BrightSpire Capital, Inc. (BRSP) Q3 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the BrightSpire Capital's Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Palame, General Counsel. Please go ahead.

Good morning, and welcome to BrightSpire Capital's third quarter 2022 earnings conference call. We will refer to BrightSpire Capital as BrightSpire, BRSP or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I end over the call, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-Q and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time-to-time. All information discussed on this call is as of today, November 2, 2022, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this morning and is available on the company's website, presents reconciliation to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. And before I turn the call over to Mike, I will provide a brief recap of our results. The company reported third quarter 2022 GAAP net loss attributable to common stockholders of $20.5 million, or $0.16 per share, distributable loss of $24.7 million and adjusted distributable earnings of $32.3 million, or $0.25 per share. The company also reported GAAP net book value of $10.87 per share and undepreciated book value of $12.08 per share as of September 30, 2022. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our third quarter earnings call, and thank you for joining us today. During the past three earnings calls, we sounded alarms due to the Fed's aggressive stance on inflation. The current market situation has been substantially self-inflicted as a result of the Fed's epic misses on inflation forecasts. Suffice it to say, we are experiencing interest rate increases and inflation levels not seen in 40 years. Currently, markets are pricing in a 75 basis point Fed interest rate increase later today, followed by a 50 basis point increase in December. We expect the Fed to pause interest rate increases at the end of the first quarter of 2023. With single-family mortgage rates recently hitting a 20-year high over 7% and we like others are concerned the Fed has a bias to overshooting the mark and dealing with the consequences later. Given this backdrop, BrightSpire expects the first half of 2023 to remain challenging. More presently, over the course of 2022, BrightSpire has been preparing for the impact of rising rates and the current risk-off investment environment. To this end, we have been throttling back our loan originations and maintaining higher cash balances. To this point, our current liquidity as of today is $387 million, of which $222 million is unrestricted cash. Our cautious views on market conditions are evidenced by the fact that our last few loan commitments were issued back in early May. Since that time, our pipeline for new loan commitments has been in a wait-and-see pause mode. For now, our focus is on asset and liability management, maintaining liquidity and protecting the balance sheet as well as our bank lenders. Furthermore, as we have said consistently during the past two quarters, there has been a scarcity of lending opportunities as the demand for commercial real estate credit has significantly contracted. On the capital markets side, the CLO market continues to experience wide credit spreads and new issuance has come to a virtual standstill. In the CLO secondary markets, recently issued AAA-rated bonds are now trading with dollar prices in the mid-90s with very attractive all-in yields at over 7%. However, secondary trading activity has been extremely thin, and therefore, not a meaningful opportunity to invest a lot of capital. We do not expect to see an improvement in credit spreads until the Fed becomes more dovish and there is an ensuing risk-on attitude among bond investors. I would now like to address the third quarter $57 million specific reserve associated with our 2 Long Island City office loans. And Frank will later address in his comments the reversal adjustments to our general CECL reserves. It has been our philosophy to provide our constituents with high levels of transparency. Along those lines, we have continuously disclosed detailed narratives about certain loans in our public filings. This disclosure is provided in order to allow investors to focus on assets that we, as management, have on our radar screens for various reasons. We first provided loan specific narratives for 2 Long Island City loans in the first quarter of 2021. Both loans also carried a risk rating of four since the first quarter of 2020, but now downgraded to a risk weighting of five just this last quarter. Both of these loan borrowers have the same sponsorship and both loans consist of a first mortgage along with a mezzanine loan position. The loans are not cross-collateralized. Despite the effects of our borrower who until recently has come out of pocket to cover negative carry costs, one of the Long Island City loans defaulted in October. This is loan number 41 in our investor supplement. Given this recent payment default, we engaged an asset sales adviser who provided an opinion of value for both loans, which led to these two specific reserves. I want to point out that the second Long Island City loan; loan number 18 in our investor supplement is still current and performing as of today. While we cannot speak on behalf of the borrower, the specific reserve on that second loan reflects the potential of a similar outcome in the coming months. We are coordinating closely with our borrower in an effort to resolve loan number 41 in the coming months. Given all I have said here, we will of course consider current market conditions in our resolution decision process. We have not ruled out that possible outcomes could include providing financing or taking ownership of the underlying property itself. Also, please note this loan has already been removed from his financing vehicle in October and is reflected in today's liquidity numbers. Please refer to our third quarter filings, where we have provided updated narratives on both of these loans. Finally, that will undoubtedly be great lending opportunities that will arise from this market dislocation. But to be clear, over these past few quarters and in the very immediate future, all things equal, our bias is that liquidity will generally take precedent over new loan originations and stock buybacks. With that, I would now like to turn the call over to our President, Andy Witt. Andy?

