Lam Research Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 11 speakers on the call.

Operator

Hello, everyone, and welcome to Claros Mortgage Trust Second Quarter 2023 Earnings Conference Call. My name is Bruno, and I'll be your conference facilitator today. All participants will be in a listen only mode. After the speakers' remarks, there will be a question and answer period. And during that presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad.

Operator

I will now hand over to your host, Hank Ewan, Vice President of Investor Relations for Claros Mortgage Trust. Please proceed.

Speaker 1

Thank you. I'm joined by Richard Mack, Chief Executive Officer and Chairman of Clarus Mortgage Trust Mike McGillis, President and Director of Clarus Mortgage Trust and Jay Agarwal, PMTT's Chief Financial Officer. We also have Kevin Cullinan, Executive Vice President, who leads MREC Originations and Priyanka Garg, Executive Vice President, who leads MREC's Portfolio and Asset Management. Prior to this call, we distributed CMPT's earnings release and supplement. We encourage you to reference these documents in conjunction with the information presented on today's call.

Speaker 1

If you have any questions following today's call, please contact me. I'd like to remind everyone that today's call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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.

Speaker 1

For reconciliations of non GAAP measures to their nearest GAAP equivalent, please refer to the earnings supplement. I would now like to turn the call over to Richard.

Speaker 2

Thank you, An, and thank you, everyone, for joining us for CMTG's 2nd quarter earnings call. Most of us have seen the headlines this summer. They tell a consistent story. 2023 has been a challenging year for the entire commercial real estate Owners, operators, developers and lenders alike adjust business plans in an environment of higher rates And sharply reduced bank lending. This has resulted in very tight credit conditions, unit transaction volumes and continued asset value decline Restat, reflecting interest rate increases.

Speaker 2

These conditions are exacerbated by sluggish office fundamentals and valuations as well as conflicting signals around recessionary and inflationary risk. Last month's inflation print Registered inflation is down broadly against the backdrop of strong economic activity and employment. Many interpreted the data to suggest that we may be nearing the end of interest rate hikes and that the chance of a recession has lessened. Not surprisingly long bonds And Equity REIT stock rally. However, the next several months of inflation readings and economic reports will be critical to the Fed's plan for the remainder of the year.

Speaker 2

And we expect volatility will continue to be the watchword as the market and the Fed interpret and react to the data and determine whether or not more rate hikes are necessary. Our view is that while inflationary forces of war, stimulus And trade disputes will be with us in the short and medium term. The long term deflationary forces of technology and globalization We'll eventually win out. Rates will normalize. However, at CMCG, we need to be prepared for an environment where inflation And high interest rates persist.

Speaker 2

Today, we are operating in an environment where benchmark rates I've reached peak levels not seen in more than 2 decades. While we would hope for the coveted soft landing and lower short term rates, We have to assume that we're facing a higher for longer rate environment and or a recession and operate our business accordingly. When we evaluate our portfolio in the context of a higher for longer rate environment and worsening office market distress, We believe our thoughtfully constructed portfolio is defensively positioned. As a primarily floating rate lender, CMCG has been in part positively impacted by rising interest rates. We are generating historically high all in yield, But at the same time, we must acknowledge that the rapid rise in rates has put extreme stress on borrowers and their borrowing costs.

Speaker 2

That said, generally our borrowers have significant capital to protect and in most instances we are continuing to see them do so. We also need to acknowledge that work from home is continuing to plague the office sector and that we have just begun to see distress in that sector. Question of what impact an office market downturn will have on the overall real estate capital market is just starting to become apparent As the industry is beginning to see resolutions occurring, institutional owners are starting to make difficult decisions regarding their office assets. Borrowers are giving back fees, many of whom have assets worth less than the debt outstanding. And in a few cases, transactions are closing in major markets to have low office exposure, and we expect office to decline as a percentage of the portfolio in the near term.

