Q4 2023 Bridge Investment Group Holdings Inc Earnings Call
Greetings and welcome to the bridge investment group for Q, 'twenty, three and full year 2023 earnings call and webcast. At this time all participants are in a listen only mode.
Brief 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 your host Bob.
Andy Rosen director of shareholder relations. Thank you Bonnie you may begin.
Good morning, everyone. Welcome to the bridge investment Group Conference call to review, our fourth quarter and full year 2023 financial results.
Prepared remarks include comments from our executive Chairman, Robert Morris, Chief Executive Officer, Jonathan Flanker, and Chief Financial Officer, Katie outcome, we will hold a Q&A session. Following the prepared remarks.
I'd like to remind you that today's call may include forward looking statements, which are uncertain outside the firm's control and may differ materially from actual results. We do not undertake any duty to update these statements for a discussion of some of the risks that could affect results. Please see the risk factors section of our Form 10-K.
During the call. We will also discuss certain non-GAAP financial metrics. The reconciliation of the non-GAAP metrics are provided in the appendix of our supplemental slides.
The supplemental materials are accessible on our IR website at IR Dot bridge I G dotcom.
These slides can be found under the presentation portion of the site along with the fourth quarter earnings call about like they are also available live during the webcast.
I will present, our GAAP metrics, and Katie will review and analyze our non-GAAP data.
We reported GAAP net income to the company for the fourth quarter of 2023 of approximately $700000 on a basic and diluted basis net loss attributable to bridge per share of class a common stock was 20 cents, mostly due to changes in noncash items.
Distributable earnings of the operating company, where $25.3 million or 14 cents per share after tax and our board of directors declared a dividend of seven cents per share, which will be paid to shareholders of record as of March eight.
Now my pleasure to turn the call over to Bob.
Thank you Bonnie and good morning to all.
Despite difficult fourth quarter results impacted by low transaction volumes as asset prices continued to reset and modest yearend capital raising activity. British continues to have a resilient business with a distinctive competency in targeted real estate credit and secondary strategies.
Even with challenging financial results for the fourth quarter, our yearly results and outlook for 2024.
On a brighter perspective on a general basis projected growth for alternatives broadly defined remains strong.
Bridge brand continues to grow globally and the discipline can be practiced in 2023 states as well as a patient and capable steward of capital.
Financially for the full year, our fee, earning AUM increased 25% year over year to 21 $7 billion and recurring management fees increased 18% to $228 million.
The federal Reserve's recent actions have announcements, including an appearance by Jay Powell 60 minutes highlight how 2024 should represent a pivot point to interest rate cuts, which in our view has meaningfully positive implications for real assets transaction markets and the broader private market ecosystem.
While rates may be slow the decline there likely headed in a more constructive direction with respect to asset pricing.
And a departure from the past 18 months.
We believe by patients over the last couple of years has been warranted and rewarded.
Further I believe that now is the time to lean in on attractive values. As an example, we are seeing quality value add residential rental assets in some cases prices at six plus percent cap rates.
As difficult as cap rate expansion, that's been in our portfolio. This has been meaningfully offset by improved operating metrics.
We believe the generational opportunity to acquire at attractive entry prices is compelling.
Transaction volumes broadly have not yet recovered.
Seeing signs of optimism with bid ask spreads narrowing and salary reluctance, giving way to salary capitulation.
$3.4 billion of dry powder. We believe now is the time to start wading back into the water.
Our recently published 2024 outlook called navigating the curve.
Outlines our perspective and provides details on why we feel so strongly about investing in the areas where bridge has developed distinctive competencies.
We see this cycle of opportunities across many sectors of real estate equity private credit and.
Private equity secondaries with this as a backdrop bridges selected areas of focus residential rental logistics private real estate credit and secondaries are poised to outperform.
First residential rental sector, a core area for bridge continues to experience robust long term secular growth drivers.
Interplay between chronically low supply growth and durable demographic tailwind has created a persistent imbalance that is expected to propel rent growth.
Certain markets experienced overbuilding during the pandemic near term supply pipelines have begun to weigh and due to higher development costs and lower availability of construction debt and equity capital.
With a long term investment thesis intact and residential rental housing.
Our platforms and strategies have a generational opportunity to capitalize on cyclically lower asset values with the ability to further drive above average returns from select distress situations of course navigating markets submarkets asset characteristics and other criteria here.
It is neither easy nor straightforward and optimizing what one acquired or developed it takes focus and expertise are specialized teams to bring these capabilities every transaction from first look to final disposition.
In real estate credit we are equally bullish if we see continued demand to a real estate credit and an increasingly bifurcated market place.
Yes.
With the market options narrow to borrowers private credit providers like bridge or in a prime position to be selective.
Tracking high quality borrowers under favorable terms, our historical focus on residential rental lending has the added benefit of strong collateral to protect principal.
Logistics real estate strategies continued to see strong fundamentals the sector has experienced robust demand tail winds over the past decade, and we anticipate these will persist with sustained ecommerce growth global trade alignment onshore in the grocery business inventories.
Each of these factors highlight the need for logistics infrastructure across the U S. Over the next decade, given the sea change in interest rates with valuations down and increased pressures to create liquidity for some asset owners, we anticipate increased opportunities for acquisitions at compelling discounts to replacement costs.
Of course like residential rental where one invest is critically important we feel on the ground teams in the most attractive markets, notably Southern California, New York, New Jersey, South, Florida, and Dallas Fort worth and we source much of our deal flow off market.
