Q3 2023 BrightSpire Capital Inc Earnings Call
Greetings and welcome to the <unk> Capital, Inc. Third quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce David Palo Verde General Counsel. Thank you David you may begin.
Good morning, and welcome to bright spire capitals third quarter 2023 earnings conference call.
We will refer to brighten spire capital as bright spire B R. S P 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, 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 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 October 31, 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.
Company's earnings release, and supplemental presentation, which was released yesterday 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.
Finally during the call management may refer to distributable earnings at the <unk> with that I would now like to turn the call over to Mike.
Thank you David welcome to our third quarter earnings call and thank you for joining us this morning.
I'll start by making some brief comments about the third quarter, and then turn the call over to Andy.
Everyone is well aware of the current geopolitical and economic issues. Therefore, I'll keep my bad for her remarks brief.
That's the first time to be Allrecipes results for the third quarter, we reported GAAP net income of $12 4 million or nine cents per share.
<unk> earnings of $31 million or 24 cents per share and adjusted distributable earnings of $35 8 million or 28 cents per share.
Our dividend coverage for the third quarter was 1.4 times.
Our liquidity as of today stands at approximately $348 million. This is comprised of $183 million of current cash.
65 million under our credit facility.
During the quarter, our overall leverage stood at 1.9 times flat with the second quarter.
Quarter over quarter are underappreciated book value increased by two thanks to 11 55, largely driven by the 1.4 times dividend coverage this quarter.
Turning briefly to the financial markets. Many believe the fed is most likely done increasing the fed funds rate.
However, interest rates are becoming less anchor to the fed's tightening policy and increasingly tied to U S physical policy.
If you look at the term premiums associated with longer dated treasury yields they are starting to become unhinged from the fed's monetary policies.
The U S. Treasury market is now becoming more preoccupied with Washington's out of control deficit spending.
This is bud.
With the federal debt, increasing by 600 billion in one month, bringing it to nearly 44 trillion.
The sceptics expanding is another reason why inflation has been very difficult to obtain.
With the old long bond trading below a dollar price of 50.
This will mark the first time that the U S. Treasuries I've had three consecutive years of losses.
Two days Treasury bond issuance calendar is now larger than ever.
Therefore, it makes sense that interest rates have been very volatile.
The 10 year Treasury yield Cos had intraday moves and as much as 15 basis points and hit 5% just two weeks ago.
Should that youll stick above 5%.
That could be the threshold for a risk off environment.
Set against this context be RFP will continue to proactively manage our loan portfolio and look to maintain our cash liquidity as we navigate through these circumstances.
With that I would now like to turn the call over to our President Andy what Andy.
Thank you, Mike and good morning, everyone throughout the third quarter. The bright star team has remained steadfast.
Focus on proactive asset and portfolio management during the third quarter, we received $58 million in REIT.
Payments across two investments consistent with expectations as repayment volume has been relatively muted year to date, we have received approximately $321 million bond repayments.
Looking ahead to the fourth quarter, we anticipate repayments to remain relatively low.
Overall, our weighted average risk ranking increased slightly from 3.1 last call. It 3.2 in the third quarter was 82% of our logs Rus find three or better.
Our weighted average risk ranking for the four prior quarters.
Relatively consistent at three point too.
We now turn to our watchlist uptick sequentially. The number of watch list loans increased by net three we had one loan granted off the watch list for $28 million and one wound was removed as we took ownership of the property underlying okay.
Office law.
Five loans were downgraded to a risk ranking of four totaling 145 million loans that were downgraded as a result of properties falling meaningfully behind on their business plans and one of the borrower may not be in a position to support the asset.
In addition, one of them was downgraded from a risk ranking for two of five multifamily property collateralized loan has faced operational challenges. Despite the borrowers recent afterwards.
Our raised additional equity for debt service and capital expenditures and now they are unable to secure the incremental funds needed to execute the remainder of it.
However, as of today this loan remains current and performing.
Additional details regarding this quarter's watch list are included in our supplement.
In terms of specific loan updates, we anticipate taking ownership of the Washington D. C risk ranked five office long asset during the fourth quarter. Once we take control of the property, we expect to commence the sales marketing process.
Current carrying value is $20 million.
With respect to the San Jose Hotel property. We previously noted the sales process was underway for the hotel annexe tower comprised of 264 rooms.
Borrow anticipates, a sale and a corresponding partial pay down of a long to occur in the fourth quarter.
The loan remains brisk right before we will continue to maintain the current ranking on the remainder of the loan until we see a clear path to resolution.
Loan financing finance rate is less than 50%.
At September 32023, excluding cash and net assets on the balance sheet. The portfolio was comprised of 92 investments with an aggregate carrying value of $3 1 billion and the net carrying value of $874 million or 80%.
The total investment portfolio.
The average loan size was 34 million our weighted average risk ranking is three point too in the loan portfolio has minimal future funding obligations, which stand at $200 million or 6% 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 remains our largest segment was 53 loans, representing 52% of the loan portfolio or 1.6 studying an aggregate carrying value.
Office comprises 32% of the loan portfolio.
Thinking of 1 billion of aggregate carrying value across 30 loans with an average loan balance of 34 million.
The remainder of our loan portfolio was comprised of 9% hospitality.
Industrial and mixed use collateral, making up the remainder with that I will turn the call over to Frank <unk>, Our Chief financial officer to elaborate on the third quarter results right.
Thank you Andy and good morning, everyone.
Before discussing our third quarter results I want to mention that our third quarter 2020 supplemental financial report is available on the Investor Relations section of our website.
As Mike mentioned for the third quarter, we reported adjusted D. E F $35 8 million or 28 cents per share.
Third quarter D. He was $31 million or 24 cents per share.
E includes a specific reserve on one loan of approximately $5 million.
Additionally for the third quarter, we reported total company GAAP net income attributable to common stockholders of $12 4 million or nine cents per share.