Thank you, Mike, and good morning, everyone. Starting in early Q2, the focus of the organization began to shift toward portfolio and liquidity management for the reasons Mike highlighted. As anticipated and previously noted, the universe of actionable opportunities continues to decline, and as our priorities have changed, the velocity of new originations has followed. During the third quarter, we closed three loans for a total commitment amount of $91 million. And at present, there are no new loans in execution. During the third quarter, our loan portfolio grew slightly and currently stands at $3.9 billion and total assets of $5.3 billion. Offsetting the decline in new originations has been a slowdown in loan repayments. During the third quarter, we received $40 million in repayments across two loans and two partial paydowns. Subsequent to quarter end, five additional loans have paid off in full, and we have received one partial paydown for a combined total of $114 million. Given the macroeconomic environment, we anticipate loan repayment volume will remain relatively low over the next couple of quarters. At a certain point, we expect sponsors will elect to hold properties longer in anticipation of a better capital markets environment, even in cases where meaningful value has been created. We also anticipate more modifications and loan extensions moving forward during the quarter and subsequently there were four modifications for an aggregate unpaid principal balance of $283 million and three by right extensions for an incremental $126 million of UPB. As interest rates continue to rise, we anticipate more loan extensions within the portfolio since alternative financing options will be less attractive. Our expectations across our loan portfolio is that repayments will slow and duration increases as borrowers elect to extend. Fewer expected repayments and an increase in duration in a rising interest rate environment bodes well for earnings in the short-term. However, we recognize there is a limit to the amount of rate-related increases that can be absorbed without partial loan pay downs from borrowers. As of September 30, 2022 excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 111 investments with an aggregate gross book value of $3.9 billion and a net book value of $945 million or 84% of the portfolio. The average loan size is $35 million and our risk rating is 3.1, unchanged from last quarter. First mortgage loans constitute 97% of our loan portfolio, of which 100% are floating rate and all of which had rate caps. Multifamily loans represent 53% of the portfolio, given the interest rate backdrop, inflation and volatility, it is no surprise that new real estate development of single-family home sales have dramatically slowed. We continue to expect multifamily occupancy rates and replacement costs to remain high. In addition, the loan portfolio composition includes 31% office. The average loan balance of our office loans is $37 million, with loan sizes ranging from $13 million to $120 million. Most of the underlying properties have granular rentals and the weighted average occupancy across the portfolio, excluding the Long Island City properties is 77%. The remainder of our loan portfolio is comprised of 11% hospitality with industrial and mixed-use collateral making up the rest. The portfolio has de minimis exposure to construction risk and 75% of the collateral is located in markets that are growing at or above the national average growth rate. We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across five primary banking relationships, totaling $2.25 billion. While this source of financing is not mark-to-market, we actively manage the portfolio for credit issues. We remain in active dialogue with our borrowers and lenders regarding asset performance, upcoming extension tests and pending maturities, which may result in loan modifications and in certain cases, loan-specific delevering. As of today, availability under our warehouse lines stand at approximately $815 million which represents a 64% aggregate utilization rate. Additionally, we have two outstanding CLOs totaling $1.6 billion. At present, approximately 42% of our loan collateral has been contributed to CLOs. 55% is on our warehouse line and 3% is unencumbered. In summary, the third quarter produced solid results, and we remain focused on portfolio, balance sheet and liquidity management given the uncertain market environment. Now, I will turn the call over to our Chief Financial Officer, Frank Saracino to elaborate on the third quarter results.