Similarly, our private equity secondaries business is also experiencing powerful tailwind the overall secondaries market as well as private markets become increasingly dynamic and complex driving L. P demand for sophisticated liquidity solutions.
The surge in primary investment commitments over the past several years, along with a significant decrease in exit activity and distributions will create meaningful opportunities for the secondary market in the coming years.
Real estate capital raising was challenged in 2023 for bridge and the industry in general characterized by a reset of valuation parameters, you didnt transaction activity and general market uncertainty.
Against this backdrop bridge raised $334 million of new capital in the fourth quarter and $1 $6 billion for the full year of 2023.
For most of 2023, our large flagship funds were in their investment periods, and therefore, not actively fund raising.
It's changed for 2024 in the fourth quarter for 2023, we held an initial close for our latest debt strategies vehicles, and we will be actively fund raising for this vehicle throughout 2024.
In addition, 2020 for capital raising activities will include vehicles from our other four horseman and putting the next vintage of our acclaimed workforce and affordable housing strategy.
The continued marketing of the current vehicle isn't our Newberry partners secondary strategy and the current vintage of logistics value add strategy. Although these strategies will represent the bulk of the capital raised in focus we have other attractive vehicles and initiatives to further drive our business and evolution.
They dropped up our first year with our secondaries team and we're excited about the long term prospects for this strategy 2023 for the strategy was largely focused on integrating the new business under the bridge umbrella.
We are seeing encouraging capital raising activity with repeat Newberry investors and expect 2024 to be successful for both of fundraising and deployment perspective.
Looking forward, we are seeing a major shift in sentiment from L. P. He's looking to allocate capital in 2024 versus 2023 or.
Our capital raising teams are averaging 50, plus meetings per week, which is up materially from last year.
In addition, this heightened level of client interaction has progressed L. P. Due diligence processes across multiple bridge products, including an increase in costs at jeopardy.
Based on the pipeline, we see today, we expect to fund raising trend experienced in the fourth quarter to persist in the first quarter. However, the high level of activity in constructive dialogue with the L. P. S gives us confidence that inflows should improve over the course of the year.
We have continued to invest in and expand our capital raise the organization, we're adding sales coverage personnel based in Dubai could deepen our coverage in the middle East and to enable more focus on continental Europe and Scandinavia, We will continue to invest in capital raising both in international markets as well as in the U S.
Over the last year, we added both senior and junior talent to focus on growing and servicing our large institutional and wealth platform coverage as well as to add true accredited investor retail coverage. One early 2024 bright spot our rock platform, which already counts most of the major wealth management.
Platforms as distributors has added yet another in the first quarter.
New relationships added our current opportunities old vehicle to their client offering we're looking forward to pursuing the prospects of additional business with them in the future.
As we have discussed on previous earnings calls, we have been exploring ways to expand our retail capital raising efforts by making certain strategies accessible to accredited investors, thereby broadening our potential investor base.
We launched an accredited investor focused product within our net lease industrial income strategy earlier this year.
Since inception in 2021, the bridge net lease industrial income team has invested more than $700 million into industrial net lease properties, including sale leasebacks and build to suit development projects. The combination of the attractiveness of the industrial sector, along with the consistent income generation.
And inflation hedging attributes will be more attractive to this new constituency.
This hold wealth estimated in excess of 50 trillion dollars in North America alone.
The allocations to alternatives less than 5%.
The total addressable market is enormous and growing rapidly.
We expect in the future to add additional retail vehicles, which offer specialized exposure to areas in which bridge has demonstrated competitive expertise.
With that I will turn the call over to Jonathan.
Thank you Bob and good morning in the fourth quarter industry wide commercial real estate transaction volumes remained at depressed levels.
Higher interest rates and volatility within the debt capital markets continued to weigh on activity.
Real capital analytics data industry transaction volume for 2023 was down 50% year over year, the sharpest year over year declines since 2009.
The experience from our investment teams in Q4, it confirmed that data as bid ask spreads remain wide and deals were challenging to consummate.
With the significant reset and asset pricing and strong long term demand drivers, particularly for residential logistics real estate. We believe the cost basis for properties acquired in 2024 will look attractive in years to come.
We believe there will be both the opportunity and some choppiness in valuation resetting as sales stimulated by interest rate induced liquidity issues hit the market over the coming months.
We also see a slowing in the operating trends for certain submarkets with near term supply issues, but most of these continue to be high growth market, where we expect recovery.
With interest rates now, reaching their peak and poised to decline and given the scale of dry powder in both equity and debt markets for commercial real estate, we anticipate macroeconomic trends to become a tailwind and helping market prices recover and transaction volumes rebound to pre pandemic levels, even though it will take time.
The building blocks for our real estate resurgence are becoming evident.
Against this backdrop bridges deployment during the quarter was mostly centered on our opportunity to own credit and secondary strategies.
Action activity remains muted our pipelines are beginning to build and we have $461 million of equity deployment under our control and subject to due diligence.
While we are encouraged by the increased level of deal sourcing our pipelines remain well below normal activity levels.
$3 4 billion of dry powder, and deep and long standing relationships with lenders and owners we have.
Well positioned to find attractive opportunities as the broader market normalizes.
With the exception of office the operating trends in most of our property portfolios remains healthy.
Political the portfolio continues to experience historically low vacancy rate.
<unk> advice continued supply demand imbalance supported by e-commerce space demands.
Like multifamily there have been some markets that experience tie deliveries, but most of them are not submarkets, we invest in an overall occupancies remain at historically high levels and the industrial market.
Leasing outperformance continues to drive portfolio returns with bridges portfolio net effect different exceeding original acquisition underwriting by 25% in 2023.
