Q1 2024 Granite Point Mortgage Trust Inc Earnings Call
Paul: Good morning. My name is Paul, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Granite Point Mortgage Trust First Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. Please note that today's call is being recorded. I would now like to turn the call over to Chris Petta, with investor relations for Granite.
Good morning, My name is Paul and I will be your conference facilitator at this time I would like to welcome everyone to the granite point mortgage Trust's first quarter 'twenty 'twenty four financial results conference call all participants will be on a listen only mode.
Chris Petta: After the Speakers' remarks, there will be a question and answer period. Please note today's call is being recorded.
Paul: I'd now like to turn the call over to Chris Petta with Investor Relations for granite point.
Chris Petta: Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's first quarter 2024 financial results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer, Marcin Urbaszek, our Chief Financial Officer, Steve Alpart, our Chief Investment Officer and Co-Head of Originations, Peter Morrell, our Chief Development Officer and Co-Head of Originations, and Steve Plus, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of marketing conditions and review our current business activities.
Chris Petta: Thank you and good morning, everyone. Thank you for joining our call to discuss granite Point's first quarter 'twenty 'twenty four financial results with me on the.
Chris Petta: Our call. This morning are Jack Taylor, our President and Chief Executive Officer, Marcia Neuropathic, our Chief Financial Officer T that part, our Chief investment Officer, and co head of originations heat and morale Chief Development Officer, and co head of originations and steep plus our chief operating officer.
Chris Petta: After my introductory comments Jack will provide a brief recap of market conditions and review our current business activities. He that part will discuss our portfolio and Marcia will highlight key items from our financial results and capitalization.
John A. Taylor: Steve Alpart will discuss our portfolio, and Marcin will highlight key items from our financial results and capitalization. The press release, financial tables, and earnings supplemental associated with today's call were filed yesterday with the SEC and are available in the investor relations section of our website, along with our Form 10-Q. I would like to remind you that remarks made by management during this call and the supporting slides may include forward-looking statements, which are uncertain and outside of the company's control.
John A. Taylor: The press release financial tables and earnings supplemental associated with today's call were filed yesterday with the S E T.
John A. Taylor: On the Investor Relations section of our website, along with our Form 10-Q.
John A. Taylor: I would like to remind you that remarks made by management. During this call and the supporting slides may include forward looking statements, which are uncertain and outside of the company's control.
John A. Taylor: Forward-looking statements reflect our views regarding future events and are subject to some uncertainties that could cause actual results to differ materially from expectations. Please see our filings with the SEC for a discussion of some risks that could affect our results. We do not undertake any obligation to update any forward-looking statements. We will also refer to non-GAAP measures on this call. This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in our earnings release and slides, which are available on our website. I will now turn the call over to Jeff.
John A. Taylor: Forward looking statements reflect our views regarding future events and are subject to uncertainties that could cause actual results to differ materially from expectations. Please see our filings with the U S. D. C for a discussion of some risks that could affect our results. We do not undertake any obligation to update any forward looking statements.
Jeff: We will also refer to non-GAAP measures on this call.
Jeff: This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Jeff: A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in our earnings release and slides, which are available on our website I will now turn the call over to Jack.
John A. Taylor: Thank you, Chris, and good morning, everyone. We would like to welcome you and thank you for joining us for Granite Point's first quarter 2024 earnings call. The first few months of 2024 have resulted in diverging trends, with the ongoing strength of the overall economy and a healthy rebound in the equity and fixed income markets. However, the commercial real estate sector continues to be pressured by high interest rates, duly suppressed transaction volumes, some fundamental shifts such as the work-from-home trends, and higher costs such as materials and labor impacting properties that require some level of capital expenditure.
Jeff: Thank you, Chris and good morning, everyone. We would like to welcome you and thank you for joining us for granite Point's first quarter 'twenty 'twenty four earnings call.
John A. Taylor: The first few months of 'twenty 'twenty, four who resulted into Virgin trends with the ongoing strength of the overall economy and a healthy rebound in the equity and fixed income markets.
John A. Taylor: While the commercial real estate sector continues to be pressured by high interest rates do you see you suppress transaction volumes some fundamental shifts such as the work from home trends and higher costs, such as materials labor impacting properties that require some level of capital expenditure.
John A. Taylor: The year began with a more upbeat sentiment in the commercial real estate market, fueled by expectations of six to seven interest rate cuts by the Fed over the course of 2024 and an anticipated rebound in real estate transaction equity, which, along with pent-up capital demand, contributed to a tightening of credit spreads and a strong pickup in CMBS issuers. However, since then, higher-than-expected inflation readings and stronger employment reports have lowered the consensus estimates for interest rate cuts to a hope for one-to-two cuts by year-end, resulting in higher interest rates across the curve and with uncertainty and sentiment in the commercial real estate markets notably worsening in the past several weeks.
John A. Taylor: The year began with a more upbeat sentiment in the commercial real estate market fueled by expectations of six to seven interest rate cuts by the fed over the course of 'twenty 'twenty four.
John A. Taylor: And then the anticipated rebound in real estate transaction activity, which.
John A. Taylor: Along with pent up capital demand contributed to a tightening of credit spreads and a strong pick up in C. M. P. S issuance.
John A. Taylor: However, since then higher than expected inflation readings and stronger employment reports have lowered the consensus estimate for interest rate cuts to hope for one to two cuts by year end, resulting in a higher interest rates across the curve and with uncertainty and sentiment in the commercial real estate markets, notably worsening in the past several weeks.
John A. Taylor: Yeah.
John A. Taylor: We believe that the path of interest rates will continue to be the main factor affecting the activity in and the performance of the commercial real estate floating rate low market in the near to medium term. We expect the prolonged elevated rates will further impact the real estate market in the near term by continuing to suppress transaction activity and property values and by putting more pressure on certain borrowers who may be reluctant to support their properties, especially those with additional capital needs in more challenged markets, and may instead choose to sell the properties rather than continue to wait for a lower cost of capital.
John A. Taylor: We believe that the path of interest rates will continue to be the main factor affecting the activity and the performance of the commercial real estate floating rate loan market in the near to medium term.
John A. Taylor: We expect a prolonged elevated rates will further impact the real estate market in the near term by continuing to suppress transaction activity and property values and by putting more pressure on certain borrowers who may be reluctant to support their properties, especially those with additional capital needs and more challenged markets and may instead choose to sell the properties.
John A. Taylor: Rather than continue to wait for a lower cost of capital.
John A. Taylor: While we are seeing this in the market and in our portfolio, we want to note that most of our borrowers are continuing to support their property. However, driven by some of these dynamics and the change in sentiment within the commercial real estate market, we lowered the risk ratings on several of our loans and increased our CECL reserves to reflect the market uncertainty and ongoing pressure on property values. Our GAAP results include additional credit loss provisions, mainly related to the risk-rated five loans, which increased our overall first quarter CECL reserve to 7.5% of total commitments from about 4.7% last quarter.
