Franklin BSP Realty Trust, Inc. (FBRT) Q3 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Franklin BSP Realty Trust Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lindsey Crabbe, Director of Investor Relations. Please go ahead.

Good morning. Thank you for hosting our call today. Welcome to the Franklin BSP Realty Trust third quarter earnings conference call. As the operator mentioned, I'm Lindsey Crabbe, Director of Investor Relations. With me on the call today are Richard Byrne, Chairman and CEO of FBRT; Jerome Baglien Chief Financial Officer and Chief Operating Officer of FBRT; and Michael Comparato, Head of Commercial Real Estate at Benefit Street Partners. Before we start today's conversation, I want to mention that some of today's comments from the team are forward-looking statements and are based on certain assumptions. Those comments and assumptions are subject to inherent risks and uncertainties as described in our most recently filed Form 10-Q filed with the SEC, and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, November 10, 2022. The company assumes no obligation to update any statements made during this call, including any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, we will refer to certain non-GAAP financial measures, which are reconciled to GAAP figures in our earnings release and supplementary slide deck, each of which are available on our website at www.fbrtreit.com. We will refer to the supplementary slide deck on today's call. With that, I will turn the call over to Richard Byrne.

Great, thanks Lindsey, and good morning, everyone. Thank you all for joining us today. As Lindsey said, I'm Rich Byrne. I'm the Chairman and CEO of FBRT. As Lindsey mentioned also, our earnings release and supplemental deck were published to our website yesterday. This morning, we're going to review our third quarter results and walk you through the current status of the portfolio. After my initial remarks, Jerry is going to cover our financial highlights and then Mike is going to discuss the portfolio in greater detail and provide some general market color. Then of course, we're going to open the call up for questions. I'm going to begin, if you're following along on our slide deck on Slide 4, and I'm going to walk you through all of our third quarter activity. So, we were very pleased with our third quarter results. We generated strong distributable earnings despite the challenging backdrop of the macroeconomic environment. Market conditions were largely similar to those in the second quarter as the Fed continue to fight inflation through interest rate increases or at least that was the biggest part of the story. While higher rates continue to benefit our earnings, the market experienced lower transactional volume. But more importantly, we also slowed our origination pace given the market volatility and our expectation that the future will bring more attractive opportunities. Despite all this and the lower deal flow in the broader market as well as our delivered posture, we originated $470 million of new loan commitments this quarter. These loans were originated on better terms than what we saw in the first half of the year and with certainly much wider spreads. The weighted average spread on loans we originated in Q3 was 651 basis points. This is approximately 200 to 300 basis points wider than the spreads we experienced in the first half of the year. Our ending portfolio balance increased to approximately $5.4 billion in Q3. We have a well-diversified portfolio of 166 loans, and our average loan size is $32 million. Incidentally, our $5.4 billion portfolio is now only slightly shy of our $5.8 billion to $6 billion stabilized portfolio target. At that level, we should achieve our full earnings power. As I'm sure many of you will ask, it's hard for us to predict when we will reach our optimal portfolio level, but believe it will be in the next one to two quarters. Mike will provide much more color on this later in the call. For the quarter, our distributable earnings were $0.33 per fully converted share, up almost 14% from the prior quarter. This translates