Good day, welcome to the Blackstone Mortgage Trust Q1 2023 Investor Call. Today's call is being recorded. If you require operator assistance at any time, please press star zero. At this time, all participants are in a listen-only mode. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.
Good morning, and welcome everyone to Blackstone Mortgage Trust Q1 2023 conference call. I'm joined today by Katie Keenan, Chief Executive Officer, Tony Marrone, Chief Financial Officer, and Austin Peña, Executive Vice President of Investments. This morning, we filed our 10-Q and issued a press release of the presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements.
We will also refer to certain non-GAAP measures on this call. For reconciliations, you should refer to the press release and our 10-Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the Q1, we reported GAAP net income of $0.68 per share, while distributable earnings were $0.79 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the Q1. If you have any questions following today's call, please let me know. With that, I'll now turn things over to Katie.
Thanks, Tim. BXMT's results this quarter stand in clear contrast to the negative macro backdrop. We reported $0.79 per share of distributable earnings, an increase of 27% year-over-year. Our earnings covered our dividend by a considerable margin of 127%. Our credit performance was steady with no defaults. Our CECL reserve increase was therefore modest and more than offset by the earnings we retained in excess of our dividends, maintaining our book value. We ended the quarter with a substantial $1.6 billion of liquidity to insulate our balance sheet and capitalize on opportunities.
More than a year into one of the most aggressive Fed tightening cycles in history, the resilience of our business continues to come through in our results, with the outsized income across the 97% of our loans that are performing offsetting the challenges of the 3% that aren't. We've taken our reserves up substantially, 2.7 times over the last year. The strong current dividend we've delivered far outstrips the book value impact of these reserves for our shareholders. On the current share price, that return dynamic is even more powerful. We're trading at a 14.7% dividend yield and an 18.7% earnings yield, with significant downside protection given the deep discount to book. Being a lender is distinct from being an equity owner. Today, the divergence is particularly meaningful in the economic experience along the way.
As a floating rate lender, our cash flows are growing, and the interest we collect on each loan, each payment date de-risks our return and that of our investors with every passing quarter. This is the power of current income, a critical differentiator for any business in a volatile period. In addition to the significant cash flow generation of our portfolio, as a senior lender, we start with a 36-point margin of safety. Credit enhancement that ensures value declines are first absorbed by the equity before we feel any impact on our recovery. Put a different way, if the value of an asset is down 10%, 20%, or even 30%, the expected outcome is the same, full recovery of our loan. We are well aware of the liquidity challenges and credit headwinds in the market, and they are not new in the last 90 days.
We proactively positioned the business to withstand them, starting with our first principles of low leverage floating rate senior lending and a well-structured match funded balance sheet. More recently, with the conservative strategic positioning we adopted a year ago. At the outset of 2022, we raised the bar on originations, shifted our asset management strategy to reduce credit risk at every opportunity, and executed on a plan to bolster liquidity ahead of the volatility, raising $1.2 billion of fresh capital during the year and terming out all of our corporate debts. We will not be immune from credit impact, especially in the office market. That is why we have booked significant reserves against our most challenged five-rated office loans, over 20% of carrying value on average, implying a roughly 50% reduction in real estate value from origination.
We are realistic that there will be more challenges over the coming quarters, hence our watch list. Our four and five-rated office loans remain just 7% of our overall portfolio. We have been extremely proactive in managing our office loans. On many of our four-rated office deals, we are in active negotiations for additional equity commitments, something we have already achieved on 16 office loans in the last year, including two on the West Coast just in the last few weeks. This quarter, we were paid off on excuse me, on $300 million of office loans, adding to the $1.5 billion of office repayments we collected last year, and reflecting the benefit of our basis and position as a senior lender. 25% of our overall loan portfolio is U.S. office.
While our pre-COVID underwriting did not contemplate today's hybrid work pressures, we have always been deliberate and selective about real estate quality, location, and sponsorship. As a result, we believe our office portfolio is meaningfully better positioned than the market as a whole. Across the top U.S. markets, less than 5% of office stock has been built since 2015. Our performing portfolio is nearly 50% post 2015 ground up or substantially renovated new construction. In contrast to the capital-starved assets that populate the CMBS market, as a transitional lender, our assets by definition have gone through recent CapEx plans. This makes them better positioned to compete for tenants, particularly as capital for renovation and leasing costs becomes more scarce. We have substantial concentration in Europe and Sun Belt markets, together 48% of our office portfolio, where fundamentals are more stable.
Moreover, the office risk is deeply priced into our market valuation. We are trading today at 0.64x book value. To dimension the losses implies it equates to an impairment of over 90% across all of our four- and five-rated office loans, effectively a full principal loss on first mortgage loans. This is extremely punitive and credit outcomes take time, during which period we benefit from current income. For the five-rated office loans we put on cost recovery as of the beginning of the year, we have already reduced our basis as we continue to collect interest across all of our loans, including these. All else equal, our highly attractive dividend would remain covered by DE even if we placed all of our four-rated office on cost recovery as well. Across the overall portfolio, we are seeing strong performance.