Speaker 2

Further, a significant portion of our office book is fully renovated, highly amenitized or is the type of office space that tenants demand today. Furthermore, many of our office loans are structured with additional credit support. Despite this, Given the state of the office economy today, we all need to consider if any office exposure is too much office exposure. And we expect that positive resolutions of office loans will require creativity and resourcefulness from both lenders and borrowers. In terms of portfolio composition, multifamily continues to be our largest allocation, reflecting one of our high conviction themes.

Speaker 2

Multifamily fundamentals continue to be relatively strong, even as elevated rates impact the asset class more broadly. However, we remain optimistic as the supply demand fundamentals for the sector continue to be extremely favorable. From a lender's perspective, we've also been observing many of our borrowers tend to create both the financial wherewithal and the motivation to protect And carry their assets through this period of higher interest rate. It's been driven today by an optimistic forward yield curve By the healthy market fundamentals that we are experiencing, with the exception of very few markets such as San Francisco. Additionally, one consideration we believe will be a boon for our multifamily portfolio is fundamental storage of housing in the U.

Speaker 2

S. And how difficult it is now to capitalize new construction. Looking ahead 1 to 3 years, we believe this historically low supply could translate into higher rents, which would make our existing assets more valuable. Mike will provide a more detailed discussion on our portfolio Later on in the call, including additional color on multifamily office and hospitality exposures. While we believe our portfolio is well positioned in the current market environment and remain confident that our approach to proactive asset management We'll continue to help us identify potential concerns early in the process.

Speaker 2

Our business does not immune to the pressures that the industry has been experiencing. We expect a higher for longer interest rate and some select softening of asset performance will continue to stress borrowers. In such an environment, some landlords may decide not to protect their assets. Consequently, we anticipate that there will continue to be instances where we will need to collaborate and or modify loans for our borrowers, instances where we will want to exit our loans And instances where we will want to take control of these assets ourselves. In general, we have strong conviction in the underlying assets collateralizing our portfolio.

Speaker 2

We manage our portfolio with a long term view and with an objective of maximizing returns and building book value for our shareholders over the medium and long term. When our borrowers decide not to protect their assets, given the broader organizational capabilities of Mack Real Estate Group, We are ready, willing and able to do so. Our broader platform experience as an owner, operator and developer give us confidence We have the necessary expertise to execute in a variety of scenarios. This is our type of market to take advantage of weakness when appropriate. The leaders of our business have been here before.

Speaker 2

We have seen the power of owning discounted assets and riding out the cycle. We have the capabilities and market intelligence to be prudent and disciplined when it comes to understanding value and being opportunistic. Being opportunistic requires investment capital. And during this period of uncertainty, preservation and generation of liquidity will be essential to ensure that we have the appropriate resources to maximize shareholder value over the long term. Therefore, and as a normal course of business, Our management team and Board of Directors will continue the dynamic process of reviewing all liquidity options available to us given the current market environment.

Speaker 2

I will now turn the call over to Mike.

Speaker 3

Thank you, Richard. I'd like to start my prepared remarks this morning with a portfolio summary, then provide color on what we're currently seeing in the market, specifically across the multifamily, hospitality and office sectors. CMTP's primarily floating rate portfolio With $7,500,000,000 based on carrying value at June 30. The portfolio is comprised of 98% senior loans And as a portfolio, LTV is 68.5 percent. During the quarter, we made follow on fundings of $162,000,000 And received partial loan repayments of $49,000,000 Looking ahead, we expect several loans to repay In the back half of the year across a number of property types, including an office construction loan.

Speaker 3

The MTG's portfolio composition remained relatively consistent quarter over quarter. However, we added an additional REO asset on June 30, which I'll touch on in a bit. Multifamily comprised 41% of the portfolio as of June 30, Representing our largest property type concentration, given that our loans are transitional in nature, which involve the repositioning of assets, We are continuing to see positive trade out, positive lead renewals and rent increases, though rent appreciation has been moderating From the historical highs we have been seeing. As Richard mentioned, the current rate environment has been challenging. Many multifamily borrowers have been struggling with negative leverage.

