TPG RE Finance Trust, Inc. (TRTX) Q2 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to the TPG RE Finance Trust Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now turn the conference over to your host, Deborah Ginsberg. You may begin.

Thank you. Good morning. And welcome to TPG Real Estate Finance Trust second quarter 2020 conference call. I’m joined today by Greta Guggenheim, Chief Executive Officer; and Bob Foley, Chief Financial Officer. Greta and Bob will share some comments about the quarter and then we’ll open up the line for questions. Yesterday evening we filed our Form 10-Q and issued a press release with a presentation of our operating results, all of which are available on our website in the Investor Relations section. 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 and 10-Q reports. We do not undertake any duty to update these statements and you should -- we will also refer to certain non-GAAP measures on this call, and for reconciliations you should refer to the press release and our Form 10-Q. With that, it’s my pleasure to turn the call over to Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust.

Thank you, Deborah. Good morning and welcome to our second quarter earnings call. While the equity and debt capital markets indicate we’re in a recovery, we expect to continue to see significant volatility. The time it will take for us to meaningfully recover is unknown. With U.S. aircraft at a relative stands still and office attendance very low real estate NOI continues to have downward pressure. Although, we believe the trough is behind us, we operate in an environment where there is no clarity regarding near-term economic conditions. Additionally, there are numerous factors that will continue to affect the slope of the recovery period, virus spread, vaccine, the election, relations with China, to name just a few. In this environment, we are defensively focused. In particular, we are taking the following steps to best position our company. First we have added to our senior management. I am delighted to announce that Matt Coleman joined us this week as President of the Re. Matt’s experience with TPG Real Estate Equity Investing business, prior workout experience during the great recession, and his legal and operational background brings valuable experience and perspective to our business. Matt is very familiar with TRT as he has been continued -- continuously involved with us starting with our inception in 2015 through the IPO in 2017 and to the present. We look forward to partnering with him. Second, we’re focused on liquidity. A key driver of liquidity is the timing of loan repayments. During the first half of the year repayments were $321 million. Repayments in the last two years prior to March generally occurred significantly earlier than we had anticipated or wanted, driven in large part by the then continued to spread tightening and borrower’s ability to increase proceeds in a refinance. This phenomenon has stopped. Borrowers are not rushing to repay despite low LIBOR and treasury rates as they expect NOI will improve as COVID gets under control and the economy rebounds. Despite this we are aware of several potential repayments in cases where borrowers are in the process of refinancing our loan or selling the underlying property. Our primary use of cash is to fund future draws for CapEx, tenant improvement and leasing commissions and interest reserves on our existing book. We have only $15 million of construction loan future fundings under our one construction loan and the remainder of our deferred fundings totaled $420 million through December 2021. As a reminder, we receive financing from our lenders to finance up to approximately 65% of these future funding draws. During the quarter, we decided to pay down our whole loan credit facilities by approximately $158 million or 8%. This reduced our advance rate on loans pledged our bank lenders from 76% to 68%. Our objective was to reduce risk in the portfolio given the uncertainty of the timing of an economic recovery. Also, we continue to evaluate our sales of individual loans or interest in loans where we believe it makes sense. Third, we are zeroed in on asset management. Our senior and junior origination teams have joined with our asset managers to form a single team to manage our assets. Asset highlights include, 63 of our 65 loans are current on interest payments. This represents 97% of interest payments. We are in the process of completing a loan modification that will bring this number of current loans to 64% in the -- to 6 -- number of current loans to 64% in the near-term. The one loan that will remain is not current is a loan on a portfolio of limited service hotels, and although, the operations are certainly feeling the impact of COVID and shutdowns, it is in large part because of a dispute between the two owners that they have not come to the table with additional equity to effectuate a modification. The properties themselves are Marriott and Hilton branded limited service hotels in six of the seven have been tipped in the last year. Current occupancy is in the 40% range, which is approximately breakeven NOI. The properties are in dry two locations and are not dependent on corporate group convention business. This acquisition loan was originated in 2019 with significant new equity invested. In the second quarter we modified six loans with a $458 million unpaid principal balance. These modifications resulted in an accrual of $551,000 of interest in the second quarter. Other than the one hotel loan I referenced previously, our hotel sponsors have contributed substantial equity to support their properties. Most of the properties can support their operating costs from property cash flow. Office property rent collections are averaging about 90% in our diversified office portfolio. Multifamily rent collections bars have also been strong and averaged over 90%. 86% of the property securing our multifamily properties generally are in non-urban locations and/or our low rise properties. Collections are strong, but we think the distinction between bars who have embraced virtual tours and other non-contact leasing strategies and those who have not. We executed a non-binding term sheet to provide acquisition financing for an office building in Brooklyn. This financing will repay an existing TRT loan which was the subject of the deed in lieu request we disclose last quarter. The acquirer of this asset and prospective borrower under a new loan is an existing bar of TRT with whom we have a long successful track record. This is a very experienced office property owner operator in New York City, as well as other markets. The new loan required significant equity contributions from the borrower, including cash at closing and future guaranteed cash contributions. Our core earnings for the quarter is $17.5 million or $0.23 a share, which reflects an $0.18 per share or $13.8 million loss on the sale of our $99.3 million loan on a Class A multifamily property in Downtown Houston. The primary purpose of this 50% loan to cost loan was to provide lease up financing and additional improvements. Since origination, the property stabilized to a 94% occupancy. However, due to significant record concessions in the market, retail space vacancy in this property is higher than underwritten OpEx relative to newly constructed properties and in our view the low prospects for meaningful NOI growth, we decided to sell the loan. While COVID and the resulting economic impacts including lower oil prices have not helped the property, our decision to sell the loan was not motivated by COVID. This loan has been the subject of continued focus and we were able to negotiate a price which we felt maximized value to us. Bolstering earnings is our 167-basis-point LIBOR floor on loans, which is 150 basis points in the money, or asset WAC [ph] 5.06% versus our liabilities WAC of approximately 1.86%. To conclude, we are committed to maximizing the performance of our loan book, and continue to focus on maintaining and increasing liquidity in these uncertain times. I will now turn the call over to Bob.

