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Operator
Good day and welcome to the Franklin BSD Realty Trust second quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then 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
Thank you so much. Good morning. Welcome to the Franklin BSP Realty Trust Second Quarter Earnings Conference Call. As the operator mentioned, I'm Lindsay Crabb. With me on the call today are Richard Wern, Chairman and CEO of FBRT, Gary Baglian, Chief Financial Officer and Chief Operating Officer of FBRT, and Michael Camperato, President of FBRT. Before we begin, I want to mention that some of today's comments 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 SEC periodic report, and actual future results may differ materially. The information conveyed on this call is current only as the date of this call, August 1st, 2023. 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. We will refer to the supplementary slide deck on today's call. With that, I'll turn the call over to Rich Byrne.
Lindsay Crabb
Great. Thanks, Lindsay. And good morning, everyone. Thank you all for joining us today. I, as Lindsay said, am Rich Byrne. I'm the chairman and CEO of FDRT. Also, as Lindsay mentioned, our earnings release and supplemental deck were just published to our website yesterday, so you can look at them there. We're going to begin today's call by reviewing our second quarter results. And then, of course, as always, we'll open the call up for your questions. I'm going to start on slide four. FBRT delivered very strong earnings in the second quarter. In particular, our distributable earnings per share increased 50% this quarter, with the company generating 66 cents per fully converted share compared to 44 cents in the prior quarter. Our quarterly dividend of 35.5 cents remains well covered by our distributable earnings. It also is well covered by our gap earnings. This dividend level represents a yield of approximately 9% on our June 30th book value of $1,585 per fully converted share. The large increase in distributable earnings this quarter was largely attributable to the gain from our resolution of Williamsburg, our Williamsburg hotel loan. In April, the hotel sold for $96 million. We recovered 100% of the principal on the loan and approximately $20 million of additional proceeds. Jerry, when I turn it over to him, will provide more explanation about the sale and the accounting treatment of the gain later in this call. Excluding the impact of the Williamsburg loan, our portfolio performed as expected this quarter, with earnings modestly improving due to the benefit of higher base rates on our floating rate portfolio. Our book value increased by 7 cents in the quarter to 1585. The retention of excess earnings over our dividend more than offset the increase in our general CECL provisions and our one asset specific CECL provision. And speaking of reserves, we took a proactive approach to risk management as evidenced by the increases this quarter and every quarter that we've taken on our portfolio. Notably, Four assets were moved onto watch list in the second quarter with a risk rating of four. And of those, two were office loans and two were multifamily loans. And one loan on our Portland office complex that was previously on watch list was moved to a five and is now on non-accrual status. We also took an asset-specific reserve on that loan. In its entirety, our watch list consists of five loans, which are four four-rated loans and one five-rated loan. And that aggregates to approximately $145 million in value, which represents 2.9% of our $5.1 billion portfolio. We believe... these watch list ads and the reserves attached to them are appropriate for our portfolio. Mike will go into greater detail about our watch list loans and our approach to our credit quality assessments, hence our ratings later in the call. Turning to our REO properties, we have a few updates on those as well. Our total REO loan positions decreased this quarter with the sale of our multifamily asset in New Rochelle, which closed in the second quarter. The asset sold for our marked value on the position, so no additional write-down was required. Regarding our Walgreens portfolio, as of quarter end, we now own all 24 Walgreens properties underlying this loan. The leases on all 24 stores currently have 15-year lease terms. We intend to focus on liquidating the portfolio beginning in the third quarter. The 24 stores make up an asset value of approximately $100 million, which is the vast majority of our foreclosure REO balance at quarter end. I would now like to cover a few more points before I turn things over to Jerry. One. Despite the subdued transaction environment during the quarter, we originated 230 million in new loan commitments, maintaining our portfolio size of 5.1 billion. Our portfolio is well diversified across 156 loans with an average loan size of 33 million. Multifamily represents 77% of our portfolio. And as we have said before, multifamily lending will remain our focus. Mike will provide more detail on our recent investments and our pipeline in his commentary. We had $1.2 billion in total liquidity as of June 30th. Of that, $225 million was our cash balances. This gives us maximum flexibility to take advantage of opportunities while also maintaining a strong liquidity cushion to protect our portfolio from any unforeseen credit events. We repurchased 5.5 million of common stock during the quarter. In aggregate, over the past two years, we've purchased more than 60 million of our stock. We still have 39 million remaining on the company's buyback authorization, and we will not hesitate to repurchase our shares when we determine it to be the best use of our capital. To conclude, While we continue to see a challenging environment for commercial real estate and the market overall, we believe our portfolio is well positioned. We are focused on maintaining a strong capital position, which will allow us to continue to invest in our portfolio, but also play offense when we see good opportunities to originate. We are confident we can navigate through the challenging market conditions while delivering long-term value to our shareholders. With that, I'll let Jerry discuss our financial performance. Over to you, Jerry.