Thank you, Andy, and good morning, everyone. I'd like to draw your attention to our third quarter supplemental financial report, which is available on the Shareholders section of our website. The supplement continues to provide asset-by-asset details as does our Form 10-Q. For the third quarter, our adjusted distributable earnings were $32.3 million or $0.25 per share. Third quarter distributable loss, which includes $57.2 million of specific loan reserves on the Long Island City loans was $24.7 million or $0.19 per share. Additionally, for the third quarter, we reported total company GAAP net loss attributable to common stockholders of $20.5 million or $0.16 per share. GAAP net loss also includes the $57.2 million specific reserves on the Long Island City loans. During the third quarter, total company GAAP net book value decreased from $11.26 to $10.87 per share, while undepreciated book value decreased from $12.42 per share to $12.8. The decline is primarily driven by the specific loan reserves previously discussed and the FX translation related to our Norway office net lease assets, partially offset by a decrease in our general CECL reserve. I would like to quickly bridge the third quarter adjustable distributable earnings of $0.25 versus $0.24 recorded in the second quarter. The increase is primarily driven by the rise in the benchmark interest rate. Additionally, during 3Q, we received a non-recurring profit participation and loan extension fee. Adjusting for these one-time items, our adjusted distributable earnings quarterly run rate is closer to $0.24 per share. As for the remainder of the year, due to the rapid pace and level of deployment in 2021 and the first quarter of 2022, combined with the recent slowdown in loan repayments, we are well-positioned all things being equal to maintain higher levels of cash, while continuing to reduce adjusted distributable earnings that support $0.20 per share quarterly dividend. Furthermore, our earnings continue to be directly correlated to in place to benefit from rising interest rates. We provide more data in our supplemental financial report with an illustrative 100 basis point increase in the benchmark rates from the September 30th spot rates would add roughly $8.5 million to our annual earnings or about $0.07 per share. It is also worth noting that one month into the third quarter, base rates have already increased by approximately 70 basis points. However, as Andy mentioned in his remarks, we are very mindful that there is a limit to the amount of rate-related increases that our borrowers can absorb without making partial loan repayments. Turning now to our dividend, given our adjustable distributable earnings performance, for the third quarter, we declared a dividend of $0.20 per share, unchanged from the prior quarter. Moving to our balance sheet, our total at share undepreciated assets stood at approximately $5.3 billion as of September 30th, 2022. Our debt-to-asset ratio was 67%, and our debt-to-equity ratio was 2.3 times at the end of the third quarter, up from 2.2 times at the end of the second quarter. In addition, our liquidity today stands at approximately $387 million between cash on hand and availability under our bank credit facility. Cash on hand of $222 million is net of the financing paid down under the fall of Long Island City loan. With respect to share repurchases, we did not repurchase any shares during the quarter. However, year-to-date, we have repurchased approximately 5.3 million shares totaling $44 million at a weighted average price of $8.31. Going forward, while it may be attractive to purchase our shares at these levels, and Mike and Andy have both mentioned, overall liquidity, given the current environment is a key focal point and takes precedent over buyback. That said, to the extent we have excess liquidity, and we will evaluate the relative value of buying back stock. Looking at reserves and risk ranking, as Mike mentioned in his comments, during the third quarter, we placed one of the two Long Island City loans on non-accrual stat. With the exception of this one Long Island City loan, 100% of our loan book is performing. As noted earlier, we took asset-specific reserves on the two Long Island City loans totaling $57.2 million. In addition, our general CECL provision was $28.9 million, a reduction of approximately $16.2 million from the prior quarter. The lower general CECL reserve is primarily driven by the elimination of the general CECL reserves associated with the Long Island City loans. The combination of the asset specific and general CECL reserve at quarter end was $86 million, an increase of $41 million from the prior quarter. Turning to risk rankings. Both Long Island City loans changed risk ranking from affordable a four to a five, the risk ranking of one office loan was upgraded from a four to a three due to the sale of one of the underlying assets, thereby improving the credit quality of the investment. Altogether, our average loan portfolio risk ranking at the end of the third quarter was 3.1, unchanged from the second quarter of risk ranking levels. That concludes our prepared remarks. And with that, let's open the call up for questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Eric Hagen of BTIG. Please, go ahead.

Hey, everyone. This is Ethan Saghi on for Eric this morning. First question, can you talk about how the Signia Hotel in San Jose is performing after reopening under the new brand in spring?