Speaker Change: Well, we are seeing this in the market and in our portfolio. We want to note that most of our borrowers are continuing to support their properties.
John A. Taylor: However, driven by some of these dynamics and the change in sentiment within the commercial real estate market, we lowered the risk ratings on several of our logs and increased our Cecil reserves to reflect the market uncertainty and ongoing pressure on property values.
John A. Taylor: Our GAAP results include additional credit loss provisions mainly related to the risk rated five bonds, which increased our overall first quarter seasonal reserve to seven 5% with total commitments from about four 7% last quarter.
John A. Taylor: Our five-rated loans are in various stages of their respective resolutions, with some expected to occur in the nearer term, while the timelines of others may extend longer. Although lending activity is currently subdued, we anticipate that improving market liquidity and opportunistic capital actively looking for investments should help drive our non-performing loan resolutions over the course of this year, though timing remains difficult to predict. We have visibility on resolutions for most of our risk-rated 5 loans, which may occur over the next several quarters. We believe we could resolve some 150 to 200 million of these loans in the near term.
John A. Taylor: Our five rated loans are in various stages of their respective resolutions with some expected to occur in the near term while the timeline. So if others may extend longer.
John A. Taylor: Although we see lending activities currently subdued we anticipate that improving market liquidity and opportunistic capital actively looking for investments should help drive our nonperforming loan resolutions over the course of this year.
John A. Taylor: Timing remains difficult to predict.
John A. Taylor: We have visibility on resolutions for most of our risk weighted five logs, which may occur over the next several quarters.
John A. Taylor: We believe we could resolve some 150 to 200 billion of these loans in the near term.
John A. Taylor: Most of the credit impact on our portfolio is driven to varying degrees by the office exposure, including on some where the overall value of the property may currently be mainly concentrated in retail or multifamily, with an underperforming office. While office leasing remains slow, we have seen some improvement in office leasing activity in select markets. Multifamily fundamentals remain generally favorable.
John A. Taylor: Most of the credit impacts on our portfolio was driven to varying degrees by the office exposure, including on some where the overall values. The property may currently be mainly concentrated in retail or multifamily with an underperforming office component.
John A. Taylor: While the office leasing remains slow we have seen some improvement in office leasing activity in select markets all.
John A. Taylor: However, we have seen some pressure on property values in this sector resulting from higher interest rates and higher cap rates. While there is meaningful liquidity in the apartment market, even properties with strong cash flow are not immune from the effects of higher rates, and we are likely to realize modest losses on select multifamily loan resolutions where sponsors have decided to transact in the near term. That said, we do not anticipate these select multifamily credit events to be very material in the context of our portfolio.
John A. Taylor: Multifamily fundamentals remain generally favorable however, we have seen some pressure on property values in this sector, resulting from higher interest rates and higher cap rates.
John A. Taylor: There's meaningful liquidity and the apartment market even properties with strong cash flow are not immune from the effects of higher rates and we are likely to realize modest losses on select multifamily loan resolutions, where sponsors have decided to transact in the near term.
John A. Taylor: That said, we do not anticipate T select multifamily credit events to be very material in the context of our portfolio.
John A. Taylor: We remain highly focused on our asset management activities and moving through this credit cycle while maximizing economic outcomes for the business and our shareholders. We believe that the process of repositioning our portfolio, even though it results in additional credit reserves and associated losses, will position us to return to our core business of lending so we can grow the portfolio and improve our run-rate profitability over time and support our total shareholder return.
John A. Taylor: We remain highly focused on our asset management activities and moving through this credit cycle, while maximizing economic outcome for the business and our shareholders. We.
John A. Taylor: We believe that the process of repositioning our portfolio, even though it results in additional credit reserves and associated losses will position us to return to our core business of blending. So we can grow the portfolio and improve our run rate profitability overtime and support our total shareholder return.
John A. Taylor: Our strategy for this year reflects our ongoing conservative approach to the market, with an emphasis on maintaining higher liquidity and proactively managing our portfolio to protect our balance. We benefit from our team's decades of experience successfully managing through various real estate cycles and market volatility. Over the course of the last couple of years, we have materially reduced our leverage through paying off corporate debt and deleveraging our loan portfolio. Modify the Resolve Mini Loan and realize healthy prepayment.
John A. Taylor: Our strategy for this year reflects our ongoing conservative approach to the market with an emphasis on maintaining higher liquidity and proactively managing our portfolio to protect our balance sheet.
John A. Taylor: We benefit from our team has decades of experience successfully managing through various real estate cycles and market volatility.
John A. Taylor: Over the course of the last couple of years, we have materially reduced our leverage through paying off corporate debt and deleveraging our loan portfolio.
John A. Taylor: Modified and resolved many loans.
John A. Taylor: And realized healthy prepayment levels.
John A. Taylor: We firmly believe that during challenging periods, emphasizing balance sheet stability is the prudent and effective strategy to navigate market uncertainty and to reposition the business for future growth opportunities, even though such steps pressure the company's returns and profitability in the near term. However, recent market consensus points to the bottoming of the property value decline. While the future path of macro trends remains uncertain, and fundamentals across property types continue to be uneven, and the timing of interest rate cuts will drive the path of recovery for commercial real estate, we agree that once there is more visibility on the cost of capital in the market, sentiment and activity should improve significantly, particularly later in the year, all of which will be aided by the large amounts of capital currently available on the sidelines.
John A. Taylor: We firmly believe that during challenging periods, emphasizing balance sheet stability as the prudent and effective strategy to navigate market uncertainty and to reposition the business for future growth opportunities, even though such steps pressure the company's returns and profitability in the near term.
John A. Taylor: Recent market consensus points to the bottoming of the property value declines of.
John A. Taylor: Well the future path of macro trends remains uncertain in fundamentals across property types continued to be uneven and the timing of its interest rate cuts will drive the path of recovery for commercial real estate. We agree that once there is more visibility on the cost of capital market sentiment and activity should improve significantly, particularly later in the year.
John A. Taylor: All of which will be aided by the large amounts of capital currently available on the sidelines.
John A. Taylor: We will continue working with our borrowers to facilitate repayments and resolutions of our risk-rated FIBOs, given their material effect on our current returns. We believe that these actions, over time, will help improve our run-rate profitability while positioning us to take advantage of attractive investment opportunities in the future. I would now like to turn the call over to Steve Alpart to discuss our portfolio activities in more detail.
Speaker Change: We will.