Speaker 3

And as a result, we anticipate instances where we'll be collaborating with our borrowers to develop solutions while also protecting our position. In aggregate, we like our basis and feel that we have the To that end, during the quarter, we moved 4 multifamily loans from a 3 risk rating to a 4 risk rating. 3 of these loans are collateralized by tax flowing multifamily assets Located in Texas and Arizona with the same operator and represent 2% of the portfolio carrying value of $154,000,000 The borrower has been impacted by the negative leverage dynamic I just spoke to, but continued to contribute fresh capital to carry the assets. Turning to Hospitality. As of June 30, Hospitality represented 20% of the portfolio.

Speaker 3

The industry is experiencing downward pressure on top line growth. While occupancy is held, ADR has been impacted by a number of factors. As of domestic leader demand post COVID has abated, the relatively strong dollar has motivated consumers to opt for European destinations as opposed to traveling domestically. Additionally, corporate group travel has not recovered to levels seen prior to the pandemic, which has resulted in fewer opportunities to push grades during compression periods. The overall performance of our The hospitality portfolio has been holding steady in light of these dynamics, and our hospitality assets are performing in line with expectations And generally outperforming their peers in their relative submarkets.

Speaker 3

Office comprised 15% of the portfolio as of quarter end. As Richard mentioned, the office sector continues to face structural headwinds. In managing our office portfolio, we are being creative in Developing solutions for our 4 rated office loans. In most cases, borrowers are demonstrating conviction in their business plans And their intention to be long term loaned. Requiring borrowers to contribute additional capital has been part of our discussions around loan modification.

Speaker 3

They will discuss the office loan that we placed on non accrual this quarter later in the call. Before turning the call over to Jay, I'd like to take a moment Speak to the assignment in lieu of foreclosure we completed on June 30. As mentioned on a previous earnings call, we identified a New York City mixed use loan That we are working towards taking the deed. On June 30, we completed the transfer of this property via an assignment in lieu of foreclosure. And in conjunction with the transaction, we recorded a principal charge off of $67,000,000 We are now carrying the property on our balance sheet at a basis of $144,000,000 We believe that our sponsors' experience As an owner, operator and developer, we'll be key in generating long term value in this property.

Speaker 3

In addition to what we consider low hanging fruit, we believe there are opportunities to reposition the property and improve NOI. It's a great example of where we feel comfortable being in the ownership position I would now like to turn the call over to Jay.

Speaker 4

Thank you, Mike and Richard. For the Q2 of 2023, we reported distributable earnings Including net realized losses of $0.35 per share. Including net realized losses, distributable loss was $0.10 per share. The realized loss was comprised of $67,000,000 or $0.47 per share loss on an assignment in lieu of foreclosure The New York City mixed use property that Mike spoke about, offset by a $2,200,000 or $0.02 per share gain on extinguishment of debt. The gain is from the retirement at a discount of $22,000,000 in face value of our Term Loan B due August 2026.

Speaker 4

The performance of our New York City area hotel portfolio grew quarter over quarter, primarily due to seasonality, impacted by the addition of 2 loans, plus a 3rd loan held in a joint venture and accounted for under the equity method, I will quickly describe each of these 3. The first is a $900,000 subordinate for which we also reported a 900,000 or 100 percent specific fee for the loans. The second is a $112,000,000 senior loan Secured by a non commodity jewel bought office property in San Francisco. The 3rd is a $42,000,000 subordinate loan secured by a hotel construction loan in New York City. No specific seasonal reserve was recorded against these last two loans placed on nonaccrual.