For multifamily hotels, essential retail and many other segments of the real estate market, cash flows are robust. Though rent growth has decelerated in some areas, absolute rents are still well above levels at origination. Rising costs and capital markets illiquidity have significantly reduced the new supply pipeline. As a result, we see business plan progress as well as repayments despite the highly illiquid environment. We had 10 upgrades this quarter, primarily multifamily and hotel loans. This included a four-rated New York City hotel, reflecting its strong cash flow growth over the last 12 months. We see the same recovery story across many of our four-rated hotel loans, as well as in the one to three risk rating segment of our portfolio.
Our upgrades also included one of our largest office loans, Burbank Studios, a Frank Gehry design trophy new build asset, where construction is substantially completed and WarnerMedia took occupancy. Unsurprisingly, given the environment, we saw some downgrades as well, primarily office loans in New York and San Francisco. Altogether, our weighted average risk rating has moved negligibly in the last year, reflecting improvement across many assets, balancing the deterioration we see in some segments of our office portfolio. Today, one and two rated loans represent 29% of our portfolio, the highest level since before COVID. Nearly $600 million of loans repaid this quarter, with more than half in office and the remainder virtually all in retail and hotel. While we continue to expect the absolute levels of repayments to be tempered, the diversification of our portfolio makes them likely to continue apace.
New originations will also be measured, a result of the much slower transaction environment, as well as our preference for maintaining maximum optionality in this environment, which we can well afford to do given our robust earnings power. As a balance sheet lender, our earnings are not dependent on the pace of new originations, but rather on the interest income we derive from our well-invested portfolio. That income is at near record levels. There's no doubt the coming quarters will continue to be challenging. We expect short rates to remain elevated. The failures in the regional banking sector will likely tighten the regulatory environment for all banks. While long-term rates are lower, recession concerns are driving sustained dislocation in the capital markets. For our business, we have not lost sight of the opportunity on the other side of this storm. Direct lending is tailor-made for this environment.
Many banks will have less money to lend, and their capital will be more expensive. With quickly changing markets and more opaque underwriting conditions, fewer platforms will have the real-time knowledge to skillfully assess opportunities. Available lending capital will become more scarce and command a higher return. While the transaction environment is subdued at the moment, the passage of time will eventually push deals into the market. We started the Blackstone Real Estate Debt business in the aftermath of the global financial crisis, stepping into the void of a similar realignment of the bank regulatory framework. Since then, we have built a $60 billion AUM platform with truly differentiated information, expertise, relationships, and investment talent. On the other side of this turmoil is a singular investment opportunity for our business, and no platform is better equipped to capitalize on it than Blackstone.
With that, I'll turn the call over to Tony.
Thank you, Katie. Good morning, everyone. This morning, BXMT posted another quarter of strong earnings, providing clear support for our stable dividend and a compelling return for our stockholders. Our Q1 GAAP net income of $0.68 per share is up considerably from last quarter's GAAP net loss of $0.28, with no significant CECL reserves running through our results this quarter. Our distributable earnings, or DE, remain strong at $0.79 per share for Q1 , roughly in line with the earnings we generated in the Q4 , excluding the notable $0.07 prepayment fee we received in December and highlighted on our previous call.
This consistent level of DE reflects the continued performance of the vast majority of our floating rate loan portfolio and the continued benefit of rising rates, which added about $0.04 per share to our Q1 earnings. This was counterbalanced by a handful of loans on cost recovery status where the interest we collected this quarter, about $0.06 per share, did not generate earnings, but instead reduced our basis in these loans. Similar to last quarter, we continue to collect all amounts due from our borrowers, including these cost recovery loans. Our book value per share of $26.28 was slightly up for the quarter as our believed retained earnings outpaced our modest 1Q CECL reserve. On the topic of CECL, we recorded a net reserve increase of $10 million this quarter, primarily related to asset-specific reserves.
Our general reserve was up slightly quarter-over-quarter after a significant increase in Q4 to reflect the more volatile macro environment. In terms of asset-specific reserves, we recorded 1 new impairment against a small office loan in Brooklyn, which we also moved to cost recovery accounting. This was significantly offset by a CECL reduction driven by incremental cash flows collected from one of our previously impaired loans. Our total asset-specific CECL reserve of $197 million represents about 20% of our five rated loans. We carry an aggregate $352 million or $2.04 per share total CECL reserve as of 3/31. This reserve reflects our quarterly bottoms up loan by loan analysis to identify impairments and risk in our portfolio, as well as the impact of broader macroeconomic conditions.
Our Q1 risk review also resulted in seven loan downgrades and 10 upgrades, reflecting the migration of our portfolio away from a typical three rating as certain loans remain challenged while others advance their business plan and improve our credit position. Continuing on credit, we added an additional metric to our reporting this quarter, net loan exposure, to facilitate understanding by investors of where credit risk may lie in our business. This metric takes our existing disclosure of gross loan portfolio and excludes our senior syndications and CECL reserves, resulting in the net credit exposure we have to each loan. GAAP treatment of loan syndications, which are sometimes accomplished through sales and sometimes synthetically through uncrossed non-recourse term match loan structures, varies depending on the legal structure of each transaction.
Some structures remain on balance sheet while others do not, but all accomplish the same economic outcome of limiting our capital at risk to our net subordinate position. Our net loan exposure creates parity among all syndication structures and properly reflects the credit risk we have sold for the senior portions of these loans, as well as where we have already taken loss reserves against our portfolio. Our 10-Q also includes net loan exposure as of 12/31 to show how our portfolio has migrated in Q1 on an equivalent basis. Turning to the right-hand side of the balance sheet, our capital structure remains well insulated from market volatility with stable asset level financing, long-dated corporate debt, and ample liquidity.