John A. Taylor: When you're working with her powers to facilitate repayments and resolutions of our risk weighted five bonds given their material effect on our current returns.
Stephen Alpart: We believe that these actions over time will help improve our run rate profitability, while positioning us to take advantage of attractive investment opportunities in the future.
Stephen Alpart: I would now like to turn the call over to Steve Halper to discuss our portfolio activities in more detail.
Stephen Alpart: Thank you, Jack, and thank you all for joining our call this morning. We ended the first quarter with total portfolio commitments of $2.8 billion and an outstanding principal balance of about $2.7 billion, with about $134 million of future funding, which accounts for only about 5% of total commitments. Our portfolio remains well-diversified across regions and property types and includes 71 loan investors, with an average size of about 38 million and a weighted average stabilized LTV at origination of 63.5%.
Stephen Alpart: Thank you Jack and thank you all for joining our call. This morning.
Stephen Alpart: We ended the first quarter with total portfolio commitments of $2 8 billion and an outstanding principal balance of about $2 7 billion with about $134 million of future fundings, which account for only about 5% of total commitments.
Stephen Alpart: Our portfolio remains well diversified across regions and property types and include 71 loan investments with an average size of about $38 million and a weighted average stabilized LTV at origination of 63, 5%.
Stephen Alpart: Our realized portfolio yield for the first quarter was about 7.7% net of the impact of the non-accrual loans, which we estimate to be about 175 basis points for the first three months of the year. During the first quarter, we funded about $17 million of existing loan commitments and UpSizes and realized about $35 million of loan repayments and paybacks. So far in the second quarter, we have funded about $3 million of existing loan commitments and realized about $13 million in loan payments out.
Stephen Alpart: Our realized portfolio yield for the first quarter was about seven 7% net of the impact of the nonaccrual loans, which we estimate to be about 175 basis points for the first three months of the year.
Stephen Alpart: During the first quarter, we funded about $17 million of existing loan commitments and upsizing and realized about $35 million of loan repayments and paydowns.
Stephen Alpart: So far in the second quarter, we have funded about $3 million of existing loan commitments and realize about 13 million in loan pay downs.
Stephen Alpart: Given the macro uncertainty, high interest rates, and a meaningful shift in market sentiment, particularly over the last few weeks, we anticipate our volume of loan repayments to be lower than the $725 million we realized in 2020. We expect our portfolio balance to trend lower in the coming quarters as we maintain our conservative stance and continue to prioritize maintaining higher levels of liquidity and working diligently to resolve our risk-rated five loans.
Stephen Alpart: Given the macro uncertainty high interest rates and a meaningful shift in market sentiment, particularly over the last few weeks, we anticipate our volume of loan repayments to be lower than the 725 million we realized during 2023.
Stephen Alpart: We expect our portfolio of balance to trend lower in the coming quarters as we maintain our conservative stance and continue to prioritize maintaining higher levels of liquidity and working diligently to resolve a risk rated five logs.
Stephen Alpart: The change in market sentiment, expectations for higher costs of capital, and lower property values that Jack just discussed contributed to the risk rating downgrade of certain of our loans and higher provisions for credit losses during the quarter. During Q1, we downgraded five loans to a risk rating of five, which we will briefly highlight. The first is a $94 million mixed-use office and retail loan in New York City where the sponsor has been pursuing a recapitalization plan, potential JV with a new partner, or a sale of the property.
Stephen Alpart: The change in market sentiment expectations for higher cost of capital and lower property values that Jack just discussed has contributed to the risk rating downgrades of certain of our allowance and higher provisions for credit losses during the quarter.
Stephen Alpart: During Q1, we downgraded five loans to a risk rating of five which means we will briefly highlight.
Stephen Alpart: The first is a $94 million mixed use office and retail loan in New York City, where the sponsor had been pursuing a recapitalization plan potential JV with a new partner or sale of the property.
Stephen Alpart: The recapitalization did not materialize, and over the course of a quarter, the sponsor made the decision to instead sell the building. The sale process is in its early stages, and we are in active discussions with the borrower about next steps. The next one is a $26 million office loan in the Boston CBD, where the property has been impacted by challenging office leasing dynamics and low liquidity in the office sector. The sponsor has been exploring a potential residential conversion opportunity for the property. They may also choose to list it for sale in the near term, and we are working with them on potential resolution options.
Stephen Alpart: The recapitalization did not materialize and over the course of the quarter. The sponsor made the decision to instead sell the building.
Stephen Alpart: The sale process is in its early stages and we are in active discussions with the borrower about next steps.
Stephen Alpart: Next one is a $26 million office loan in the Boston CBD, where the property has been impacted by challenging office leasing dynamics and low liquidity in the office sector.
Stephen Alpart: The sponsor has been exploring a potential residential conversion opportunity for the property.
Stephen Alpart: It may also choose to listed for sale and then in the near term and we're working with them on potential resolution options.
Stephen Alpart: The remaining three include a $51 million mixed... Multi-Family Event Space Office Loan in Pittsburgh, a $34 million multi-family loan in Chicago, and a $12 million multi-family loan in Milwaukee. The borrowers on these three loans have been conducting sales processes for their properties to repay our loans. The recent interest rate and capital markets environment has resulted in an expectation that the ultimate sale proceeds on all three will likely come in below our loan amounts, which in turn resulted in our impairment assessments as of March 31st.
Stephen Alpart: The remaining three include a $51 million mixed use multifamily event space office alone in Pittsburgh, a $34 million multifamily loan in Chicago, and a $12 million multifamily loan in Milwaukee.
Stephen Alpart: The borrowers on these three loans have been conducting sales processes for their properties to repay our allowance. The recent interest rate and capital markets environment has resulted in an expectation that the ultimate sale proceeds on all three will likely come in below our loan amounts, which in turn resulted in our impairment assessments as of March 31st.
Stephen Alpart: In addition, during the first quarter, we also downgraded three other office loans with an aggregate UPB of about $90 million to a risk rating of 4 as the collateral properties have been impacted to varying degrees by office leasing challenges and reduced liquidity for office properties generally. The risk rating downgrades, which were partially offset by several upgrades to loans where the business plan has been achieved, resulted in our portfolio weighted average risk rating modestly increasing to 3.0 as of March 31st, compared to 2.8 in the prior period.
Stephen Alpart: In addition, during the first quarter. We also downgraded three other office loans with an aggregate U P. B of about $90 million to a risk rating of four as the collateral properties have been impacted to varying degrees by office leasing challenges and reduced liquidity for office properties generally.
Stephen Alpart: The risk rating downgrades, which were partially offset by several upgrades to loans, where the business plan has been achieved resulted in our portfolio weighted average risk rating modestly increasing to 3.0 as of March 31, compared to two eight in the prior period.
