Q4 2023 Claros Mortgage Trust Inc Earnings Call
Bruno (Conference Facilitator): Hello, everyone, and welcome to the Claros Mortgage Trust fourth quarter 2023 earnings conference call. My name is Bruno, and I'll be your conference facilitator today. All participants will be in a listen-only mode.
Hello, everyone and welcome to Clarus Mortgage Trust fourth quarter 2023 earnings Conference call. My name is Bruno and I'll be your conference facilitator today.
All participants will be in a listen only mode.
Bruno (Conference Facilitator): After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. I would now like to hand over the call to Han Nguyen, Vice President of Investor Relations for Claros MRT Trust. Thank you.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to register for a question. Please press star one on your telephone keypad.
I would now like to hand over the call to <unk> Nguyen Vice President of Investor Relations for cargoes mortgage Trust.
These proceeds.
Thank you I'm joined by Richard Mack, Chief Executive Officer, and Chairman of Claris mortgage trusts, and Mike Mcgillis, President and Chief Financial Officer, and director of Claris Mortgage Trust.
Han Nguyen (Vice President of Investor Relations): I'm joined by Richard Mack, Chief Executive Officer and Chairman of Claros Mortgage Trust, and Mike McGillis, President and Chief Financial Officer and Director of Claros Mortgage Trust. We also have Kevin Cullinan, Executive Vice President who leads M-REX Originations, and Priyanka Garg, Executive Vice President who leads M-REX Portfolio and Asset Management. Prior to this call, we distributed CMTG's earnings release and supplement. We encourage you to reference these documents in conjunction with the information presented on today's call. If you have any questions following today's call, please contact me...
We also have Kevin Cullinan Executive Vice President, who leads amex origination and Priyanka Garg Executive Vice President, who leads ameren portfolio and asset management.
Prior to this call we distributed <unk> earnings release and supplement.
We encourage you to reference these documents in conjunction with the information presented on today's call.
If you have any questions. Following today's call. Please contact me.
Han Nguyen (Vice President of Investor Relations): I'd like to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. However, actual results may differ materially from those indicated by these four forward-looking statements as a result of various important factors, including those discussed in our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will also be referring to certain non-GAAP financial measures on today's call, such as distributable earnings, which we believe may be important to investors to assess our operating performance. For reconciliations of non-GAAP measures for their nearest GAP equivalent, please refer to the earnings supplement. I would now like to turn the call over to Richard. Good morning, and thank you for joining us for CNTG's fourth-quarter earnings call. What a difference a year makes.
I'd like to remind everyone that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors.
Including those discussed in our other filings with the SEC.
Any forward looking statements made on this call represent our views only as of today and we undertake no obligation to update them.
We will also be referring to certain non-GAAP financial measures on today's call such as distributable earnings, which we believe may be important to investors to assess our operating performance.
Reconciliations of non-GAAP measures for their nearest GAAP equivalent please refer to the earnings supplement.
Now I'd like to turn the call over to Richard.
Good morning, and thank you for joining us for <unk> fourth quarter earnings call.
What a difference a year makes or at least thats, how it seemed as markets commenced 2024 with optimism.
Richard Mack (Chief Executive Officer and Chairman): Or at least that's how it seemed as markets commenced 2024 with optimism. Even CMBS spreads rallied as investors enthusiastically purchased bonds in anticipation of imminent rate cuts and a CRE market bottom. But early optimism in the real estate market for rapid monetary easing has been tempered by the reality that the U.S. economy continues to demonstrate resilience, strong employment, and moderate but persistent inflation. GDP is strong. Labor numbers beat expectations.
Even she MBS spreads rallied as investors enthusiastically purchase bonds in anticipation of imminent rate cuts.
CRE market bonds.
But early optimism in the real estate market for rapid monetary easing had been tampered by the reality that the U S economy continues to demonstrate resilience strong employment and moderate persistent inflation.
<unk> has strong.
Labor numbers beat expectations.
Richard Mack (Chief Executive Officer and Chairman): And while inflation has declined significantly, marking meaningful progress towards the Fed's inflation target, it's still above the target. And if January and February are any guide, handicapping said movements will be very hard in 2024. Will there be a lag effect of monetary policy dampening growth?
And while inflation has declined significantly marking meaningful progress towards the feds inflation target, it's still above the target.
And if January and February are any guide handicapping fed movements will be very hard in 2024.
Will there be a lag effect of monetary policy dampening growth will lay offs commenced in earnest will ongoing geopolitical risks this.
Richard Mack (Chief Executive Officer and Chairman): Will layoffs commence in earnest? Will ongoing geopolitical risks disrupt supply chains and re-ignite inflation? And what are the inherent complexities surrounding the election year?