While our financing activity was light in 1Q given the slow transaction environment, we continue to benefit from our deep banking relationships as part of the Blackstone franchise and the structure of our financing, none of which allow for margin calls driven by market-based valuations. Further, 63% of our total financing are fully non-mark-to-market, either structurally immune from any form of margin call or with mark-to-market provisions limited to default assets only. Our liabilities are term matched to our assets, eliminating the risk of duration mismatch. Following the $220 million repayment of our convertible notes this quarter, we have no corporate debt maturities until 2026.
Our adjusted debt-to-equity ratio of 3.5x is down slightly from 3.6 last quarter, reflecting the benefit of Q1 retained earnings and $150 million of net principal cash flows from our portfolio as $594 million of repayments outpaced $444 million of fundings under existing loans. In addition to partial de-leveraging, this also contributed to our $1.6 billion of liquidity at quarter end, consistent with our effective liquidity at 12/31 at a level we have established to manage our business through a period of generally less liquid capital markets and stress in the banking system.
Our liquidity is composed of cash on hand and immediately available undrawn borrowings under our revolving credit facilities, which are concentrated with top global banks with no exposure to Credit Suisse, Signature Bank, or other high focus banks. We believe the strength of our portfolio and our defensive posture with respect to our liquidity and capitalization will allow us to continue delivering consistent, reliable current income for our stockholders as we continue to navigate a more challenging macroeconomic environment. With that, I'll ask the operator to open the call to questions.
Thank you. As a reminder, please press star one to ask a question. Please limit yourself to one question and one follow-up question to allow everyone an opportunity to ask a question. We'll go first to Steve DeLaney with JMP Securities.
Good morning, everyone, and thank you for the question. Prepayments, $600 million looks like represents only about a 9% annualized rate. That would just on the surface would appear to be low, you know, on loans with a three to four year life expectancy. Katie, I was just wondering if, you know, we're sort of in a shock and awe moment maybe here with the bank failures, et cetera. Looking out for the balance of 2023 and into early part of next year, where do you expect prepays to kind of settle in? Do you expect them to be a little higher than what we saw in the Q1? Thank you.
Thanks, Steve. certainly we saw a slower pace of repayments this quarter, which, you know, I think we expected and have been talking about for a while. It's a natural impact of
The capital markets, illiquidity, and everyone sort of going to the sidelines. Obviously, our portfolio remains well invested. We're able to sort of match the repayments and make sure we keep a well-invested portfolio and strong earnings power. I think looking ahead, there's a couple of elements. One, I agree with you that I think as the market sort of settles in, we'll see a bit more. We have a lot of loans in the portfolio that are stabilized and certainly available and in a good place from their business plans to be repaid, sold, refied, et cetera. I think the other element is looking at the five-year and the 10-year, they've obviously come down quite a lot and stabilized.
I think that when you think about liquidity in the fixed rate market, whether it's the agencies, CMBS, insurance, all markets that we're seeing much more active, I think that's going to result in more turnover over time. I think from our perspective, though, you know, what's really most important and what we've seen in the history of our business is that origination volumes and repayments are certainly lumpy. We have periods when they're very high, we have periods when they're lower, but they tend to be very well correlated, and we expect that to continue, you know, as we look out for the balance of the year.
Great. I appreciate that. My follow-up, you know, 5% of your portfolio is in Ireland, including your large $1 billion office portfolio loan. Could you talk a little bit about leasing conditions there in the Dublin market? We know there's some, you know, political unrest picking up again, unfortunately. The work from home, WFH, is that similar in Europe and in Ireland as we're experiencing here in the States? Thanks.
Sure. I would say as a general matter, when we look at Europe and the office markets there, you know, we see a lot more stability, lower vacancy rates, more positive dynamics on rents. Those markets on the office side historically have had a lot less in the sort of leasing concession, amenity war dynamic. The economic experience of owning an office building in Europe, especially a new quality, you know, high ESG standard office building is quite different than what we see in the U.S. I would say as far as Dublin and Ireland particularly, you know, the portfolio we have there, the large one, is actually a cross portfolio of office and industrial. The industrial has been extremely strong. The office has been very stable, well leased, long duration leases with multinational tenants.
From our collateral perspective, we're in a very stable place. As the market at large, there's obviously, you know, more tech exposure there. I think that'll take time to play out. The dynamics that make Ireland a strong long-term market, cost of living, well-educated population, you know, English speaking, part of the Eurozone, we feel good about those dynamics over time. As far as the near-term performance of our collateral, we see a lot of stability there as well.
Great. Appreciate those comments. I do note that.
Thanks.
We'll take our next question from Sarah Barcomb with BTIG.
Hi, everyone. Thanks for taking the question. You know, you spoke to preserving liquidity in the current environment, and we didn't see any new originations. I was hoping you could first talk about some of the spreads that you saw on any deals that didn't cross the finish line relative to the previous quarter, and also the attractiveness of maybe buying back stock and debt versus new originations going forward.