Quarter over quarter total company GAAP net book value decreased one half of 1% from $10.16 per share to $10.11 per share. However.
Unappreciated book value increased from 11 53 to 11 55 per share. The increase is a result of adjusted D. E in excess of dividends declared partially offset by increases in our seasonal reserves.
The third quarter change in adjusted D. E F. 'twenty eight cents versus this 25 cents recorded in the second quarter was driven by the impact of rising interest rates and income from our operating real estate portfolio.
Turning to our dividend for the third quarter, we declared a dividend of <unk> 20 per share in line with the second quarter, our dividend remains well covered at 1.4 times.
Looking at reserves are specific reserves decreased to $35 million from $55 million.
Decrease was driven by the charge off of the Milpitas, California mezzanine note and are taking ownership of the property underlying the Oakland office won.
This was offset by a specific reserve increase of approximately $5 million on the Washington D. C office one.
As Andy mentioned in his comments, we expect to take control of the Washington D. C office asset in short order.
Finally, no specific reserve was required on the multifamily loans downgraded to a thought.
Our general Cecil provision stands at $55 million, an increase of 3 million from the prior quarter.
The increase in the general see solar is driven by economic conditions as well as specific inputs on certain office and multifamily properties.
The combination of asset specific and general Cecil reserves at third quarter end was $90 million or 268 basis points on the total loan commitments and overall decrease from $107 million or 311 basis points from the last quarter.
As a reminder, these are point in time assessments that we evaluate each quarter.
Looking at watch list highlights our two risks ranked five loans represent approximately 2% of the total loan portfolio carrying value.
10 loans equating to 16% of the total loan portfolio carrying value arborists rank four.
While all of US ranked poor loans are current performing loans, we see potential for increased risk and accordingly are 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 September 32023 steady with last quarter.
Our corporate leverage levels remain at the low end of the sector, our debt to assets ratio of 63% and our debt to equity ratio was one nine times flat quarter over quarter.
We have no corporate debt or final facility maturity due until the second quarter of 2026.
That concludes our prepared remarks, and with that let's open it up for questions operator.
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Our first question comes from the line of Sara Baack home with P. T. I G. Please proceed with your question.
Hey, everyone. Thanks for taking the question. So you discussed in that prepared remarks, I'm you know the decision to downgrade some of those multifamily loans I'm just curious what the debt yield is on those roughly and where there any modifications on those agreements during the quarter.
Hey, sorry, how are you.
First of all all of those loans are current pay right now.
And we've had I think most of them are any indication from the borrower that theyre going to continue to support the asset and in fact in one case, we have preferred equity that stepping in as well supporting the asset. So all of those loans are current I think where we have an issue is that there is some execution.
Issues at the property, our property level and so an abundance of caution we downgraded the loans I think we've commented before that our biggest concern is going from a three to five where there is a default all alone.
And while that can happen and I don't want anyone can be surprised we wanted to demonstrate to the market that we're erring on the side of being conservative. So are those those properties were expecting a new equity to come in.
They fell behind on their business plan some of them fell behind on their occupancies.
But everything we're hearing from the borrower and in one case the preferred equity is that they are going to step in and as I said all those loans are current we had one loan that was a risk weight rated for our that we upgraded a two or three because the occupancy picked up dramatically over the quarter and the loan that we downgraded the multifamily loans.
Downgraded to a five that borrower in fact raise equity very recently, but there are real execution issues at the property so to comment on the debt yield. There really is there was a real execution in terms of a bad debt and turning around the units for refurbishment and so at this point. Despite the fact that the borrower raise equity in them.
The loan is still current we downgraded alone because we're going to plan on taking action around that asset. So it's really regarding the debt yields all these properties of transition and the issue has been execution at the property level, but as I said every indication we have at this point, even with the downgrade loans is that the borrowers or in this one case of preferred equity.
I'll go to support the asset and get it back on track.
Okay, Great and maybe just switching gears to office for a second it appears this specific Cecil reserve on the five rate in D. C asset increased during the quarter and you're now anticipating taking title.
Could we see a charge off and access at that specific reserve taken in Q3. During Q4 results I'm just trying to see how that will shake out in the model and then what's the occupancy on that building if you have it.
Well first let me tell you that we expect to foreclose on that building in November and it doesn't matter what the occupancy is because that building, we believe needs to be converted to residential based on where it's located and based on what's going on in the D. C office market. There is occupancy now.
Operator: Greetings and welcome to the BrightSpire Capital Inc. 3rd quarter, 2023 earnings conference call. At this time, old participants are on a listen only mode.
Operator: A question and answer session will follow the formal presentation. If anyone to require operator assistance during the conference, please press star zero under telephone keypad. As a reminder, this conference is being recorded.
They are they cover expense are the leases are all very very short so unlike other office properties, where one of the issues with conversion. It was simply the right wall that the rent roll doesn't allow it. So we think this is gonna be a conversion and the markdown that we took a isn't anticipation of that and since we really.
David Palam: It is now my pleasure to introduce David Palamay, General Counsel. Thank you, David. Good morning and welcome to BrightSpire Capital's 3rd quarter, 2023 earnings conference call. We will refer to BrightSpire Capital as BrightSpire, the RSP or the company throughout this call.
Valued alone little ways back whats happened, but there's no market for construction loans and so we effectively marked alone, but we think it's pretty close to certainly land value on a square footage basis for office and close to land value for a square footage basis on F. A off for a resin conversion.
David Palam: Speaking on the call today are the company's chief executive officer, Mike Mazzei, President and Chief Operating Officer Andy Witt, and Chief Financial Officer Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements which are based on management's current expectations are subject to risk uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially.
So we plan on for closing in November and probably market the property for sale.
In the new year.
It adds to the second half of your question, Yes, we would charge offs to see so related to that in the fourth quarter.
David Palam: For a discussion of risks that could affect results, please see the risk factors section of our most recent 10K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the FDC from time to time.
Thank you.
Or anything else.
Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Yeah, Hi, good morning.
David Palam: All information discussed on this call is as of today, October 31, 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-depth financial measures. The company's earnings release and supplemental presentation, which was released yesterday and is available on the company's website, presents recommendations to the appropriate gap measures and an explanation of why the company believes such non-depth financial measures are useful to investors. Finally, during the call, management may refer to distributable earnings at DE.
Just wanted to touch base are really around.
Now how you think about capital allocation decisions you know a number of options you know CRE loans you can repurchase are.
What are your capital stack common or that you can look at our liquidity and paying down lines. Mike. It seems like that's what you're kind of pointed to maybe in your prepared remarks is just maintaining liquid given this environment.
But you can also look at things outside of CRE loans other equity investments or securities. So you know when you look out there at this opportunity set kind of a you know what what do you think looks interesting and you know what do you think the timeline is starting to maybe do more new originations.
Thanks for the question I think what looks the most interesting to US is closing the gap between market value and book value.
David Palam: With that, I would now like to turn the call over to Mike. Thank you, David.
Right now the market is clearly price again uncertainty so our job is to provide as much transparency and certainty of execution on the assets on the balance sheet too to close that gap.
Michael Mazzei: Welcome to our third quarter earnings call and thank you for joining us this morning. I'll stop by making some brief comments about the third quarter and then turn the call over to Andy. Everyone is well aware of the current geopolitical and economic issues, therefore I'll keep my map early marks brief.
So in terms of allocation of capital first and foremost a its liquidity.
And staying staying working with our warehouse lenders are working with our borrowers to make sure. We know what's coming and we have ample liquidity to address anything that maybe maybe required secondly, when you look at the opportunities out there, yes, they're there they're all going to be a lot of opportunities of regional banks are all are cutting back their old the law.
Michael Mazzei: Let's first turn to BRSP's results. For the third quarter, we reported gap debt income of 12.4 million or 9 cents per share, distributable earnings of 31 million or 24 cents per share, and adjusted distributable earnings of 35.8 million or 28 cents per share. Our dividend coverage for the third quarter was 1.4 times. I will look what are the odds of today's stands of approximately 348 million. This is a comprised of 183 million of current cash and 165 million under our credit facility. During the quarter, our overall leverage to 1.9 times flat with the second quarter. Quarter Over Quarter are under-appreciated book value increased by two cents to 1155, largely driven by the 1.4 times dividend coverage, this quarter.
Or just a component of construction lending in the market so with them cutting back we expect construction loans to fall dramatically.
Which will be beneficial for the market as they work through vacancies, especially on the multifamily side over the next couple of a couple of years. So we think the opportunities out there between regional banks cutting back in between this Basel and game is gonna be enforced at the bigger banks there'll be plenty of plenty of run way.
To execute on a on new transactions, but right now I think our best focuses as I said is closing the gap between market and book value for our shareholders and that's really that bridges bridge liquidity.
Michael Mazzei: Turning briefly to the financial markets, many believe the Fed is most likely done increasing the Fed bonds rate. However, interest rates are becoming less anchored to the Fed's tightening policy than increasingly tied to US fiscal policy. If you look at the term premiums associated with longer-dated treasury yields, they are starting to become unhinged from the Fed's monetary policies. The US treasury market is now becoming more preoccupied with Washington's out of control deficit spending.
Great appreciate the comments and maybe as a follow up around the modifications you know can now it.
It seems like it.
<unk> level.
Bars, putting in more capital in return for more time, but can you talk about some of the other gives and takes that you're seeing are come up consistently and you know around floors in our loans you know if you're not moving those to market and the modifications as you know have you thought about using some of your high coverage on the dividend maybe by your own floors.
Michael Mazzei: This is led to the federal debt increasing by 600 billion in one month, bringing it to nearly 34 trillion. This deficit spending is another reason why inflation has been very difficult to attain. With the old long bond trading below a dollar price of 50, this will mark the first time that the US treasury has had reconstructive years of losses. Today's treasury bond issue of calendar is now larger than ever. Therefore, it makes sense that interest rates have been very volatile.
And in case, you know rates move the other way.
Got to lock in some of this outsized ER asset yields.
So why don't we put modifications why don't we turn that over to Andrew and then we'll we'll go from there.
Great.
Hello in terms of modifications I mean, they've been relatively consistent with what we've seen in previous quarters. Some of those modifications are.
Just addressing add maturity a rate cap and interest reserve to carry the loan through the subsequent term others are more complicated may include you know a pay down.
Michael Mazzei: The 10-year treasury yield has had intraday moves at as much as 15 basis points and had 5% just two weeks ago. Should that yield stick above 5%, that could be the threshold for a risk-off environment. That against this context, the USP will continue to proactively manage Alalon portfolio and maintain our cash liquidity as we navigate through these circular census.
Some modification of future hurdles and so forth, but I think in terms of what we are seeing quarter over quarter. It's a lot of the same types of modifications, giving the borrower runway to complete the execution of their business plan.
Intimately get to a better capital markets environment. So that's what we've been trying to facilitate and we do that in connection with the borrower.
Andrew Witt: This fact, I would now like to turn the call over to a president Andy Witt. Andy? Thank you, Mike, and good morning, everyone. Throughout the third quarter, the Bright Star team has remained steadfast in our focus on proactive asset and portfolio management. During the third quarter, we received 58 million in repayments across two investments, consistent with expectations. As repayment volume has been relatively muted. Year-to-date, we have received approximately 321 million of new loan repayments.
You know generally doing something to just to move the asset forward, whether that's a pay down whether that's funding reserves buying interest rate counts, which is a prerequisite for extension. So it's really.
An effort that we go through with each borrower.
Each particular instance.
Andrew Witt: Looking ahead with the fourth quarter, we anticipate repayments to remain relatively low. Overall, our weighted average risk ranking increased slightly from 3.1 last quarter to 3.2 in the third quarter, with 82% of our loans risk-praying three or better. Our weighted average risk ranking for the four prior courtes has remained relatively consistent at 3.2.