<unk> supply chain and reunite inflation and one of the inherent complexities surrounding the election year.
Richard Mack (Chief Executive Officer and Chairman): Cutting through the noise, most signals point to a soft landing unless you're in the property business and counting on rapid rate cuts. Consequently, good news can be bad news for commercial real estate. With the exception of January, commercial real estate capital markets have been constrained for the last 18 months.
I think through the noise most signals point to a soft landing unless you are in the property business and counting on rapid rate cuts.
Consequently, good news can be bad news for commercial real estate.
With the exception of January real estate capital markets have been constrained for the last 18 months.
Richard Mack (Chief Executive Officer and Chairman): Higher borrowing costs coupled with muted transaction volumes have driven up cap rates, and many operators are contending with negative leverage until and unless the Fed drops rates. As a result, not much happened in real estate in 2023, despite the extreme market volatility and negative sentiment and headlines. Most real estate investors assume a wait and see stance, with many postponing difficult decisions that will eventually need to be addressed. Looking ahead, we believe that 2024 and, more certainly, 2025 will unfold much differently.
Higher borrowing costs, coupled with new to transaction volumes have driven up cap rates and many operators are contending with negative leverage until and unless the fed drops rates.
As a result, not much happened in real estate in 2023, despite the extreme market volatility and negative sentiment and headlines.
Most real estate investors assume a wait and see stance with many postponing difficult decisions that will eventually need to be addressed.
Looking ahead, we believe that 2024 and more certainly 2025, we will unfold much differently.
Richard Mack (Chief Executive Officer and Chairman): In 2024, the expectation of rate cuts, along with the availability or lack thereof of distressed asset trades, will likely become a critical inflection point for investors feeling the weight of capital available to deploy. This will bode well for the beginning of the inevitable rationalization of the real estate market and some consensus as to value. However, our best guess now is that this happens slowly in 2024, with rate cuts remaining on the horizon but slow to materialize. As a result, it will likely take until 2025 for the industry to fully embrace refinancing and recapitalization. Until rate cuts happen, or there is conclusive evidence that they will not, the system is likely to be constrained. And right now, it seems unlikely to be clear until the end of 2024 or 2025, regardless of the exact timing.
In 2024, the expectation of rate cuts, along with the availability or lack thereof of distressed asset trades will likely become a critical inflection point for investors feeling the weight of capital available to deploy.
This will bode well for the beginning of the inevitable rationalizing the real estate market and some consensus as to values.
However, our best guess now is that this happens slowly in 2024 with rate cuts remaining on the horizon, but slow to materialize.
As a result, it will likely take until 2025 for the industry to fully embrace refinancings and recapitalizations.
Until rate cuts happen or there is conclusive evidence that they will not the system is likely to be constrained and.
And right now it seems unlikely to be clear until the end of 2024 or 2025, regardless of the exact timing, we need more consensus on CRE values and fundamentals.
Richard Mack (Chief Executive Officer and Chairman): We need more consensus on CRE values and fundamentals and more visibility from the Fed on rate cuts for transaction volumes to escalate to a level where the capital markets will become constructive. That said, we do anticipate seeing more price discovery and a reduction of bid-ask spreads in 2024. We expect this will slowly lead to heightened transaction volumes and to more seller capitulation, which will, in turn, place pressure on certain banks and investors to come to terms with declining valuations and weakening fundamentals of certain asset classes. Therefore, we are anticipating a more active 2024, but also a more challenging year for the commercial real estate industry collectively. On a positive note, we can look to the substantial amount of capital sitting on the sidelines waiting to be deployed to act as a shock absorber. If you have capital to deploy, there are investment opportunities across various property types that are supported by strong, long-term fundamentals. However, after a slow 2023, investor patience may be waning, and there is not likely to be a clear sign for an opportune entry point.
And more visibility from the fed on rate cuts or transaction volumes to escalate to a level, where the capital markets will become constructive.
That said, we do anticipate seeing more price discovery and a reduction of bid ask spreads in 2024.
We expect this will slowly lead to heightened transaction volumes and to more seller capitulation.
Which will in turn placed pressure on certain banks and investors to come to terms with declining valuations and weakening fundamentals of certain asset classes.
Therefore, we are anticipating a more active 2024, but also a more challenging year for the commercial real estate industry collectively.
On a positive note, we can look to the substantial amount of capital sitting on the sidelines waiting to be deployed to act as a shock absorber.
If you have capital to deploy there are investment opportunities across various property types that are supported by strong long term fundamentals.
However, after a slow 2023 investor patients, maybe waning and there is not likely to be a clear sign for an opportune entry point.