Thanks, Greta, and good morning, everyone. A quick review of operating results. For the second quarter we generated GAAP net income of $42.9 million or $0.52 per diluted common share, net income available to TRTX common shareholders was $40.1 million, also $0.52 per common share and core earnings was $17.5 million or $0.23 per diluted common share. Our net interest margin was $44.2 million, up 2.1% from the prior quarter. We had no loans on non-accrual at June 30. We paid on July 14th, the $0.43 per share dividend relating to the first quarter of this year and we paid last week on July 24th, the $0.20 per share dividend declared on June 16th. Book value at quarter end was $16.55 per share, an increase of $0.49 per share, due primarily to the issuance of warrants in connection with the Series B Preferred Stock we issued on May 28th to a fund managed by Starwood Capital Group and GAAP earnings in excess of our $0.20 per share common dividend. Our second quarter results had seven -- several drivers. First, net interest margin, NIM grew quarter-over-quarter by 2.1%, due largely to the positive benefits of our in the money LIBOR floors on 100% of our loans, combined with non-zero LIBOR floors on only 5% of our liabilities, and that combination remains an important driver of our net interest margin. All of our assets and liabilities are floating rates. At quarter end, our weighted average LIBOR floor was 1.67%. In comparison, LIBOR at quarter end was 16 basis points. We continue to explore strategies to cost effectively preserve this positive margin against fluctuations in rates. Expenses were up 26% quarter-over-quarter, due primarily to non-recurring COVID-related expenses of approximately $2.9 million. We continue to manage tightly our controllable expenses but we recognize the need for professional services to help us manage the business. The base management fee was virtually unchanged from the first quarter. We paid no incentive management fee in the second quarter, nor did we in the first and we will not until we earn back over time the loss sustained in the first quarter. Loan loss expense was actually a benefit or income during the second quarter of $10.5 million, because the decline in our CECL reserve of $24.3 million net outstripped the loss on sale of $13.8 million incurred from the sale of that first mortgage loan that Greta described. In summary, the loans realized loss was materially less than its CECL related loss reserve that we booked at March 31. We held higher than normal cash balances during the quarter for defensive purposes, ending the quarter with roughly $300 million of available liquidity, including $173 million of cash on hand, net of cash we are required to hold for covenant compliance, $46.2 million of immediately available funds under our credit facilities and $81.3 million available for reinvestment from our second CLO FL2. It was a very busy quarter for us on the capital markets front, where we raise $225 million of preferred stock, deleveraged aggregate borrowings under our existing secured credit facilities by $157.7 million or roughly 7.7% of the outstandings. We extended maturities on three existing credit facilities, while simultaneously rightsizing the commitment amounts of two of those three facilities. We moved certain existing loans to our CLOs, and borrowed and repaid regularly with our repo lenders in the normal course of business. We issued $225 million of Series B 11% cumulative preferred stock and we hold an option to issue up to $100 million more before year end in two tranches of $50 million each. This capital buttresses our capital base during these uncertain times, with size to address our expected capital needs and aligns us with Starwood Capital Group, one of the strongest investors in the commercial real estate space. The voluntary deleveraging payments we made in late May, which totaled $157 million, reduced our average advance rate on repo borrowings to 68% from 76%, which implies a lender look-through LTV of a very modest 44%. In exchange for these payments, we will have a holiday for margin calls for certain defined periods and our work continues to increase from 51% share of total borrowings that are non-mark-to-market, non-recourse and equal or longer dated than our loan investments. We exercise existing extension options on our credit facilities with Morgan Stanley, Goldman Sachs and Bank