to an 8.3% return on common equity. The increase in earnings was almost entirely driven by our increased net interest margin. We maintained our dividend level at $0.355 per share, representing a 9% yield on our fully converted book value. Once our portfolio reaches optimization, we expect distributable earnings to match or exceed our dividend level. Now I want to focus on our balance sheet. Our book value increased this quarter to $15.84 per fully converted share. This increase was largely driven by our common stock repurchases. And speaking of those repurchases, let me just go into that briefly. Shortly after the end of the second quarter, our advisors stock program was exhausted. At that point, the company's $65 million share repurchase plan was activated. Through the end of the quarter, the company repurchased approximately 931,000 shares for $11 million. Post quarter end, we were active as well. And through November 4, we repurchased an additional 485,000 [ph] shares for $5.5 million. Year-to-date, the advisor's purchase program and the company's repurchase program through both, we bought $51.6 million of our common stock. Under the company's plan, which, by the way, the Board extended through December 2023, we have $48.4 million still available to repurchase in the coming quarters. Looking at our assets, we are confident in the quality of our diversified portfolio and continue to favor the middle market space, where conditions are less competitive - than those for bigger loans. And thus, we believe the risk return is very attractive. Importantly, 75% of our portfolio collateral is in multifamily asset class spread largely throughout the Sun Belt region where we continue to see large amounts of population migration. And as a result, positive performance trends at the property level. Our portfolio has only 8% exposure to the office sector, and we have no international exposure at all. Mike will go into all this and more in much greater detail later in the call. Importantly, 68% of our portfolio - of our performing loan portfolio was originated in the last 15 months. We have limited near-term maturities as well. Jerry will discuss this and more, but we believe analysis of metrics like these will be increasingly relevant when assessing the quality of commercial real estate portfolios and predicting defaults and write-downs going forward. Our liquidity position at quarter end was extremely strong, with ample cash reserves capacity in our warehouse lines and reinvest options across our CLOs. Our total liquidity at quarter end was just under $1.2 billion. This provides a great liquidity buffer and affords us the flexibility to take advantage of opportunities as they arise from market volatility. Another structural highlight is our conservative use of leverage. We ended this quarter with 2.5 times net debt to equity and 78% of this is non-recourse and non-mark-to-market of our debt. Our portfolio risk rating remained at 2.1% for the quarter, which we believe to be a good indication of the inherent strength of our credits. We added two loans to our watch list this quarter and continue to have two loans on our non-accrual list. Both of the non-accrual loans we have discussed with you in the past. Mike will update you later on all this in the call, but to provide some brief color on the two non-accrual loans, we feel positive about the potential resolution of our Brooklyn Hotel loan, and we expect final recovery in 2023. We believe this could result in a gain. Because of the ongoing litigation, we do not have a lot to report on the Walgreens portfolio. However, there have been a few positive developments there that Mike will touch on. To conclude, our platform is stable and we view volatile markets like - those that we are currently experience to be an opportunity. We came through the COVID quarters as a market leader, and we're able to lend when others were not. Our defensive positioning has and will continue to enable us, to take advantage of attractive opportunities that arise through times of market dislocation. I'll let Jerry now walk you through our performance in the quarter.