Stephen Alpart: With respect to our other risk-rated five loans, most of them are in various stages of their respective resolution processes, which remain ongoing. The mixed-use retail and office property collateralizing our $84 million loan in Baton Rouge, Louisiana, is in a sales process, and though the ultimate timing and outcome remain hard to predict in this market, we hope to reach a potential resolution in the coming months or quarters. Similarly, the office property with a retail component that secures our $81 million loan in Chicago is also in the process of being sold, which could happen in the intermediate term.
Stephen Alpart: With respect to our other risk rated five loans most of them are in various stages of their respective resolution processes, which remain ongoing.
Stephen Alpart: The mixed use retail and office property.
Stephen Alpart: Lateral wising are $84 million alone in Baton Rouge, Louisiana is in a sales process and though the ultimate timing and outcome remain hard to predict in this market, we hope to reach a potential resolution in the coming months or quarters.
Stephen Alpart: Similarly, the office property with a retail component that's of course, our $81 million alone in Chicago is also in the process of being sold which could happen in the intermediate term.
Stephen Alpart: The sale process for the Minneapolis Hotel, securing our $28 million loan, remains ongoing and may take some time given the local market dynamics. We are in discussions with the sponsor on the $37 million L.A. mixed-use office and retail loan as they are evaluating various leasing opportunities for the property. We are actively managing our one REO office asset in Phoenix while also marketing it for potential sale later this year. The office property securing our $36 million risk-rated loan in Massachusetts is likely to be transferred to REO in the coming months through a negotiated deed in lieu.
Stephen Alpart: The sale process for the Minneapolis hotel, securing our $28 million alone remains ongoing and May take some time, given the local market dynamics.
Stephen Alpart: We are in discussions with the sponsor under $37 million L. A mixed use office and retail down as they are evaluating various leasing opportunities for the property.
Stephen Alpart: We are actively managing our one Oreo office asset in Phoenix, while also marketing it for potential sale later this year.
Stephen Alpart: The office property, securing our $36 million for risk rated loan in Massachusetts is likely to be transferred to Oreo in the coming months through a negotiated deed in blue.
Stephen Alpart: The asset has positive cash flow, and we intend to maximize the value of the asset over time. Despite the low real estate transaction volumes overall, there is some increased liquidity in the market as buyers believe we're getting close to the bottom in valuations, have capital to deploy, and are beginning to invest in the long-term recovery. Our strategies for these loans are likely to include property sales, sometimes with staple financing from Granite Point, loan sales, discounted payoffs, loan restructuring, and select transfers to REO where we see potential for medium-term value upside, all with the goal of maximizing economic outcomes for the company.
Stephen Alpart: The asset has positive cash flow and we intend to maximize the value of the asset over time.
Stephen Alpart: Despite the low real estate transaction volumes overall, there is some increased liquidity in the market as buyers believe we're getting close to the bottom and valuations have capital to deploy and are beginning to invest in the long term recovery.
Stephen Alpart: Our strategies for these loans are likely to include property sales, sometimes with staple financing from granite point loan sales just kind of pay offs loan restructuring and select transfers to Oreo, where we see potential for medium term value upside all with the goal of maximizing economic maximizing economic outcomes.
Stephen Alpart: The company.
Stephen Alpart: Timing is hard to predict in this type of market, but given the current macro backdrop and ongoing discussions with our borrowers, we believe we could resolve many of these assets by the end of 2024, with some potentially taking longer to resolve given more challenging local market dynamics. Our goal is to balance the timing of resolutions, realized losses, and improve the company's run rate profitability by repaying higher cost financing and or returning some of these assets to accrual status on a delevered basis with new equity sponsors supporting the property.
Stephen Alpart: It's hard to predict in this type of market, but given the current macro backdrop in ongoing discussions with our borrowers. We believe we could resolve many of these assets by the end of 2024 with some potentially taking longer to resolve given more challenging local market dynamics.
Stephen Alpart: Our goal is to balance the timing of resolutions realized losses and improving the company's run rate profitability by repaying higher cost financing and we're returning some of these assets to accrual status on a delivered basis with new equity sponsors supporting the properties.
Stephen Alpart: Despite the headwinds impacting the loans we've just discussed, we remain pleased that most of our high-quality institutional sponsors continue to support their properties and are progressing on their business plans. While we have a lot of work to do, we look forward to resolving our five rated loans and REO asset and returning to our core business as soon as possible. I will now turn the call over to Marcin for a more detailed review of our financial results and capitalization.
Stephen Alpart: Despite the headwinds impacting the loans. We've just discussed we remain pleased that most of our high quality institutional sponsors continue to support their properties and are progressing on their business plans. While we have a lot of work to do we look forward to resolving our five rated loans and Oreo asset and returning to our core business as soon as <unk>.
Marcin: Hospital I will now turn the call over to Martin for a more detailed review of our financial results and capitalization.
Marcin Urbaszek: Thank you, Steve. Good morning, everyone, and thank you for joining us today.
Marcin: Thank you Steve Good morning, everyone and thank you for joining us today.
Marcin Urbaszek: Yesterday afternoon, we reported a first quarter gap net loss of $77.7 million, or $1.53 per basic share, which includes a provision for credit losses of $75.6 million, or $1.49 per basic share, mainly related to certain risk-graded five loans. Distributable earnings for the quarter were $1.3 million, or $0.03 per basic share, and were mainly impacted by non-accrual loans, which pressured interest income by approximately $12 Our book value at March 31st was $11.14 per common share, a decline of about $1.77 per share from Q4, which was primarily due to the loan loss provision mentioned earlier.
Marcin Urbaszek: Yesterday afternoon, we reported a first quarter GAAP net loss of $77 $7 million or $1 53 per basic share which.
Marcin Urbaszek: Which includes a provision for credit losses of $75 $6 million or $1 49 per basic share mainly related to certain risk rated five loans.
Marcin Urbaszek: Distributable earnings for the quarter were $1 $3 million or three cents per basic share and were mainly impacted by non accrual loans, which pressured interest income by approximately $12 million or 24 cents per basic share.
Marcin Urbaszek: Our book value at March 31 was $11 14 per common share a decline of about $1 77 per share from Q4, which was primarily due to the loan loss provision mentioned earlier.
Marcin Urbaszek: Our CECL reserve at quarter end was about $213 million or $4.17 per share, representing 7.5% of our portfolio commitments, as compared to $137 million or 4.7% of total commitments last quarter. The change in our CECL reserve was mainly related to the additional provisions on loans that were newly risk-graded 5 this quarter. Our general reserve increased by about $12 million in Q1 due to macro assumptions, expectations for ongoing challenges in the commercial real estate market, and pressure on property values.