Our next question comes from the line of Matthew Howlett with B Riley. Please proceed with your question.
Thanks for taking my question just on the.
You guys are always very conservative with what you sort of look at the watch list I mean is that sort of what you guys did this quarter with the multifamily it sounds like maybe getting equity, but you're just being cautious with marking them as watchlist names.
Oh, yeah. Thanks for the question and answer the answer is yes, and you've heard US say this in previous calls this has been a focus of sorrows as well, we I mean, we really as I said, we we wanted to make sure that we don't have anything that leapfrog from one risk ranking to default and that's and by by being.
Andrew Witt: We now turn to our watch list update sequentially. The number of watch list loans increased by net three. We had one loan upgraded off the watch list for 28 million and one loan was remitted as we took ownership of the property underlying the Oakland office loan. Five loans were downgraded to a risk-granking of four, totaling 145 million. The loans that were downgraded were as a result of properties falling meaningfully behind on their business plans and where the borrower may not be in a position to support the asset, in addition, one loan was downgraded from a risk ranking 4 to a 5.
Conservative on the risk rankings, even though these loans are current and even though these borrowers are all have a plan in place to raise more capital.
And then as I said in one case, where the preferred equity is protecting they believe that there's equity there are worth worth preserving.
So all of those loans are current but yes, when we look at the property level behind it we have a we have and this is also the case with the office loans I believe.
Andrew Witt: The multi-family property collateralizing this loan has faced operational challenges despite the borrowers' recent efforts to raise additional equity for debt service and capital expenditures. It now appears they are unable to secure the incremental funds needed to execute the remainder of the business's plan. However, as of today, this loan remains current and profoundly.
Downgrade away you know that there's something going on at the property level, where there's good news borrowers are committed but there's also something going on where they've fallen behind enough in our business plan execution, whether it's a combination of bad debt at the properties and that has been an issue across the entire sector.
So the moratoriums that were put in place that came out of a COVID-19, or operating expenses going up and it's just not insurance utilities as taxes as payroll so those bad fallen enough behind.
Andrew Witt: Additional details regarding this quarter's watch list are included in our supplement. In terms of specific loan updates, we anticipate taking ownership of the Washington, D.C, risk rank 5 office loan asset during the fourth quarter. Once we take control of the property, we expect to commence the sales marketing process. Our current caring value is 20 million. With respect to the San Jose hotel property, we previously noticed that a sales process was underway for the hotel annex tower comprised of 264 rooms.
Where there's a lot of work to get done so we heard on the side of caution to downgrade them.
I said, we had one that we upgraded this quarter, we downgraded it because of the vacancy really fell off we really don't want to move them back and forth.
And so we in this case, we downgraded loans be to be cautious on the on the San Jose alone for instance, the hotel loan.
Andrew Witt: The borrowing anticipates the sale and corresponding partial paydown of our loan to occur in the fourth quarter. The loan remains risk rank 4. We will continue to maintain the current ranking on the remainder of the loan until we see a clear path to resolution. The list's loan financing, your finance rate, is less than 50%. As of September 30, 2023, excluding cash and net assets on the balance sheet, the portfolio is comprised of 92 investments with an aggregate caring value of 3.1 billion and the net caring value of 874 million or 80% of the total investment portfolio.
There is something going on at the property as Andy described in his prepared remarks, where maybe in the next 30 days, we have a sale of a portion of the hotel that would result in a pretty decent pay down of the mortgage loan I. Even think after that occurs we'll continue to have that loan risk ranked four.
And we will not upgrade it that that hotel is still has to get to stabilization. So even when there's good news that it may occur at the asset level for instance, but that loan being our largest I still think we'll err on the side of keeping it before we don't want to play Ping Pong with the risk weightings are so if it's if it's out of four will probably keep it out of warranty.
We really feel comfortable that it's not going to revert back.
Andrew Witt: The average loan size of 34 million or weighted average risk ranking is 3.2 and the loan portfolio has minimal future funding obligations which stand at 200 million or 6% about standing commitments. First mortgage loans constitute 97% of our loan portfolio of which 100% are floating rate and all of which have interest rate caps. The multi-family portion of our portfolio remains our largest segment with 53 loans representing 52% of the loan portfolio or 1.6 billion of aggregate caring value.
Yeah look I really appreciate the conservatism I know everyone has risk ratings mean something different for everyone that puts a mountain your bedroom.
<unk> been very conservative historically, so I appreciate that and on that loan.
San Jose a hotel you mentioned, the advanced 300, or 50% I mean, what do you think that will free up in terms of liquidity and I think you said last quarter that the entire hotel.
Maybe market any update there.
So I have to be careful about what I say that because we don't own the hotel.
But.
As I said it at our I can't speak on behalf of the borrower, but there is a process its a public processes in the newspapers. So you can read about it and are in the various local Berkeley or San Jose papers. The buyer is is supported by our the ultimate user of the tower and that ultimate end user.
Andrew Witt: Office comprises 32% of the loan portfolio consisting of 1 billion of aggregate caring value across 30 loans with an average loan balance of 34 million. The remainder of our loan portfolios comprised of 9% hospitality with industrial mixed-use collateral making up the remainder.
It is San Jose University Ah.
We're not privy to exactly the structure between the buyer and San Jose and in an entity that's going to buy it.
Frank Saracino: With that, I will turn the call over to Frank Sarasino, our Chief Financial Officer to elaborate on the third quarter results. Frank? Thank you, Andy, and good morning everyone.
That will result in a pretty good pay down of the loan and we will get a decent amount of that capital back to us because as you said theres a less than 50% advance rate I think it's like 47% with regard to the rest of the hotel it really is up to the borrower.