Great thanks, Rich. Good morning, everyone. I'm Jerry Baglien, the COO and CFO of FBRT. I appreciate everyone being on the call today. Moving on to the results, let's start on Slide 5. In the third quarter, FBRT generated distributable earnings of $34.4 million or $0.33 per fully converted share. That represents an 8.3% return on equity. I'll walk through of our distributable earnings to GAAP net income - can be found in the earnings release for further details. We paid an aggregate amount of common stock dividend of $0.355 per share for the quarter, and that represents a yield of 9% on our fully converted book value of $15.84, and its - 93% of that was covered by our distributable earnings this quarter. Our commercial real estate portfolio increased to $5.4 billion, and Mike will go into further details on this later. Total real estate securities this quarter increased to $327 million. We added $75 million in investment-grade CRE/CLO securities as a yield enhancer in lieu of holding more cash. Shortly after the start of the fourth quarter, we added an additional $86 million of these. We do not expect total equity allocated to this asset class to exceed 5%. Our leverage position remains in our target range with net leverage ending the quarter at a very conservative 2.5 times, and our recourse leverage ended the quarter at 0.6 times. Our fully converted book value improved to $15.84 at the end of the quarter, and that's up $0.03 from the end of the prior quarter. Moving to Slide 6, you will see our run rate distributable earnings per share increased this quarter by approximately 50% and was right on top of our Q3 distributable earnings. The improvement in our distributable earnings was due almost entirely to our net interest margin. We have been seeing the benefits - the increase in base rates, SOFR and LIBOR on our floating rate portfolio, and this has immediately benefited our earnings. And while our distributable earnings did fall just short of dividend coverage this quarter, we are confident our earnings power will continue to improve as our portfolio nears optimization levels mentioned earlier in the call. The Fed's action to raise base interest rates will also continue to be a tailwind to earnings with every 50 basis point increase in base rates, our earnings per share increased approximately 7% or $0.07 on an annual basis. Moving to Slide 7, we closed $470 million of new loan commitments in the quarter. Net portfolio growth for the quarter was $99 million, bringing our core portfolio to $5.4 billion of principal balance on 166 loans. Additionally, we ended the quarter with approximately $530 million of add-on funding to take our commitments to $6 billion. On Slide 8, and as Rich touched on earlier, the origination vintage of our portfolio is highlighted. The dramatic and swift increase in interest rates and a corresponding rise in cap rates will likely create issues in many mortgage lending portfolios. We do not expect to see a dramatic increase in industry-wide interest payment defaults or write-downs in the near term. However, we do expect problems to surface once many loans reach maturity and thus borrowers are willing to write bigger equity checks or potentially take losses if they choose to sell. As such, we believe that age of inventory will become increasingly important as a statistic to monitor. 68% of FBRT's loan portfolio was originated in the past 15 months, which we believe puts us in a strong relative position while we wait for markets to recover. As for loan maturities, we now only have $77 million maturing in the fourth quarter of 2022 versus the $155 million that we show in the deck, and this is reflective of payoffs and extensions post quarter end. In addition, we have a total of $766 million maturing in Q1 and Q2 of 2023 combined. While markets are experiencing some current dislocation, having limited near-term maturities is a positive. On Slide 9, this shows our capitalization overview. Our average financing costs trended higher this quarter at 4.2% compared to 2.9% in the second quarter, and this is largely driven due to increases in the base rates. Our core portfolio is financed predominantly with non-mark-to-market facilities, which we view as best-in-class. At quarter end, 78% of our financing is non-recourse and non-mark-to-market and our overall recourse leverage stands at just over half a turn. On Slide 10, you'll see the details of our financing sources. We are now up to seven separate counterparties on our warehouse line because of proactive positioning, we have capacity on both warehouse lines and through the reinvest options on our CLO. Slide 11 shows the full picture of our available liquidity. In total, we have almost $1.2 billion of liquidity available at quarter end, including cash, warehouse capacity and available CLO reinvest. This liquidity will ensure we are able to take advantage of any market dislocations in the coming quarters and be a lender of choice for our borrowers. We are moving closer to optimization and seeing the full capabilities of our commercial real estate portfolio. Importantly, our flexible balance sheet and diversified loan portfolio puts us in a position of strength moving into the fourth quarter of 2023. With that, I'll turn it over to Mike to give you an update on our portfolio.