Richard Mack (Chief Executive Officer and Chairman): As for CMTG, our borrowers have not been immune to the higher rate environment and resulting diminution in asset value. Generally speaking, our portfolio performance can primarily be attributed to the trends we are seeing in the broader market, namely higher interest rates and reduced capital markets activity. As we navigate these times, it gives me much comfort to know that our executive team has extensive experience managing portfolios through real estate cycles, and we know that this too shall pass. We believe that our equity mindset approach will now prove to be even more critical.
As for <unk>, our borrowers have not been immune to the higher rate environment, and resulting dimunition in asset values.
Generally speaking our portfolio performance can primarily be attributed to the trends we are seeing in the broader market.
Higher interest rates and reduced capital markets activity.
As we navigate through these times. It gives me much comfort to know that our executive team has extensive experience managing portfolios through real estate cycles.
And we know that this too shall pass.
We believe that our equity mindset approach will now proved to be even more critical.
Richard Mack (Chief Executive Officer and Chairman): Real estate lending is no longer simply a spread game. This environment dictates that we are all equity investors now, which requires deep boots on the ground real estate expertise. This will be essential to applying a focused solutions-driven approach to the inevitable problem. To a large extent, we were made for this, and as disconcerting as such a reordering may be, we are ready.
Real estate lending is no longer simply a spread game.
This environment dictates that we are all equity investors now which requires deep boots on the ground real estate expertise.
This will be essential to applying a focus solutions driven approach to the inevitable problems.
To a large extent we were made for us.
And as disconcerting as such a reordering maybe.
We are ready.
Mike McGillis (President and Chief Financial Officer): Thank you all for this opportunity to demonstrate what we can do over the coming quarter. I will now turn the call over to my assistant. Thank you, Richard. For the fourth quarter of 2023, CMTG reported distributable earnings per share prior to realized gains and principal charge-offs of $0.31 per share, which exceeded our quarterly dividend of $0.25 per share, resulting in 1.2x dividend coverage. Distributive earnings per share prior to realized gains in principal charge-offs for the prior quarter were 35 cents per share. Mrtg Trtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtrtr The quarterly improvement of the Aereo hotel portfolio reflected the seasonality you usually see with New York City hotels, generally reporting a weak first quarter, followed by improvements in the second and third quarters, and then rounding out the year with a strong fourth quarter. Distributable earnings per share came in at $0.26 per share for the fourth quarter of 2023, and gap net income was $0.24 per share.
Thank you all for this opportunity to demonstrate what we can do over the coming quarters.
I will now turn the call over to Mike.
Thank you Richard for the fourth quarter of 2023, CMT G reported distributable earnings per share prior realised gains in principal charge offs of 31 per share, which exceeded our quarterly dividend of <unk> 25 per share, resulting in $1 two X dividend coverage.
Distributable earnings per share prior to realized gains in principal charge offs for the prior quarter 35 per share.
<unk> over quarter change is primarily a result of the California multifamily loans placed on non accrual during the fourth quarter, which I will discuss in more detail. Shortly in addition to earnings reflecting the full quarterly impact of two loans that were placed on non accrual during the prior quarter offer.
Set in part by improved operating performance of the New York City, our REO hotel portfolio.
The quarterly improvement in the area of hotel portfolio reflected the seasonality you usually see with New York City hotels generally reporting a weak first quarter followed by improvements in the second and third quarters, and then rounding out the year with a strong fourth quarter.
Distributable earnings per share came in at 26 per share for the fourth quarter of 2023 and GAAP net income was 24 per share.
Mike McGillis (President and Chief Financial Officer): CMTG's primarily floating rate portfolio was 6.9 billion at December 31, compared to 7.1 billion at September 30. The quarter-over-quarter decrease was primarily due to the reclassification of three loans secured by a variety of asset classes to help for sale, representing $267 million of carrying value as of September 30, and loan repayments of $38 million, which was offset in part by the impact of follow-on fundings in our existing portfolio of $168 million. Subsequent to year-end, three loans held for sale were sold to a single buyer for $262 million.
<unk>, primarily floating rate portfolio was $6 9 billion at December 31, compared to $7 1 billion at September 30.
The quarter over quarter decrease was primarily due to the reclassification of three loans secured by a variety of asset classes to held for sale representing $267 million of carrying value as of September 30th and.
And loan repayments of $38 million, which was offset in part by the impact of follow on fundings in our existing portfolio of $168 million subsequent to year end three loans held for sale were sold to a single buyer for $262 million.
Mike McGillis (President and Chief Financial Officer): Effectively, two loans were sold at par, and one load secured by a mixed-use development project was sold at 93% of its total loan commitment due to its significant future funding and being early in its construction cycle. In total, the three loans were sold at 96% of UPB. In this case, the opportunity to sell two large loans at par and a smaller third loan at a reasonable discount, while eliminating a meaningful future funding commitment, aligns with our goal of maximizing liquidity and deleveraging our balance. This transaction generated $77 million of net liquidity, and the fact that the loans were sold at a modest discount to par, despite a large future funding component and an excess of $100 million on the mixed-use construction loan speaks well to the As of December 31st, multifamily remains our largest exposure at 41% of the portfolio's carrying value.