Sure. I think on the investment environment, the spread dynamic we're seeing is certainly still attractive from a absolute perspective. I mean, spreads are certainly wider than they've been. Base rates are obviously higher. I think the challenge is from an origination perspective, we're also very focused on credit and higher spreads, higher base rates means more interest burden. We're very focused on DSCR, making sure the deals stand up to the return we want, but also the risk profile we want, and also not compromising on the quality of borrowers and investment collateral that we target. To bring all those things together, you know, we have not seen a ton of deals that meet that bar. Again, really because the transaction environment is so slow.
I think transaction volumes were down, like, 50% year-over-year, and even more so in sort of larger assets. It's a very slow environment. We continue to look at things, and I think that, you know, spreads are wider for deals that we see. There's also other interesting investment opportunities that are starting to crop up, especially, you know, the potential to buy seasoned portfolios at a discount where you have legacy lower spreads, but you're buying them at a discount. The return works for a lender, but the DSCR math is a little bit easier. I think we're starting to see that, but really the position we're taking is maintaining that maximum optionality because we think the more interesting investment opportunities are really to come.
We haven't seen a lot of them yet, and we really wanna have the dry powder to address those very compelling investment opportunities that we think might come. You know, I think as far as, you know, looking at various parts of the capital structure and buyback, certainly we think that, you know, the way the various parts of the capital structure are trading are not reflective of the risk profile. I spoke to that a bit in my script. We always look at that. I think we're also, again, really focused on maintaining that maximum optionality for our business to address what we think may be a very interesting environment ahead.
Okay. great. I was hoping for a little bit more detail on that new five-rated New York office loan. Could you talk about what was happening on the ground there?
Sure. You know, that's a very small loan in our portfolio. It's an asset that we have reduced our basis in over time, but ultimately, you know, sort of hitting a decision point around maturity. You know, it was time for us to put it on five rating and take what we think is an appropriate impairment. You know, we're working with the sponsor, and I think we both expect to bring it to a close over the coming quarters. It's a well-located asset, maybe has an alternative use away from office, but, you know, overall, small loan and not particularly impactful to the overall portfolio.
Great. Thank you. We'll take our next question from Doug Harter with Credit Suisse.
Thanks. Can you talk about what loans you have maturing in the next 12 months and how those conversations with sponsors is going about, you know, maybe needing to put additional equity in in order to get an extension or to refinance?
Absolutely. We don't have a ton of maturities over the next 12 months or 2023 are the numbers I have. 7% of the total portfolio, 13% of our office portfolio. I would say as we look ahead at the maturities, they do really fall into a couple of categories. There are a number of loans we've already addressed. We've gotten significant paydowns from sponsors, you know, reduced our basis and put the loans in a stable position. There's other loans that we have clear path to repayment, so, you know, under app for Refi, et cetera. I would say, especially on the office side, the rest of the sort of 2023 maturities that don't fall into those two categories, we've already put on the watch list.
We really don't see a lot of additional risk in that segment of the portfolio. I think that as far as the conversations with the sponsors, you know, the tenor has been very good. I think one of the benefits of having the types of sponsors we have is they have a lot of capital. Obviously, they also have to see equity value to protect over the long term. You need the ability and the desire, you know, to protect the assets. Having sponsors that have plenty of capital makes the conversations work better, and we've been very successful over the last year getting paydowns on loans from well-capitalized sponsors and putting them on stable footing to get through this period.
I think in the last year, we got about $500 million of incremental equity just on office loans, which I think is, again, just a good indication of how we're able to negotiate with our sponsors, the quality of our assets, the basis we have, and the equity value our sponsors feel they have to protect.
Can you just remind us on your typical loan, are they recourse back to the sponsor or, you know, is it like CMBS where if they don't see equity that they can, you know, kinda hand the keys back to you?
I would say it's in between. We're primarily a non-recourse lender, so we don't have a lot of principal payment guarantees in our loans. We do have a lot of very thoughtful other structure, whether that's carry guarantees, completion guarantees, equity contribution guarantees, or other forms of structure in the loan that allow us to, along the way, improve our credit positioning as we go through these conversations with our borrowers.
You know, that's the approach we've taken, and I think that we found over the last year that these structural elements that we've always baked into our loans, which really didn't come into play for, you know, a lot of the last 10 years, have proven to be incredibly valuable in terms of being early warning signs and allowing us to have those positive credit outcomes early, not necessarily have to wait until maturity to, you know, touch our loans and improve our credit position.
Great. Thank you, Katie.
We'll take our next question from Stephen Laws with Raymond James.
Hi. Good morning, Katie. Or good morning, all. I guess to Katie to start, I wanted to follow up really on Sarah's question. You know, I know liquidity is in a defensive position to party here, but, you know, given your comments in the prepared remark about the disconnect between valuation and what that implies on loss severity across parts of your portfolio that seem to be unrealistic, you know, what are the thought process around stock repurchases or buying back debt, you know, when you do decide it's time to lean in? I mean, how do you think about the repurchase or opportunity versus a return on a new investment, you know, given the current valuation of the stock?
Yeah. I mean, I think it's a constant evaluation. I mean, we're obviously looking at all the different opportunities, both within the portfolio, outside of the portfolio, you know, the investment opportunities that we think are coming, and again, maintaining that optionality. You know, I think it, it is all of the elements I mentioned and it, and it's a constant evaluation. You know, we certainly, see the value of the various parts of the capital structure, and spend, you know, time thinking about it. Again, just looking at all of those different options, and I think optionality is the most valuable right now. As we see things play out, you know, some repayments in our portfolio, et cetera, you know, it's certainly something we consider.