Lindsay
Great. Thanks, Rich. I'm Jerry Baglan, the Chief Financial Officer and Chief Operating Officer of FBRT. It's great to have everyone on the call today. Moving on to our results, let's start on slide five. FBRT generated GAAP earnings of $39.6 million, or $0.39 per diluted common share, representing a 9.8% return on common equity. Gap net income was down quarter over quarter, as the first quarter had one-time contributions from security sales and gain on debt extinguishment. And in the second quarter, the large gain on the Williamsburg resolution was mostly offset by CECL reserves. Our distributable earnings in the second quarter were $63.5 million, or $0.66 per fully converted share, representing a 16.5% ROE. A walkthrough of our distributable earnings to GAAP and income can be found in the earnings release. As Rich discussed, the sale of the Williamsburg Hotel was the biggest driver of our distributable earnings beat. The $20 million in additional proceeds consisted of accrued interest that we received on the loan. We originated $230 million in new loans during the quarter, while also receiving paydowns of $232 million, which kept our portfolio flat to first quarter at $5.1 billion. Our portfolio size was flat in the quarter and we maintain a large liquidity position. The cash flow on our portfolio currently generates comfortably enough to cover our dividend. As a result of this, we can continue to be deliberate in our originations and wait for the right opportunities. Our net leverage position remained modest at roughly 2.4 times this quarter. We are deliberate in our use of leverage and view it as a structural highlight. Moving to slide six, you can see the layout of our distributable earnings growth. The portfolio performed well and distributable earnings would have been similar to the first quarter without the one-time benefit from the sale of Williamsburg. As I mentioned, our GAAP net income reflects the increase we took as part of our CECL provision. We endeavor to use conservative CECL assumptions for both general and specific reserves. Our total reserve increased by $21.6 million this quarter to $52.1 million. with 59% of the total reserves on multifamily. Office assets accounted for 25% of the reserve, despite representing only 6% of our portfolio. Our specific reserve this quarter was attributable to our Portland office property that was downgraded to a risk rating of five. We engaged a third-party valuation firm to determine the market value of the property, and after reviewing and agreeing with their change in value, we took an asset-specific reserve of $11.9 million, which is included in the total reserve amount discussed previously. Our carrying value of the asset was approximately $33 million and is now $20.4 million post the adjustment. Mike will share more details on the watch list in his comments. Moving to slide seven, you can see a walk of our portfolio. I've discussed new originations, but I also want to provide similar details to last quarter on our repayments. The majority of repayments were from hospitality and multifamily loans, contributing 50% and 37% of the balance, respectively. The other item to note is the $38 million decrease in our core loan portfolio, which was moved into REO. This was due to us taking the title to the remainder of the Walgreens portfolio. The Walgreens position comprises the majority of the balance in foreclosure REO, with the other property being an office building that we foreclosed in St. Louis. As we have discussed, while never our outcome of choice, we are comfortable holding positions in REO. Our team has expertise in owning and operating assets. This comfort affords us time to execute sales at the best levels. I will also note our entire foreclosure REO position represents approximately 1.8% of our total assets. We can move on to slide eight and discuss our capitalization. Our average cost of debt during the quarter was 7.3%. The increase in our cost of debt has trended up with increases in SOFR and LIBOR as our debt primarily floats. 77% of our financing sources on our core portfolio are non-recourse, non-mark-to-market. As of quarter end, we have reinvest available to us on four of our CLOs. We will continue to actively manage our CLO book. We did observe some CLO issuance activity during the quarter from other issuers. We participated as an active buyer of these bonds and we find them to be attractive additions to our portfolio on a levered yield basis. While CLOs remain our preferred financing mechanism over the long term, we have seen attractive rates on our warehouse lines. We are constantly watching CLO markets and will engage in new issuance should the opportunity present itself at levels we believe to be attractive. Subsequent to quarter end, our FL5 CLO was redeemed. This was re-levered at an advance rate of 67% and freed up approximately $52 million of cash. On slide 10, and Rich touched on this, the importance of our liquidity position going into the second half of the year. We have $1.2 billion in available liquidity. Our CLO reinvest balance tends to be relatively low because of how closely we manage the reinvest on our deals. When a loan repays in a CLO, we look to fill it quickly, which keeps this cash balance at zero or close to it. Our goal is to minimize any cash drag that may occur from the repayment on our loans in these CLOs and backfill with loans we have financed on our warehouse lines. This paired with our cash position and available capacity on our warehouse lines and revolver stabilizes our balance sheet and positions us to transact in the coming quarters. With that, I'll turn it over to Mike to give you an update on our portfolio.