Marcin Urbaszek: Our seasonal reserve at quarter end was about $213 million or $4 17 per share.
Marcin Urbaszek: Representing seven 5% of our portfolio of commitments as compared to $137 million or four 7% of.
Marcin Urbaszek: Total commitments last quarter.
Marcin Urbaszek: The change in our seasonal reserve was mainly related to the additional provisions on loans that were newly risk rated five this quarter.
Marcin Urbaszek: Our general reserves increased by about $12 million in Q1, due to macro assumptions expectations for ongoing challenges in the commercial real estate market and pressure on property values.
Marcin Urbaszek: Over 70% of our total CESA reserve, or $155 million, is allocated to select individually assessed loans, which implies an average estimated loss severity of about 29% of those assets. As of quarter end, we had about $690 million of loans on non-accrual status, most of which are in various stages of resolution. The additional five loans that were placed on Non or Cruel as of March 31st accounted for about $4 million of interest income realized during the first quarter.
Marcin Urbaszek: Over 70% of our total seasonal reserve or $155 million is allocated to select individually assessed loans, which implies an average estimated loss severity or about 29% of those assets.
Marcin Urbaszek: As of quarter end, we had about $690 million of loans on non accrual status most of which are in various stages of resolutions.
Marcin Urbaszek: The additional five loans that were placed on nonaccrual as of March 31st.
Marcin Urbaszek: Counted for about $4 million of interest income realized during the first quarter.
Marcin Urbaszek: Given the impact our non-performing loans have on the company's run-rate profitability, we anticipate our earnings to be below our dividend in the near term. As we make progress on resolving these assets, we believe the company's profitability should improve over time, though the exact timing remains difficult to predict in this uncertain market. Turning to liquidity and capitalization, we ended the quarter with over $155 million of unrestricted cash, and our total leverage modestly increased to 2.3 times in Q1 compared to 2.1 times in Q4, mainly due to a lower equity balance impacted by the higher CSO reserve. Our funding mix remains well-balanced, and we enjoy continued support from our lenders, highlighting our longstanding relationships in the market. As of a few days ago, we had about $130 million in cash.
Marcin Urbaszek: Given the impact our nonperforming loans have on the company's run rate profitability, we anticipate our earnings to be below our dividend in the near term as.
Marcin Urbaszek: As we make progress on resolving these assets, we believe the company's profitability should improve over time.
Marcin Urbaszek: Though the exact timing remains difficult to predict in this uncertain market.
Marcin Urbaszek: Turning to liquidity and capitalization, we ended the quarter with over $155 million of unrestricted cash.
Marcin Urbaszek: And our total leverage modestly increased to two three times in Q1 compared to two one times in Q4, mainly due to a lower equity balance impacted by the higher seasonal reserves.
Marcin Urbaszek: Our funding mix remains well balanced and we enjoy continued support from our lenders highlighting our long standing relationships in the market.
Marcin Urbaszek: A few days ago about $130 million in cash.
Operator: I would like to thank you again for joining us today, and we will now open the call for questions. Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: I would like to thank you again for joining us today, and we will now open the call for questions.
Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants, you can see your equipment.
Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Operator: You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.
Operator: It may be necessary to pick up your handset before pressing the star 2. One moment, please, while we poll for questions. Thank you. Our first question is from Stephen Laws with Raymond James. Please proceed with your question.
Operator: Yeah.
Operator: Okay.
Operator: Okay.
Stephen Albert Laws: Thank you our first question is from.
Stephen Albert Laws: Stephen laws with Raymond James. Please proceed with your question.
Stephen Albert Laws: Hi, good morning. Steve, I wanted to circle back to something you mentioned specifically around Pittsburgh, Chicago, and Milwaukee, the three new, you know, Two multi-family, one mixed-use multi, and it went from three to five during the quarter. Can you give us a little more detail on that? Was it a situation where they were going to defend and buy caps, and then rates moved, and they changed their strategy on protecting assets? What caused those double downgrades during the quarter?
Stephen Albert Laws: Hi, good morning.
Stephen Albert Laws: Steve wanted to circle back to something you mentioned, specifically around Pittsburgh, Chicago and Milwaukee, the three new.
Stephen Albert Laws: Two multi one mixed use <unk>.
Stephen Albert Laws: Went from three to five during the quarter can you give us a little more detail on that was it a situation where they were going to defend and buy caps and then rates moved and they changed their their biology on protecting assets kind of what what caused those double downgrades during the quarter.
Stephen Alpart: Sure, Steve, good morning. Thanks for joining our call this morning. Yeah, look, these two loans had some similarities between them. They were good sponsors, both very far along on their business plans, and the properties were at or near stabilization.
Stephen Albert Laws: Sure Steve Good morning, Thanks for joining our call. This morning.
Steve: These were the these these two loans had some similarities to them.
Steve: They are good sponsors both very far along on business plan the properties were at or near stabilization.
Stephen Alpart: Each of them is involved in active bidding and sales processes. The Milwaukee one is pretty far along. They're both kind of in the middle of the process, if you will.
Stephen Alpart: Each of them are.
Stephen Alpart: All are involved and active bidding and sales processes.
Stephen Alpart: The Milwaukee, one is pretty far along and they are both kind of in the middle of the process. If you will.
Stephen Alpart: And as it was really a function of, as bids began to come in, it looked like they were coming in below the loan amount, so they came in a little bit below expectations. I think I would say that the Chicago asset, the investment sales market there has been a little soft. The Milwaukee deal is primarily multifamily, and it has some ground floor retail. It's partially leased, not fully leased. So I wouldn't, but those are the reasons why we moved it to a five, mainly because we thought the bids were coming in below the loan amount. We wouldn't generalize too much from these loans. In general, we're pretty comfortable with the fundamentals we're seeing in our multifamily loans, but it was mainly just a function of where we think the bids are going.
Stephen Alpart: And as it was really a function of as bid began to come in.
Stephen Alpart: It looked like they were coming in below.
Stephen Alpart: Below the loan amount so they came in a little bit below expectations.
Stephen Alpart: I think I would say that the Chicago asset the investment sales market there has been a little soft.
Stephen Alpart: The Milwaukee deal is primarily multifamily has some ground floor retail with partially leased not fully leased.
Stephen Alpart: So I wouldn't so those are the reasons why we moved it from a bumping up to a five mainly because we thought the bids are coming in below the loan amount.
Stephen Alpart: We wouldnt generalize too much from these these loans.
Stephen Alpart: In general what we're seeing we're pretty comfortable with the fundamentals, we're seeing in our multifamily loans, but it was mainly just a function of.
Stephen Alpart: Where we think the bids are coming in.