Effectively two loans were sold at par and one loan secured by a mixed use development project was sold at 93% of its total loan commitment due to its significant future funding component.
And being early in its construction cycle.
In total the three loans were sold at 96% of <unk>.
In this case the opportunity to sell to large loans at par and a smaller third loan at a reasonable discount while eliminating a meaningful future funding commitment.
Lines with our goal of maximizing liquidity and deleveraging our balance sheet.
This transaction generated $77 million of net liquidity and the fact that the loans were sold at a modest discount to par despite a large future funding component in excess of $100 million.
On the mixed use construction loan speaks well to the credit quality of our portfolio.
At December 31st multifamily remains our largest exposure at 41% of the portfolio is carrying value.
Mike McGillis (President and Chief Financial Officer): We've been actively monitoring the multifamily sector, keeping a watchful eye on underlying fundamentals. Near term, we believe there will generally be pressure on the sector as the impact of higher benchmark rates adversely affects certain floating rate borrowers who acquired assets at tight cap rates. We have been observing certain property level NOIs being negatively impacted by decelerating rent growth or rent contraction, in addition to rising labor and insurance costs.
We've been actively monitoring the multifamily sector, keeping a watchful eye on underlying fundamentals.
Near term, we believe there will generally be pressure on the sector as the impact of higher benchmark rates adversely affects certain floating rate borrowers who acquired assets tight cap rates.
We have been observing certain property level NOI is being negatively impacted by decelerating rent growth rent contraction.
In addition to rising labor and insurance costs.
Mike McGillis (President and Chief Financial Officer): Additionally, the higher rate environment has placed many owners in the challenging position of having negative leverage; near-term cash flow issues combined with the cost of replacing interest rate caps, replenishing interest and operating reserves, as well as valuation pressures upon loan maturity can potentially exacerbate the pressure on multifamily operators. With this in mind, we anticipate there will be circumstances where we will be working with our borrowers on extension requirements if they are demonstrating a continued financial and operational commitment to their assets. That said, we continue to have a favorable view of the long-term outlook for the multifamily sector. Limited housing supply and relatively higher mortgage rates associated with home purchases will continue to drive demand in the multifamily sector.
Additionally, the higher rate environment has placed many owners and the challenging position of having negative leverage.
Near term cash flow issues combined with the cost of replacing interest rate caps replenishing interest and operating reserves.
As well as valuation pressures upon loan maturity can potentially exacerbate the pressure on multifamily operators with this in mind, we anticipate there will be circumstances, where we will be working with our borrowers on extension requirements. If they are demonstrating a continued financial and operational commitments.
To their assets that said, we continue to have a favorable view of the long term outlook for the multifamily sector.
Limited housing supply and relatively higher mortgage rates associated with home purchases will continue to drive demand in the multifamily sector.
Looking ahead, we believe high growth markets will outperform on a relative basis. Our continued conviction in the strength of the asset class will inform our approach to working with borrowers. If we don't see a continued financial and operational commitment to assets, we have the experience and conviction to pursue our.
Mike McGillis (President and Chief Financial Officer): Looking ahead, we believe high-growth markets will outperform on a relative basis. Our continued conviction in the strength of the asset class will inform our approach to working with borrowers. If we don't see a continued financial and operational commitment to assets, we have the experience and conviction to pursue our remedy. Now turning to portfolio credit, the weighted average risk rating on the portfolio increased to 3.3 from 3.2 for the prior quarter. During the quarter, we migrated five loans to a four risk rating, and no additional loans migrated to a five risk rating. We downgraded three of the five ones.
Our remedies.
Now turning to portfolio credit.
The weighted average risk rating on the portfolio increased to three three from three two for the prior quarter.
During the quarter, we migrated five loans to wait for risk rating and no additional loans migrated to a five risk rating.
We downgraded three of the five loans.
Due to recent our near term maturities with certain borrowers grappling with the higher interest rate environment and declining valuations that Richard mentioned, we are keenly focused on borrower's ability to meet as of right extension conditions or pay off loans as required and therefore have added these to our watch list.