Rich
Thanks, Jerry. Good morning, everyone, and thank you for joining us. I'm Mike Comparato, President of FBRT. I'm going to start on slide 12. I'll focus today on key attributes of our commercial loan portfolio, current market opportunities, and we'll provide an update on our watch list assets. Similar to prior quarters, our collateral remains focused in multifamily, with 77% of our exposure in this sector. It was also our largest addition this quarter. We continue to barbell the portfolio with multifamily being our mainstay asset class and sprinkle in some hospitality, industrial and retail. Hospitality was our second largest ad in the second quarter. We have not seen improvement in the office sector. We have discussed for several quarters that office has an identity crisis and that crisis only appears to be worsening. We anticipate tens of billions of dollars of office loan defaults in the coming years. as we are already witnessing countless owners merely walking away from assets at loan maturity. During the quarter, we downgraded two of our office loans to a four risk rating, and our reserves were appropriately increased to reflect further weakness. Thankfully, our office exposure is only 6% of our total portfolio, and overall is performing very well at the asset level. Geographically, our focus continues to be across the southeast and southwest. You'll note we added a breakout by state this quarter in our presentation to provide more transparency into the portfolio and will continue to provide more clarity in future quarters. We have no intention of adding international exposure to our portfolio in the near future. We can move to slide 13 for specifics on our quarterly originations and current market color. Seven loans were originated this quarter at a weighted average spread of 432 basis points. The credits we are writing today are some of the highest credit qualities we have seen in years. Market conditions are creating opportunities and deals are becoming more attractive. Banks are clearly on the sidelines for new direct origination and a meaningful subset of our competitors in the mortgage rate and debt fund space are focused on legacy portfolio concerns versus adding new additional risk. With approximately 1.5 trillion of commercial mortgage real estate loans Maturing in the next three years, we believe the environment to be ripe for well-capitalized alternative lenders with dry powder, FBRT clearly being one of them. Acquisitions overall are quite slow, although improving as the bid-ask spread between buyers and sellers narrow. Multifamily transactional volume for the first half of 2023 was the lowest since 2011. That said, we are starting to see more acquisitions and getting some price discovery within the stabilized multifamily market. For several quarters, we have discussed negative leverage needing to leave the system prior to transactional volume returning to historical norms. In the stabilized multifamily sector, we are seeing buyers accept one to two years of negative leverage via 10-year low leverage interest-only fixed rate agency debt with the expectation that they can grow NOI to positive leverage in year three and beyond. However, transitional multifamily transactions continue to have meaningful negative leverage, and the deals we are seeing in the space appear to be more forced sellers versus willing sellers. Office remains the clear industry albatross. Debt is more difficult to obtain than any time in history, perhaps other than 2009. Cost of tenant retention is hitting all-time highs, in many cases, non-economically logical levels. Uncertainty abounds. Will office become an opportunity in the future? Absolutely. But we will be very selective. It is uninteresting at the pricing levels of the past few years, but when it is priced appropriate to other risks in the market, we may be interested. As Jerry mentioned, we have been an active buyer of CRE CLO bonds. buying AAA rated bonds with seven to eight handle coupons that produce leverage returns in excess of 20%. It's hard to consider writing a loan on an office building when a AAA bond can make you equity-like returns. The last thing I'll review today is our watch list loans. Let's look at slide 14. As Rich mentioned, we have five loans on watch list as of June 30th. Two loans were removed from our watch list in the second quarter. The Walgreens loan was moved entirely to REO, and the Williamsburg Hotel came to a positive resolution in April. One loan that was moved on to our watch list in the first quarter, an office complex in Portland, was downgraded to a five. Jerry provided information on our mark and the asset-specific reserve in place on this loan. We are in active dialogue with the borrower and would expect to take the property as REO in the third quarter via deed-in-lieu foreclosure. The new loans added to watchlists this quarter include a CBD high-rise office building in Denver, Colorado, a suburban Class A office building in Alpharetta, Georgia, a garden-style apartment community in Arlington, Texas, and a garden-style apartment complex in Lubbock, Texas. In aggregate, the four new watchlist names total $113 million in principal balance. Our reserves have