Thanks, Jerry, and good morning, everyone. I'm Mike Comparato, Head of Commercial Real Estate at BSP. I appreciate you being on the call today. I'm going to start on Slide 13. Our commercial loan portfolio consists of 166 loans, of which 99% are senior mortgages. We are well positioned for a rising interest rate environment with 98% being floating rate. The portfolio is predominantly multifamily with 75% of the book allocated to that asset class. Our geographic footprint is still predominantly focused across the Southeast and Southwest. I want to touch briefly on office exposure as that continues to be a focal point in the current market environment. As was mentioned earlier, we had 8% office exposure at the end of Q3. Yesterday, we received an office payoff loan, reducing our total office exposure to approximately $410 million. Our two largest office loans representing nearly 32% of our overall office exposure are heavily or completely leased to large public and/or investment-grade companies on very long-term leases. Our traditional multi-tenant office exposure when excluding those two loans is only 5% of the total portfolio and has an average loan exposure under $25 million, we believe our office portfolio to be very manageable at these levels. We have chosen to be selective in adding loans to our portfolio. Loan spreads seem to have stabilized in the recent weeks. However, coupons continue to increase. This time last year, coupons were ranging from 2.5% to 2.75%, while today, we are writing loans with coupons at 7.25% and higher. While we desire to achieve optimization as soon as possible, we are in uncertain times. There are several earnings tailwinds that are allowing us to be patient in origination, namely, those tailwinds are the continuously - increases we're experiencing in SOFR as well as the expected positive resolution of the Brooklyn Hotel in 2023. We always have been and will continue to be a middle market lender. Our average loan size of $32 million allows us to be incredibly selective on credit quality, given the size of the space. In addition, it provides a granularity of the book that meaningfully spreads out credit risk. Moving to Slide 14, this is our activity specific to the third quarter. We originated eight loans in the quarter for a total commitment of $470 million. Our average loan size this quarter ticked up. This was due to one larger transaction for the Elser condominium loan in Miami. Importantly, weighted average spreads and weighted average coupons were significantly higher than what we saw in the first half of the year. Headed into Q4, we believe spreads remain relatively flat, while overall coupons will continue to grow via increases in SOFR. Multifamily was our largest ad in the quarter with over 77% of originations in this sector. We also found opportunities in the hospitality and industrial sectors and remain focused on finding investments that meet our risk-return profile. We discussed negative leverage on our last quarterly call and that has not resolved itself. More importantly, we do not think it will resolve itself for several quarters. Accordingly, the transactional deal flow on tighter cap rate assets continues to be limited. We believe a meaningful amount of cap rate widening still needs to occur in both the multifamily and industrial sectors. Finally, on Slide 15, we have four loans on watch list as of September 30. Two loans were added this quarter with a loan risk rating of four. Those were a high-rise apartment complex and an office building. Both loans are two of the oldest on our portfolio originated in 2018. The high-rise apartment complex is under application with another lender, and our expectation is for full repayment before the end of the year. Our principal balance on this loan is approximately $35 million. For the office loan, we took title to the property in early Q4 via a deed in lieu of foreclosure. Our principal balance on that loan is only $13 million. The property was put on the market for sale on November 7. The other two loans on watch list are our Brooklyn Hotel and the Walgreens Retail portfolio. Both are subject to ongoing legal proceedings, so our commentary has to be limited. That said, we feel positive about the resolution on the Brooklyn Hotel property and expect to make a meaningful recovery in 2023. Because of the ongoing - litigation, we are limited in questions we can answer during the Q&A session regarding Walgreens. However, I want to provide a fulsome update. Through today, we have recovered $6.4 million of cash $4.4 million of the cash recovery was received during Q3. However, the specific allowance for credit losses was only decreased by $800,000 due to fair value adjustments that offset the cash recovery. In addition, shortly after the beginning of Q4, we received approximately $1.1 million of back and current rent directly from Walgreens and will continue to see rental payments across the entire portfolio directly from Walgreens going forward of approximately $1.1 million per quarter. We have obtained a final judgment against the borrower and its principles, and we have identified a number of recipients of fraudulent transfers. We intend to expand our litigation to maximize recovery. The total collectability, if any, from legal judgments is not currently determinable. Lastly, we have foreclosed and taken title on seven locations to-date. We expect to foreclose on several more between now and the end of 2022 with the balance to be foreclosed on in the first half of 2023. With that, I would like to turn it back over to the operator and begin the Q&A session.