Now turning to investment performance, excluding office or equity real estate portfolios were down approximately three per cent in Q4, and 5.1% in 2023 as a whole.
That's higher current income was offset by slightly more conservative terminal values and cap rates.
Fourth quarter was characterized by continued uncertainty over asset values in the marketplace.
Is persistent interest rate volatility wait on price discovery.
As holders of assets enclosed in funds with long fund durations, we have the wherewithal to withstand short term capital markets volatility as we focus on improving operations at the property level to maximize future exit values.
Our credit strategies the increase in base rates has supported a strong distribution yield.
Looking ahead, the future earnings a bridge or benefits significantly as real estate transaction markets inevitably recover.
I will now turn the call over to Katie.
Thank you Jonathan.
I just elaborated resilient performance for 2023, and that's a challenging external operating environment <unk>.
<unk> management fees increased 18% year over year empty, earning a U M increased 25 per cent your over a year to 21.7 billion <unk>.
By the acquisition of our secondary business.
Management. Thank thank you for wearing megabyte impacted by a 5.7 million dollar right off related to office on Wednesday seemed uncollectible.
Management. The revenue was also Laura due to the timing of higher placement agencies that were noted on last quarter's earnings cough.
I just have to the prior period office right off management fees would've been 60.7 million.
The headlines in the office sector have been well documented across the industry.
By the end of 2023.
Office, and one was unable to online with a significant portion of its lenders on a restructuring plan.
Market conditions have deteriorated further such that it is unlikely that we can create needed liquidity with additional asset sales are incremental equity in Houston.
Discussions with lenders also continue to be inconclusive.
Which has led us to assume that where you can no longer expect a <unk> management piece for fun one.
While market conditions have one of our options in the near term, we will continue to work closely and cooperatively with our lenders and pursue any avenue for positive outcomes for our investors.
Going forward, we do not expect to recognize further management be revenue in the office on one <unk>.
<unk> recurring for management fees from the office vertical will decrease from approximately $2.3 million in Q3 or 333.7% a recurring fund management fees.
Approximately 729000, a quarter or 1.2% a recurring fund management fees.
This will continue to be less meaningful as other parts of our business grow.
From a fee, earning a UN perspective office and one was small at two per cent.
Additionally, our balance sheet commitment to fund one is comprised entirely of an unsecured line to the <unk> for $15 million, which trenary to approximately 711000 of interest income during 2023.
And is included as a receivable on the balance sheet.
Based upon the equity in the fund the loan is collectible as of December 31st 2023. However.
However, if conditions in the office sector do not approve the recoverability it alone is uncertain.
<unk>, which was generally invested as a more favorable vintage during the pandemic at current market valuation has positive performance in spite of market headwinds within the auto sector.
While the ask that they're performing relatively well operationally if the current market conditions continuing to 2025.
The fund may be constrained by limited liquidity.
R C, earning a one exposure to office on to a small with be earning a U M of 184 million, representing just under one per cent.
Our balance sheet commitment to office on too is comprised of a G. P equity commitment F 15 million.
And the 13 million unsecured loan to the fun.
Which generates 565000 of annual interest income.
We continue to recognize interest income on this long.
While we remain committed to protecting investor capital in the office vertical the vast majority of our <unk> and profitability has been in our other real estate equity and credit and secondary strategies.
Moving further and are resolved yearning.
<unk> M decrease slightly by 75 million from last quarter.
Primarily due to 461 million decrease in <unk> related to bridge office on one <unk>.
Partially offset by inflows, which Bob described earlier.
Over 97 per cent of our yearning a O M. As in longterm closed and plans that have no redemption features and a weighted average duration of 6.8 years.
Be related earnings to the operating company or $28.5 million and a quarter.
<unk> $7.5 million from Q3.
Mostly driven by the impact of office on one and lower transaction revenue and.
Partially offset by policy related expenses.
The lowest be related expenses were impacted by the slower operating environment during the quarter.
While the organization Dreaming disciplined unexpected management, we would expect an increase the fee related expenses more in line with inflation to begin the year.
Wow, Jonathan noted that we think transaction activity is beginning to pick up that.
That will take time before we start to see immaterial financial impact.
Asset, we expect a more muted level transaction revenue in the near term.
The related margins will continue to be impacted to the extent, we have lower transaction ketchup. Please.
As transaction and capillaries in volume normalized.
We'll see a minimum of our margins towards our longer term average of 50 per cent.
Distributable earnings to the operating company for the quarter with 25.3 million with after tax D E for sure a 14 cents.
A decrease of 8.5 cents from last quarter, mostly due to the items discussed previously.
Three cents from office fund one impact three.
<unk> and lower transaction fees, and three cents and lower neck realization offset by lower fee related expense uhm, one and a half cents.
Realisation for the quarter were mostly comprised of tax distributions within the depths strategies.
Realisation revenue in the near term is expected to remain subdued. However, we are well positioned for an eventual acceleration in the context of improving liquidity in the real estate transaction markets.
<unk> performance revenue on the balance sheet stands at $382 million.
Net insurance income decreased during the quarter related to new stuff off policies to have planes frontloaded during the contract period, which runs from June did Ya.
Finally, our board of directors declared a dividend of seven cents per share payable to shareholders of record on March 8th.
This dividend represents a lower percentage of our distributable earnings and in previous quarters, and they're paying cash will allow us to invest in our business and strengthen our balance sheet.
With that I'd like to know within the call for questions.
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Thank you our first question.
Comes from the line of Tuma Mccoy with Morgan Stanley. Please proceed with your question.