been increased this quarter to reflect the change in credit quality. We are in close communication with the borrowers on each loan and will determine the appropriate path forward to each resolution. The team has a history of cleaning up watch list loans quickly and our asset management group is actively engaged across the board. I want to take a moment on the methodology of our risk ratings. A loan that is risk rated four is a loan we identify as not meeting its business plan at initial origination. It is not necessarily a reflection of a loan we expect to take a future loss. Those loans we risk rate five. Take, for example, the loan I mentioned in Arlington, Texas that we added this quarter to our watch list as a four. This property is underperforming on its original business plan. However, the loan will receive a pay down this week and is currently under non-refundable contract to be sold, resulting in a full repayment of our loan, assuming the sale closes. We perform a thorough review each quarter of all assets and have a disciplined approach to increasing our general and asset-specific reserves as we deem appropriate. We are proactive in managing any potential risks in our portfolio and have made incremental improvements to our credit positions with loan modifications made during this quarter. Our goal is to identify issues and resolve them quickly, allowing asset management and senior management to have as few balls in the air at the same time as possible. We believe the company's existing portfolio composition will continue to position us as an industry leader and give us the opportunity to play offense, while a substantial portion of our competitive set cannot. With that, I would like to turn it back to the operator to begin the Q&A session.
Operator
We will now begin the Q&A session. To ask a question, you may press star then 1 on your touchtone 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. Our first question comes from Sarah Barcom with VTIG. Please go ahead.
Sarah Barcom
Hey, good morning, everyone. So we saw some multifamily assets go on watch list. One of them we'll see a near-term repayment for, so that's good to hear. But could you talk about the potential for future watch list migration as additional multifamily loans that were originated during that low-rate 2021 period reach their initial maturities next year? How should we think about the debt yield on those assets particularly maybe those in Florida where we keep hearing about higher expenses and rent growth softening, themes that we've talked about before. If you could speak to that, that would be great.
Rich
Hi, Sarah. Good morning. It's Mike. I'll take that. So I'm going to start with the back half of your question first. I think the expense growth that we're seeing is not necessarily specific to Florida, but we're kind of seeing it across the portfolio. I think the expense side of the income statement is catching up with the rent growth that we saw in 2021. Most notably, Texas and real estate taxes, most notably in any kind of coastal markets in property insurance, where we're seeing insurance double, in some cases, triple. As we've mentioned previously, I think for the several next quarters, we're gonna continue to see new additions to watch list loans, resolution to watch list loans, and then dealing with a new subset of watch list loans. I think it's just the reality of the environment that we're in when rates go from sub 3% coupons to eight or 9% coupons, there's just going to be a fairly consistent stream of loans that we're going to be working through over the coming quarters. I think we're overall pretty positive about our position within the multifamily sector, certainly with 77% of the portfolio exposed there. We think overall the multifamily market has probably witnessed a 20 to 30% correction in valuations. 20% likely more for newer vintage assets and larger markets, you know, probably closer to 30 for some older vintage assets and secondary and tertiary markets. But we think that we're positioned very well based on our basis. We've seen hundreds of millions of loans pay off. We're seeing some assets trade, you know, Arlington being an example above our debt basis. And so overall, I think we are generally positive on our portfolio. It doesn't mean we don't have a lot of work to do every quarter in working through these positions, but as it stands today, we are not concerned that losses within the multifamily sector on a macro basis have carried over into the debt portion of the capital stack for FBRT.
Sarah Barcom
Okay. Thanks for all the detail there. And maybe just switching over to the debt side. You touched on CLO capacity as well as, you know, seeing some more attractive rates on the warehouse lines. Could you also just talk about your levers for more defensive liquidity, just given the potential for taking the keys back on some of these assets? And in that context, how do you think about you know, how we should measure the amount of real estate owned that can come onto the balance sheet at once. You know, maybe with some further commentary on the broader Benefit Street platform and the capabilities there. I'm curious for your thoughts there.
