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Operator
Hey, and welcome to the Franklin BSP Realty Trust third quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Lindsay Crabb, Director of Investor Relations. Please go ahead.
Lindsay Crabb
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 am Lindsay Crabb, Director of Investor Relations. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerome Baglian, Chief Financial Officer and Chief Operating Officer of FBRT, and Michael Camperato, 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 10th, 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 Burns.
Lindsay Crabb
Great. Thanks, Lindsay. And good morning, everyone. Thank you all for joining us today. As Lindsay said, I'm Rich Byrne. I'm the chairman and CEO of FBRT. As Lindsay 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 four, 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 continued to fight inflation through interest rate increases, or at least that was the biggest part of the story. While higher rates continued 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 deliberate 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 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 33 cents 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 35.5 cents 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 advisor's 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 million, excuse me, 1,000 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 Sunbelt 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 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 did 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 experiencing to be an opportunity. We came through the COVID quarters as a market leader and were 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.
Lindsay
Great. Thanks, Rich. Good morning, everyone. I'm Jerry Baglian, the COO and CFO of FBRT. Appreciate everyone being on the call today. Moving on to the results, let's start on slide five. 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. A walkthrough of our distributable earnings to GapNet 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 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 ending 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 3 cents from the end of the prior quarter. Moving to slide six, 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 to the increase in base rates, both 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 increase approximately 7% or $0.07 on an annual basis. Moving to slide seven, we closed $470 million of new loan commitments in a 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, unless 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 $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 nine, this shows our capitalization overview. Our average financing cost trended to higher this quarter, 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.
Rich
Thanks, Sherry. And good morning, everyone. I'm Mike Comparato, head of commercial real estate at BSP. I appreciate your 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 will 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 30th. 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 7th. The other two loans on Watchlist are 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 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 receive 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 principals, 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.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Steve Delaney with J&P Securities. Please go ahead.
Steve Delaney
Thanks. Good morning, Rich and team. First, I just want to say I applaud the opportunistic CMBS CLO investments. You know, 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, you know, modest percent, I think that's an appropriate response for management and the boards. And I know it'll work out well. You're welcome. One of the strengths about your balance sheet is 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 what the attractive spreads are over LIBOR or SOFR. When you look at what you're originating today, you know, with all in coupons and the, you know, at least 600, if not 700, you know, range, you know, on an incremental reinvestment into one of those open CLOs, can you estimate for us what your ROE would be on that marginal range? And do you see that looking out over the next 12 months as a key driver of an increase in distributable EPS? Thank you.
Lindsay
Yeah, maybe I'll take that. Go ahead, Jerry. This is 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 hundred basis points wider than in spread than a lot of the older vintage that made up those 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 vintage that we'll be able to drop in there. So, yeah, I think you can extrapolate a little bit of that. You know, assuming we can fit all the same boxes, which we've managed to do so far and we kind of target, there's a lot of upside from that. And you correctly noted, you know, 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 and all those CLOs that we've done over the last year and a half, two years.
Steve Delaney
Yeah. Thank you for that, Jarek. 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 pass your higher bar today?
Rich
Just in general. Yeah, it's a good question, obviously. I 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 four. Looks like it's going to go into five. Yeah, there's there's a little bit of deer in headlights syndrome going on from equity players and lenders across the market. So we're being selective. And I think, you know, I mentioned in our in our statement, you know, 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, you know, 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, you know, is clearly the prudent move on adding new risk to the portfolio.
Steve Delaney
Well, thank each of you for your comments this morning and have a great close to the year. Thanks.
Lindsay Crabb
Thanks, Dave.
Operator
Next question comes from Jason Stewart with Jones Trading. Please go ahead.
Jason Stewart
Hey guys, this is Matthew on for Jason. Congrats on the 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?
Lindsay Crabb
Mike, why don't you talk about new originations, then we'll put it in the context of the share repurchases.
Rich
Yeah, so follow, hey Matt, good to speak with you. You know, following up kind of on 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's giving us today. So, you know, looking forward, I expect this to continue to be very heavily, you know, oriented to multifamily. and selectively adding hospitality and industrial assets.
Lindsay Crabb
Yeah. And Matt, just as Rich, you asked about the share purchases and contextualize that. I think we have obviously 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 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 rate 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 broader perspective. Mortgage-read 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, you know, people need to look at existing portfolios and be, you know, thoughtful about, you know, who has risk and where that risk might be. You know, I think, you know, we haven't been in the public markets that long, but, you know, our posture for forever has been, you know, to be, you know, fairly conservative in our portfolio structure, whether it's our 75% multi or only two and a half times leverage. The fact that Jerry talked about our vintage, you know, 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 on 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, you know, we still have about $50 million left on our authorization for our share repurchases. So, you know, it's my long way of saying that assume that we will be active in the market on buying our shares when they're cheap.