Thanks. As a follow-up, I wanna maybe follow up on Doug's comment on some, you know, your answer on some structural protections and loans. You know, seem to have a lot of discussions about interest rate caps. I'd love it if you could talk about, you know, any color on how many of your loans have those? You know, how long are they in place? Do they start at origination date, or were some of the loans set up with springing caps, which would, you know, change the timing? You know, or maybe it's other structural protections in the loans or things that you think really enhance the interest collection and ability of borrowers to pay. Would love some comments around that if available. Thanks.
Absolutely. I think over time, we've been really successful in maintaining the credit protection on the interest coverage in our portfolio. We continue to have 95% of the portfolio with either rate caps, carry guarantees, or very significant interest reserves. I think that's one of the reasons why we continue to see 100% interest collection in our portfolio and obviously that cash income coming in, de-risking our return, de-risking our basis. It's something we anticipated and that we were very disciplined on in terms of structuring these loans going in, and I think that it's proving out over time. The rate caps, the way they usually work is they, you know, they follow the maturity schedule of the loan. We have had a lot of conversations with borrowers at extension to extend the rate caps.
I think that 95% number sort of tells you what you need to know in terms of how those conversations have gone. I think that, you know, other structural elements we have in our loans, I covered some of them earlier, but, you know, we have a lot of hurdles, leasing hurdles, extension tests, cash flow sweeps. You know, when we see cash flows moving in the wrong direction, we start sweeping cash right away in a lot of cases, and that's proven to be difference-making in some situations. You know, it's really the function of being a thoughtful transitional lender.
When we set these deals up, we really thought carefully about how we were gonna put guardrails into our loans to be early warning signs and really just keep us out of the danger zone if we saw things moving in the wrong direction. Not perfect. You know, we obviously have some loans that are challenged and where we've sort of exhausted all of those remedies. I will say in a lot of those cases, the structure we had along the way has mitigated our basis on those loans. Whatever the ultimate outcome will be, we've benefited over time from, you know, de-leveraging or other credit enhancement over time, and that'll mitigate our exposure when we ultimately, you know, come to conclusion on these loans.
I think that it's really been a hallmark of our business to think carefully about how to, you know, keep ourselves out of the danger zone as much as possible using those structural protections from origination.
Great. Appreciate all the color on that, Katie. Thank you.
We'll take our next question from Don Fandetti with Wells Fargo.
Hi, Katie. I guess one of the challenges in this environment is just the lumpiness of reserve build. You know, as you look at your reserve, it reflects the risk as you see it today. Would you be surprised to see like a meaningful reserve build in Q2 as you sit here today?
Well, I think as we sit here today, obviously our reserves reflect what we see in the market. I think that it's absolutely appropriate to know that we're in a dynamic environment. Conditions can change over time in either direction. We obviously had a reserve release this quarter, on one loan, but I think it's certainly possible that we could see more reserves over time. I think when we think about it, though, you know, looking at that watch list, percentage of our portfolio, particularly the office loans, you know, our four and five rated office loans are 7% of the portfolio. Thinking about the potential for reserve build, you know, I think as we see it today, it's really within that, you know, universe of assets.
A lot of them we're working on, you know, positive mods, as I mentioned, with our borrowers, more capital coming in, et cetera. We also have many examples of four rated loans over time, either repaying, being upgraded, or staying as performing loans for quarters or years. You know, I think that, you know, the environment is dynamic. We go through a rigorous process. We've obviously raised our reserves quite a bit over the last couple of quarters. But, you know, we don't have a crystal ball. You know, it is a pretty illiquid environment and things could change. But I think big picture, the universe of where we see challenges in the portfolio, you know, is a small portion of the portfolio. The materially higher earnings of everything else is really a very significant offset.
To date, the performance has been very strong. 100% collections, no defaults, and, you know, the challenges in the portfolio are really limited to a pretty small overall percentage.
You know, I think in the prepared remarks, there was a mention of the discount to the book, the market's applying, you know, significant 35% type discount. What do you think the disconnect is where investors sort of don't appreciate your office risk? Is it just the kinda new Class A high quality? Like, where do you think the disconnect is?
I think that in this environment where it's really sort of a risk-off environment, there's a lot of broad brush going on in the market and, you know, people sort of trading themes and thinking about, you know, the big picture versus spending the time to really dig into each individual business and its positioning. I think you can see that from the fact that, you know, a lot of the sort of most recent challenge in market trading performance came with the regional bank failures, which was, you know, an overall challenge in the market, but obviously not directly impactful to our business or really many of the others in the space. Clearly, we felt that in the trading performance.
I think it's really just a broad brush approach to, you know, being risk off on commercial real estate as a whole, obviously broader office concerns and, you know, perhaps just less sort of deep dive underwriting of what's going on in each individual portfolio.
Okay. Thank you.
We'll take our next question from Jade Rahmani with KBW.
Thank you very much. first question would just be, you know, squaring the very modest CECL reserve levels with what numerous banks have reported thus far this quarter, it does seem, you know, a disconnect. It seems out of trend with-What many of the CRE concentrated banks are reporting with an average CECL reserve on their overall CRE loan books of 2.05%, yet they should have, you know, lower LTVs, more stabilized assets than the commercial mortgage REITs. you know, just an overall question about how you think about the CECL reserve in context with a $25 billion portfolio that has a predominance in, office and is transitional, and the right sizing of that reserve.