Hi, Good morning, Thanks for taking my question that switching languages.
Michael Snipers just a quick question on <unk> access to financing.
You'd be interested in the comments you made about.
Alright.
With the bank, so just remind us.
Bank financing generally speaking across the business and how are those relationships now relative to say.
You should have conversations that you're having with your banking paulinism out differences App I Trust you you know.
<unk> you know across the board.
Good morning. Thank you. Thank you for the questions Small-bore speaking in and I'll I'll start out in Katy I'm sure. We'll have some comments as well that's a complex question in an evolving.
Marketplace.
Rule.
Our relationship with our leverage providers broadly defined is is is quite good.
There are multiple element to that we have we have some leverage.
Leverage at our public company level with a number of insurance companies and and and those relationships of course remains strong. We we have a lot of credit as well we finance.
The asset level, we finance with a variety of sources.
One level, we refinanced our residential rental assets, primarily with agencies, Fannie and Freddie and and they are open for business actually their pipelines are not are not terribly large in there is her appetite is strong, particularly on the workforce of affordable housing side, where is the priority.
For them as well as for us to for his workforce affordable housing assets and incapacity across our other verticals. We we rely on on a variety of of of lenders. Some some agency some securitization market some direct lending.
With with with different different banks.
Banks regional banks.
Et cetera.
And in in in General the market is returning to some health at this point, it's very different depending on the depending on the strategy the amount of of appetite for office as it is pretty low quite low the the appetite for logistics assets.
Residential rental assets the financing vehicle, we have in place for at.
At least for a net lease activities is is quite strong as well we've worked hard over the years too.
Eight a diversion and robust universe of of of lenders across the different parts of the business that we pursue and those relationships have.
Have certainly paid dividends.
Difficult times of of 2022 in 2023 like many markets and like our remarks suggested the financing mortgage seemed to be.
Path towards a more normalization at this point, we're seeing some lenders who actually are professing and increased appetite to to increase exposure with with Austin undoubtedly with others as well as as markets Normalised.
Katie would you add anything to that.
The only thing I think that I would add is that.
Have a relationship with learning relationships with almost 40 financial institutions.
You know, we pride ourselves on making sure that we communicate clearly and accurately to our investors and we try to be very good lending partners and we work very well with them.
Excellent. Thank you.
And as a follow up just wanted to transfer for one reason.
So Q1 will be a bit lighter and then you should expect us to pick up as you go through the year just curious how how would you characterize the total calling from a fund raising you expect your for 22 24, I guess in the context of this sort of four to 5 billion range 21, and 22 understanding of course that had multifamily you.
Flagship in the market for those so that period, just curious how how should we think about the relative to the call. It just on disability needed for it for 23, how should we think about 24.
2 billion 2 billion for 2000 twenty-three was was was a struggle.
It was a struggle as we said because the the the markets were not terribly interested in real estate at that point.
The the the funds that we had an offer to vehicles that we had an offer we're we're we're not necessarily our flagship vehicles were entering we've entered 2024 with a with a with a lineup of investment vehicles that are that that that are later.
In their series.
Well performing popular et cetera, we think that the fund raising market has has has improved as the calendar page is turned and certainly that is reflected in the amount of dialogue that we've been having is it. It's also a product of the investments that we may.
Made in our client solutions group, both domestically as well as as as none U S. In a lot of respects, we have high aspirations in terms of fundraising for for 2024 and beyond we think that we think that our funds we think that our.
Our investment vehicles offer great opportunity and and and have residence across the across the the sweet of of of Investor sectors. If you will we referenced the the the continued interest in pursuit.
Of a of a retail.
<unk> vehicle and and and that obviously would represent a significant expansion of the of the potential investor base as well. So so so well we don't necessarily guide the future in terms of what we've accomplished in the past, we certainly don't look at those.
The past is a limit to what we can do in the future.
Thank you very much good luck in the queue.
Thank you.
Our next question comes from the line of Finian O'shea with Wells Fargo Securities. Please proceed with your question.
Everyone thinks of the morning so.
First question on the office fund.
I appreciate your color there.
But.
A lot of value went away quickly.
Sounds like this is still a risk without an improvement in and liquidity conditions as you've cited.
Does this mean that the bid ask spread is just still really wide and if so are are you able to get.
Sort of in front of.
The wall here to preserve value through.
The refinancing or a secondary capital or so forth, even if that feels a little bit more painful today.
And then on the this the sort of as a follow up there in terms of how.
Video synchronic or one off the Savannah hopefully was.
Are there enough.
Their situations.
That gives you comfort, where you say received maturity extensions or found refinancing capital.
Or was this kind of you know the first test against a larger financing wall.
Thank you.
Mmm.
Jonathan do you Wanna do you want to tackle that question.
Yeah happy to and thanks for the question I'm Gonna clarified that with respect to the.
Bulk of our portfolios, which is non office so industrial.
Slash logistics and multifamily and other residential.
That we have significant liquidity, we have you know there's there's no concern with respect to our ability to manage our liquidity in those portfolios with respect to office in particular.
As in a very unique situation, where almost overnight. It went from a circumstance where there was continued you know activity liquidity both on the debt in the equity markets too too where the market's just basically seized up and and.
And as a result.
Think both lenders and equity investors have been trying to figure out.
How to proceed and what the market should be and what was unique about fun.
One.
Was that it was.
Literally and it sort of harvest period, where it had maturities in a lot of the the that was structured so that it would mature at the time, we were liquidating me out at the time, we were liquidity dating the assets with just says that the market was just completely seizing up and so in a normal circumstance you would be.