Jason Stewart
Yeah, 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 loans?
Rich
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 You know, could be 500 in smaller markets, could be 300 in, you know, CBD. It's just, you know, obviously case by case.
Jason Stewart
Awesome. Thank you guys for the question, for answering.
Lindsay
Thanks, Pat.
Jason Stewart
Thanks.
Operator
Again, if you have a question, please press start, then want to be joined into the queue. Our next question comes from Matthew Howlett with BU Riley. Please go ahead.
Matthew Howlett
Hey, 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, that can really take over from here. And my question surrounds how do we think about and how do you guys think about modifications and extensions if they come up? I mean, 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 out of a CLO or a bank line? Just walk me through the conversation with borrowers when that comes up.
Rich
Yeah, 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 lap. 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 DNA 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 optioned 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. You know, 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, you know, focused on economics. And then I would just say, lastly, you know, 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.
Matthew Howlett
That's reassuring and good to hear. Does it Do they have to buy a cap? Do you make them do that if you do an extension? Just curious.
Rich
Yep. So every part of our negotiation requires – that's just one kind of non-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.
Matthew Howlett
Great. I appreciate that, and it's good to hear 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, and I don't know whether it's in bankruptcy yet or not, but what can you tell us in terms of comps? It looks like that market is strong. Just high level, can you point us to any comps in recent hotel sales in the area of?
Rich
I'm not going to point you to any comps. I will just say the hotel is performing exceptionally well under the tutelage of the trustee, and it has been on the market for sale via e-still for quite some time and running through that bankruptcy kind of sale process.
Matthew Howlett
Great. Okay. What's the current non-fair value on it? I know you have it.
Rich
Of our loan or of the hotel? Of the loan. We're carrying the loan at $57 million, which is the original principal balance.
Matthew Howlett
Great. And then last question is big picture, Rich. I mean, the dividend, I mean, it 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, you know, just – use the buyback until, you know, the stock can get, you know, at a decent premium to your underappreciated book value. Um, no need to, you know, look at any higher dividends next year. Just, just thought about when you get dividend coverage, optimize portfolio. I mean, what's the strategically, you're in a good position to just keep your powder dry, buy back shares and wait for a new entry point. Um, or is there some other way to think about it?
Lindsay Crabb
Well, uh, Yeah, 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, you know, 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, you know, it wasn't a very tough decision. I think going forward, you know, as we've referenced, you know, whether it's SOFR increases, you know, and or the other, you know, future earnings driver for us is going to get to a more optimized level, not carry around so much cash like we've been. You know, we should... you know, be able to at least match that dividend or hopefully get even higher. And if so, you know, we'll talk to the board and potentially, you know, have our dividend, you know, match, you know, our level of earnings. I think it's as, you know, as straightforward as that. You know, we have some other moving pieces like you heard with Williamsburg and some other things which, you know, 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, you know, as you heard, you know, originating loans at L6 something. So, you know, we certainly have a very attractive use of capital. But, you know, when our stock gets cheap, we like to buy it also. you know, for all the obvious reasons we like to buy our stock, not the least of which is, you know, we've only been public for a little over a year. You know, it's not a bad thing for us to, you know, help manage our stock price so it trades, you know, well and smoothly. So, you know, we're cognizant of all the above, and we're going to just try to make prudent decisions.
Matthew Howlett
Great. And, of course, the leverage levels, I mean, obviously you're below a lot of other peers we see out there in what you, I 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 sort of two and a half kind of, that's sort of what you want to do in the model, and that's kind of it?
Lindsay
Hey, it's Jerry. I'd say we've always kind of talked about a two and a half to two and three quarters range on leverage. And on a net basis, we're at the low end of that range now. you know, based on what the market's doing today and what we're earning on our assets, you know, I think we're pretty comfortable there from a kind of risk return perspective. You know, we're like you said, almost at dividend coverage where we're at. You know, 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.
Lindsay Crabb
Yeah, 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 You know, we've only been public for a little over a year, but, you know, we've been operating the REIT for many, many years before that. You know, in a consistent range there has been just because of our net interest margin, which, you know, we have a giant origination team. You know, we think, you know, that's a little bit of our secret sauce. And the fact that our average deal size is around $30 million per loan, you know, we're just competing a little less competitive markets. So, you know, 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, you know, with comparable leverage, you know, just given the NIMS spreads we've been producing.
Matthew Howlett
No, it's a great thing. It's a positive characteristic. I just point that out and hear your thoughts. I really appreciate it. For sure.
Operator
This concludes the question and answer session. I would like to send the conference back over to Lindsay for brief conclusion.
Lindsay Crabb
Thank you for attending our call today. We look forward to speaking with you next quarter.
Lindsay Crabb
Thanks, everyone. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.
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