Thanks for the question, Jade. I guess the first comment I would make is that, you know, we are very comfortable with the level of our reserves. I mentioned in my remarks, you know, this goes through a detailed grounds up loan-by-loan process in a SOX-controlled environment that's subject to audit. First and foremost, we believe our reserves are totally appropriate. You know, when you think about comparing us to the banks, you know, we're running at about 1.5% of our portfolio in terms of our total CECL reserve. You know, I think it's important to differentiate our business from the banking model, right? We don't take deposits. We do not have the kind of leverage they do. We are not regulated the way that banks are.
You know, when the CECL rules came out, excuse me, they're very analogous to the CCAR reserving that banks have to do for regulatory capital purposes. A lot of banks leverage their CCAR models, or in some cases, just use their CCAR models for CECL. That is a much more, you know, macroeconomic, statistical, top-down view, which I think is appropriate if you're a national bank with, you know, hundreds and thousands of loans that you can't necessarily go through loan by loan as we do for our 199 loans. So I think there's a little bit of a procedural difference in terms of how banks approach CECL and how we do.
Then, you know, your comments on the composition of the portfolio, you know, we are a transitional lender, but I think Katie mentioned in her remarks we are benefiting from that business model where the assets that collateralize our loans are able to pursue business plans and improve their cash flows and in many cases improve our credit position. Although we do have a focus on office, you know, which may be outsized relative to some comps in our space or, you know, in the banks, you know, if you take out the European component of that, which we covered earlier is a fairly different story, you're left with about 25% of the portfolio in U.S. office and about half of that in Sun Belt or new build office collateral.
That leaves a relatively modest portion of our portfolio that is probably more comparable to the generic office portfolio you might see if you were just looking across the market generally.
Thank you. As a follow-up, I was just wondering if you could comment on a few of the downgrades, you know, the San Jose office, the San Francisco office, New York mixed use, New York office, and I think also, if I recall correctly, a New York multifamily. Can you comment on some of the downgraded loans and the outlook there?
Yeah. I think the New York multifamily was from last quarter. As far as the recent downgrades, you know, I think you hit it. They're all office loans, primarily New York, San Francisco area, where liquidity is particularly challenged right now. Certainly looking ahead, as I mentioned at those sort of 2023 maturities decision points. You know, engaged in very constructive conversation on a lot of them. I think it's also worth noting, you know, at this point, when we look at our office with near-term maturities, and the sort of non-new build assets we have in these markets, there's not a lot that we haven't put on the watch list because, you know, for obvious reasons, we're focused on the prospects of what's going on with these types of assets.
You know, I think that they reflect the risk we've talked about in our portfolio. They really are. They do stand apart from a lot of the rest of the office, which as I've mentioned and Tony mentioned, you know, 50% new or substantially renovated since 2015. A lot of Europe and Sun Belt, a lot of new equity coming into our deals, you know, low basis loans. You know, we've tried to identify where we see the challenges, but the composition of that part of the portfolio is pretty distinct from the rest.
Thanks.
As a reminder, star one if you would like to ask a question. We'll take our next question from Richard Shane with JP Morgan.
Thanks for taking my question this morning. Katie, you mentioned that 95% of the loans have rate caps. I didn't catch, did you mention how long, the weighted average remaining life of those caps is?
Yeah. It's 95% with rate caps or other, you know, carry guarantees, reserves, et cetera. The duration really varies. I think that, you know, a good expectation would be that it ties to maturities, but it's really granular across the portfolio. I think that when I look at it, you know, we've had that 95% number plus or minus as long as we've been tracking this statistic, which has been probably the last year or more. You know, there's been a lot of maturities we've encountered over that period, a lot of conversations with borrowers and a lot of success maintaining, you know, those caps.
I'd also say with the shape of the curve, you know, we're, you know, well, we can all debate, you know, what's gonna happen with the Fed and sort of how the interest rates are gonna change. At this point, thinking about whether we have caps going out three years, I think is probably like a less relevant consideration. Looking ahead one, two, three quarters, you know, that cap dynamic is pretty consistent.
Got it. What I think I'm trying to understand here is you say that they're tied to the maturity, there's an initial maturity, and there's a maximum maturity. When you look at the maximum maturity, you kind of say, "Okay, most loans have a two-year extension option on them." Are they tied to the initial maturity, or do these caps actually have or do they have term tied to the maximum maturity? It's a pretty significant difference.
Yeah, no, absolutely. The caps are tied to initial maturity, but the caps are required to be renewed as part of a condition of extension tests. That's where I get at the fact that, you know, we have been very consistent and successful in getting those caps renewed at each point where they come to an extension test.
Understood. I'm assuming that as borrowers look at their decisions, those caps have gone up a quantum in terms of cost at this point. You know, to date, the impact of the floating rate portfolio really hasn't been zero-sum between you and the borrower. It's been zero-sum between you, the borrower, and the counterparty on the cap. Presumably as the caps mature, as you hit initial maturity, a lot more of the cost of higher rates is actually gonna be borne by the borrowers.