of America to add at least 12 months of term to each arraignment -- arrangements, excuse me. Additional extensions are available to us. With Goldman and Bank of America, we reduce the financing commitments to avoid unnecessary fees, but we did retain options to increase each facility to $500 million at a future date. The weighted average final maturity of our secured credit facilities is now 2.3 years and these facilities represent 49% of our current borrowings. Non-recourse, non-mark-to-market borrowings represent 51% of our borrowings. Our two CLOs represent almost 48% of current borrowings have final rated maturities of 2034 and 2037, but their true maturity dates are tied to the repayment behavior of the underlying loans. Across both CLOs, the weighted average extended maturity of the loan so financed is about 4.3 years. During the quarter we borrowed a total of $23.5 million from four of our repo lenders in connection with the funding of $62.5 million of preexisting loan commitments to our borrowers. During the quarter we recycled $64.6 million of CLO reinvestment capacity, generating $22.6 million of cash for TRTX net of debt repayment on the loans contributed. That capacity was created by a partial principal payment of $15 million on one of our hotel loans, and the removal and refinancing outside of our CLOs of an existing loan. This recycling will remain available to us until the CLO reinvestment periods expire in the fourth quarter of 2020 for FL2 and the fourth quarter of 2021 for FL3, all subject to loan repayments that create the capacity I just mentioned. And finally, with respect to leverage, at quarter end, our debt-to-equity ratio was 2.8 to 1, which is consistent with our long-term historical trends and comfortably below our financial covenants. Regarding CECL, at June 30th, our CECL reserve was $58.7 million or $0.76 per share, a net reduction of $24.3 million over the prior quarter. The principal cause of the decline was the sale in early June of a $99.3 million first mortgage loan that created a realized loss of $13.8 million. The removal of that loan from our portfolio and its related CECL estimates of loan loss reserves resulted in a reduction in the CECL reserve of $24.8 million. The net impact of these offsetting factors, plus a net increase in the general CECL reserve of $0.5 million was to increase our net income by $10.5 million. Expressed in basis points against the total commitment amount of our portfolio, the CECL reserve was 104 basis points, as compared to 144 basis points at March 31st. On the same-store basis, our CECL reserve is slightly higher than the 101 basis points at March 31, which reflects our continuing caution regarding the COVID impacted economy and its impact on commercial real estate performance and values. We independently assess one of our 65 loans, which is a hotel loan that Greta described earlier, because it met the GAAP guidance for doing so. This collateral dependent loans contribution to the CECL reserve was less than $2 million and was estimated using discounted cash flow analysis. The macroeconomic assumptions embedded in our CECL analysis remained very conservative. We’re three months deeper into this COVID crisis. Our analysis assumes we’re no closer to a recovery. We do expect quarter-over-quarter changes and those reserve may continue to change materially in responses to COVID macroeconomic assumptions, observe transactions in the investment sales and loan sales markets and the actual operating performance of our loan collateral. Our weighted average risk rating measured on the amortized cost declined quarter-over-quarter to 3.1 from 3.2, reflecting the sale of one 5 rated loan, classification to 5 from 4 of the hotel portfolio loan Greta described and the upgrade to 2 from 3 of the multifamily loan based on performance that exceeds underwriting. We modified six loans during the second quarter to allow, among other things, borrowers to accrue 50% of interest due for up to six months. At June 30th, we accrued approximately 551,000 of payment-in-kind or PIK interest. Interest collections during the quarter were strong and we had no non-accrual loans at quarter end. Future performance will depend on many factors, especially the pace and the strength of the reopening of our national economy. And with that, we’ll turn the floor, excuse me, we’ll open the floor to questions. Operator?