Rich
So I'm going to let Jerry handle the first part of that question with levers and liquidity and leverage. But let me just address quickly the second half of the question with respect to REO. you know, watch list assets and REO, we have the same view, fix them fast and move them fast. And unless we see some sort of meaningful upside in holding an REO asset, you know, as Jerry mentioned, we have an equity practice within the real estate group at benefit street. We're very comfortable owning commercial real estate assets, and we believe we can add value on commercial real estate assets. So if we take something REO, it's either a quick liquidation at a price that we think is acceptable to us, but if we believe that we can get better execution in the future, whether that's from market improvement or improvements that we can make at the asset level, we will certainly explore that. But we have very, very little interest in owning REO long-term within the vehicle.
Lindsay
Yeah, and then just in terms of our ability to finance things, you know, I think we've spoken tons about our ability to reinvest into our CLOs and we're going to have that capacity for some time to come across the floor that still have reinvest. Um, you know, the next one burns off in mid September, but then you've got December, February into July of next year. So there's a decent amount of, you know, relatively short term, um, capacity that we can take things off warehouse lines and free up space there. Um, And we can use those warehouse lines to, in some cases, take back assets if we need to. We can hold a decent amount on levered, too. I mean, if you look at our leverage point relative to a lot of the peer set, I think we run at a pretty low leverage, which gives us a little more flexibility to, if we want, add debt in other ways. There's other debt options that we haven't tapped in terms of unsecured or other similar options. we haven't chosen to go down that path because we don't need it and we'd rather run with less leverage right now. But we certainly have that ability to flex it if we ever really want to in the future. But right now, I think we're pretty comfortable with our position. We have tons of capacity across our different options and we'll flex those as needed as we need to work through things. But I think Mike kind of hit the most important part, which is really trying to cycle through whatever may come up. I think we're very proactive in on monitoring our portfolio and trying to work through things in advance of them becoming, you know, issues that end up on the balance sheet, you know, directly as REO or unlevered loan positions. And so I think that's probably the most productive way to sort of stem off the secondary part of your question, which is how would you deal with the liability side? So I think proactive asset management involvement is probably the key part of that.
Sarah Barcom
Great. Thanks for all the comments there.
Lindsay Crabb
Sure. Thanks, Sarah.
Operator
The next question comes from Matthew Erdner with Jones Trading. Please go ahead.
Matthew Erdner
Hey, good morning, guys. Thanks for taking the question. Mike, you mentioned in the earnings release about AI. How much are you looking to invest here, both dollars and attention? And I guess what kind of business lines are you going to use, whether it be underwriting, portfolio monitoring? Could you just expand on that a little bit, please?
Rich
Sure. Uh, I don't think we have a dollar amount circled at this point. Um, our, our co-CEO David Manlo of overall BSP, uh, has made it a very front burner, big picture initiative for the firm. So it's across the entire platform where we're turning attention to AI, how it can add alpha, you know, to every aspect of our business. Uh, we are already utilizing it in some capacity. within our origination platform, and we're looking to see how it can add value, whether it's a second or third set of eyes. We're not sure exactly what role it plays, but how can it help us through our legal processing? How can it help us through our underwriting process? How can it help us through asset management? I think we're clearly in the very, very early days of AI, but we want to be on the forefront of technology and using it to the best of our ability to just be a leader in the space. So any way we can find an advantage, we want to do that and we're exploring it kind of across the board.
Matthew Erdner
Awesome. Thanks. That's helpful. And then going to REO and other expenses, would that be where the REO expenses were for the quarter?
spk10
Yeah, that's generally where they're going to flow through.
Matthew Erdner
Okay. And then do you know the percentage of what that was for the quarter for REO?
Lindsay
I don't have that number in front of me right now. It's, you know, relatively small if you think about what we hold. You know, the Walgreens assets are triple net, so there's very limited expense in terms of what's occurring there. What you're going to pick up is some residual from the new Rochelle asset, which moved off in the second quarter. And then the balance is going to be from the St. Louis office, which is a pretty small position. So once the multi-asset's gone, it's going to be a very small contribution to expense in terms of what REO is generating on the balance sheet because $100 million of that number is triple net. So it has virtually no bearing on expense.
Matthew Erdner
Awesome. Thanks, Jarrett.
Operator
The next question comes from Steve Delaney with J&P Securities. Please go ahead.