Liquidating you know strong assets, where he had significant equity values that would create liquidity to restructure refinance anything that needed to be done to extend it but when you're in a situation, where there's neither equity nor that liquidity.
And the lenders are unclear and I think what we were alluding to with respect to fund one was that the lenders have just been.
Willing to you.
You know give us feedback or or you know provide us with enough guidance to be able to structure anything.
So we're sitting here kind of as as these as these loans continued amount in a situation where we just you know we don't know how that proceeds and and the the you know equity continues to erode and that fun and so that's why we've made the difficult decisions that we've made we think that.
Yeah that could start to be a problem with respect to that but again with that relates to bridge investment group or B R. D. G.
A relatively small item as it relates to our reputation with our L. P is it very important and so we're working really hard to do everything we can but we as Bob said you know we've continued to be super transparent everybody's seen the effort, we're continuing to be committed to do.
Everything we can to to return Catholic L PS and the support our bank and lending relationships, which which seemed to have survived really well because they're all very understanding of this larger problem. It's not a bridge problem it to a larger problem in the office market overall.
Thanks to it and I think one other thing that's helpful to add if you look at Yale Bridge and escalated the.
The fact that we have less than 10%.
Maturing in the next 12 months.
I was very helpful. Thank you both.
Just a follow up I guess on the the the broader.
Portfolios or the the core multifamily business lines you've.
Generally described your strategy as value add which to our understanding can be more lighter more heavy but but translates to a lower cash flowing issuer profile.
You know you're putting money into reservations and then you're dependent on the output of higher achieved rants after executing the plan.
Correct me if I'm wrong.
So.
So how're you navigating.
Like the market.
Liquidity headwind specifically are are cash constrained at the property level.
Stalling your value add plan execution.
And our exit rent expectations.
Holding up to underwriting.
Thank you.
What was the last part with you ask just so I can clarify finian did you ask about the exit plan expectations is that what you <unk>.
Yeah. So just.
Are you able to.
Are you able to enact your your value add plan and yeah.
Okay. Thank you.
Yeah, Yeah. We're we're we have a very robust and part of the word I think distinguishes bridges, it's integration between its asset management and its property management on the ground.
And we have really sophisticated tracking mechanisms to determine whether we are getting paid for making the investment in the value add improvements.
And in terms of you know.
It's a case by case basis market by market basis, and and we always adjust based on what's happening in the market broadly speaking you know we are you know in in the strongest of the market.
We are continuing to see.
Significant value in doing the renovations, but there are also a lot of markets, where there's supply issues, which we've alluded to in some of our comments that we think are near term because these are high growth markets, where there's a lot of demand.
So at we adjust and moderate accordingly in terms of liquidity. If that's the question or availability of capital to do it we don't rely on leverage to do those plans. Those are those are funded out of subsequent equity.
And we continue to have sufficient capital and each of our funds to support our original business plan as long as the market continues to support it.
It's very helpful. Thanks, you know feeling I would I would add an and I I believe this is is something that we alluded to in our prepared remarks that when we when we look at the results of our value added process. We of course, when we when we acquired asset we we have.
Detailed projected pro forma in place that the costs out everything that we're gonna do that attributes revenue to to to the actions that we undertake et cetera, and we would characterize those as as achievable, but in in in part aspirational in in some respects and overall.
Or you know double digits ahead of those those pro forma as in terms of of the actual NOI created at our at a residential rental multifamily assets that varies a little bit by fund, but the but the overall trend is a is a is a positive trend.
It comes from it comes from.
Understanding what resonates with with residents and potential residents. It it it comes from being cost effective in implementing those those those renovations both in the common areas early on in the ownership of Vanessa.
And N as you become vacant in the in the ongoing ownership of an asset.
And and and and making sure that and making sure that we're we're getting paid for for what we're doing but we we think that the value add process and our our our day to day management of that value added process really create a meaningful amount of alpha at the at the asset.
Level over the course of the last year or so maybe more than a year. We've we've seen.
Cap rates increase as interest rates have gone up in.
Some instances those cap rate increases have have been offset and in some cases meaningfully offset by the N O Y increases the value added process has created at the at the asset levels. So it's a it's a process that pays dividends and good times in in more difficult times.
Awesome. Thank you.
Mmm.
Thanks for the question.
Thank you. Our next question comes from the lineup Kenworth Vinton with J P. Morgan. Please proceed with your question.
Good morning.
So performance is holding up well in certain of your vertical under pressure elsewhere and I know the focus has been office this quarter, but as we look to multifamily five it seems that fund continues to struggle.
Dry powder, but there seems to be a pretty big hole here, how does a more benign interest rate environment or time or investment resolve the performance here or given the depths as a whole is this friend sort of destined to be a poor performer.
Mmm.
You want me to do that one Bob.
Yeah, why don't you start Jonathan please.
Yeah <unk> I.
I mean can you know.
No one has the crystal ball that I think we're we're sitting area our perspective.
Is that there's been what I would consider an overt correction in the multifamily valuation I think they're broadly it's been you know.
When you look at the compression the expansion of cap rates and the impact on values on you know kind of like for like net operating income it's about a 30% drop which is which is very meaningful when you think about especially with respect to leverage that being said.
We have a very.
Strongly held house you that [noise].
That interest rate you know are gonna come back down as inflation comes down as if that makes their moves yield per normalized we think that will contribute but we also see significant amounts of dry powder and and longterm secular demand in the multifamily sector. They will also drive cap right back.