[Operator Instructions] Our first question is from Stephen Laws from Raymond James. Please proceed with your question.

All right. Good morning, Greta and Bob. I figure, first, Greta, if you could talk maybe a little bit about the six loan modifications, how that’s -- those discussions go, what the give and takes are? I would assume the existing LIBOR floors will remain in those loans as through the new duration. But could you maybe provide a little bit of color around that and how many more modifications from here, I know you mentioned, one in process, but additional color on those conversations will be great?

Sure. Of the loans that we modified in the second quarter, which we mentioned, there were six of them, four involved some element of deferral of interest and in no case was the deferral of interest greater than 50% of the monthly debt service due and in no case was the period that we allowed any deferral of interest greater than six months and in many cases it was significantly less. These were all hotel loans and two of the six have no deferral of interest. And they each require the sponsor making significant equity contributions to the property either upfront or on an ongoing basis to cover all the other costs and expenses associated with the hotel, plus, of course, the 50% -- up to 50% of deferral of interest. In the -- in one case, the borrower contributed equity, representing 13% of the loan amount, of which two-thirds of that went to pay down the loan and the rest of that went to fund and interest reserve. And in the -- and in other case, and in many cases, the flags of these hotels have allowed the borrowers to access FF&E reserves to cover operating costs and debt service and we allow that as well pursuant to these modifications. We are working on, as we mentioned, one modification and we have completed a couple of modifications. It’s -- post the end of the second quarter and these are generally for hotel properties which are having the most stress.

Great. I appreciate the color on that, Greta. And I guess switching properties each from those hotel loans. You mentioned all hotel loans to office, your largest property type exposure. Can you give us any color just on discussions with borrowers, however, you would like to dissect it, whether it’s gateway city versus non-gateway or maybe central business district versus more outside the downtown area, business office complexes. Can you talk maybe a little bit about what those borrowers are seeing, how those discussions are going and differences in demand and maybe how you expect performance to be inside that property type?

Sure. Well, it’s -- the -- I guess, the cities people are most concerned about that the urban cores. And in New York City we have two main office properties in -- well, really three, one is classified as mixed-use, because there is a component of retail, but the primary use of that property is office. And of these three, for the purpose of this call, I’ll refer to them as office. Of these three office properties, one is 100% leased to a very strong tenant for 15 years. The other is 100% leased and 50% of the tendency or 47% to be precise is leased to one of the most successful online streaming movies companies…

Right.

… for a long period of time and it’s doing quite well, that tenant. And then we have one that is a mixed-use property. We have really one mixed-use property in Manhattan that has more of a diverse tenancy. It happens to be institutionally-owned by one of the top three largest insurance companies and a very, very strong office focused, private equity operator of the property. So that’s really our New York exposure. We don’t really have downtown exposure in some of the other major cities that people are focused on like, San Francisco, Los Angeles, Chicago. Our properties are pretty diverse. We have some properties in sort of Silicon Valley outside San Francisco that is -- one loan that is life science. We have one outside San Diego that’s life science. But I would say that it’s pretty diverse markets and not a tremendous amount of the cities that people are concerned about locations in at least the in the urban core. I don’t know if that helped you.

Great. Yeah. That’s helpful. A lot of discussions seem to be taking place on the office category and location clearly being at the center of that discussion. Bob…

But I -- but also, I’m sorry to interject, but I think you asked, how the discussions are going with these borrowers [ph]. And really with the bar -- these -- the -- as I mentioned, the office rent collections are in the 90% range and our office borrowers have not really -- they haven’t come to us like our hotel bars have asking for some type of you interest deferral or other types of modifications?

That’s great color. Appreciate that comment. Bob at the risk of asking a question that may need a call back. So, CECL and the assumptions behind that, clearly, the reserve in March was a bigger number for the loan that was sold then what was realized on sale? Can you talk about those assumptions? Is it simply conservatism that something changed from March to May or March to the sale that makes it a unique situation or is there likely conservatism across all the assumptions in CECL? So maybe and I know that’s a very general broad question, but any color there would be great?