Steve Delaney
Good morning, everyone, and congratulations on resolving Williamsburg and the net lease portfolio. Just to be clear, in case we get this question, with respect to the Williamsburg resolution, did you have to provide any financing to the new owner of the property or resolve that all? They got their own financing. Thanks.
Rich
Thanks, Steve. It's Mike. So we had a lender in the original, a subordinate lender in the original loan that we had made to the borrowers. That lender provided a acquisition loan for the new buyer. And then we provided note on note financing to that lender. So we have a incredibly low leverage exposure to the hotel. through kind of a leveraging of the mortgage on the asset.
Steve Delaney
It sounds like good teamwork with your original Mezlender just to get the first deed off your books. So good work out there, no question. And as you reported, you had a nice gain, and it sounds like you received all your accrued interest and fees as well. So good work out on that. Mike, I'm still sticking with you. Talk a little bit about the conduit outlook in the second half of this year, just sort of the overall market. How do you see liquidity and new issuance? And you guys have just kind of quietly been putting up a couple million dollars here and there in fees. So what's your expectation over the next few quarters for FBRT's activity level? And for modeling purposes, analysts, should we Should we expect some fee income gains continuing to come in the near term? Thanks.
Rich
Yeah, it's been a really difficult business line to model on a go-forward basis. It's really been schizophrenic. As I've been describing to a lot of people, I feel like this rate increases. We're finally kind of through the five stages of death, and we're finally at acceptance. You know, borrowers are accepting the fact that they just can't borrow at 3% and 4% anymore, and rates are where they are. So I can't directly answer the question in what do I expect for the second half. I will say, you know, we find it to be an incredibly important part of our business. When it's working well, it's a very high ROE business. I will say we are investing in the space. We're actually actively hiring new origination within our conduit group. So we're really hoping that volume picks up. It'd be hard for it to get much worse than it's been, so we're hoping that it's moving in the right direction, but we're really investing around the product going forward in hopes that we do see more volume going forward.
Steve Delaney
Yeah. That's helpful, and I think what I would do in a situation like that is probably plug in something over the next year but not put too much on the table for the next quarter because you never know whether the next quarter is going to come up with anything. But that's helpful, and I appreciate the comments this morning.
Lindsay Crabb
Sure. Thanks, Steve. Thanks, Steve.
Operator
The next question comes from Stephen Laws with Raymond James. Please go ahead.
Stephen Laws
Hi, good morning. I want to start a solid quarter, so congrats on that. I want to start with the originations. You guys are one of the few companies doing new originations. Can you talk about what the current lending market looks like? Who are your main competitors since a lot of other commercial mortgage REITs are not active on the new origination side? What's the difference in spread you're seeing across various property types as you do the due diligence on deals in the pipeline?
Rich
Hey, Steve. It's Mike. Thanks for the question. As I mentioned in the prepared remarks, I think banks have largely exited the direct origination business. I also think a lot of the mortgage rate and debt fund space is concerned with legacy issues and really aren't looking to add new risk at the time. Keep in mind, we've probably originate as wide a swath of loans as anyone out there from every single asset class. But we're also doing bridge financing, construction financing, and permanent financing. So the competitive set is different in virtually everything we do. So in the construction loan space, we're seeing more debt funds play there. In the bridge lending space, we are seeing You have new vintage debt funds. Maybe XYZ Company Fund 2, 3, and 4 isn't doing anything, but they've got Fund 5, and they're trying to actively lend out of Fund 5. So it's really case by case. What I can say fairly definitively is over the past few months, spreads have continued to tighten. And as I mentioned last quarter, I don't necessarily think that's a reflection of credit quality as much as it is scarcity of product. You know, we all know what a good credit looks like. And when the guys with dry powder see it, we're seemingly all competing for that strong credit quality loan. So I would say today multifamily generically is probably 325 to 350 over as transactions get over 20 million, you know, probably gravitating closer to that 325 mark. Hospitality, and I would say industrials is largely on top of those spreads. Hospitality, I would say, is probably $450 to $500 for kind of the highest leverage hospitality loan that we'll consider today. Retail, probably the same spot. We're not seeing much on the retail side today, to be honest. And then office. I mean, that's just as opaque as it's ever been. I don't think anyone could tell you with a straight face what it costs to borrow money today on an office portfolio or an office loan.