Marcin Urbaszek: Appreciate that. And then, Marcin, I wanted to follow up on the comments on CECL, and I believe Steve may have also mentioned you don't expect, you know, significant losses on the multi where you do take them. But, you know, roughly 30% reserve level as far as specific reserves on those five rated loans. You know, could you maybe bifurcate that? You know, how do you allocate that to the specific reserve percentage of the office loans versus the, you know, the remaining specific reserves against the non-office components?
Speaker Change: I appreciate that and then Marcel or to follow up on the comments on.
Marcin Urbaszek: Seasonal and I believe Steve May have also mentioned you don't expect significant losses on the multi where you do take them, but roughly 30%.
Marcin Urbaszek: Reserve level as far as specific reserves on those those five rated loans.
Marcin Urbaszek: Could you maybe bifurcate that.
Marcin Urbaszek: How do you allocate that to the specific reserves that percentage of the office loans versus the remaining specific reserves against the non office component.
Marcin Urbaszek: Morning, Stephen. Thanks for joining us.
Marcin Urbaszek: Sure Good morning, Stephen Thanks for joining us.
Marcin Urbaszek: I'd say it really varies by by loan, but I think.
Marcin Urbaszek:
Marcin Urbaszek: Yeah, I would say it really varies by loan, but I think, generally, office impairments are higher than multifamily. It's hard to get to specifics on particular assets, but I would say the majority of the reserve, on the specific reserve, is related to office issues and meaningfully less on multifamily.
Marcin Urbaszek: Generally office office impairments are higher than.
Marcin Urbaszek: And then multifamily.
Marcin Urbaszek: Yes.
Marcin Urbaszek: It's hard to get to sort of specifics on particular assets.
Speaker Change: I would say.
Marcin Urbaszek: The majority of the reserve.
Marcin Urbaszek: On the specific reserve is related to office office issues.
Marcin Urbaszek: Meaningfully less on multifamily.
Stephen Albert Laws: Great. I appreciate the comments this morning. Thank you.
Speaker Change: Great I appreciate the comments this morning. Thank you.
Douglas Michael Harter: Thank you. Our next question is from Doug Harter with UBS. Please proceed with your question.
Stephen Albert Laws: Thank you. Our next question is from Doug Harter with UBS. Please proceed with your question.
Douglas Michael Harter: Thanks. Given the starting point for earnings this quarter, plus the incremental drag from non-accruals, can you talk about your commitment to paying the dividend or how you would think about instead using that cash to buy back stock, which would be clearly more accretive?
Douglas Michael Harter: Thanks.
Douglas Michael Harter: Given the starting point of earnings this quarter plus the incremental drag from non accruals can you talk about your commitment to paying the dividend or how you would think about instead.
Douglas Michael Harter: Using that cash to buy back stock, which would be clearly more accretive.
John A. Taylor: Sure. Good morning, Doug. Thanks for joining us.
Speaker Change: Sure Good morning, Doug and thanks for joining us.
John A. Taylor: Doug, we and the board look at the dividend sort of over a longer time horizon in terms of Runway profitability. Obviously, as we said when we reduced the dividend for the first quarter and today, there's going to be some pressure on earnings as we sort of resolve these assets. Timing is sort of hard to predict, but I think some of these solutions can have a pretty material impact on our runway profitability.
Speaker Change: Look I think the dividend, we and the board looks at the dividend sort of over and over.
John A. Taylor: Or a longer longer time horizon in terms of.
John A. Taylor: Run rate profitability, obviously as we as we said in our when.
John A. Taylor: When we reduced the dividend for the first quarter and today.
John A. Taylor: There's going to be some pressure on earnings as we sort of resolve these assets timing is sort of hard to predict but I think some of these resolutions can have a pretty material impact to our run rate profitability. So from our point of view, it's sort of a matter of sort of time rather than.
Speaker Change: Right and if that happens so but.
John A. Taylor: Again timing is difficult to predict.
John A. Taylor: As we said on the prepared remarks.
John A. Taylor: So from our point of view, it's sort of a matter of time rather than if that happens. But again, timing is difficult to predict, but as we said in the prepared remarks, we think that many of these assets may be resolved by the end of the year, and we look at all of that every single quarter with our board and as we sort of assess the dividends, so it's going to be an ongoing process.
John A. Taylor: We think that.
John A. Taylor: Many of these assets may be resolved by the end of the year.
John A. Taylor: We look at all of that every single quarter with our board and as we sort of assess the dividends. So it is going to be an ongoing process.
John A. Taylor: And Doug, I would add, this is Jack. Good morning.
Speaker Change: And Doug I would add Chris is Jack good morning.
Doug: Good morning, just about the stock buyback.
John A. Taylor: I would ask you just about the stock buybacks. You know, as we normally will say, we don't give guidance on stock buybacks. We have been pretty opportunistic over the course of 2023, for example, purchasing, I think it was about two million common shares. And we do think that our stock price presents a great value opportunity for investors, given the fundamentals of the business, and the potential repurchase as a current valuation would be quite accretive. But I do want to note that our number one priority for now is maintaining liquidity as we work through the not accrual process.
Jack: We normally will say, we don't give guidance on stock buybacks, we have been pretty opportunistic.
John A. Taylor: Over the course of 2023 for example, purchasing I think it was about 2 million common shares.
John A. Taylor: And we.
John A. Taylor: We do think that our stock price presents a great value opportunity for the investors.
John A. Taylor: The fundamentals of the business.
John A. Taylor: He tapped for repurchases at current valuation would be quite accretive.
John A. Taylor: I do want to note.
John A. Taylor: Our number one priority for now is on maintaining liquidity as we work through the non accrual loans.
John A. Taylor: I guess just on that, what would your comfort level be of being able to transact on some of those non-accrual loans in the short term at or close to the current mark and being able to use that liquidity to buy back stocks? Well, you know, it's a complex question because it's an ever-changing issue.
John A. Taylor: I guess just on that what would be your comfort of being able to transact on some of those non accrual loans.
John A. Taylor: The short term at or.
John A. Taylor: At or close to the current marks and being able to use that liquidity to buy back stocks.
John A. Taylor: Well, you know, that's a complex question because it's an ever-dynamic market. We think that, as we said, $150 to $200 million is nearer-term visibility, you know, to call it the next two quarters on things. We have visibility; eight out of the ten fives are in a process of resolution and sales process, in particular. But, you know, the $150 to $200 million seems riper or nearer in the stage. And so we would have to assess at the time of those resolutions, you know, what our position is with respect to liquidity and earnings potential and the like at that time. So I couldn't say right now.
John A. Taylor: Well you know that's a complex question, because it's an ever dynamic market.
John A. Taylor: We think that as we said.
John A. Taylor: 150 to 200 million is nearer term visibility call. It the next two quarters.