Frank Saracino: Before discussing our third quarter results, I want to mention that our third quarter 2020 grace supplemental financial report is available on the Investor Relations section of our website. As Mike mentioned, for the third quarter we reported adjusted DE at 35.8 million or 28 cents per share. Third quarter DE was 31 million or 24 cents per share. DE includes a specific reserve on one loan of approximately five million dollars.
They're there had been protective advances that have been made there's a mezzanine loan the mezzanine is made protective advances.
The operator of the hotel.
It has helped and assisted the borrower where they could but I do think ultimately that has to be a resolution on the larger asset remaining asset I can't speak on behalf of the borrowers that could be a sale.
Frank Saracino: Awards. Additionally, for the third quarter, we reported total company gap net income, it should be the bulk of common stockholders of 12.4 million or 9 cents per share. Quarter of a quarter, total company gap net book value decreased one half of 1 percent from $10.16 per share to $10.11 per share. However, unappreciated book value increased from $11.53 to $11.55 per share. The increases result of adjusted DE and excess of dividends required partially offset by increases in our seasonal reserves.
In the in the second.
Second quarter of next year, it could be a substantial recap of our hotel.
Where some of our loan stays in place and a new capital comes in.
They'll obviously, we would be taken out in fall and that would be a lot of capital that would come back to us that we can redeploy.
It could be a windfall for you in on that final know what I mean.
We're scratching our head with it yeah, there would be as it yes, it would be it could be a substantial amount of liquidity that comes back, but then if the borrower.
Recap the entire property is such that it would be attractive for us to stay in the financing that we would we could consider that at that time, but we'd have to be presented with the facts.
Frank Saracino: The third quarter change in adjusted DE of $0.28 versus the $0.25 recorded in the second quarter, which driven by the impact of rising interest rates and income from our operating real estate portfolio. Turning toward dividend from the third quarter, we declared a dividend of 20 cents per share in line with the second quarter. Our dividend remains well covered at 1.4 times. Looking at reserves, our specific seasonal reserves decreased to $35 million from $55 million.
When that happens.
Like you're maintaining the dividend and covering it but the disconnect with the stock price and NAV, which actually was up in the quarter, how how eager argue to just start buying back stock do you foresee a scenario. If you look at 2024, and you know liquidity youre getting more liquidity from the portfolio, but could just commenced the buyback.
It seems like that's that'd be the best way to to kind of close the gap.
Frank Saracino: Decrease was driven by the charge off of the Milpitas, California Mezby note and our taking ownership of the property underlying the Oakland office loan. This was offset by a specific reserve increase in approximately $5 million on the Washington DC office loan. As Andy mentioned in his comments, we expect to take control of the Washington DC office asset in short order. Finally, no specific reserve was required on the multi-family loan downgraded to $5 million.
Between you.
No.
There are differences of opinion on that we've seen folks buy back stock and it's a great investment and we think it's a very compelling investment at these levels. Given if you just do the math book value versus where the stock is trading and what the imputed.
What the implications of that.
Or so we think theres a theres a massive got there having said that the best way to harvest that gap to close that gap to harvest the discount here.
Frank Saracino: Our general seasonal provisions stands at $55 million and increase of $3 million from the prior quarter. The increase in the general seasonal was driven by economic conditions as well as specific inputs on certain office and multi-family properties. The combination of asset-specific and general seasonal reserves at third quarter and was $90 million or 268 basis points on the total loan commitments and overall decreased from $107 million or 311 basis points from the last quarter.
Is liquidity.
And so kind of buying back stock is a onetime thing that really at the end of the day it might move the needle for a day or it might have a nice halo effect for a quarter, but in terms of the long term mission of really closing that got booked at versus market substantially. We think you need the liquidity to do that and so spending money on a one time purchase of the stock.
The metrics looks fantastic, it's still something that from a corporate finance perspective, we would earn the side of the longer term view maintain liquidity. So the market has confidence.
Frank Saracino: As a reminder, these are point and time assessments that we evaluate each quarter. Looking at watchlists highlights, our two risk-ranked five loans represented approximately 2% of the total loan portfolio carrying value. Ten loans equating to 16% of the total loan portfolio carrying value are risk-ranked four. While all risk-ranked four loans are current performing loans, we see potential for increased risk and accordingly are monitoring these investments and working with sponsors to ensure the best possible outcomes.
And your balance sheet, and we think that will have far greater impact on market price then buying back some shares.
Looking at the Nissan Nicola.
Frank Saracino: Moving to our balance sheet, our total at-share, un-appreciated assets suited approximately $4.5 billion as of September 30, 2023, steady with last quarter. Our corporate leverage levels remain at the low end of the sector. Our debt to assets ratio is 63%, and our debt to equity ratio is 1.9 times flat quarter over quarter. We have no corporate debt or final facility maturity due until the second quarter of 2026.
Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.
Good morning, Mike, Andy and Frank I appreciate the question.
Excuse me.
Our distributable EPS estimate for the third quarter was 16 sent that was still low. It included based on your commentary on the second quarter call. It included an estimated realized loss of $11 million or eight cents per share on the Oakland office, one and I don't want to get in.
Frank Saracino: That concludes our prepared remarks, and with that, let's open it up for questions.
Operator: Operator? Thank you.
Operator: Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question you may press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
To like too much nitty gritty accounting, but just to explain or practice had been obviously see some reserves whether specific or general have no impact on distributable Etfs.
But two.
Two things I guess could happen you could sell a loan loss that hits distributable EPS you could just.
With foreclosures.
We understand it are you always carried at fair value and generally we have had an impact on distributable EPS went alone with a reserve specific reserve has been foreclosed upon and see some reserve goes away, but we take a charge at that time. So I'm just curious I guess.
Sarah Barcomb: Sarah Barcomb with BTIG. Please proceed with your question. Hey everyone, thanks for taking the question.
Andrew Witt: So you discussed in the prepared remarks the decision to downgrade some of those multi-family loans. I'm just curious what the debt yield is on those roughly and were there any modifications on those agreements during the quarter? Hey Sarah, how are you? Thanks. First of all, all those loans are current pay right now. And we've had, I think a most of them, an indication from the borrower that they're going to continue to support the asset.