Hi. Thank you, and thanks for joining us. The Signia Hotel is starting to do pretty well. Occupancy is up. They're opening about 30 rooms per month. I think they're moving on to the second tower in terms of opening rooms. There are two towers at the hotel. So I think that we're expecting some positive cash flow coming on that loan soon. And I think occupancy, as I said, has been trending higher over the past couple of months. So we're expecting a pretty solid performance and occupancy in the fourth quarter.

That's great to hear. And then, last question, just how are you thinking about the CECL reserve going forward? I know you said, the general went down, but specific went up because of the two Long Island City loans. If you could just give more color there, that would be appreciated.

Well, with regard to the Long Island City loans, I think, as I said in the prepared remarks, we had an opinion of value done on both of them, as we are potentially anticipating that the second loan has the same result as the first loan in the months ahead. I think, we were very realistic there in terms of rates, rental rates and lease up time in particular, given the softness of that market. And so, now, that loan is at a basis of under $300 a square foot. It's almost effectively one-third of the capital stack that was there when the loan was originally done. I think with the equity in the deal, about $34 million, the entire capital stack was slightly in excess of $100 million. So now we're down to about a-third of that. And we just want to be realistic with regard to the markdown. The second loan, loan number 18, that loan has more occupancy than loan number 41. It's about 30% occupied, has some signage income and antenna income as well. So that loan covers operating expenses, almost breakeven. So the markdown on that loan was less. It's also less dollars per square foot going in. I think the basis on that loan, with the new specific reserve is in the low $200s, like $205 a square foot. So we want to be very realistic on those loans, given current leasing conditions in the New York market. Frank, any further comments on the CECL? I don't think there's anything else there of note in the remaining CECL.

Got it. All right. Appreciate it.

I want to also just point out that the Signia alone, the hotel loan that you mentioned, that loan is only 50% levered on its borrowing today.

Great. Thanks.

Next question, Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Mike, first off, you guys really focused on asset management liquidity in your prepared remarks. I appreciate that. Can you talk about maybe some details on your asset management group, how big is it? How involved will you be? At what point do you get involved? Is it at a 4 rating? Is it before that? Maybe a little additional color on focus of asset management team over the next six months?

I would say substantially involved in every asset. We stay very close with our Head of Capital Markets, who works with our banking relationships and our CLO financing and asset management, which is in-house, along with special servicing, we have people located in a number of cities around the country. We're hands-on talking to borrowers every day that information flows directly into our Head of Capital Markets, where he's able to correspond with the banks to keep the banks abreast of what's going on at the properties on a daily basis. When we had a previous question about the Signia loan, I speak to that borrower directly often to get updates on what's going on there. So active -- we've always been very active in our management side of the assets and taking advantage of in-house asset management. We do not outsource any of that external. And when you're in the mortgage REIT business and you're running at 75% leverage, every asset has to be looked at and the banks want updates and expect that information to come to them quickly on every asset whenever they ask questions. And so you have to be prepared and stay ahead of the banks and make sure that you're giving them information real time when you're getting it.

Thanks, Mike. I appreciate the color on that process. Moving to the loans, as mentioned in the prepared remarks, maybe more than once, that borrowers do see some stress from continuing to higher rates with higher payments. Can you talk about caps? How many of the loans have caps in them? And maybe what -- whether they're in the money or weighted average strike? I know some other peers have provided some color around that. And I'm just curious kind of at this point of increases from here, how much of that increase in payments absorbed by the borrower versus some counterparty of the caps?

Why don't we turn that over to our President, Andy Witt, he's working very closely with a lot of loan modifications and extensions that are going on today. Andy?

Thank you. And to answer your question on caps, 100% of our senior mortgages have rate caps and condition for extension is acquiring another rate cap. So that's something that we're very focused on the onset and then on a go-forward basis. In terms of the modifications that we've seen in the recent quarter. Those have largely been as a result of not meeting extension hurdles. And we've -- in a number of those cases, provided release for and in exchange for paydowns of the loans, obviously, acquiring another cap. And then working with the borrower to effectuate a business plan to exit or extend the loan. It's also worth noting that with the modifications in the recent quarter, a fair bit of that, about 65% is associated with one loan that we expect to get to a positive resolution on keeping the coming quarter.