Speaker 4

For this segment, the economic and higher rate environment continues to impact the broader CRE industry and this reflects that trend. We also increased a specific seasonality on 3 loans. 1, we added 19,000,000 calls With the previously 5 rated multifamily investment in San Francisco, reducing our carrying value to 101,000,000 This represents a 27% result on the UPB of the loan. The second is a $900,000 And lastly, an additional $25,000,000 in The NeoCity mixed use REO Property, trending at carrying value of the loan, 244,000,000 The cumulative specifically for the results was $67,000,000 against the New York fixed lease REO asset With Charles Doss and the loss upon assignment in lieu of foreclosure. As a reminder, the New York Mixed Pier property is comprised of office space, Finance, well leased CPL in the Times Square submarket and the asset is held unlevered without any financing.

Speaker 4

Our general piece of the road stands at 1.1% or $80,000,000 with quarter end. This is comprised of 3.6% on 4 day loans and 0.6% on the remaining loans. Turning to the balance sheet. We continue to maintain conservative net leverage levels, increasing slightly quarter over Quarter from 2.2x on 31st to 2.3x on June 30th. The weighted average advance rate on loans subject to asset specific financing is 68%.

Speaker 4

This can be further bifurcated into 75% advance rate on multifamily loans and 63% on everything else. We remain focused on liquidity and reported $407,000,000 of liquidity in June 30th. This consists of cash And approved and undrawn credit capacity. We also have significant unencumbered assets comprised of $404,000,000 in senior loans As well as the $144,000,000 mixed use REO property. Additionally, subsequent to the quarter, We extended the initial maturity of all financing under our largest warehouse facility in July of 2026.

Speaker 4

I would now like to open the call for questions. Operator, please go ahead.

Operator

We have our first question coming comes from Don Fendetti from Wells Fargo. Don, your line is now open. Please proceed.

Speaker 5

Yes. Can you talk a little bit more about the multifamily properties that were moved from 3 to 4? Yes, I think you mentioned negative leverage and just more broadly in multifamily, how are borrowers handling higher rates And cap rates moving up?

Speaker 6

Yes. Hi, Don. It's Priyanka. Thank you for that question. We took a very proactive and transparent approach there.

Speaker 6

So those four loans that we moved, to a 4, they are where sponsors have asked us for rate relief. These are the only loans in our book where borrowers approached us asking for rate relief during the quarter, which is why we downgraded them. It does not mean that we're going to agree to it. In fact, quite the opposite. We feel very good about our basis in those loans, and we don't anticipate significant modifications, but really made the Shift to provide transparency.

Speaker 6

We're going to work with the borrowers on path forward if needed, but we're also willing to take title at our basis. The other points I would make is that all the cash flowing loans are current on debt service, borrowers are contributing capital, But they did approach us. And so again, we wanted to be transparent in this very dynamic market.

Speaker 5

Okay. And just more generally in multifamily, are you Seeing borrower pressure with higher rates?

Speaker 6

Yes. Yes, absolutely, of course. And that's exactly why we made that shift in credit ratings on those four properties because we have a huge multifamily We are very focused on monitoring all of those and making sure that borrowers are being Successful in an environment where they have negative leverage, but they are all doing the right thing. They believe in their thesis. They're putting in additional capital.

Speaker 6

So we have yet to see cracks in their business plans because we're a transitional lender. We're still seeing NOI increase generally across the board. So we are optimistic that the borrowers will be able to refinance this out over time, but we are monitoring it Very closely. And again, that was the reason for the migration on the handful of loans that we moved to a floor.

Speaker 5

Got it. And then real quickly, we've seen some other companies selling office loans. Are you looking at that option as well?

Speaker 6

I'll start and then Richard, you might want to jump in here. I we're going to look at all options available to us, as Sure. In his remarks, there are going to be moments where we're going to say, okay, we want to exit the loan. There are going to be moments where we say we like our basis. That example being the REO asset in New York that we just took on June 30, which has an office component, but we like our basis there and we think we have Great business plan.

Speaker 6

But there are going to be other there might be other Loans where we're going to say, you know what, we don't think that it makes sense to try to take ownership of it. We don't think we can add value specifically. And in which case, we might look to exit loans, but nothing on our radar as we sit here today.