So we expect them to kind of move back down and mean revert that will recover a lot and as Bob alluded to we are well ahead on R. R. N O Y target center underwritten operating performance at the outset level.
And the combination of those two things, we expect will will generate positive recovery of the existing portfolio and then we've got the remaining half the portfolio.
We were able to buy we think.
It's at what will look like incredibly attractive positions and so when you start taking those two together we still have hopes very very high hopes that the performance of this plan will be will be solid and will it be as good as some of our highest performing vintage.
<unk> no, but not all vintages are created equal, but I do think it will be in outperformer relative to its peers and the same vintage which at the end of the day is probably how the market will measure us.
And I think the magenta color and this also relates to the previous question is just how the value at strategy at play now N multifamily fan five right now.
Today at you know, we're seeing a 16.4 per cent return on investment.
3000 assets that we have upgraded so far so we are saying that like <unk> <unk> and <unk>.
Got it to you as well.
Okay. Thank you.
Not not to pile on too much but the the tailwinds.
In the fundamental tailwinds in multifamily are are enormous.
We're in an era.
<unk>, where it costs so much more to <unk> than it does to rent there are a number of of of aspirational homeowners who were now renters by necessity. There are a number of people who just choose to choose to rent for extended periods of time over.
They're over their life cycles, and and and we have a housing shortage in the in the U S. So we think we we think that our ownership and operation of these communities really speaks to the the the the needs of of of of folks who comprise that great big.
Cohort of the U S population, we think that we also have developed over the decades and ability to very cost effectively manage these these communities on on behalf of our investors on behalf of our residents to provide a great experience for the.
For the residents and that's reflected in in in very high Occupancies, It's reflected as Katie said in the in the in the in the metrics around around financial performance and and the the multifamily fun five vintage you started off at a at a at a P.
Time, but is ending ending up with with his vestments at at some pretty attractive value. So when your average that out and you and you overlay the the operating metrics and performance that we that we seek to achieve it should be should be as Jonathan set a very a very soon.
Solid.
<unk> in and and you know certainly for something that was sort of in the in the in the apex of the market. If if that's if that's the downside. It's we think it will be very solid.
Okay, great. Thank you and maybe a question just on on on how your clients are reacting.
So if if offices is struggling and and I carry a multifamily may.
Maybe at the the.
It seems to be struggling now to what extent.
Is the bridge brand.
Being impacted here by a couple of these areas that are struggling and does the performance in these protocols.
Flow through to impact fund raising you.
In 2024 in areas that you know are more in favor of performing better like cross sell like we think like Newberry, it's like cross-sell.
Is is a factor here for secondaries and some of the other verticals are are you seeing or hearing any flow through from you know <unk>.
Investors any struggling areas maybe impacting.
Your aspirations and you know the other areas.
You know it's interesting it's a it's a it's a really good question. It's a it's a question that we that we care deeply about an issue we care deeply about in in terms of what our brand is and how we how we maintain and enhance the value of our brand we start off with with comprehensive.
And transparent communication and the view that the bad news doesn't get better with time and.
And and we we seek to we seek to be be very transparent in terms of what we do one one vignette I was with I was with a significant investor of ours as well as others and we were talking about this very issue and and and I.
And mentioned the difference in performance between a coupla vintages of of of one of our funds and they stopped me and said if you were about to apologize do not apologize. Your your relative performance has been so much stronger than the other.
Then the other entities in which we've invested for for for the same strategy. So my point is relative performance matters and and and we think you know in good times, we will outperform in in our in our areas of competitive differ.
<unk>, we think in in in Bad times, we will outperform not not as much but certainly on a relative basis out outperform as well. We we we have a you know a.
Mongst other things we have the next vintage of our workforce and affordable housing investment vehicle that that is in the market. Now. The early returns are are are very very strong with with with respect to to that that's a pretty close beria too all the experience.
As in multifamily and you know it's.
Jonathan said, there's there's in in the.
Maybe just in another way in the in the in the teens from 2014 2020, or so there was really very little J curve as it related to to to investment vehicles. When they were launched because asset values were growing up now there now.
There there is a J curve again, and and we think that we think that the back end of that Jake or will result in some pretty significant pretty significant relative and absolute value. That's that's created for investors as it as it really.
To the brand we we we we have found over the course of last year and this year and in the past as well that the the the the value of our brand continues to grow the recognition amongst the most prominent.
Institutional investors continues to grow the the the the the network of wealth management platforms, with whom we have a dialogue and on whom were distributed continues to grow we mentioned that in our prepared remarks, and and and in each case institutional.
Esters wealth management platforms, everybody you know have a lot of choices and we seek to be we seek to be a a a a good solid choice that that people can provide us with their capital of no that that that come good times and bad we will do is as well as possibly can.
Be done with with that capital.
Alright, Thank you very much.
Thank you.
Our next question comes from the line of Adam Beattie with you B S. Please proceed with your question.
Alright, Thank you and good morning, just wanted to ask about the three per cent mark down across the portfolio in four Q Jo just thinking back to the environment at that point. It seemed like the rate outlook was getting better public markets were definitely optimistic. So I just wanted to understand the dynamics year cause it's the three per cent.
Was sort of the better part of the 5% you know for the full year, so that might've been a little bit unexpected. So just if you could have a little bit about what would drive to mark down to get you know a little bit worse than four Q and also maybe which subsectors or vertical might've driven that thank you.
Maybe maybe I don't know I'll start there and Jonathan I'm sure, we'll have some things to add as well.
D D.
D E E. When when you refer to the to the improving outlook I think as it relates to you as your comments relate to.