Thanks, Andy. And as a follow-up on that on the mods, are there any terms that that when you're modifying these, do you guys look to improve? I mean, can you modify and move a LIBOR floor that was maybe 50 basis points up to 3 or 300-plus that gives you some return potential – in the out years? I mean, how do you think about the terms you're willing to give on and what you're asking these modifications?

Yeah. It's really a holistic approach. So when we're looking at a modification, we're looking at what makes sense for us, what makes sense for the borrower, what's acceptable for our banking counterparties. So that may include an increase in rate. So really everything is on the table and we're discussing a potential modification.

Great. Appreciate the comments, this morning.

Let me just add back to connect this to the asset management question. We are, as we said on the call, we're working with borrowers, quarters in advance. We are anticipating that despite their intention to potentially pay off the loan, we're anticipating that likelihood is getting less. And so we are preparing those borrowers for what they would need to exercise an extension with us whether it be partial pay down of the loan, the rate cap, as Andy mentioned, replenishing reserves, things like that. So we are working with those borrowers well in advance of these dates.

Next question comes from Chris Muller with JMP Securities. Please go ahead.

Hey, guys. Thanks for taking my questions. I'm on for Steve today. So looking at your 2020 to 2023 priorities, can you talk about how you're thinking about fine-tuning the liability structure in this environment? So obviously, CLOs aren't going to be that in the near-term at least. So just the type of things you're looking at would be helpful. Thanks.

I think what we'd like to see is just some stabilization of the market. So what we are trying to do is, right now, warehouse as much cash as possible in anticipation of needing to move assets around. For instance, the Long Island City asset number 41 is now unencumbered. We removed that asset from its financing vehicles. So right now, we're trying to look out over the next few quarters to try to anticipate what assets may do and what capital may be needed to maneuver that asset in some cases, partially pay down loans or unencumbered loans should they go sideways. So right now, the game plan over the next few months is trying to get visibility on how much capital we need it much more to do that. We think right now, we have more than enough adequate capital to deal with all of this based on our planning. But as that dust begins to settle, and we get a handle on where the market is, then we can start to more confidently deploy capital into new loans. But right now, I would say, for the next couple of quarters, we're probably in more of an asset management mode. And if there are opportunities that come up, there's a pretty high bar to try to get the capital from us. So as I said, going forward next few months, more asset liability management, working closely with the banks, all borrowers to make sure the portfolio is stabilized.

Got it. That's helpful. And then on the loan extensions, would you characterize those more as borrowers waiting for a better market to sell into, or are there delays in business spend still going on there?

Andy, would you take that?

Sure. It's really a combination of both. Some are behind on their business plans as a result of various factors and looking for additional time. And as we move forward, we think that certain borrowers may delay the refinancing of their loans or any capital markets execution. So we see a combination of both.

Got it. That’s helpful. Thanks for taking the questions.

Next question comes from Matthew Erdner with JonesTrading. Please go ahead.

Hey guys. On for Jason. What are your guys' expectations for cap rates upon exit of some of these loans and where if they move from last quarter?

I think generally speaking, cap rates are probably up 100 to 200 basis points. It really depends on market and asset. In office assets, that's become very squishy. The market is in a pretty uncertain place in terms of how to value and finance office assets. So I think really going forward, it's how you're dealing with your office portfolio that is going to be of consequence. The multifamily assets, we're in markets where there's growth, and you can grow out of this with the short-term nature of those leases over the next year or two as loans extend. It's really how you deal with the office assets. And one of the things I'd point out is that roughly half of our -- less than half of our loans in office are pre-COVID, maybe -- I think it's like 11 loans for $0.5 billion that are pre-COVID loans, and the balance of the office loans, about 20-plus loans are roughly $600 million. So the average loan size there for the post-COVID loans is under $30 million. Our average loan size in new office sector is $35 million. The Long Island City loans are really one concentration, same borrower. The assets are a block away from each other for $135 million, $138 million for what the total loan amounts were there. That's a large concentration for us. So we have a very granular portfolio. And I think in terms of your cap rate question, really, it's going to be the office market. That is going to be a very difficult market in the coming year or so in terms of work-from-home impact and valuation of those rent rolls and the ability to finance those assets.