Sure. Good morning, Stephen. Let’s see if we can break that down into two topics and take the second one first. I would say that the results of the sale of the loan when compared to the CECL reserve, in our view, largely reflects the team’s ability to identify a buyer for that note that had a materially rosier view of Houston and CBD Houston multifamily than we did. So in that regard, we found the outlier and executed with yet. With respect to our views on the conservatism of our economic assumptions and everything else, all the other judgmental factors that are involved in the CECL reserve. We came out of the box in March on a conservative bent, if you had prepared a schedule and your research that lined up, reserves measured in basis points across the space and ours were near the high-end of the range, frankly. At this quarter end, net of the loan that was sold, it appears that our reserves are more in line relationship wise with our competitors. But we were conservative out of the box. You saw that we had -- we downgraded from higher levels to four all, but one of the hotel loans in our portfolio at March end and risk ratings were an important driver of a loss reserve estimates. So I think that quarter-over-quarter, we remain very conservative in our macroeconomic assumptions. But I think the market should evaluate our CECL reserve in the context of us having adopted a very conservative stance beginning in March.

That’s helpful. You’re correct. The reserve levels certainly are pretty wide range across the sector. Last question, I think a quick one, the loan that went from a four to five non-accrual. How much interest income did that contributing Q2 that we assume going forward, we’ll go to pay down the carrying value of the loan?

Yeah. And generally speaking, we use the cost recovery method.

Yeah.

The GAAP permits different approaches and we can come back to you on the precise amount. It’s not material in comparison to companies NIM as a whole.

Right. Fantastic. Thanks for taking my question both of you Greta…

Yeah.

…and Bob.

Thank you.

And our next question is from Steve Delaney from JMP Securities. Please proceed with your question.

Good morning, Greta and Bob and Matt. Welcome. I look forward to meeting you. If I could start, you mentioned that there was a impact on core EPS from the Houston loan sale. I apologize that I wasn’t writing fast enough to keep up with that?

Yes. The loss on that was -- the realized loss was $13.8 million, which impacted core earnings by $0.18.

$0.18. Okay. And I think this is correct, as far as the impact on core, we should always just focus on realized losses rather than anything that’s going on within CECL, whether that would be general or specific. Is that correct?

Yeah.

Yes.

Okay. Great. And you’ll highlight for us, I guess, each quarter, when you actually have a realized loss, okay. Thanks for the clarity there. I guess, on LIBOR floors, really helping out a lot for the group as we -- you all work so hard to work through these credit issues, but 167 basis points, $0.15, it sounded like impact quarterly earnings. You’re sitting down maybe beyond just the hotel that you -- Greta you were describing how you met with your hotel borrowers and worked through modifications. But just in a broader general sense, should we assume that part of the ask on behalf of a borrower as you’re going through discussions for modifications, should we expect that will be getting -- you’ll be receiving requests to either lower or remove LIBOR floors and as we roll forward, you expect that weighted average floor to decline, say, over the next 6 month to 12 months?

None of our modifications have we changed the interest rate or the floor on our loans.

Interesting. Okay. Great. All right. Well, then maybe…

And if anything, the spread goes up, if there is -- like, if some of the negotiations maybe, can you give us some relief on the extension tests…

Right.

…that we have in a year and a half ad if we may trade that off for a more spread, certainly try to get as big of pay down, that’s the priority as we can -- as much as we can as the priority, but in some cases we might actually increase the spread.

Interesting. Okay. That makes sense. The loan sales, it sounded like the Houston situation was sort of a one-off and that you found a strategic -- local strategic buyer who had market Intel. But just more broadly, is there -- would you consider further loan sales, I guess, just to maybe take a lower your asset management burden, do you expect the market will develop -- secondary market will develop there, given what we read about all these private equity funds raising distress debt money?

Well, we would consider parcels. So, we would look at a…

Okay.

If someone approached us to buy a loan at par. Regarding our hotel loans, we don’t feel now is the time to be selling hotel exposure. We think most of the distress that’s going on with hotels is COVID and economic shutdown related, and our hotels occupancy really is varying across the Board. We have one hotel that is not reopened, that will open -- supposed to be opening within the next 30 days to 60 days. I haven’t seen the latest update. It may be sooner than that. But it was scheduled to open in July and then I believe that got pushed back to August and so it has zero percent occupancy. On the other end of the spectrum, we have a hotel that has 77% occupancy, and then a lot in between. In general, for limited service hotels, breakeven occupancy is around 35% to cover operating costs and if you have a union hotel in urban market like New York City, which we don’t happen to have, but that would be at the higher extreme, maybe 50%, 55% occupancy. But we don’t believe now is the time to selling these hotel loans, because that people are using a discount rate today and looking at an IRR that reflects the uncertainty regarding the timing of the recovery. So once that uncertainty diminishes through medical achievements for vaccine…

Sure. Vaccine. Yeah.