Thank you. [Operator Instructions] Our first question comes from Steve DeLaney with JMP Securities. Please go ahead.

Thanks, good morning Rich and team. First, I just want to say - I applaud the opportunistic CMBS CLO investments. There are not many silver linings out there, but when you can take advantage of that and have the expertise. I think that's a - at some modest percent. I think that's an appropriate response for management and the Board. I hope that - and I know it will work out well.

Thanks Steve.

You're welcome. One of the strengths is about your balance sheet as your CLOs and the fact that I believe they're five, but you still have only one, I think, is past the reinvestment date. So you're out into 2023, 2024 on the other four, I believe. So as we look at this today, and you've listed for us in the deck with the attractive spreads are over LIBOR and SOFR - which you're originating today with all-in coupons and at least 600, if not 700 range? On an incremental reinvestment into one of those open CLOs, can you estimate for us what your ROE would be on that marginal loan? And is that - do you see that looking out over the next 12 months as a key driver of an increase in distributable EPS? Thank you.

Yes, maybe I'll take that.

Go ahead, Jerry.

This is Jerry.

Hi Jerry.

The short answer is yes. It's certainly going to be an incremental driver. I don't have the exact math in front of me on any given loan, but you're talking about putting loans in that are a couple of hundred basis points wider in spread than a lot of the older vintage that made up the tools. So just doing the simple math on that, we were at low to mid-teens returns on those before. On an incremental loan basis, it's going to be a factor higher than that. You're putting us into high teens on some of those new vintages that we'll be able to drop in there. So yes, I think you can extrapolate a little bit of that, assuming we can fit all the same boxes, which we managed to do so far, and we kind of target - there's a lot of upside from that. And you correctly noted, the first reinvestment besides FL5, which is already over, is September of next year. So we have a lot of term left on the reinvest in all those CLOs that we've done over the last year and a half two years.

Yes, thank you for that Jerry. And Rich, and I guess Michael, either one, we are in unprecedented times. How high is the bar now for new originations versus historical? And of the percentage of loan opportunities you're seeing, how selective are you being - like what percent of the loans that you look at actually past your higher bar today just to check?

Go ahead, Michael.

Yes, it's a good question, obviously. I'd like to think we've always had a relatively high credit bar. Obviously, the unfortunate Walgreens situation notwithstanding, we've never experienced a credit loss. But we are being even more selective given what's going on in the market. I think there's a lot of uncertainty, obviously, Fed funds was 1% in June. It's now 4% - it looks like it's going to.

Go into 5%.

Yes, there's a little bit of deer and headlight syndrome going on from equity players and lenders across the market. So we're being selective. And I think I mentioned in our statement, we've got a lot of tailwinds here that I think clearly get us to dividend coverage, hopefully sooner rather than later, even without writing many loans. Just with SOFR increases in the resolution of the Brooklyn hotel, we feel like we're in a great spot for 2023. So not only are we being selective because of the market environment, but we're being selective because we just feel like we've got tailwinds that allow us to be even more patient I think CPI this morning obviously is a meaningful step in the right direction. But we still think that there's probably more that can go wrong than right in the next six to 12 months. So being patient and cautious is clearly the prudent move on adding new risk to the portfolio.

Well, thank you - for your comments this morning, and have a great close to the year. Thanks.

Thanks, Steve.

Our next question comes from Jason Stewart with Jones Trading. Please go ahead.

Hi guys, this is Matthew on for Jason. Congrats on a good quarter. Where do you feel like is the best opportunity to deploy capital right now? I know you guys have been active repurchasing shares. So how do you view that to new originations at the moment?

Mike, why don't you talk about new originations, then we'll put it in the context of the share repurchases.

Yes so hey Matt, good to speak with you. Following up kind of what I said to Steve, we have the luxury of being patient right now. So we're really focused and continue to focus on the multifamily sector. We find that clearly to be the most recession-resistant asset class out there and certainly in the markets that we're focused. So we want to stick to our knitting and stay largely multifamily oriented. So we're continuing to look for opportunities in that space. We continue to be looking for opportunities in hospitality as well as industrial. And I would say the bar is highest kind of for retail and office. Office has an identity crisis and is going to continue to have one for a while. And I just don't think we're getting paid anywhere close to the appropriate premium for writing an office loan versus other asset classes for what the market appears to be providing. So we're just generally avoiding office, generally avoiding retail, not because we think there's a retail apocalypse coming. But again, I'm just not sure the incremental return that we're receiving for taking retail risk is worth it based on what the market is giving us today. So yes, looking forward, I expect this to continue to be very heavily oriented to multifamily and selectively adding hospitality and industrial assets.

Yes and Matt, this is Rich. Just to - you asked about the share purchases and contextualize that. I think we have obviously it's a zero-sum game with your capital. You only have so much. But we're sitting on a fortunate liquidity position. Think about our stock purchases in three - for three reasons. One is because we said we would in conjunction with the Capstead merger. We committed to a share purchase, and we've done what we've said. Two is because we think the stock is cheap. Clearly, what's been going on in the market has, as Mike put it, during the headlights a little bit, including for mortgage REIT investors and our stock traded pretty cheap, and we love buying our stock at attractive prices. And third is just to hopefully smooth out the trading a little bit and stabilize things. Now just a comment on all that, just again, to maybe put it in a broader perspective. Mortgage REIT stocks have dropped for a reason. I mean there's been a pretty dramatic increase in interest rates and all the knock-on effects that, that has created. And I think people need to look at existing portfolios and be thoughtful about who has risk and where that risk might be. I think we haven't been in the public markets that long, but our posture forever has been to be fairly conservative in our portfolio structure, whether it's our 75% multi or only 2.5x leverage. The fact that Jerry talked about are vintage - we have very limited near-term maturities. We think a lot of problems are going to arise when companies start to have to deal with maturities on loans. So I think if you look at our book - quite a diversification and a whole bunch of other things, I think we feel reasonably good about this, which is, we think, way more than offset by the opportunity. So the market dislocation has created two things. One is risk, obviously, in existing portfolios but has also created a great opportunity as you're hearing about for new originations. So of course, we're always balancing that against our share repurchases. But we still have about $50 million left on our authorization for our share repurchases. So it's my long way of saying that - I assume that we will be in the active in the market on buying our shares when they're cheap.