John A. Taylor: We have visibility eight out of the 10 fives or at a process of resolution and sales process particular.
John A. Taylor: But.
John A. Taylor: The $150 million to $200 million seems riper or nearer.
John A. Taylor: And in the stage.
John A. Taylor: So we would have to assess it.
John A. Taylor: Time with those resolutions what our position is with respect to liquidity and earnings potential in Hawaii at that time, So I couldn't say right now.
Speaker Change: Okay. Thank you.
Steve DeLaney: Thank you. Our next question is from Steve DeLaney with Citizens JMP. Please proceed with your question.
John A. Taylor: Thank you. Our next question is what Steve Delaney with citizens JMP. Please proceed with your question.
Steve DeLaney: Good morning. Can you hear me, everyone?
Steve DeLaney: Good morning can you hear me everyone.
Steve DeLaney: Yes.
Operator: Yes. wonderful, wonderful. Good to be here with you this morning. So, we've observed over the last few days. Reports, I guess.
Steve DeLaney: Wonderful wonderful could to be obviously this morning.
Steve DeLaney: So Mike we've observed over the last few days.
Steve DeLaney: Reports I guess.
Steve DeLaney: Both companies have been able to sell loans as opposed to taking the property into REO. And Richard Mack yesterday actually offered some comments on that and sounded pretty optimistic about the amount of opportunistic money that he was seeing from people that are looking to get in and maybe in sort of a loan-to-own strategy. Just your thoughts on whether you are looking at opportunities and having discussions with possible loan purchasers and how you feel about, you know, taking – okay, go ahead and taking a loss, but a pretty clean loss rather than having to go through the REO process. Appreciate your comments. [inaudible]
Steve DeLaney: <unk> last week, and then CMT G yesterday both companies.
Steve DeLaney: <unk> been able to sell loans as opposed to taking the property into Oreo.
Steve DeLaney: And Richard back yesterday actually offered some some comments on that.
Steve DeLaney: It sounded pretty optimistic about.
Steve DeLaney: The amount of opportunistic.
Steve DeLaney: He sounded positive about the opportunistic money that he was seeing people that are.
Steve DeLaney: We're looking to get in.
Steve DeLaney: And maybe and sort of a loan to own.
Steve DeLaney: Strategy.
Steve DeLaney: Just your thoughts on are you looking at opportunities.
Steve DeLaney: <unk> with possible loan purchasers and how you feel about <unk>.
Steve DeLaney: Taking okay go ahead, and taken a loss, but a pretty clean loss rather than having to go through the RVO process.
Speaker Change: State your comments.
John A. Taylor: Well, I'll make a quick comment, Steve, which is that we've done it in the past. We're able to do it in the future. Steve, you looked at me like you wanted to answer, so go ahead.
Speaker Change: Well I'll make a quick comment Steve which is we've done it in the past.
Speaker Change: We're able to do it in the future Steve If you looked at me like you wanted to answer. So go ahead. Please.
John A. Taylor: Okay.
Stephen Alpart: It's Steve Alpart. Good morning. We have a number of resolution strategies that you've heard us talk about quarter over quarter. For a lot of the loans that we just talked about trying to resolve by the end of the year, many of them, I would say most of them, we are working with a good borrower on a cooperative basis to sell the property. In general, we think you get a better price by selling the property versus selling the loan, although they're both very good strategies. We've done both.
John A. Taylor: No I was.
Speaker Change: Yes, so we havent see if we have let's see about park. Good morning, we have.
Stephen Alpart: A number of resolution strategy that you've heard us talk about quarter over quarter.
Stephen Alpart: For for a lot of the loans that we just talked about trying to resolve by the end of the year.
Stephen Alpart: Many of them I would say most of them.
Stephen Alpart: We are working with a good borrower on a cooperative basis to sell the property.
Stephen Alpart: In general, we think you'll get a better price by selling the property versus selling alone. Although they are both very good strategies. We've done both in fact last quarter.
Stephen Alpart: In fact, last quarter, we did a loan sale. In a few cases, we've been marketing the property while we have the loan, and we're simultaneously running a deed-in-lieu and, or a foreclosure process, sometimes both, so we know when the buyer's ready, we can deliver the fee. If we don't like the bid price, or we think we need to take ownership of the property for a variety of reasons, as we did on the Phoenix office deal, in probably a smaller number of cases, we'll take title, own the REO, do what we think we need to do to kind of maximize value in the short-term or medium-term.
Speaker Change: We did a loan sale.
Stephen Alpart: A few cases, we've been marketing the property at this while we have alone and we're simultaneously running.
Stephen Alpart: David Lowe <unk> foreclosure process, sometimes it both so we know when the buyer is ready we can deliver the fee.
Stephen Alpart: If we don't like the bid price, where we think we need to take ownership of the property for a variety of reasons as.
Stephen Alpart: As we did on the Phoenix office deal.
Stephen Alpart: Probably a small number of cases, we'll take title only RVO.
Stephen Alpart: What we think we need to do to kind of maximize value in the short term or medium term, we're not going to look to own those assets on the long term.
Stephen Alpart: We're not gonna look to own those assets for the long term, and then we can sell the REO. So it really is very situational, and we've done all the different flavors of it. A lot of them right now are working with the borrower to sell the property.
Stephen Alpart: And then we can sell the Ral so it really is very situational and we've done all the different flavors of it.
Stephen Alpart: A lot of them right now are working with the borrower to sell the property. We think that gets you in general the best bid.
Stephen Alpart: We think that gets you, in general, the best.
Stephen Alpart: Got it. And when you're working with those borrowers to find a new buyer, new capital infusion, is it usually with the understanding that your existing loan will remain in place to benefit the new buyer and the new equity?
Stephen Alpart: Got it and when Youre working with those borrowers to find a new buyer.
Stephen Alpart: Capital infusion is it usually with the understanding that your existing loan will remain in place to benefit the new buyer in the new equity.
Stephen Alpart: It can be the existing loan, but I would say, more often, we're going to provide, and we don't do it in every case, but if we need to, certainly on an office sale today, it's probably likely that we're going to need to provide core financing, at least in the short to medium term. It's more likely, if we are providing financing case by case, that we would be providing a new loan at a reset price. I'm Chris Petta, and thanks for watching.
Stephen Alpart: It can be the existing loan, but I would say more often we're going to provide and we don't do it in every case, but if we need to certainly on an office sale today.
Stephen Alpart: It's probably likely that we're going to need to provide staple financing.
Stephen Alpart: At least in the short to medium term.
Stephen Alpart: More likely if we are providing financing case by case that we would be providing a new loan at a reset basis.
Stephen Alpart: As opposed to a buyer.
Stephen Alpart: <unk> just assuming alone.