Looking at distributable EPS, whether it's the base or the adjusted that's four cents higher can you just Frank talk about.
Andrew Witt: In fact, in one case we have preferred equity that's stepping in as well supporting the assets. So all those loans are current. I think where we have an issue is that there is some execution. Execution issues at the property property level. And so an abundance of caution we've downgraded the loans. I think we've commented before that our biggest concern is going from a three to a five where there's a default on a loan.
What impact there was if any on third quarter results on the foreclosure of the B.
Oakland Office building if I.
I said hotel apologies.
So the foreclosure of the office building so the specific reserves when we take a specific reserve that hits, our distributable earnings in the quarter that we'd take it.
Right. So we took we closed all day and.
During the quarter. So we took a specific cecil on that in the second quarter and that came through distributable earnings in the second quarter and gets added back in the third quarter.
The change in <unk> related to 14.
2014, our Oakland is not a is that an income statement item, but just it's just a balance sheet charge off you know the only impact in the third quarter would be any earnings that potentially came up that property. Once we took ownership of it that would roll into our distributable earnings for the quarter.
Andrew Witt: And while back it happened and anyone anyone could be surprised, we want to demonstrate to the market that we're earning on the side of being conservative. So those those properties were expecting new equity to come in. They fell behind on their business plan. Some of them fell behind on their occupancies, but everything we're hearing from the borrower in in one case, the preferred equity is that they are going to step in.
Got it we'll talk about that offline I mean did it.
You're obviously I apologize for not recalling the prior charge distributable earnings, but we have other companies that are having their specific.
Andrew Witt: And as I said, all those loans are current. We had one loan that was a risk rate rated for that we upgraded to a three because the occupancy picked up dramatically over the quarter. And the loan that we downgraded, the multi-family loan that we downgraded to a five, that borrower in fact raised equity very recently, but there are real execution issues at the property. So the comment on the debt yield, really if there was a real execution in terms of bad debt and turning around the units for refurbishment.
Specific reserves, but they wait until they foreclose and have it in our Argo to take the charge against distributor E. P. S. But thank you so much for explaining and then on the D. C Hotel should we understand it.
Andrew Witt: And so at this point, despite the fact that the borrower raised equity and the fact the loan is still current, we downgraded the loan because we're going to plan on taking action around that asset. So really regarding the debt yields, all these properties of transition and the issue has been execution at the property level. But as I said, every indication we have at this point, even with the downgraded loans, is that the borrowers or in this one case, the preferred equity. I'm going to support the asset and get it back on track.
Sarah Barcomb: Okay, great.
When you foreclose on that in the fourth quarter, which sounds like that's going to likely to happen would there be an impact on distributable or would your your specific reserves previously established have already covered that because it will it be treated the same way. It's Oakland. That's correct. We don't have we don't expect that port closure to have any more effect on it.
Distributable earnings the additional $5 million, we took this quarter should cover that.
Okay, Great and just remind me the four cents difference between distributable in adjusted distributable.
Where does that item.
That's it.
This is Kurt.
So it's just a specific reserve on the D. C asset that we took during the quarter.
Andrew Witt: Maybe just switching gears to office for a second. It appears this specific Cecil Reserve on the five rated DC asset increased during the quarter and you're now anticipating taking title. Could we see a charge off in excess of that specific reserve taken in Q3 during Q4 results? Just trying to see how that will shake out in the model.
Got it okay. Thank you for the comments and we'll talk in a bit anyway will go into this a little more thank you very much.
Yeah.
Our next question comes from the line of Matthew had now with Jones trading. Please proceed with your question.
Hey, guys. Thanks for taking the question. So you had 71 million and a fully extended maturities. This year 58 of which come from two separate office properties in Miami in Blue Bell can you talk a little bit about those and they are expected to pay off on time, and just kind of the overall thoughts on those two loans.
Andrew Witt: And then what's the occupancy on that building if you have it? First let me tell you that we expected four clothes on that building in November and it doesn't matter what the occupancy is because that building we believe needs to be converted to residential based on where it's located and based on what's going on in the DC office market. There is occupancy now there that covers expense. The leases are all very, very short so unlike other office properties where one of the issues with conversion is simply the rent roll that the rent roll doesn't allow it.
There, we're working with those borrowers on extensions on those properties.
Gotcha. Thank you and then is there any update on the long island assets I believe that you guys are stabilizing them last quarter and then eventually going to Mark for sale are those in part of the Oreo for sale or are they still being held.
Andrew Witt: So we think this is going to be a conversion and the markdown that we took is an anticipation of that and since we really valued the loan a little ways back what's happened. There's a single market for construction loans and so we effectively marked the loan at what we think is pretty close to certainly land value on a square footage basis for office and close to land value for square footage basis on F.I.R, for a resi conversion.
The Oreo as Oreo is always for sale are those are the long island city assets in Queens.
So.
So we've taken back two assets there the Paragon and Blanchard buildings. They are literally on each side of the long Island Expressway right at the foot of the Midtown tunnel.
We are getting we put a new property manager in place since we took back those properties, we are getting pretty solid inquiry.
With regards to the Paragon building that building sits more proximate to mass transit a it is 100 feet away from one subway station in one block away from another and sits right above the long Island Railroad station, which is pretty actively use so theres been a lot of interest in that asset in particular, we have two full.
Andrew Witt: So we plan on foreclosing in November and probably market the property for sale in the New Year and dance to the second half of your question. Yes, we would charge off the seats related to that in the fourth quarter.
Operator: Thank you.
Office building users that are looking at the property.
Stephen Laws: Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question. Hi, good morning. You know, just wanted to touch base really around how you think about capital allocation decisions, you know, a number of options. You know, theory loans, you can repurchase. Part of your capital stack, comment or debt, you can look at liquidity and paying down lines and Mike, it seems like that's what you kind of pointed to.