That's helpful, thank you for that. And then in terms of hospitality, could you talk a little bit about the loans you originated this quarter and then how those cap rates compare to multifamily?

Sure. I mean, Matt, keep in mind, we're usually lending on transitional assets. So cap rate is not always reflective of why we're making a loan or cap rate today is not always reflective of why we're making a loan. I would generally say cap rates on hospitality are probably 400-ish basis points wide of cap rates on multifamily, at least just generically speaking, on the multi that we look at versus the hospitality that we look at. So I think we've seen an overall widening in multi of probably 100-ish basis points. We think there's a little bit more to go, maybe a lot more to go, depending on the rate environment. And then I would say hospitality again, is probably 400 back of that could be 500 in smaller markets, could be 300 and CBD, it's just obviously case-by-case.

Awesome, thank you guys for the question for answering.

Thanks Matt.

Thanks.

[Operator Instructions] Our next question comes from Matthew Howlett with B. Riley. Please go ahead.

Hi guys, good morning. Thanks for taking my question. Look, great quarter, what I liked about the quarter is the portfolio is in terrific shape. Like you said, there's really - that can really take over from here. And my question is around - how do we think about - and how do you guys think about modifications and extensions, if they come up, and you have the luxury of not having much maturing here in the near term? But how do we think about when they do come up you work with your borrowers? And how does that fit in, in terms of your financing? Do you have to buy them up as CLO or a bank line? Just walk me through the conversation with borrowers when - that comes up?

Yes, thanks for the question, Matt. I think, obviously, COVID and the dislocation we experienced there was a great training session for our entire asset management group to be dealing with what we're dealing with today. And I think they did a phenomenal job through COVID, managing a bunch of modifications that all landed simultaneously in their lab. The nice thing, as you pointed out, is our maturities are pretty spread out over the next few quarters. So I think we're having the opportunity to deal with one, two, three situations at a time. So they're very manageable. But I would say that our D&A for extensions and modifications, is usually a very clear but nice message to the borrower that we are not their partner, and we expect them to show up to a conversation with their checkbook. If the loan doesn't qualify for extension and it's not performing to a level where they can extend. We're happy to have a dialogue and find a middle ground, but we are not going to be one-way option on extending loans that haven't hit the performance hurdles that we require them to hit at the original origination. So we do the best that we can to work with people. We just extended a loan yesterday borrower wrote a multi seven-digit check. We increased the spread. We got a fee. We went from interest only to a 20-year amortization. We really are thoughtful on making sure that the borrower is getting deeper into the asset, and we're always first focused on credit and then second, focus on economics. And then I would just say, lastly, we're very comfortable owning real estate. Clearly, it's never our goal and never the desired outcome. But if we have to own real estate, we've operated every asset class in the past, we're comfortable owning. We're comfortable operating. And in some cases, we think we can add value before we liquidate. So generally speaking, that's how we view it. And again, I think our experience from COVID sets us up really well to go through the next 12 to 24 months as we experience some maturities and potentially needed modifications.

No that's reassuring and good to hear, does it. Do, that provide a cap, you may come to that when you do an extension, just curious?

Yes, so every part of our negotiation requires that's just one kind of not negotiable point is typically our borrowers are buying interest rate caps that are coterminous with maturity. And in conjunction with an extension and/or modification, they've got to purchase a new cap that is through the extended maturity date.