Got you. That's helpful. And then you mentioned a high bar on committing to new originations. What does that look like? Is it multifamily in growing areas or stuff like that?

It will be the same MO that we had before, yes, multifamily and growth areas. It is plausible that we do other assets and we can get returns that require a lot less leverage. We are making note of the fact that the CLO AAA market is yielding roughly 7% with the discount on where bonds are trading right now. But as I said in the prepared remarks, we really don't view that as a huge opportunity because of the ability to buy bonds there, you might have to buy -- to put out $100 million, you might have to buy seven, eight, 10 bonds, each one of them consisting of roughly 30 loans, you end up watching 300 loans on your balance sheet behind these securities to deploy what could be $25 million, $30 million of equity. So we don't really look at the CLO market secondary as an opportunity. And in terms of the returns, we need to punch way above 11%. We think we can get there with less leverage. But right now, as I said, buying back stock and making new loans is falling behind preserving capital for the next two quarters.

Got you. Thank you.

Next question comes from Matthew Howlett with B. Riley. Please go ahead.

Thanks for taking my question. Just on the outlook on the dividend rate and the core EPS. I know you don't provide guidance, but just how we think about you're covering the dividend nicely. How important is it to you, Mike, to keep that dividend payment where it is and continuing to cover it?

We think it's very important and which is why we haven't raised the dividend despite the coverage that we had to date. Our expectations are that given the prepayment slowdown despite the fact that we're not originating new loans. The prepayment slowdown is going to help sustain our dividend for a while there. And we also have -- we're earning now we would have thought 4% on our money our cash, which was unheard of a year ago. So I think that our expectations are we have some stability in earnings in the near term in the coming quarters. I think the issue is, as Andy pointed out, is that you can't just say interest rates up 100, interest rates up 200 and not expect some sort of deterioration in the underlying portfolio. That's why it's very important that we work with borrowers quarters in advance to make sure if they put the loan into a better coverage perspective, if they require a new rate cap and refunding of reserves, we want to make sure that we maintain the stability of the asset portfolio as rates are going up. But overall, right now, I don't anticipate moving the dividend but we kept it at a conservative level over these past quarters. As I said early on, we were talking about the Fed in Q1 and what they were going to do with rate rises. And knowing that we kept the dividend where it was to make sure that we wouldn't have to move it backwards.

I appreciate that. And then just on cash and where you would free up, I mean you have a net lease portfolio and a securities portfolio, are there any levers you can pull to sell some sort of high-priced assets that may be coming off of sense or something real estate securities to free up cash to continue to create liquidity, delever?

Okay. So right now, we have $222 million of cash. We have an undrawn credit facility. So we feel like we have ample liquidity to do anything here we have to do in terms of moving around loans, which is why I emphasized earlier that we -- especially with the loans that we've done pre-COVID, there was a high focus on making sure that the loans relative to our shareholder equity size, we're not out of balance. So we were not doing $100 million, $200 million of loans relative to our $1.5 billion of shareholder equity. We made sure that the portfolio was granular enough where we can deal with loans and move them around. The Albertsons equity, everyone knows, we own that at a 7 cap. We have no idea what happens with the merger with Kroger that's way out in 2024. If that were to happen, perhaps the rating on the credit will go to investment grade. But as I said, that could be a year and half from now, yeah. So we have -- there's interest in that asset. It's a triple net lease long-term 2038 lease, very financeable. We could pay off the CMBS with minimal defeasance at this point. So that is something that we can tap for capital if we need it. But right now, that's not something we think we have to do.

Great. And then just the – the last just one the Long Island City. You said once in the fall, one is you've written down to the value. Is there any preferred, sort of, I mean, would you want to foreclose? I mean you're a senior position. Just curious on what a workout could look like or what the best exit here is from here?

So out of respect to the borrower, the loan number 18 is current and paying.

Right.

And so that's all I'll say there. But we did say that we are anticipating a potential similar outcome and that's just from our perspective. I'm not speaking on behalf of the borrower. With regard to loan number 41, both of the loan LC loans have a small mezz component. Right now, on the defaulted loan, we are working with the borrower to see if there's a joint exit of the property that we can potentially do. But we are not ruling out the possibility that we pursue our remedies under a UCC mezz foreclosure. That's possible. We're not at that point yet, but that is possible. That would allow us to move more quickly because we have the mezz. What we do with the property thereafter depends on how we see the market. Right now, it is not an ideal time to sell anything, any financial instrument, and we are aware of that. That's why I said in the prepared remarks. We will consider market conditions in our decision-making, and that may ultimately entail us owning the asset. That's not something we're rolling out.