…therapeutic, then we believe the discount rate if that investors would require drops materially and you’ll realize a better result from a sale.

Yeah. Makes sense. Well, thank you both for your comments. Appreciate it.

Thank you, Steve.

And our next question is from Rick Shane from JP Morgan. Please proceed with your question.

Thanks guys for taking my questions this morning. Interesting comments related to incentive fee. And I appreciate that you guys have high watermarks that spherical investors. I am curious how you guys think about that given the difficulty, given just sort of the nature of the economic model of regaining that high watermark in the incentive, the ability to capture the incentive fee going forward. How do you think about that and I hate to reuse the word incentive, but from an incentive perspective, I do think it’s a good sign and welcome that that TPG had -- is reiterating their commitment to the vehicle. But I do wonder the challenges with incentive fees being reduced probably for a very long time?

Well, Rick, it’s a good question from an analytical standpoint. The provisions of our management agreement, which as you know are very, very similar to those of everyone else in the publicly traded space. For us to be in the money on the incentive fee or the manager to be in the money on the incentive fee and for the read to be obligated to pay it, several tests need to be met. One of them is that, cumulative core earnings needs to be positive as measured over the preceding 12 quarters. So the simple math there would be to take a look at what our cumulative core earnings were assuming that last quarter, the first quarter was T equals zero [ph] and then divide that by what you think our run rate core earnings are going forward. And it’s not immediate, but it’s close enough that I think that TPG and the employees of the manager can see it and they know that it’s there and they know that by doing the work that the credit articulated earlier with some cooperation from the macro economy that we can get there. But in the interim, our duty is to our shareholders and to maximize the value of the company and that’s largely about ensuring that the credit outcomes on our portfolio are as positive as they can be and that we continue to maintain a strong liability and liquidity profile. Greta, anything that you’d want to amplify?

I think you covered it very well. Thank you.

Yeah. Look and I appreciate that. Obviously, we’ve all known each other for a long time and I am highly aware of your individual personal commitments and integrity around that. It’s an interesting question in terms of motivating sort of the next level of managers and employees, and certainly an important consideration and it sounds like TPG is being supportive, which is good.

Yeah. The last point, Rick, I’m sorry to interject, but I think it warrants emphasis. TRTX is strategically it remains a very important part of the larger TPG investment platform. We are not the only permanent capital vehicle that the firm has sponsored. TSLX the business lender, the BDC type lender is a very important and a very successful platform as well. But this is an area of true commitment, an emphasis by TPG as a global firm. Of that all of us can assure you and everybody else on the call.

Great. Thank you, Bob. I do appreciate that. And the other thing I just wanted to circle back on is, last quarter you guys had discussed a property where the sponsor advocates presented to you the notion of deed in lieu and that loan is still on the books exactly the way it was carried last quarter. I’m assuming that those conversations have taken a different course. But I am curious as you’re in conversations with your sponsors, if you’re finding any other sort of surprising scenarios, that was a loan that at least on paper look like a really good situation on a relative basis. And I’m just curious if you’re finding little strange incentives or motivations that are driving unexpected conversations?

I -- we’re not seeing that in the portfolio. That was -- you’re correct that this one was not something we anticipated. And I think it was related to, perhaps, divergent views among the ownership. But yeah, this asset is the one I mentioned in my comments, that is being acquired by a borrower that we’ve had experience with and that is quite capable in operating office properties and turning situations around. We -- the only other property I think that would come to mind would be the one that that is we rated number five. That is the only hotel property that the borrowers have not come to us with a meaningful proposal for a modification. And it really surprises us because we think that these being limited service and drive to locations that it would be in their economic best interest to enter into a modifications on this property as opposed to letting it go past due for three months. So that would be the only other one that I would call a surprise the rest of the portfolio, so far no unexpected news.

Great. Yeah. That definitely sounds like the sort of prototypical idiosyncratic situation. So that’s a good example. Thank you so much guys.