Mike McGillis (President and Chief Financial Officer): Due to recent or near-term maturities, with certain borrowers grappling with the higher interest rate environment and declining valuations that Richard mentioned, we are keenly focused on borrowers' ability to meet as-of-right extension conditions or pay off loans as required, and therefore, we have added these to our watchlist. It's important to note that all three loans are covered on DebtServe. A fourth downgraded loan was a multifamily loan that is also current on debt service but is experiencing downward NOI pressure consistent with what I previously mentioned. Finally, the fifth downgraded loan is a New York City land loan that has been in payment default but carries a significant repayment guarantee. In addition, one loan was placed on non-accrual during the quarter, a previously for rated loan with a UPB of 215 million collateralized by two under construction multifamily properties in Southern California. As of year end, all accrued interest through the third quarter has been collected.
It's important to note that all three loans are current on debt service.
A fourth downgraded loans was a multifamily loan that is also kind of went on debt service, but is experiencing downward NOI pressure.
System with what I previously mentioned.
Finally, the fifth downgrade the loan is in New York City land loan that has been in payment default, but carries a significant repayment guarantee.
In addition, one loan was placed on non accrual during the quarter. Our previously four rated loan with a <unk> of $215 million collateralized by two under construction multifamily properties in southern California.
Born yet.
As of year end, all accrued interest through the third quarter has been collected.
The two assets that collateralize the loan are very well located and we believe upon completion will be worth well in excess of our loan amount.
Because of that and our conviction in longer term tail winds in the multifamily sector generally we have initiated foreclosure proceedings as.
As we work through this process there are several potential paths to resolution all of which we are currently pursuing.
With regard to Cecil total seasonal reserves as a percentage of <unk> was two 2%.
Mike McGillis (President and Chief Financial Officer): The two assets that collateralize the loan are very well located, and we believe upon completion, they will be worthwhile in excess of our loan amount because of that and our conviction and longer-term tailwinds in the multifamily sector generally. We have initiated foreclosure proceedings. As we work through this process, there are several potential paths to resolution, all of which we are currently pursuing. With regard to CECL, total CECL reserves as a percentage of UPB was 2.2%, which is in line with the prior quarter. Specific CECL reserves represented 21.5% of the UPB of our loans with specific CECL reserves. We have no new specific CECL reserves as of year-end.
Which is in line with the prior quarter.
Specific seasonal reserves represented 21, 5% of the <unk> of our loans with specific seasonal reserves, we have no new specific seasonal reserves as of year end the.
The general seasonal reserve of one 2% was comprised of 3% of the <unk> four rated loans and 60 basis points on the <unk> of the remaining loans.
Proactively managing our liabilities.
Equally important is managing our loan portfolio.
Maintaining frequent collaborative and constructive conversations with our Counterparties remains a top priority.
As a result, we have reduced leverage on a number of assets that are in more challenged property types over the course of 2023 and expect it will continue throughout 2024.
Mike McGillis (President and Chief Financial Officer): The General Cecil Reserve of 1.2% was comprised of 3% of the UPB on four rated loans and 60 basis points on the UPB of the remainder, proactively managing our liabilities as equally important as managing our loan portfolio. Maintaining frequent collaborative and constructive conversations with our counterparties remains a top priority. As a result, we have reduced leverage on a number of assets that are in more challenged property types during the course of 2023 and expect it will continue throughout 2024. In doing so, we continue to look for opportunities to deleverage the portfolio and reduce our cost of funding. During these times, we also believe it's prudent to adopt a higher for longer mindset as it relates to interest rates and employ a conservative approach to liquidity management. At December 31, we reported $238 million in total liquidity, which includes cash and approved and undrawn credit capacity. Unencumbered loans totaled $433 million, of which 93% were senior loans.
In doing so we continue to look for opportunities to deleverage the portfolio and reduce our cost of funding.
During these times. We also believe it is prudent to adopt a higher for longer mindset as it relates to interest rates and employ a conservative approach to liquidity management.
At December 31, we reported $238 million in total liquidity, which includes cash and approved and then growing credit capacity.
Unencumbered loans totaled $433 million of which 93% were senior loans.
In addition, the $147 million in New York mixed use our REO property.
It was also held unlevered.
Our portfolio is future funding commitment has steadily decreased over the course of 2023.
December 31, our future funding commitment was $1 1 billion compared to $1 9 billion at.
At year end 2022.
Looking to the year ahead, we plan to prioritize liquidity.
Mike McGillis (President and Chief Financial Officer): In addition, the $147 million New York mixed-use REO property was also held on leverage. Our portfolio's future funding commitment has steadily decreased over the course of 2023. At December 31, our future funding commitment was $1.1 billion compared to $1.9 billion at year end 2020. Looking to the year ahead, we plan to prioritize liquidity, meaning we'll favor liquidity preservation over deploying capital via originations until there's a shift in market dynamics. I would now like to open the call for questions. Operator? Ladies and gentlemen, if you'd like to ask a question, please press star 1. Star 1, on your telephone keypad, to withdraw your questions. Star followed by 2, and please also remember to unmute your microphone when it's your turn to speak.