And we're working closely with right now, but it could take about 90 to 120 days to see if there's really any substance there, but we are getting some some good inquiry activity with regard to that with the Paragon building that I'm talking about now I think what we'd like to do.
See if we can get some traction with.
With those potential leases.
We do have some other partial building leases out that we're looking at as well.
We would like to get some traction with those leases before we put the asset up for sale. So I would think that we'd like on that one asset to let it play out for the 90 to 120 days to see if we get anything going on there with the other asset there are the plants you're building that asset does cover operating expenses and so that could be a little bit of a longer play.
Stephen Laws: Maybe in your prepared remarks is just maintaining liquid given this environment. But you can also look at things outside of theory loans, other equity investments or securities. So, you know, when you look out there at this opportunity said kind of, you know, what, what do you think looks interesting and. You know, what do you think the timeline is of starting to maybe be more new originations. Thanks for the question. I think what looks the most interesting to us is closing the gap between market value and book value.
But that one we're probably going to sell.
Without having any leasing traction and it there is a chance that some of those tenants looking at the polygon building also care about the building across the street the plants you're building. So we're going to let that play out a little bit as well to see if there's an opportunity there, but you know we will look to sell as both bulk buildings as.
Stephen Laws: Right now the market is clearly pricing in uncertainty. So our job is to provide as much transparency and certainty and execution on the assets and the balance sheet to close that gap. So in terms of allocation of capital, first and foremost, it's liquidity and staying, staying working with our warehouse lenders and working with our borrowers to make sure we know what's coming and we have ample liquidity to address anything that may be maybe required.
As economically.
Beneficial these are not long term lease up holds well sell them as soon as we get some clarity.
Around the assets.
Got it thank you.
Yeah.
Stephen Laws: Secondly, when you look at the opportunities out there, yes, there are going to be a lot of opportunities or regional banks are all cutting back. They're the largest component of construction lending in the market. So with them cutting back, we expect construction loans to fall dramatically, which will be beneficial for the market as they work through vacancies, especially on the multifamily side over the next couple of years. So we think the opportunities out there between regional banks cutting back and between this Basel endgame that's going to be enforced at the bigger banks. There'll be plenty of, plenty of runway to execute on new transactions.
That concludes our question and answer session I'd like to hand, the call back to Michael Matthews for closing remarks.
Well. Thank you all for joining us today as always feel free to contact us if you'd like to have them. One on one conversational meeting, but take into more of the detail. If not please have a great holiday season, and we will see you in February.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Oh yeah.
Michael Mazzei: But right now I think our best focus is, as I said, is closing the gap between market and book value for our shareholders. [inaudible] David Palam, David Palam, David Palam, David Palam[inaudible] David Palam, David Palam, David Palam David Palam, David Palam, David Palam David Palam, David Palam David Palam, David Palam David Palam, David Palam, David Palam, David Palam, David Palam, David Palam, David Palam,[inaudible] There is something going on at the property as Andy described in his prepared remarks where maybe in the next 30 days we have a cell of a portion of the hotel that would result in a pretty decent paydown of the mortgage loan.
Okay.
Michael Mazzei: I even think after that occurs, we'll continue to have that loan risk ranked before and we will not upgrade it. That hotel still has to get to stabilization. So even when there's good news that it may occur at the asset level, for instance, with that loan being our largest, I still think we'll earn a side of keeping it affordable. We don't want to play ping pong with the risk ratings. So if it's out of four, we'll probably keep it out of four until we really feel comfortable that it's not going to revert back.
Michael Mazzei: Yeah, look, I really appreciate the conservatism. I know everyone has, you know, risk ratings mean something different for everyone that puts them out. You guys are just being very conservative historically. So I appreciate that. And on that loan, I mean, on that San Jose hotel, you mentioned the advanced rate or 50%. I mean, what do you think that will free up in terms of liquidity? And I think he said last quarter that the entire hotel might, you know, maybe market any update there.
Michael Mazzei: All right, so I have to be careful about what I say there because we don't own the hotel. But as I said, I can't speak on behalf of the borrower, but there is a process. It's a public process. It's in the newspapers. So you can read about it in the various local Berkeley or San Jose papers. The buyer is supported by the ultimate user of the tower and that ultimate end user is San Jose University.
Michael Mazzei: We're not privy to exactly the structure between the buyer and San Jose and the entity that's going to buy it. If that will result in a pretty good paydown of the loan and we'll get a decent amount of that capital back to us because, as you said, there's a less than 50% advanced rate. I think it's like 47%. With regard to the rest of the hotel that really is up to the borrower, there have been protective advances that have been made.
Michael Mazzei: There's a mezzanine on the loan and mezzanine has made protective advances. The the operate of the hotel has helped and assisted the borrow where they could. But I do think ultimately there has to be a resolution on the larger asset, the remaining asset. I can't speak on behalf of the borrower. That could be a sale in the second quarter of next year. It could be a substantial recap of a hotel where some of all loans stays in place and new capital comes in in a sale.
Michael Mazzei: Obviously, we would be taking out and falling. That would be a lot of capital that would come back to us that we could redeploy. Look, it could be a windfall for you. On that final note, I mean, you know, we're scratching our head with this. Yeah, there would be as a yes, there would be, it could be a substantial amount of liquidity that comes back. But then if the borrower would have recapped the entire property such that it would be attractive for us to stay in the financing, we would we could consider that at that time, but we'd have to be presented with the facts when that happens.
Michael Mazzei: Like you're maintaining the dividend and covering it, but the disc connect with the stock price and NAV, which actually was up in the quarter. How eager are you to start buying back stock? Do you foresee a scenario you look at 2024? and you're getting more liquidity from the portfolio. Could you commence a buyback? I mean, it seems like that would be the best way to kind of close the gap between any of the involved.