Got you. We'll wait for more disclosures. Thanks a lot. I appreciate it.

Next question comes from Jade Rahmani with KBW. Please go ahead.

Thank you for taking the question. I'm sure the other analysts on the call are getting an avalanche of questions on office. And I wanted to get your thoughts on what's playing out right now. We're seeing a spike in CECL reserves driven by specific office deals that are coming to maturity, do you think that primarily reflects liquidity, lack of liquidity in the market, or do you believe it also partly reflects the impact of remote work and longer-term issues in the office space?

I think it reflects both more immediately, the maturities are certainly an issue. And if you have some very, very large assets that require institutional capital, there are some liquidity concerns with regard to that. I can only speak to our portfolio. Our portfolio generally is pretty granular. As I said earlier Jade, we have 11 loans pre-COVID for about $0.5 billion that includes the two Long Island City assets. And we have some positive things that may result in some bigger assets there in the coming quarter with regard to that office segment of the portfolio. And with regard to what we did post-COVID, we have 22 loans. I have the exact number now, $634 million and the average loan size there is 28%. Our exposure is mostly drive to markets, and we look for very diversified rent rolls in markets where they were open for business and the work from home was having less of an impact. We do have some pre-COVID loans in New York still one loan. That's office it's really mixed use in Williamsburg. It's retail, which is leased. It's apartment, which is leased and Scott office, which is only partially leased. We do have some small loans in San Francisco. One has got a full LOI for the whole building and one is still struggling with some leasing. Those two loans add up to $50 million. So we have a very granular loan portfolio in office. And it really is city-by-city, loan-by-loan. But we think given the size of those loans that we have and the ability to work with borrowers to get loans pay down. We don't see any major moves in CECL. We think the Long Island City, as I said, that was the biggest office exposure that we had, the two assets combined. So we think that's the biggest CECL adjustment you'll have going forward.

And the follow-up would be, do you think that the trends playing out and coming to visibility right now in office is the tip of the iceberg for commercial real estate, and we're going to see cascading, loan defaults and other asset classes like multi-family, or do you think it's primarily an office issue right now?

I think it's primarily an office issue. And I think it's primarily an office issue in some of the major CBDs that are still having very low office attendance rates. New York City, subway ridership is still 65% during the week. Office attendance is still about 50% during the week, San Francisco is worse. So we really think this is primarily New York, San Francisco issue, but major CBDs. We do have some exposure in L.A. Quite frankly, we did some smaller lease-ups post-COVID, which are going very well in our office portfolio in L.A. We have some exposure in San Jose, two office buildings there for $100 million. Those are substantially leased. There's a lot going on with expansion and growth in that market. So we really kind of look at this as it's primarily a New York and San Francisco issue. But I do think that the chilling effect that, that is having on the office market at large is substantial. And I think banks are concerned about how do you land on office when you really can't predict what the rent roll is going to do or tenant is going to contract. There's been a tremendous amount of leasing in New York City, but those -- a lot of those tenants are moving around from other places. And there's going to be a lot in the sublet market that comes on. So I think we're just at the beginning of what's happening in the office market. And I think this is going to be a trend that is going to be talked about a lot more often in the first half of 2023.

Thank you very much.

I think other markets, short duration and with interest rates at 7%, single-family housing market is slowing down development is slowing down. We still have housing shortages. I think anything with short duration leases will continue to do well, and the office market is spotty. But as I said, Long Island City is our largest. And when you look at our portfolio, we have some issues, absolutely. There are some things that we're watching very closely, but it is very, very granular. My concern is who's going to buy the $500 million office building, who's going to buy the $250 million office building that can really start to shrink.

Thank you very much. Appreciate it.

I would like to turn the floor over to Mike Mazzei for closing remarks.

Well, thank you all for joining us today and thank you for your support, and we will see you on the fourth quarter call in February. Have a great holiday.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.