Yeah, that's right. I think that the fact that we've maintained our interest collection and maintained the cap experience in our portfolio indicates, you know, how that structure has worked. At the end of the day, the borrowers have to pay the interest on the loans. You know, whether that comes in the form of a lower strike price rate cap or a higher strike price rate cap that they then deposit the difference in an interest reserve, or they're just putting the gross, you know, look-forward interest amount in an interest reserve.
There's a lot of thoughtful ways we can cut it, but at the end of the day, I think we're benefiting from the requirements we have in our loans and the ability to ensure that our interest is well-sourced, whether it's from, you know, any of those areas that I mentioned. It really just comes down to the fact that we can get, you know, effectively a prepayment of interest in one form or another when we hit these extensions.
Got it. Okay. Thank you. I'll drop off and then try to get back into the queue. Thank you.
We'll take our next question from Arren Cyganovich with Citi.
Thanks. Yeah, I just wanted to follow up on the maturities question. You have two that are maturing in this quarter. One actually I guess already matured. It was an $84 million rated five office loan in April, and then there's one, looks like next week, $345 million. It's four-rated. What are the conversations like on those two specific loans?
You know, I think that, as I mentioned, the near term, you know, 2023 maturity office loans, you know, really fall into two categories. Either we have very clear visibility on near term repayment or we've watchlisted them. I think for the ones we mentioned, I mean the five-rated loan is five-rated. You know, as I mentioned, we're engaged in active dialogue with the borrower to, you know, bring that loan to a conclusion. You know, if we see liquidity in the market, I think both us and the borrower will be happy to, you know, move on from it. At the end of the day, all of our remedy conversations are about maximizing value for our shareholders. We have been evaluating all the options to make sure we maximize value.
It's a cooperative conversation. The borrower is not willing to put more capital in the deal. That's why it's a five. We've taken an appropriate reserve, and as I mentioned, it's a small loan. I think we'll move on from it in the relatively near term if we can. On the larger loan you mentioned, that is a very well-capitalized, strong long-term borrower, and that falls into the category of the loans that we're having very constructive dialogue with our borrowers on about, you know, getting the loans into a place of stability, you know, for the coming years.
Thanks. I guess, you know, the smaller loan, it had a original LTV of 64. You talked about, you know, the fact that there is all of that equity helping, you know, protect your loan. I guess that's the thing that surprised me thus far so much in this, you know, early parts of this cycle, is that, you know, you have folks that are willing to walk away. That's a significant amount of equity that they are walking away from because they essentially see the value as, you know, at least my perception, the value's below that, right? That's a, that's a really big drop in terms of, of office value.
I guess, it's just hard from us on the outside to say, you know, "Wow, that one wasn't good, but the, you know, these other ones are better." I don't know, whatever there is that you guys can do to provide, you know, I guess, clarity in terms of where we're seeing that, and I think that's what reflects the discount in your shares right now, is that kind of unknown related to that.
Yeah. No, I think that makes a lot of sense. We obviously talked about that a fair bit on last quarter's call. I think when you look at, you know, the new five-rated loan and the ones we downgraded previously, they really do share a commonality, and that is older vintage loans in a non-core location. The new five is in Brooklyn. You know, our previous downgrades we've had, you know, outer boroughs, Washington, D.C. Assets that targeted, you know, a relatively niche demand base that has really changed. You know, as we mentioned last quarter, you know, GSA being a most common one from that perspective. In some cases, you know, sponsors who are at the end of their fund lives or may otherwise have other considerations away from the deals. Of course, the value of the deals impacts their view.
I think, you know, as I mentioned in the script, you know, we are, you know, very realistic about the value of certain types of office having declined significantly. I think that it is really important to note that it's not monolithic, it's not across the board. What we're seeing from the fundamentals for newer builds, high-quality office is positive net effective rent growth, 10 points differential in occupancy levels, you know, pretty consistently across markets, positive net absorption, much less subleased space. You know, all of those fundamental dynamics that really do make a difference on individual assets. You know, the real estate market, you know, every asset is its own underwriting, its own location, its own dynamics, you know, I think that that's sort of core to how we've approached this business.
When we look at sort of the composition of the portfolio, we've tried to be very clear about where we see most susceptibility to risk, and it's in those older vintage, more challenged markets, and where we see less susceptibility to risk. That really comes down to flight to quality, better quality buildings, and markets that have less of a challenge from a fundamentals perspective, like the Sun Belt, like Europe.
Thanks. Just last question on getting a lot of questions about risk to liquidity and repo counterparties. Maybe you could just talk about whether or not there's larger covenants that your firm has to adhere to relative to these repos that you have outstanding. You know, how does it work on, I guess, an individual loan basis? If you have a loan that defaults, yeah, presumably you have to pay that counterparty back fairly quickly on that because they don't wanna have, you know, loans in default on their book. And does that impact your ability to borrow on that relationship whenever you have those kind of dynamics going on at the same time?
Sure. happy to jump in. There was a few questions there. I'll try to hit all of them. I guess to take the first one, as far as covenants, We do have uniform covenants across our credit facilities and our corporate debt. They're described in some detail in the Q, but they're the typical things you would expect around, you know, tangible net worth and minimum liquidity, things like that. We meet them. There's not particularly pressure on them. From a covenant perspective, I would say it's not something that, there's, you know, it's not very dynamic. We meet the covenants, and we have a healthy amount of space to meet them.