Meaning we will favor liquidity preservation over deploying capital via originations until there is a shift in market dynamics.
I would now like to open the call for questions operator.
Yeah.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Thats Star one.
Your telephone keypad.
To withdraw your question Star followed by two and please also remember too and mutual microphone when you should turn to speak.
We do have our first question comes from Rick Shane from JP Morgan Rick Your line is now open.
Hey, guys. Thanks for taking my question this morning.
I'd love to talk about dividend policy at this point.
Given.
The distributable income in 'twenty three as you move into 'twenty four.
You are in a position where you don't have to pay a dividend as high as the current run rate.
Operator: We do have our first question, which comes from Rick Shane from JP Morgan. Rick, your line is now open. Hey, guys, thanks for taking my question this morning. Look, I'd love to talk about dividend policy at this point. You know, given the distributable income in 23, as you move into 24, you are in a position where you don't have to pay a dividend as high as the current run rate.
And I realize that there is.
Potentially an adverse signal to the market in terms of reducing the dividend, but the reality is there are also advantages to retain capital, particularly in environments like this.
Are you starting to see some opportunity is there a case to be made for a.
Rick Shane (JP Morgan): And I realize that there is, you know, potentially an adverse signal to the market in terms of reducing the dividend. But the reality is there are also advantages to retaining capital, particularly in environments like this, where you're starting to see some opportunity. Is there a case to be made for a
And I almost I am not sure what the right words are a bullish dividend cut where you are retaining capital. So that you can recycle it into high returns.
Rick Thanks for the question.
Thats a very good question.
When we if you recall, we cut our dividend back in the third quarter of 2023.
Richard Mack (Chief Executive Officer and Chairman): And I almost, I'm not sure what the right words are, a bullish dividend cut where you're retaining capital so that you can recycle it into a high return. Rick, thanks. Thanks for the question. And it's a very good question.
To try to bring it to a more sustainable level based on where we felt our.
Moderate term outlook was going to be distributable earnings.
Richard Mack (Chief Executive Officer and Chairman): You know, when we, if you recall, we cut our dividend back in the 3rd quarter of 2023 to try to bring it to a more sustainable level based on where we felt our moderate term outlook was going to be on distributed and The dividend is something we look at with our board every quarter. Part of that where, Pivots in the Portfolio, Market Opportunities, What We Need Liquidity, among others. But that'll be something that our team and our board will continue to evaluate. But you correctly highlight right now the cost of capital is very high. Capital, the the the the the the the the Got it. And understood. Look, it's a weird balancing act.
And the dividend is something we look at with our board every quarter.
And as part of that we're looking at.
Pivots in the portfolio market opportunities, what we need liquidity for.
Among other factors.
But that'll be something that our us and our board will continue to evaluate.
But you properly highlight right now the cost of capital is very high.
And retaining.
Retaining capital.
May be a good use of funds but.
Too early to see anything at this point in time.
Got it and understood look at it's a weird balancing act I totally get it in a very much appreciate the answer thank you.
Richard Mack (Chief Executive Officer and Chairman): I totally understand it and very much appreciate the answer. Thank you. Thank you. Our next question comes from Douglas Harter from UBS. Douglas, your line is now open. Great. Thank you.
Thanks, Rick.
Our next question comes from Douglas Harter from UBS Douglas Your line is now open.
Great. Thank you.
Douglas Harter (UBS): As you mentioned, you're looking to continue to prioritize liquidity. You know, are you thinking about that as, you know, not making new loans? Are you looking to continue to sell loans and reduce future funding commitments as we go through 24?
As you mentioned, you're looking to continue to prioritize liquidity.
Are you thinking about that as not making new loans or are you looking to continue to sell loans and reduce future funding commitments.
As we go through 'twenty four.
Mike McGillis (President and Chief Financial Officer): Thanks. Thanks, Doug. You know, I think we will likely not be making future funding commitments on new loans until... We've seen more repayment activity, probably, And I think we continue to see opportunities to... Execute, opportunistic lon Mark, And that's some www.brockvandervliet.com, This is something that we're constantly looking at, http://TheBusinessProfessor.com relative to future funding requirements on our https://www.youtube.com opportunities to sell, I think the focus really is on how do we continue to generate liquidity out of the market. Foley, repayments, loan sales. , Dr , Dr , Dr , Dr , Dr , Dr , Dr, And it's just a follow up, you know, how are you thinking about which assets to target sale for is that um assets where you think where you think you can get closest to par and therefore kind of selling some of the better quality loans or how are you thinking about which assets to consider selling? Yeah, I mean, it's it's a very granular decision.
Thanks, Thanks, Doug.
