate upon completion, which is going to fare better in this uncertain environment certainly we're seeing that with the two assets that are right now and being sold and refinanced.
And two we have much better structure.
We got to re underwrite the asked that monthly borrowers are rebalancing monthly, they're contributing equity as needed and of course, we have completion guarantees from really creditworthy sponsors. So we've been really happy with that exposure and it's played out as we would have been expected.
Thank you.
Okay.
Yeah.
We currently have no further questions. So I'd like to hand, the call back to Richard Mack for closing remarks, Richard Please go ahead.
Thank you and thank you all for joining us today.
Would summarize.
How we see managing our business is focusing every day on creating long term shareholder value.
And to do that we're going to be opportunistic when we can and we're staffed today, we are organized to take assets back if necessary sell them.
Refinance them and just be opportunistic around creating shareholder value for the long term.
That is a dynamic process as we manage our liquidity versus opportunity.
And something that we're working on every day.
And we think that.
The process that we're undergoing an E.
Value we've created already.
Some of the Oreo and some of the other actions we've taken working with borrowers it is going to be.
Dividends so to speak.
To continue to increase value over the long term.
Thanks, all for joining and.
We will look forward to our next earnings call.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
[music].