Stephen Laws
Yeah, well, I appreciate the color on that and certainly understand the last point. And as a follow-up, I'd love to shift over to the security side. You know, you guys added some into Q. You know, I think that was often a new issue, CLO. Can you talk about your appetite for more securities? Will those be kind of new issue CLOs or secondary market purchases? You know, what type of deals are collateral are you looking for? And, you know, as you think about bigger picture in the CLO markets, Mike, you know, I think everything's been static deals so far. You know, as a AAA buyer, would you be receptive to deals with reinvestment periods starting to reemerge? Or how do you think about the reopening and improving liquidity on the CLO markets?
Rich
I mean, the rally that we've seen, I think, throughout the stack has been pretty impressive in just a matter of weeks. You know, tightening within the AAA is probably 50 basis points at this point. Look, I think the market, unlike 2021, is finally getting to a point where it's tiering issuers. And I think we would be open to a reinvestment with issuers that we think highly of. On the flip side, we hope the market thinks highly of us. And if we issue, they'll be buying our bonds on a reinvest basis as well. We as a firm don't really believe static CRE CLOs are the greatest structure for us as an issuer. We love buying the bonds, but we just don't like issuing that. We really like the flexibility and the duration of managed deals. In terms of overall exposure, I would say we're probably getting closer. You know, we like the relative value. We like the returns you're generating today. Obviously, the flip side of that is, you know, these are mark-to-market assets. And, you know, if you're using leverage, that leverage can go away relatively quickly. So I don't see us getting significantly larger on our bond book today. If anything, we might sell into this strength a little bit. When all is said and done, I would love to just have a portfolio of great mortgage loan credits. And we'll probably, again, look to sell into the strength if we think we can originate loans to offset kind of that NIM that would be coming off through bond sales.
Lindsay Crabb
Hey, Steven. It's Rich. Just to tag on there. You know, I assume underlying your question is the same head scratch we've been doing is that most of our commercial mortgage republic comps, at least, you know, really aren't doing much of any origination at all. And the head scratching is because, as Mike said, I mean, the vintage of deals that we're seeing now, I mean, they're just really high quality. And it's also great to have your pick of the litter as well, you know, without a lot of competition, right? You know, why is that? I don't know. I mean, from our perspective, we have a lot of cash, you know, well in excess of anything we think we need to, you know, keep around to fix any, you know, unforeseen credit problems. You know, and in our case, we have, you know, you heard us talk about Walgreens. You know, those are, you know, pretty attractive investment grade triple net assets, you know, appealing 1031 world, et cetera. You know, that's 100 million more potentially of liquidity that, you know, may come our way. sometime soon as our multi portfolio, you know, continues to pay down. So, I mean, if you don't spend money, you know, what's, what's the alternative and, you know, does it get cheaper later? You know, maybe, I don't know, but, um, you know, certainly it's hard to see, you know, sort of not being a relatively active participant in, in the, in the market today. And as Mike described, they're just, you know, the conventional competition, banks included, just aren't out there. I assume that's going to change, and I assume other people are maybe pulling in their wings or horns, whatever the expression is, because, you know, maybe they're just concerned about, you know, future credit problems. You know, the truth of our world is everybody, you know, we provided this quarter a debt maturity schedule in the appendix of our earnings supplement. But the reality is for us and every other commercial mortgage, we generally make three-year loans. Rates started going up last year. So guess what? In this year, next year, and the following year, you're going to see, hopefully, the entire books mature, which means whether it's if you have a high degree of office exposure or whatnot, it's just something you're going to have to deal with. So we assume that most commercial mortgage rates are really primarily focused on that and secondarily focused on everything else. Just the way we look at the world, we have a lot of liquidity. The market feels pretty cheap. Sure, we can buy securities, but if we can do our core business of making loans, that feels like a pretty good bet right now, especially since companies like ours are benefiting from a tailwind of higher rates and we're already covering our dividends. you know, what you're investing is indeed truly opportunistic.
Stephen Laws
Great. I appreciate the comments this morning, Rich and Mike. Thank you very much.
Operator
Again, if you have a question, please press star, then one to be joined into the queue. The next question comes from Matthew Hall with B Riley. Please go ahead.
Matthew Hall
Thanks for taking my question, Rich, just to follow on. I mean, In the past, you've sort of given out a target loan portfolio, and I think you sort of said in your prepared remarks that you're going to be opportunistic. I mean, is there a target? Can you give us that by the end of the year, or is it just sort of too early to tell? I mean, you have all these options. You can buy back stock. You can buy securities. You can do other things with your excess capital. Is there a target on the core loan portfolio by the end of the year or next year?