Michael Mazzei: You know, there are differences of opinion on that. We have seen folks buyback stock and it's a great investment. And we think it's a very compelling investment at these levels. Given, if you just do the math book value versus where the stock is trading and what the imputed with the implications of that, so we think there's a massive gap there. Having said that, the best way to harvest that gap, to close that gap, to harvest the discount here is liquidity.
Michael Mazzei: And so kind of buying back stock is a one time thing that really at the end of the day, it might move the needle for a day or might have a nice halo effect for a quarter. But in terms of the long term mission of really closing that book versus market substantially, we think you need the liquidity to do that. And so spending money on a one time purchase of stock, the metrics look fantastic.
Michael Mazzei: It's still something that from a corporate finance perspective, we would earn the side of the longer term view, maintain liquidity. So the market has confidence in your balance sheet and we think that we'll have far greater impact on market price than buying back some shares. Look, look at these times, they make a lot.
Steve Filini: Our next question comes from the line of Steve Filini with JMP Securities.
Frank Saracino: Please be seated with your question. Good morning, Mike, Andy, and Frank. I appreciate the question. Excuse me, air distributable EPS estimate for the third quarter was 16th end, that was the low. It included, based on your commentary on the second quarter call, it included an estimated realize loss of $11 million or 8 cents per share on the Oakland Office line. And I don't want to get into like too much nitty-gritty accounting.
Frank Saracino: But air, just to explain, air practice had been obviously Cecil reserves, whether specific or general have no impact on distributable EPS. But two things I guess could happen. You could sell a loan at loss that hits a distributable EPS. You could just, with foreclosures, we understand that RIO is carried at fair value. And generally we have had an impact on distributable EPS when a loan with a specific reserve has been foreclosed upon.
Frank Saracino: And Cecil reserve goes away but we take a charge at that time. So I'm just curious, I guess, looking at the distributable EPS, whether it's the base or the adjusted that's forced entire. Can you just frank talk about what impact there was if any on third quarter results on the foreclosure of the Oakland Office building? Thank you. If I said hotel policy. Thank you. So the foreclosure of the office building, so the specific reserves, when we take a specific reserve, that hits our distributable earnings in the quarter that we take it.
Frank Saracino: Right, so we took our close on the quarter, so we took a specific seasonal on that in the second quarter, and that came through distributable earnings in the second quarter and get added back in the third quarter. You know, the change in CSO related to 14 are Oakland is not an income statement either, but just it's just a balance sheet charge off. You know, the only impact in the third quarter would be any earnings that potentially came off that property once we took ownership of it, that would roll into our distributable earnings for the quarter.
Frank Saracino: Got it. We'll talk about that offline. I mean, you're obviously apologized for not recalling the prior charge to the distributable earnings, but just we have other companies that are having their specific reserves, but they wait until they foreclose and have it in our are you to take the charge against the distributable EPS, but thank you so much for explaining. And then on the DC hotel should we understand that when you foreclose on that in the fourth quarter, which sounds like that's going to likely to happen.
Frank Saracino: Would there be an impact on distributable or which your specific reserve previously established have already covered that? Will it be treated the same way as Oakland? That's correct. We don't expect that for closure to have any more effect on our distributable earnings. The additional 5 million, we took this quarter should cover that. Okay. Great. And just remind me the four cents difference between distributable and adjusted distributable. What is that item? That is this is curative and head of corporate finance. That's just incredible specific reserve on the DC asset that we took during the quarter. Got it. Okay. Thank you for the comments and we'll talk in a bit anyway. We'll go into this a little more.
Frank Saracino: Thank you very much.
Matthew Edner: Our next question comes in line of Matthew Edner with Jones trading. Please proceed with your question. Yeah. Thanks for taking the question. So you have 71 million and fully extended maturities this year, 58 of which come from two separate office properties in Miami and Bluebell. Can you talk a little bit about those and they're expected to pay off on time and just kind of the overall thoughts on those two loans? Thanks. We're working with those borrowers on extensions on those properties. Gotcha. Thank you.
Andrew Witt: And then is there any update on the Long Island assets? I believe that you guys were stabilizing in last quarter and then eventually going to mark for sale? Are those in part of the REO for sale or are they still being held? The REO is always for sale. Those are the Long Island city assets and creams. So we've taken back two assets there, the Paragon and the Blanchard buildings. They are literally on each side of the Long Island Expressway right at the foot of the midtown tunnel.
Andrew Witt: We are getting we put a new property manager in place since we took back those properties. We are getting pretty solid inquiry. With regard to the Paragon building, that building sits more proximate to mass transit. It is 100 feet away from one subway station and one block away from another and sits right above the Long Island Railroad station, which is pretty actively used. So there's been a lot of interest in that asset.
Andrew Witt: In particular, we have two full office building users that are looking at the property. And we're working closely with right now, but it could take about 90 to 120 days to see if there's really any substance there. But we are getting some some good inquiry activity with regard to that with the Paragon building that I'm talking about now. I think what we'd like to do is see if we can get some traction with those potential leases.
Andrew Witt: We do have some other partial building leases that we're looking at as well. We would like to get some traction with those leases before we put the asset up for sale. So I would think that we'd like on that one asset to let it play out for the 90 to 120 days to see if we get anything going on there. But the other asset there, the blanchor building, that asset does cover operating expenses.
Andrew Witt: And so that could be a little bit of a longer play out, but that one would probably going to sell without having any leasing traction in it. There is a chance that some of those tenants looking at the Paragon building also care about the building across the street, the blanchor building. So we're going to let that play out a little bit as well to see if there's an opportunity there. But we will look to sell as both buildings as quickly as economically beneficial. These are not long-term lease upholds. We'll sell them as soon as we get some clarity around the asset.
Operator: Thank you. That concludes our question in the answer session.
Michael Mazzei: I'd like to hand the call back to Michael Mazzei for closing remarks. Well, thank you all for joining us today. As always, feel free to contact us if you'd like to have a one-on-one conversation or meeting.
Operator: By taking some more of the details, if not, please have a great holiday season and we will see you in February.
Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.