Speaker 1

Richard?

Speaker 2

Let me just add as a general statement that Everything that we own is kind of for sale. And so We are constantly looking at what is the value going forward that we think we can create. And If we think a sale is better, we're going to sell. And if we think we can create value and really in this environment, equity like returns, Holding an asset, or taking it REO? And we will.

Speaker 2

Thank you.

Operator

Our next question comes from Vilas Abraham from UBS. Phyllis, your line is now open. Please go ahead.

Speaker 7

Hey, everybody. Thanks for taking the question. Can you talk a little bit more about liquidity trends? Cash was down quarter over quarter, Also quarter to date, just any color on what specifically is driving that? How much of that is maybe posting additional Collateral to financing counterparties.

Speaker 7

And then maybe in that context, if you could also Touch on the dividend and how you feel about it in the context of some of

Speaker 3

the liquidity pressure? Thank you. Sure, Rios. This is Mike McGillis. Yes, in terms of the liquidity trend, obviously, we paid our 2nd quarter dividend in Mid July, we've also continued to reduce leverage in the portfolio.

Speaker 3

So those are The primary drivers of the movement in liquidity, however, we do have some significant Loans in various stages of expected repayment over the remaining course of the year, Representing about in excess of $600,000,000 whether the current market environment, whether they happen or Not is always a question, but those payoffs would generate In excess of $400,000,000 of liquidity to the balance sheet. So in terms of your other question, I mean, we're Constantly reevaluating as a management team along with our Board of Directors Where we stand with respect to earnings, where we stand with respect to liquidity And make dividend calls with our board on a quarterly basis.

Speaker 7

That's out. All I have

Speaker 3

to say on that, see Any liquidity we do have is really going to be deployed to maximize long term shareholder value. That's our critical focus in everything we do.

Speaker 7

And on that REO property, do you Plan to keep that on an unlevered basis? Or would you Put any financing on that given the quality of the collateral there?

Speaker 6

Hi, it's Priyanka. I'll jump in there. We're definitely going to look at potentially putting on financing. It's really going to depend on Leverage levels and pricing, but we're also very optimistic about creating value. So the question is going to be, do we Encumbent with financing now or wait until there is additional value created.

Speaker 3

Okay. And Priyanka, maybe you

Speaker 7

could answer this one on maturity defaults around $400,000,000 or so, and that's outside of the kind of an official non accrual bucket, and that's kind of unchanged, I think, quarter over Quarter, just how do we think about that balance and just where do we go from here on those?

Speaker 6

Yes. That's a great question, and obviously one that we talk about a lot internally. Our view there is we are We're going to be as patient as we can with our borrowers, so long as we feel good about our basis and we feel comfortable stepping in if we have to. But our goal is to allow borrowers To execute on their business plan and monetize when they can, we Of those of the $400,000,000 that you mentioned, half of those loans are actually under transaction of some sort under term sheet or LOI and Part of the number that Mike just referred to where we might see some repayments in the back half of the year. Obviously, it's a very uncertain environment.

Speaker 6

We don't know where that will end up, but We're going to monitor those. And in the interim, we're coming up with plans B, C and D in terms of other various, Red Pass to resolutions. So We're highly focused on it. But at the end of the day, it's all about the basis and then are we comfortable stepping in or not, Which the answer to all of those is yes.

Speaker 7

Okay. And Richard, just maybe last one from me for you. You touched on this a little bit in your Opening comments in terms of transaction volumes, but just in terms of general posture between buyers and sellers, has there been any compression In the bid ask spread there between now and say 6 months ago, or do you feel like we're Just kind of in the same place and people are still waiting for more developments in interest rates.