I think we will likely not be making future funding commitments on new loans until.
We see more repayment activity in the existing portfolio.
And I think we continue to see opportunities to.
Execute.
Opportunistic loan sales and the current market environment and Thats something network.
We sort of look at liquidity needs of the business.
Something that we're constantly looking at.
Across <unk>.
Across the portfolio every day.
Relative to future.
Ending requirements on our existing construction loans expected repayment activity opportunities to sell loans.
And in the marketplace. So it is.
I think the focus really is on how do we continue to generate liquidity out of the existing portfolio.
Through repayments loan sales.
Leveraging unlevered assets.
Until.
Where we start to look at new.
New origination opportunities.
And then just a follow up how are you thinking about which assets to target.
<unk> four is that.
Assets, where do you think.
Where do you think.
The closest to par and therefore kind of selling some of the better quality loans or.
Or how are you thinking about which assets to consider selling.
Yes, I mean, it's a very granular decision, it's very much loan by loan.
Mike McGillis (President and Chief Financial Officer): It's very much loan by loan. And, you know, back in the back, a quarter ago, we made a tough decision to sell on. It was a hard decision.
And back in the.
Back a quarter ago, we made a couple of quarters ago, we made a tough decision to sell a loan at a deep discount.
To the <unk>.
And it was a hard decision but.
Mike McGillis (President and Chief Financial Officer): But as we sort of looked at the opportunity on that loan and the underlying collateral, we felt it was best to take our lumps and move on. And there are other cases where, like in this case, we saw the opportunity to sell two loans that were very close to maturity. Pay off, and by combining it with another that had a significant future funding obligation, we were able to generate near-term liquidity, and de-leverage the balance. That checked a lot of boxes as well for us. But it's something that we look at regularly and, Thank you. Our next question comes from Sarah Bearcomb from BTIG. Sarah, your line is now open. Hey, everyone, thanks for taking the question.
As we sort of looked at the opportunity on that loan and the underlying collateral we felt it was best to.
Take our lumps and move on and there is other cases, where like in this case this quarter or are we.
We saw.
The opportunity to sell two loans that were very close to maturity.
Pay off and by combining it with another loan that had a significant future funding obligation we were able to generate near term liquidity deleverage the balance sheet.
And reduce future funding commitments so.
That checked a lot of boxes as well for us, but it's something that we look at regularly and it's going to be a case by case analysis.
Okay. Thank you.
Yeah.
Our next question comes from Sarah <unk> from BTG Sara Your line is now open.
Hey, everyone. Thanks for taking the question.
Sarah Bearcomb (BTIG): I know you've touched on liquidity a lot here, but just hoping we can dive in on the subject of liquidity, just given there are over a billion of unfunded commitments. Could you walk me through your sources of liquidity for funding these commitments, particularly the 673 million of additional liquidity sources you highlight in your supplementary. I just wanted to make sure I had those sources clear. I'm, You know, I think the supplemental liquidity, And I'm not sure which, uh, which I... I can walk you through our sources of liquidity. We have a number of, as well as Humbert S, www.larryweaver.com, and transcribed by https://otter.ai, and tagged by https://www.youtube.com. Thank you. Thank you. Thank you.
I touched on liquidity a lot here, but just hoping we can dive in.
On the subject of liquidity, just given theres over a $1 billion of unfunded commitments.
As you walk me through your sources of liquidity for funding these commitments, particularly the $673 million of additional liquidity sources you highlight that in your supplemental I just wanted to make sure I had those sources clear.
Okay.
Sure.
I think the the supplemental liquidity.
And I'm, not sure, which which item you are referring to.
I can walk you through our sources of liquidity, we have a number of near term.
Loan repayments and recent resolutions that we expect to occur.
Over the near to medium term.
As well as unencumbered assets, consisting of about just under $600 million.
Loans, primarily senior loans that we own on leverage.
On our REO portfolio that is also on Unlevered as well.
So.
The financings and then with respect to the financings in place.
Our financing commitments that we've already achieved.
Obtained on our construction loans with future funding obligations.
And those loans those future funding.
<unk> ability to draw on that future funding.
<unk> is in place and it's spread across a variety of.
Asset specific financings as well as.
Warehouse facilities, but primarily assets.
Yes.
Okay great.
And then just switching gears here for my follow up could you give us an idea.
For the magnitude of active loan modifications that you are negotiating in the near term here and have repo lender has been supportive of these modifications and if so can you give some color on the terms.
Yes, hi, thanks for the question.
Okay.
Sarah It's priyanka I'll jump in here.
So we are.
You see our watch list, we did migrate a handful of loans.
To force and those were really driven by exactly what you just pointed out which is near.
Near term maturities that have.