Great no, I appreciate that. And it's good to you guys are very proactive and on top of it. But things do come about. On that note, on the Brooklyn Hotel, I know you can't say much, but I don't know about the bankruptcy - whether it's in bankruptcy or not, but what can you tell us in terms of comps? It looks like that market is strong. But - just high level, can you point us to any comps in recent hotel sales in the area?

I'm not going to point you to any comps. I would just say the hotel is performing exceptionally well under the tutelage of the trustee, and it has been on the market for sale via East deal [ph] for quite some time and running through that bankruptcy kind of sale process?

Great, okay. Got it. What's the current non-fair value on it? I know you have it?

Of our loan or of the hotel?

Of the loan?

We're carrying the loan to $57 million, which is the original principal balance.

Great. And then last question is big picture, Rich, I mean the dividend, I mean, you got to - looks like you're going to have dividend coverage here in the fourth quarter, and you may even go above it next year. Is the thought here just to, just use the buyback until the stock can get at a decent premium to your underappreciated book value, no need to look at any higher dividends next year? Just thought about when you get dividend coverage, optimized portfolio. I mean what's the strategically you're in a good position, just keep your powder dry, buyback shares and wait for a new entry point or is there some another way to think about it?

Well yes, I think there's, a couple of parts to that question. First, with respect to the dividend, we're always going to just try to match our dividend to our earnings. During this transition period, remember, we've been through this year or so where we've been transitioning the portfolio out of the acquired arms assets, which largely completed. And we set that $0.355 dividend based on what we thought we'd earn at the other end. Thankfully, we earned pretty close to that throughout and it wasn't a very tough decision. I think going forward, as we've referenced, whether it's SOFR increases, and/or the other future earnings driver for us is going to get to a more optimized level not carry around so much cash like we've been. We should be able to at least match that dividend or hopefully get even higher. And if so, we'll talk to the Board and potentially have our dividend match our level of earnings. I think it's straightforward as that. We have some other moving pieces like you heard with Williamsburg and some other things, which to the extent they impact earnings, we'll try to match. Again, our distributions with our earnings - with respect to the buybacks, as I said before, I mean, we think of that as almost like a separate capital allocation decision. And when our stock is - as you heard, we're originating loans it will fix something. So we certainly have a very attractive use of capital. But when our stock gets cheap, we like to buy it also for all the obvious reasons we like to buy our stock, not the least of which is we've only been public for a little over a year. It's not a bad thing for us to help manage our stock price, so it trades well and smoothly. So we're cognizant of all the above and we're going to just try to make prudent decisions.

Great. And then, of course, the leverage levels, I mean, obviously, you're below a lot of other peers we see out there and what you think you've done historically. But clearly, no need to do anything there - but the capacity to go up at some point, whether it's a year from now, is that still there or at some point, would you - or sort of 2.5% kind of that's sort of what you want to do in the model, and that's kind of it.

Hey it's Jerry. I'd say we've always kind of talked about a 2.5% to 2.75% range on leverage. And on a net basis, we're at the low end of that range now based on what the market is doing today and what we're earning on our assets, I think we're pretty comfortable there from a kind of risk return perspective. We're like you said, almost at dividend coverage where we're at. If the opportunity set improves and we like the credit side of things, maybe we'll tick-up towards the higher end of that range. But for us, it's just kind of a balance based on what we see today and how comfortable we are with the opportunity set.

Yes and just to add on, Matt. I mean, I think that range obviously is relatively low relative to our peer group. I think the reason we've been able to operate in that leverage range and have for, we've only been public for a little over a year, but we've been operating the REIT for many, many years before that in a consistent range there has been just because of our net interest margin, which we have a giant origination team. We think that's a little bit of our secret sauce and the fact that our average deal size is around $30 million per loan. We're just competing a little less competitive market. So if we can generate the ROEs as good or better, we hope as our comps and do it with less leverage, we'd rather do that than swing for the fences with comparable leverage just given the NIM spreads we've been producing.

No, it's a great thing. It's a positive characteristic. I just - though point that out and hear your thoughts. I really appreciate it.

For sure.

This concludes the question-and-answer session. I would like to turn the conference back over to Lindsey for a brief conclusion.

Thank you for attending our call today. We look forward to speaking with you next quarter.

Thanks, everyone.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.