Speaker 3

Yes. This is Mike. Richard, unfortunately, Got dropped from the call, and he's trying to get back on. But, yes, clearly, what we've seen is, for high quality assets, there continues Speed demand, although transaction volumes are down, in terms of our visibility through our equity business, we continue to see a lot of Transactions, we continue to see what we think are very reasonable pricing On high quality assets such as multifamily, industrial, etcetera, the buyer pools are obviously a lot smaller. So the in terms of the bid ask, you're not seeing prices being pushed up as much because of multiple parties bidding, but We continue to see strong pricing in the multifamily and industrial and even Hospitality markets as well.

Speaker 3

So, but the volumes are way down. I think Some kind of thawing in the capital markets will clearly bring people back into the marketplace. That's my view and I think Richard is taking on the questions. And Heath, Richard, can I

Speaker 2

ask you that question? Yes. Let me just add that

Speaker 3

We are active

Speaker 2

in trying to buy assets and while valuations have moved down, We still see tremendous competition for the few assets that are out there, especially in the multi space. We're seeing assets trade at higher values than we would have expected. So while values are down, there's still plenty of capital on the sideline that's showing up. So, it's a pretty interesting dynamic and I think price discovery is going to be ongoing, but there is liquidity. So it's quite interesting, Watkin.

Speaker 3

Thank you.

Operator

Our next question comes from Richard Chaney from JPMorgan. Richard, your line is now open. Please go ahead.

Speaker 8

Hey, guys. Thanks for taking my questions this morning. Sorry, and I apologize if some of this has been covered. It's a little bit of a chaotic and crazy morning for us. If we look at the End of the Q1, there was a $60,000,000 specific reserve.

Speaker 8

This quarter, you realized Losses of just about $67,000,000 Was all of the loss During the quarter associated with the specific reserve, I just want to get a sense of sort of execution versus where the reserve levels were set. The other thing is that if we look, the overall reserve levels have come down. The general reserves come down a couple $1,000,000 and it appears that what essentially happened was you replenished The specific reserve by about $38,000,000 is that right? And should we Sort of anticipate in the near term that $38,000,000 of specific reserve manifesting into charge offs.

Speaker 4

Yes. This is Jay. So I'll take the first one first. On the specific fees of reserves, We did charge off $67,000,000 like you mentioned. Of that $42,000,000 was reserved previously.

Speaker 4

This is under Times Square Mixed Use Property, and we added another $25,000,000 to that. The $38,000,000 for the quarter, like I had mentioned, is comprised of $25,000,000 for the Times Square property, $19,000,000 for the multifamily San Francisco asset and just under $1,000,000 for a subordinate loan. That's on the specific reserves. On the general reserves, you are correct that it went down slightly. Now that's a function of I'll say 2 things there.

Speaker 4

1, the CECL model is a very duration sensitive model. So as our loan portfolio has been unchanged for the most part, as we are closer to the maturity 90 days closer to the maturity date, the CECL reserve should come down. So some of that is now offset by worsening Macroeconomic conditions, but net net our CECL reserves did reduce a little bit. The last thing I'd say there is, we do disclose the Component of the general reserves, the 1.1% broken out between 4 80 loans and then loans that are rated better than a 4. So once you break out that 1.1%, it's actually 3.6% on 4 day loans And 60 basis points on 3 and better rated loans.

Speaker 4

So we feel we intellectually look at about the 3.6% on 4 rated loans.

Speaker 8

Got it. And obviously, the portfolio is a little bit smaller as well, which also has an impact in terms of the general reserve.

Speaker 4

Exactly.

Speaker 1

And in terms

Speaker 8

of Migration from specific reserve to loss. And again, the good news

Operator

is that

Speaker 8

there's not a ton of data within Your history to help us sort of do pattern recognition, but when we look back at the times where you have had losses, Generally speaking, it looks like the specific reserves have turned fairly quickly into realized losses, Which is frankly the way it should work. Should we use that $38,000,000 as a Sort of near term, and I would describe near term as sort of next 1 to 2 quarters, perspective on what we could see for realized losses?