Occurring or have occurred and also modification discussions that we're having with different borrowers. So.
If you look at the watch list that gives you a good sense of active dialogue with borrowers in terms of the flavor of those modifications.
Very granular deal by deal dependent on market sponsorship all the things you would expect but we've really held firm to two.
Two different guiding principles, one is that we need a committed sponsor and that means both with capital and with <unk>.
Operational expertise so if a borrower is bringing some capital to the table that's meaningful to them and also demonstrating that they are adding value, we're going to work with that borrower.
We're in the business of lending not owning and Thats, what we want to do.
But the second guiding principle is we're not interested in kicking the can down the road, but we're not.
Agreeing to picking interest accruing partial interest we.
Wanted to make sure we're not exacerbating issues on thesis on the backend as we sit here today in our portfolio. We only had two small loans that have any kind of pick feature and thats only about 1% of our U P. B, So we're being very.
Very disciplined as we approach these modifications.
And then the last part of your question was as it relates to our financing Counterparties and they've generally been very supportive where we believe in the early and often when it comes to conversations with them.
Were making sure were.
Secondly, having a tri party negotiation and I want no surprises so.
Yes.
There depending on the situation and what their own hot buttons are will have discussions around that.
We really want to make sure that we're identifying the issues upfront.
Thank you.
Okay.
Yes, no problem.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Thats Star one on your telephone keypad.
Our next question comes from Jade Rahmani from K B W.
Your line is now open.
Hi, This is Jason inception on for Jade. Thank you for taking my questions.
It'd be helpful. If you could walk us through the change in overall liquidity and where it stands today.
ICU was around $430 million in third quarter.
$238 million at year end and then.
The February update it was around $215 million, so any any color on that would be helpful. Thank you.
Sure.
I would say that.
Yes.
We continue to work on resolutions of existing.
Loans in the portfolio.
To work through.
Potential repayments of some of those loans.
In addition.
We also continue to use available liquidity to deleverage and I think that's primarily what you've seen.
Between the end of.
<unk> 2023.
A week or so ago.
Combination of the dividend payment as well as paying.
Paying down leverage on our existing facilities.
Obviously, we've had.
Generated net liquidity from the loan sales, which we have.
Use that liquidity too.
Pay down borrowings.
Manner.
I think we're going to continue to see a lot more of this going forward where are we.
Continue to try to.
Worked through repayments on existing loans and execute opportunistic loan sales across the portfolio and use that liquidity due.
To deleverage the balance sheet.
Great.
Thank you and just to switch gears could you comment on the seasonal reserve.
It was flat quarter over quarter over quarter, despite the increase in risk for loans.
Also the earnings presentation shows that general reserves declined on those risk for and on the 1% to three rated loans. So.
There would be helpful. If you could comment on that.
Sure.
<unk> see some reserve staying relatively flat despite the increase in four rated loans is a function of how we how.
How we have.
Built out our seasonal model so those loans that migrated into the four category. We had even though there were three rated loans, we had already applied a projected loss factor multiplier of those given the underlying property type.
And the.
Of those of those assets so that that has already been captured in prior.
Prior reserves.
And then with respect to the.
The general.
Seasonal reserve, that's very much a function of a lot of the macroeconomic data that way.
That goes into the model.
And.
Really from.
Third quarter to fourth quarter there were.
Sort of favorable movements in.
Some of the historical loss history, I know it sounds a little counterintuitive, but that's what the data set.
That was a relatively small impact.
Great. Thank you very much.
We currently have no further questions. So I would like to hand, the call back to Richard Becker for closing remarks over to you.
Thank you.
Thanks to all of you for joining us and for your insightful questions as always let.
Let me summarize some of the questions in the call by saying that this is of course, a balancing act on liquidity offense having.
Having capital deployed and Delevering in a difficult environment.
We do see opportunities to lend in this mark, but we want to see the real estate capital market shows stability <unk>.
The benefit of being low Levered is that we are likely able to increase leverage and pivot pivots offense. Once we have confidence in market stability.
In the interim and as always it is a bad asset managing.
We are in the weeds and every asset that we are making sure that the borrowers do the right thing.
And if they do not we are ready to do so we are ready to step in.
And to do so and we believe that this.
Principal.
Is highly valued by our lending Counterparties and.
And we are in constant.
Transparent communication with them.
I think that has made a tremendous difference for our from our business from day one.
So while this is a tough time.
We know how to work through it and.
I think we are starting to look forward to.
A different capital market, but until we see that.
We're going to keep assuming that things are going to be higher for longer and difficult for longer.
And look with optimism towards a change in the market.
So we thank you all for your support and for joining us today.
And we'll look forward to talking to you all again soon.
Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Thank you.
Yeah.
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Okay.
Yes.
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