Broad market indices, that's that's that's absolutely true and and that's that's the crux of what we think creates the opportunity in real estate today. The you you you have broad marketed disease, whether it be the S and P 500, whether it be NASDAQ Dow or whatever that are at or or near all time highs we'll see.
When the market opens in three minutes, whether the videos blow out results are gonna are gonna create new all time highs and and and and at the at the same time in an environment of of rising interest rates you have real estate values that that in our view <unk>.
<unk> to reset over the full course of 2023, including including the fourth quarter and it's it's there aren't there aren't many asset in our view there aren't many asset classes like real estate that have pretty substantially.
Reset and and you know we were in your at the at the 2021 peak.
When when cap rates for different types of assets were bumping around but have but what now are interpreted as as cyclical lows. Those those cap rates have increased in some cases as much as as as 200 250 300 basis points over the course of the <unk>.
Interest rate rises and and that's what in our view create the opportunity for some generationally attractive entry points in in in real estate at this point part of the.
Part of the the valuation process, which which which we go through certainly acknowledges the the cap rate increases from the selected transactional activity that occurred over the course of the fourth quarter of 2023 and earlier.
Quarters as well. It also it also incorporates some of the operational improvements that we were able to achieve at our assets and so the three per cent said annette of that but more broadly we think that that <unk> that that resetting of of of.
Valuation parameters is created a pretty terrific entry points in our view and it makes it appropriate to start waiting back into the water, Jonathan any any incremental comments to that.
No I think he did I think he did a good job I think you know the bulk of it really is and the multifamily side, which you know obviously, that's the largest part of our a U M and it I think.
Yes, the perspective that we have held is we we took a lot of time on valuation because they're so little.
There's a little clarity and he gets a simple truth, there's very low transaction volume of the transactions that happen.
Cap rates that are evidence are very broad and very wide even within the same market.
And similar vintage and similar quality assets. So so we spend a lotta time with our audit partner. So we spent a lotta time with I can tell you right now the the the normal that's the information comes from the brokerage industry and the brokers are they're just throw it out there.
Hands, saying, we don't really know so I think that's with me you know kind of marking things challenging we've always prided ourselves on trying to be as conservative as we can in marking without being extreme.
And so we hope we found the balance here and and the year and that that was how the numbers came out I would add one other thing which was interesting which was.
Q for even though it seemed that there was some relief in sight with interest rate you know <unk>.
<unk> to to to move.
Move we also started to see them move in a different direction and so we <unk>. What's happened every time, we felt like we were getting to a place where the volumes were starting to return and and you know people were were ready to transact.
So it's been really interesting both in terms of trying to understand when when transaction volume to recover and exactly where where trees are to try to put good mark hunting N.
N N candidly on a positive note we are under no pressure in any of our fun.
The trade in this market unless we get a great price that we've gotten a few assets. So that we felt like we had really attractive pricing and we got really great returns on just to kind of start to realize some of the some of the assets in our older portfolios.
I think we did a really successful recapitalization of our country vintage too to print a really good total return for investors.
And so I think overall, it's just right now.
<unk> really are related to multifamily and as I said in remarks I'm.
I'm feeling that's gonna be.
Gonna see recovery on that as as the debt markets Stabilise as interest rates come down, which they inevitably well.
That's great. Thank you for all those details I appreciate that and then just a quick follow up on you know just the sweetest remarks, because bobbin prepared mentioned stellar capitulation and so it seems like you know at the rate outlook changes, maybe sellers are capitulating around capitulating or what have you, but you know just wondering what you're seeing and what else.
Areas in particular, you see more capitulation, which maybe while painful maybe healing for the market ultimately thank you.
Oh.
Yeah, We're we're I think right now.
The.
Capitulation is really slow I guess is the best way I could pay it and I think that we have.
The the the the time when we're actually going to see the market opening up more broadly is after we start to actually see some sort of movement on the interest rate and received the broader Denmark, it's really start to stabilize.
And you know the same thing when we talk about the dry powder on me equity side. We also see dry powder on the private side, where there's a lot of lenders that are starting to say, hey, I Wanna I Wanna get aggressive to try to you know get some transaction volume even in a slow market. So we're seeing them started tightening their spread.
Read a little bit in the index is need to kind of improve a little bit and we need to get a more normal yield curve and we get all of that they were gonna start to see volume to return value start to recover between now and then it will be the lenders are starting to.
The lenders are starting to bring us thing and we're starting to see some.
Interestingly structured.
Portfolios that that really where you you saw regional sponsors who didn't have the wherewithal to raise new capital into their vehicles and the the just rapid rise in interest rates.
Have essentially encap rates have essentially wiped out most of their equity and made it impossible for them to continue to serve as that so we're starting to see some of that happening with lenders, but but we haven't seen it in any large volume and I think it's gonna take another you know just like we saw with the G. F C I.
It's gonna take the next 18 24 months for that to read disperse itself into the market, but again on a really positive note I would say <unk>.
We do think that one the market starts to open back up there's gonna be a little bit of a rebound effect right because there's been almost there will have been almost two years of <unk>.
Very very slow transaction volume well below you know kind of call it market norms.
And that will be a lot of pent up demand for regular way selling for people, who are just at a point, where they need to realize their assets and they have a good basis for making me maybe not as much profit as they would've at peak, but a nice profit and we'll start to see some of that you know those challenged assets.
Low through the system, either either through short sales or through lenders, taking things back in and we are the great thing about bridge as we are in active dialogue have great relationships across all of the owners and sellers.
As well as this broad base of lenders that we have deep and long relationships with so we're in the middle of all of it and I think we're gonna see benefit to that with the question really becomes that happen next corner then following corner later this year.