As far as if we had an issue under a particular loan and whether that impedes our ability to borrow under the credit facility, I'd say probably the simple answer is no. If you think about a credit facility with a given counterparty, if we have, let's say, five assets pledged under there's an availability for each asset. If something happens with asset A, you know, whatever the resolution of asset A might be, if we're able to borrow $50 million against asset B and have not, in fact, borrowed all $50 million of that, we could then still borrow against asset B. Although they're crossed in a downside scenario, provided we resolve asset A, our access to the available borrowings under the credit facility, you know, would remain.
That liquidity would be preserved. As far as your question on what would happen in a downside, yeah, if there was an actual defaulted asset, you know, that the banks would have an ability to call us up and ask for remedies there. I mean, it would be, depending on the credit facility and the specific mechanics, there may be, you know, more or less of a conversation there. I'd say to date, we haven't faced that issue. We continue to benefit from the broad relationships that we have with these banks. I think, you know, they're not, you know, particularly axed to make their first phone call to us and try to push collateral off.
That is one of the reasons we have $1.6 billion of liquidity, is if we do need to resolve some of these assets as we go further through the cycle, you know, we have the capital available to handle that.
Thank you.
We'll take our final question from Jade Rahmani with KBW.
Thank you. Can you comment on two loans? One is, the Chicago loan totaling $310 million. I think it's One South Wacker. Can you comment on the Woolworth Building? What's going on with those two loans? Woolworth is obviously historic, but, you know, not, well, needs to be repositioned and reconsidered. Please, comment on those two loans. Thank you.
Sure. I think on the first one, you know, both of those loans, as you can see from our, you know, portfolio overview, we have put on the watch list, you know, natural, given the locations, markets, liquidity. They both have been pretty strong performers. You know, sponsors who are very actively engaged. One of them does fall into that category, as I mentioned. Actually, both of them fall in the category, as I mentioned, with very constructive dialogue with sponsors in terms of more equity in the deal. There's been recent leasing momentum in both of them as well. You know, they're appropriately watchlisted, you know, given their locations and, you know, the overall dynamics of assets of that type. You know, we have seen continued performance.
You know, One South Wacker is in an A-plus location. The sponsor's done a really strong renovation, great amenities. You know, Woolworth has been a pretty steady performer. It fits its market, given its location, you know, strong value proposition for the tenants that use that asset. You know, we see stability in those assets, but we're obviously, you know, we're engaged in dialogue on them, and they're appropriately on our watchlist.
Thank you. On the liquidity side, you have over $500 million in cash. The remaining liquidity, is it primarily undrawn repo capacity? What exactly is it? To put new loans on repo requires repo lender approval, correct?
Sure, Jade, I could jump in. Correct on your last question. That doesn't relate to the liquidity point. The way I would think of it, as you said, is correct. The rest of the balance is availability under our credit facilities. That is not conditional availability. The way I would think of that is if we put a $100 million loan on our credit facility, get it approved by the bank, it's pledged, it's locked, and we can borrow $80 million against it. Once we have that approval for $80 million, we can revolve that balance up and down just like any other revolving credit facility you might have.
If we paid down $40 million because we had excess cash sitting around, we'd call up the bank and get the other $40 million back basically the next day, and they don't have any approval mechanics. The $1.1 billion or so of liquidity that we quote, which is the availability under the credit facilities, it's that dynamic I just described where it's basically as good as cash in 24 hours. The availability under the credit facilities to post incremental assets, which would require approval of the banks, that is not in our $1.6 billion. That would be upsized if we actually had new assets put on and approved.
In an environment of declining asset prices, which we are in, clearly, the repo lenders won't require updated appraisals on the underlying collateral since they've already previously approved it.
No. Generally, no, they don't. We don't face, you know, valuation-based, you know, capital markets margin calls on our facilities, so that's not really the dynamic that we face.
How generally are they speaking to you about their exposure? I see that the advance rates on your term loans, on your asset-specific financings and CLOs is close to 80%, but much lower on the repo side. I know you're leaving cushion and, you know, liquidity available, but are the repo lenders concerned at all about, you know, the underlying value of the collateral?
I think as a, as a general comment, I mean, we maintain extremely active, very constructive dialogue with our lenders. We talk to them daily, weekly. They're completely up to speed on everything in our portfolio. It's really important to note these credit facilities, they're cross-credit facilities. You know, they represent a cross-section across our portfolio. As I mentioned, you know, earlier, our four and five rated office is 7% of the overall portfolio. The rest of the portfolio is performing very strongly, and their credit facility credit, you know, reflects that diversification. They also have very deep relationships with us as a firm. They trust our ability to manage this collateral in the best way possible using all of the resources we have here.
They appreciate our level of dialogue and, you know, ongoing discussion with them about the very strong performance of the vast majority of their collateral. Those conversations have consistently been very constructive. As Tony mentioned, you know, the sort of ability to revolve up and down is completely separate and apart from the credit analysis. On the credit analysis side, you know, we have been, we have had, you know, just very good dialogue and very good treatment from the banks reflective of the track record of our portfolio and their comfort level.
Thank you. That will conclude our question and answer session. At this time, I'd like to turn the call back over to Tim Hayes for any additional or closing remarks.
Thank you, operator, and everyone joining us today. Please reach out with any questions.