Speaker 4

I'll start with it's a very case by case basis. It's so not every asset is different. So it's hard to draw some kind of parallel as to what happened with asset 1, what happened with other assets. But Priyanka, please feel free to add more on where specific reserves could go in terms of charge offs.

Speaker 6

Yes, sure. Thanks, Rick, for the question. The we're that's related to

Speaker 1

the San

Speaker 6

Francisco multi Family properties and the additional reserve that was put on, it was really just due to migration of cap rates in the San Francisco market. It's no surprise that that market has And challenged. And as it relates to that loan, we're exploring all of our options, and we'll determine how we Whether this is a loan we ultimately end up exiting or if we think we should own it or not based on the framework that Richard has already gone through. But in the interim, the assets are generating enough cash flow to cover operating expenses. We're entirely focused on protecting the asset value as we determine the right path to resolution here.

Speaker 8

Okay. That's very helpful. Thank you, guys.

Operator

Our next question comes from Jade Rahmani from KBW.

Speaker 9

Jay, your line is now open. Please proceed.

Speaker 10

Thank you very much. One of your peers reduced their dividend by eliminating the supplemental dividend today, and That's about a 6% impact. And when you said dynamic process of reviewing all options, and Mike gave some color around that, I assume that's meant to signal a dividend reduction. So are there any parameters or framework for Thinking about that, that you might be able to talk to, for example, earnings distributable earnings excluding all items It was about $0.35 The portfolio is going to be going down in value based on The repayments you've identified and there's also probably some carrying costs associated with the New York mixed use. So directionally, it'd be lower than the $0.35 And then I also assume you're not just going to reduce it By $0.01 or $0.02 to save liquidity, it would be more meaningful than that.

Speaker 10

So any commentary would be appreciated. Thank you.

Speaker 3

No, Jade, it's not there's no comment on the dividend. I mean, I think The way that we think about distributable earnings were $0.35 excluding these net realized gains losses this quarter. There are catalysts to increase distributable earnings in the form of higher benchmark rates In the form of future fundings on our existing portfolio, which are At a higher spread than the weighted average portfolio at this time, we have a number of liquidity Events in process, I. E, payoffs on existing loans that can be redeployed In ways to enhance returns, including deleveraging these existing portfolio Would be accretive to distributable earnings. So we look at distributable earnings, and I would just say that There's a number of items that could enhance that.

Speaker 3

And to the extent there's additional non accrual loans that are added that will REDUCE IT on the New York mixed use asset that is has leases in place. It does generate NOI. And then the broader picture is from a liquidity standpoint, we're constantly looking at that Across the business, as a management team and with our Board, and we're going to do what we think maximizes value In the over the medium to long term for our shareholders. And That's I'll leave it at that.

Speaker 2

Mike, can I just Let me add a few things? In my comments, everything is on the table, And we own unlevered assets. We are looking at selling assets. We are trying to be opportunistic And make those moves that we think are going to create the greatest long term shareholder value. And that's what I was trying to get at.

Speaker 10

Thanks very much. Just wanted to ask about the New York mixed use project. I saw in the 10 Q the discount rate, 7% to 7.5%, I believe, and exit cap rate 5% to 5.5%. Just wanted to ask about the basis for those assumptions And what your thoughts were?

Speaker 6

Yes. Hi, it's Priyanka Jade. I'll jump in there. So we I mean, those assumptions are based on certainly what we observe in the market. We also had a 3rd party appraiser involved, and these were all vetted by Our auditors.

Speaker 6

So but it is all a guess, I suppose, in this kind of market environment. But we are We're very optimistic about the path forward there, just given it's in our the assets in our backyard and our firm has deep ownership experience and relationships where we can Really add value here. We want to particularly highlight the rich history of the asset in order to Repositioned the building, and so we think there's a lot of low hanging fruit that's both strategic and operational. We had a former owner here that was not really paying attention to the asset, and We're optimistic about growing the NOI on that asset. Just as a data point, the other REO hotel portfolio that we have, When we took ownership, NOI was significantly negative.