Thank you.

[Operator Instructions] And our next question is from George Bahamondes from Deutsche Bank. Please proceed with your question.

Hi. Good morning, Greta and Bob. A question on, I want to follow-up on Stephen’s earlier question regarding loan modifications, as you think about the world beyond the next six months for agreed upon period between shared checks and the borrowers that you’ve been having discussions with more recently. Should there be a need for an extension of the modification beyond the agreed upon period, can we see further loan modifications at that point or is it likely that those loans would be pretty soon send for the default process. I’m just kind of curious to what your thoughts are kind of beyond the agreed upon period ideally, the longer and better shape then, but just wondering what that might look like?

Well, that is the key question and that is why we highlight how uncertain these times are. And due to the fact that we just don’t know the pace of the recovery and when travel will improve to help these properties. However, the modifications that we’ve entered into have required very, very significant equity contributions from the borrower. So, I think, since they are still contributing their own cash to these properties each month to keep them open, to pay debt service and cover operating costs, and any other property related expense. We would like to think that they will continue to support the property. That’s usually a good indicator of future behavior is how they are treating the property presently in terms of cash contributions. So if the virus spread continues and this current decrease in the rising cases reverses and case rises start increasing, yes, I think, it’s quite possible. There will be a need for further modifications and we will work with borrowers, who continue to support their properties.

Understand. And imagine that would just require an additional kind of cash on their part, kind of -- what may be some scenarios that you could think of in a hypothetical situation if you’re able to share?

Well, I mean, what we’ve been willing to do to-date is to defer up to a total of three months interest. I mean, the way we get there as we defer 50% interest over at most six months, and in many cases, it is significantly less than that. There is other reserves available to the borrower to such that they don’t need us to defer the interest payment. But so I would expect them to be similar to that. I -- we believe that these properties will recover with the economy. Yes, corporate business travel hotels will rebound less quickly. It’ll take a longer for a recovery, but our leisure-oriented properties, our limited service-oriented properties, which is the majority of our properties that secure our loans, we think we’ll recover as quickly as with the economy it broadly speaking. We do sense that corporate business travel may be affected long-term, if not permanently, I think, people’s attitudes to travel has changed a bit, but time will tell how lasting that sentiment is.

Great. That’s helpful color Greta. I appreciate that and that’s it for me today. My questions have been asked and answered.

Thank you, George.

And our next question is from Stephen Laws from Raymond James. Please proceed with your questions.

A couple of follow-ups if you guys don’t mind. Greta, I guess, first, what is your borrowers, how many of your have been able to receive some type of funding either to furlough employees or something that they’re leaning on? Do they need additional support from the government or are these largely borrowers that really don’t qualify for anything under these programs. Can you provide any color around that?

Well, most of our hotel bars did qualify for the PPP funds and have already received it. I don’t know if they’re qualified for additional future funds. I -- we haven’t heard of them receiving more funds. But the rest of our borrowers were not aware of them taking advantage or benefiting from the governmental programs. Many of our borrowers are large institutional type entities and have not -- frankly have not needed the assistance.

All right. Fantastic. And then lastly on the Starwood Capital Group, I know you’ve got the second and third options. How should we think about that? I’m guessing it’s unlikely that would be drawn down for offensive reasons. So, I mean, is there a threshold you’re willing to share or some color as you think about what would prompt you to look to take down that second round, is it liquidity on your balance sheet, is something in the portfolio, is it a shift in that the long-term outlook. Maybe -- what is the thought process that would go behind drawing down the second and possibly third options on that financing?

Yes. We negotiated to have those because of the tremendous amount of uncertainty and opaqueness in how this economic recovery will pan out. And at this point, we haven’t made any decision to draw it or not to draw it. But as you pointed out, it would not be for offensive reasons. It would be for defensive reasons. If we found the economy taking a really severe turn to the negative, it’s there to help us. But at this point, we haven’t made a decision on how we’re going to proceed with that.

Great. Well, certainly a valuable option that could not take the dilution or the high cost of financing unless you -- we feel like you need it. So great. Thanks for taking my follow-up questions.

Thank you.

We have reached the end of the question-and-answer session. And I will now turn the call over to Greta Guggenheim for closing remarks.

Well, thank you all for joining us today and we look forward to another eventful quarter and speaking with you at the end of the third quarter.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.