That's what we don't know, but we know what's coming and we're excited for it.
Mmm got it. Thank you that's a clear picture of an unclear situation really appreciate it. Thank you.
Alright.
[laughter].
Thank you <unk>.
Our next question comes from Bill Cats with T. D. Cowan. Please proceed with your question.
Thank you very much and good morning, everybody. So a couple of questions. So I apologize in advance sort of thinking through some of your balance sheet exposure here and maybe a two part question. The first question is.
Keesa review, what you sort of Max exposure is in terms of on the asset side.
And then I think within that you'd mentioned that there's some G. P equity at risk here as well would that influence any kind of pressure to adjust your F. R. We related compensation.
Is it really even mentioned it sure is.
Sure sure I interrupt you are up so the and thanks for the clarification. So you.
You mentioned a couple of loans that are on your balance sheet that may not be fully recoverable. So I'm. So I'm looking through your balance she's just trying to understand what kind of risk there might be in terms of a write off.
Related to that and then secondarily I think you mentioned that there's some G. P equity within the fund as well and I'm just sort of wondering to the extent that there needs to be any kind of adjustment to compensation to offset the lost earnings associated with that.
I can answer the second part of the question and and Katie you might Wanna, you might want to touch on the first part of the question.
And until you have for your reference down there, there's two lines outstanding into our office fan.
<unk> have a $15 million around outstanding and that's really the alone that we're monitoring for impairment and they'll continue to provide an update on.
The second loan his office Spanky, which has a 13 million dollar loan and based upon the performance right now and there are no indicators and potential.
Peter impairment and as it relates to you at.
Balance a P. P investment we do have 815 million dollar at T. P commitment.
Two for the office strategy.
And and <unk> you know we have we have significant G. P contributions.
Both from existing employee owners into our funds as well as selected G. P contributions from from bridge into our our funds as well the the typical fun terms you know call for a minimum of of of of X million.
Per fun generally speaking, we we exceed that minimal been often those those those those G. P commitment come from from individual.
Individual investor employees, who who were enthusiastic about the fund those those in the aggregate across all of our funds past and present those aggregate to the hundreds literally to the hundreds of millions of dollars. So there's a pretty soon there's a very significant alignment between between us.
As a as as managers of investment vehicles and N R. L. PS and that's something that we think is valuable we think it's <unk>.
We think it's something that's expected and it is something that sharpens focus in in a lot of respects as it relates to as it relates to compensation and adjusting compensation either related related to any issues, including the issues around office one <unk>.
Compensation is a product of of of of a lot of different factors its product of firm performance product of individual performance. It's a product of of of the performance of the of the vertical that and and and we we have we have what we think is a very informed and sophisticate.
Process that allows us to to appropriately compensate our our employees and and her colleagues and and that compensation has a number of different elements to it as you would expect in and there's been a lot of dialogue across alternative asset investment managers about what the right <unk>.
Structure of compensation is it's kind of interesting from our perspective as as we see that dialogue because I think we've been we've been early adopters of the of of the of the thought that that employees should should benefit when are when are L PS and shareholders benefit.
And and then alignment should be should be pretty significant. So this particular incident I I don't believe will impact our compensation philosophy.
The the the it's way too early in 2024 to have any meaningful thoughts about where compensation will be in in in in 2024, we run a very tight ship in in terms of of of how many people we employ.
How how how we how we structure, our our funds management infrastructure and investment teams in order to deliver really good results with with with inappropriate cost burden related to that we we think.
That where we think that that that were amongst the leanest in the in the industry as it relates to that and and so we can deliver a really good waterfall gross to that over over the course of what we do.
Great. Thank you would pay bill was it for you concerned about Bill where you I'm just wanting to clarify whether we really answered. The question you're after I mean, you you concerned about the impact of FRE going forward.
Is that kind of what you were driving at.
Right I was just wondering if there's gonna be a need to make up if you had to write off against much fun too. So maybe I'm I'm I'm, making more at that needs to be I think I'm. Good on that question. My second question is just in terms of your of your balance sheet can you remind me of what the debt covenants are around the debt and then Relatedly I guess <unk> are you a.
Justin your your dividend payout ratio knows a lot of noise. This particular corner, but it looks like a much lower payout just not normalize earning so how how do we think about the the pay out right and then just remind me of what the debt covenants are on your own debt.
Katie.
Happy to pay a fine Sir I think for your reference say yeah on their primary care that you <unk> be focused on whidbey and as defined in terms of the agreement at 3.75 out you know.
Library to Asia.
At this point in time, where where approximately a three time price you out, though we are very much incompliant.
Uhm.
And then F U I apologize what was the second part of the question.
Yeah, I'm sorry for the message set of questions. This morning, just in terms of the dividend payout policy. It looks like it moved around a little bit this quarter I blooming your husband and no more capital.
How do you feel about that parrot ratio in light of just saw the depressed earnings the conversation this morning, and the need to reinvest back in parts of the business. Thank you.
Okay. If you think of about you know once we actually our destination of quarter was really based upon the cash and sell it at that included.
The address for the the one time charges and stuff you know ultimately it was about a 70% payout ratio, which you know obviously I <unk> to our our board approval of that you know in in in the near term I I think that it is reasonable to expect a similar type ratio.
Alright. So we are we are adjusting we're still trying to distribute reasonable amount, but we're trying to.
Moderate that so that we have additional strength on the balance sheet. So that's really the goal.
Okay. Thank you.
Thank you.
There are no further questions at this time.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Goodbye.
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