Speaker 6

And now here we are with NOI that's very close to pre COVID levels. So It's we're seeing a similar story, which is why we chose to take ownership of that asset. If we see an opportunity, we're going to take it because of the And the team that we have to execute, and we see that opportunity in that asset.

Speaker 10

And lastly, just the Virginia land hospitality asset. I think last quarter you said there were Bids for the debt above your basis or perhaps bid for the property, is that still the case? And I noticed there's no CECL reserve there, and it's rated risk 4. Just some commentary on that would be appreciated. Thanks a lot.

Speaker 6

Yes, of course. I'll take that. So the commentary last quarter was there have been bids that the That were provided to the borrower prior to our ownership sorry, prior to the Vault. And so the those bids were out there. Obviously, it was a very different capital markets environment.

Speaker 6

So While we think this is a very attractive development site, it's just not the right time to monetize the investment. That said, we think the basis makes sense, and that's why it Continues to be rated at 4. We're going to continue to evaluate the path forward with or without the borrower, and Our path is going to really be driven by the goal of maximizing shareholder value in the long term there, but this is not the right moment to monetize that opportunity.

Speaker 10

Thank you.

Speaker 9

Our next question comes from Sarah Berkom from BTIG. Sarah, your line is open. Please go ahead. Hi, everyone. Most of my questions have been answered, but I did want to mention that We've heard from some of your peers that they've taken a look at amending some of their covenants given the pressure coming from this rising rate environment.

Speaker 9

Could you speak to how you're feeling about meeting those covenants on a go forward basis? And if you look to make an amendment there?

Speaker 4

Hi, this is Jay. Yes, you are right with the rising interest rate environment, We are in active dialogue with our lenders, and we actively monitor our covenants. We are comfortable that we are going to Meet our financing covenants. And to the extent we need to be proactive about modifying some of those, we will go ahead and do that.

Speaker 9

Okay. And I was also hoping you could speak Maybe more thematically on what you're seeing on the ground in your construction book. How's the labor market there? Are you seeing more projects get certificates Occupancy, any color you can give on the ground up exposure?

Speaker 6

Yes. Hi, Sarah. It's Priyanka. I'll take that one. We're really Happy with our construction exposure.

Speaker 6

In fact, this quarter, we shifted a number of loans From construction status to operating status in light of achieving their certificates of occupancy. And So that has brought down our construction exposure. And of those assets that have recently become operating assets, 2 out of 8 of them are working on Sales and refinancings and the others are really going through a lease up process right now. So we've been really happy with that performance, and we've always liked our construction exposure, And really for two reasons. 1, our sponsors are going to have best in class real estate upon completion, which is going to fare better in this uncertain environment.

Speaker 6

Certainly, we're seeing that with the 2 assets that are right now being sold and refinanced. And 2, we have much better Structure, we get to re underwrite the asset monthly, borrowers are rebalancing monthly, they're contributing equity as needed. And of course, we have completion guarantees from really creditworthy sponsors. So we've been really happy with that exposure, and it's played out as we would have

Operator

We currently have no further questions. So I'd like to hand the call back to Richard Mack for closing remarks. Richard, please go ahead.

Speaker 2

Thank you, and thank you all for joining us today. I would summarize How we see managing our business as focusing every day on creating long term shareholder value. And to do that, we are going to be opportunistic when we can and we're staffed today. We are organized to take assets back if necessary, sell them, refinance them and just be opportunistic around creating shareholder value for the long term. That is a dynamic process as we manage our liquidity versus opportunity And something that we're working on every day, and we think that the process that we're undergoing and the Value we've created already in some of the REO and some of the other actions we've taken working with borrowers is going to pay Dividends, so to speak, is going to continue to increase value over the long term.

Speaker 2

So thanks all for joining, and

Powered by Quartr
Earnings Conference Call
Lam Research Q2 2023
00:00 / 00:00