Stephen Alpart: There are ways to do that but more often than not it's going to be what we refer to as staple financing, providing a new loan to a new buyout or reset basis.
Stephen Alpart: Thank you for your comments this morning. Thank you.
Speaker Change: Thank you for the comments this morning. Thank.
Stephen Alpart: Thank you thank you Steve.
Jade Joseph Rahmani: Thank you. Our next question is from Jade Rahmani with KBW. Please proceed with your question.
Stephen Alpart: Thank you. Our next question is from Jade Rahmani with <unk>. Please proceed with your question.
Jade Joseph Rahmani: Thank you very much. This quarter has been kind of a tale of two cities between the banks and the commercial mortgage REITs with the banks, offering some relief in terms of commercial real estate credit performance. Essentially, I believe they're modifying and extending loans, and there's less pressure on their liabilities as rates, while volatile, have been more stable than a year ago. On the other hand, commercial mortgage rates have suffered significant losses. And so, it raises the question as to whether most of the pressure is on the assets side or if it's on the liabilities. And I was wondering if you could comment on that.
Jade Joseph Rahmani: Thank you very much.
Jade Joseph Rahmani: This quarter, it's been kind of a tale of two cities between the banks and the commercial mortgage Reits with the banks.
Jade Joseph Rahmani: Offering some relief in terms of commercial real estate credit performance, essentially I believe there and modifying and extending loans and.
Jade Joseph Rahmani: Yes.
Jade Joseph Rahmani: There is less pressure on their liabilities as rates, while volatile had been more stable and.
Jade Joseph Rahmani: Then a year ago on the other hand, the commercial mortgage REIT to have taken significant losses.
Jade Joseph Rahmani: And so yes, it raises the question as to whether the most.
Jade Joseph Rahmani: Most of the pressure is on the asset side or if it's on the liability side and I was wondering if you could comment on that.
John A. Taylor: Well, I'll start off by saying I think it's on both. In general, banks have lent at a lower interest rate than the non-bank lenders. So you would expect that there would be some difference between the non-bank lenders at a higher advance rate, even though a low advance rate, with what we like to call, stealing from the bond world, positive convexity on credit, which has worked out in many cases, but not in all in the current environment, meaning that the loans are meant to improve the assets with the capital from the loan, and the borrower is meant to improve his credit over time.
Speaker Change: Well I'll start off by saying I think it's on both.
John A. Taylor: In general the banks lend.
John A. Taylor: I've learnt at a lower advance rate and the non bank lenders. So you would expect that there would be some.
John A. Taylor: Difference between the non bank lenders at a higher advance rate, even though a low advance rate.
John A. Taylor: With that we'd like to call.
John A. Taylor: Stealing from the bond World positive convexity credit.
John A. Taylor: Has worked out in many cases, but not in all in the current environment.
John A. Taylor: That.
John A. Taylor: The loans are meant to improve.
John A. Taylor: The assets with the capital from the loan and the borrowers that to improve credit over time.
John A. Taylor: With the double punch of the pandemic and now very elevated interest rates, it's proven more difficult in some cases. So I do think on the asset side, that's true. On the liability side, we have, as in our own case and in many others of our peers, financing facilities and other structures that have provided us with our leverage. However, banks have deposits, and it's a lower cost of capital to work with. So I think this is why we're observing that.
John A. Taylor: With a double punch of the pandemic and now very elevated interest rates has proven more difficult in some of the cases. So I do think on the asset side that is true.
John A. Taylor: On the liability.
John A. Taylor: The liability side.
John A. Taylor: We have.
John A. Taylor: As in our own case, and many others of our peers very stable.
John A. Taylor: Broadly the first.
John A. Taylor: Financing facilities and other structures that have.
John A. Taylor: With our leverage however, the banks have deposits.
John A. Taylor: It's a lower cost of capital.
John A. Taylor: To to work with so I think this is why we are observing that.
John A. Taylor: And so do you think that if GPMT was part of a bigger balance sheet, or some type of investment management firm that had access to multiple lines of capital that are a reprieve on the liquidity side, you mentioned that's your top priority, would help? You're saying that there are better results when properties are sold than when loans are sold. So, I'm wondering if you could put a finer point on that. Well, with respect to the better results when loans are taken out – sorry.
John A. Taylor: And so do you think that <unk> T was part of a bigger balance sheet.
John A. Taylor: Or some type of investment management firm that had access to multiple lines of of capital that a reprieve on the liquidity side, you mentioned that your top priority would help.
John A. Taylor: Cushing.
John A. Taylor: The credit outcomes, Youre, saying that Theres better results when properties are sold.
John A. Taylor: Then loans are sold.
John A. Taylor: Wondering if you could put a finer point on that so with respect to the better results when loans, sometimes the best route is to sell alone other times if you if you.
John A. Taylor: Well, with respect to better results, sometimes the best route is to sell a loan. Other times, if you particularly have a cooperative borrower who's working with you, you can get a better result by taking over the property and selling it, and probably in a simultaneous sale in the deep blue structure. But so I don't think of that as so much of a... It's a case-by-case basis on a loan sale versus equity sale, but oftentimes, not always, but oftentimes, somebody who's buying the note wants to do so at a discount to what they think the property is worth. And so that's what I believe Steve was referencing when he made that comment.
John A. Taylor: We have a cooperative a borrower who is working with you you can get.
John A. Taylor: Get a better result by taking over the property and selling it and probably it is.
John A. Taylor: Simultaneous L P.
John A. Taylor: <unk> loop structure.
John A. Taylor: So I don't think of it that is so much of S. A.
John A. Taylor: Okay.
John A. Taylor: Quiddity aspect compared to what you were talking about with Thanksgiving.
John A. Taylor: Asset basis. So the it's a case by case basis on the loan sale versus equity sale, but.
John A. Taylor: Oftentimes not always but often times somebody who's buying the note.
John A. Taylor: To do so at a discount to what they think the property's worth and so that's what I believe Steve was.
John A. Taylor: Referencing when he made that comment.
Speaker Change: Thanks very much.
Speaker Change: Thank you.
John A. Taylor: Thank you. There are no further questions. I would like to turn the floor back over to Jack Taylor for any closing comments. Thank you.
Speaker Change: Thank you there are no further questions.
John A. Taylor: I would like to turn the floor back over to Jack Taylor for any closing comments.
John A. Taylor: Thank you. We appreciate all of our investors' support and the team's effort in navigating this extraordinarily challenging market, and we look forward to speaking with you next time. Thank you very much.
John A. Taylor: Thank you we appreciate all of our investors support.
John A. Taylor: And the team's effort in navigating this extraordinarily challenging market and we look forward to speaking with you next time. Thank you very much.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.