Lindsay Crabb
Let me start. Let me give you an initial answer and then maybe Jerry or Mike might want to elaborate. First of all, I think all the above always applies to us. We're going to use our capital to where, you know, we think we can create the most shareholder value. For a while, that was buying back our stock. We were extremely active in the market, you know, buying our shares when it was really cheap. We even bought back some of our bonds. We bought those at a nice discount. So all accretive and, you know, I think, you know, great returns. We've also been using our cash to make loans. And as I said, as Mike's talked about the vintage of loans that we've seen, you know, more recently has been some of the best we've seen, you know, maybe in forever. So, you know, we're going to be actively deploying our cash. You know, Jerry can speak maybe more specifically how we're thinking about leverage and whatnot, but we have 225 million of cash. We have well over a billion dollars of liquidity. And as I mentioned, we have some cash sources heading our way. And we have loans repaying. Everything goes the way it's supposed to. It's a bit of a hamster wheel. We're just on a treadmill. So I think there's some minimum amount just to maintain the portfolio size. And if we can grow it, we're just going to do it opportunistically. As I said, we're covering the dividend already. But Jerry or Mike, if there's any specific guidance you want to share, please do.
Lindsay
Yeah, maybe I'll start, Mike, and let you chime in. But I think the target portfolio size concept for me is more of a target ROE concept overall. Uh, not necessarily a given number on, you know, AUM of, of loans outstanding, um, because the yield that we're generating today is so much higher because of base rates having moved up so substantially. So, you know, we sit here today with a $5 billion loan portfolio that's covering our dividend, you know, fairly comfortably. Um, right now it just gives us flexibility and that flexibility can go, like Mike said, can go into securities in the short term. It can go into loans. I think, you know, we even have a little room to, you know, let it, let it go down slightly if we want and still cover the dividend. And so for us, it's really just a great opportunity to be opportunistic. I think with how we originated and really take credits that we like, um, And if we see really good opportunities, it's a chance for us to grow that ROE overall. So I think the downside is, you know, making sure we maintain the yields that we set for investors in the form of our dividend. And then beyond that, when we do see those things in bonds or loans, you know, we add them on and hopefully we can grow our earnings overall as we go forward. So that's kind of high level how I think about it.
Rich
Yeah, and I don't want to add too much there. I think those guys answered it all appropriately. I will say, I think the company is phenomenally positioned right now. Our asset allocation, I think, is the darling of the sector. We have ample cash. Everybody in the market knows that we are active. We're getting looks that are outstanding. And I think there's a lot of dislocation that's coming over the course of the next 12 to 18 months. Sarah alluded to it in her question, but all of these loans are maturing in the next 18 months. And I think we're going to be one of the groups with a lot of dry powder to pick up the pieces at what I will say are probably the highest coupons we've seen in three decades. So to have that backdrop, With our balance sheet in the condition it's in, the cash position in the condition it's in, this is a very, very exciting time, I think, for the group at FBRT.
Matthew Hall
Yeah, I'll certainly commend you on buying back stock, too. One of the few who reached doing it here now in this environment. I appreciate those comments. I know you said on the multifamily is going to be the predominant asset class. You did a hotel loan. I'd love to hear... what your philosophy is on that asset class. Is it a certain geography you're targeting, a certain type of hotel? Just curious, and the spreads must be terrific on it.
Rich
Yeah, I would say overall hospitality is performing exceptionally well, certainly within the leisure aspect of that space. I think we've seen across the board a lot of leisure-oriented hotels surpassing their performance of 2019, which was, you know, all-time highs. And I think as you look across kind of all travel segments, whether it's TSA checkpoints, whether it's airlines that are, you know, recording record revenue, you know, everybody on this call has probably stayed in a hotel in the U.S. in the past six to 12 months. The rates are mind-blowing. So, you know, they've hotels really have pricing power right now and are doing exceptionally well. Again, you know, specific to the leisure-oriented space. I think the business traveler and certainly the convention center hotel is an area that we will continue to avoid. It's recovering. It's moving the right direction post-COVID. but it is not anywhere close to recovering to full COVID levels. And I'm not sure that we will ever see that take place. You know, if you were the generic salesman that went to see your client four times a year, you know, you're probably not seeing them four times a year anymore. You're probably seeing them once or twice and the other once or twice are going to be by some means of a virtual conference. So I just think that COVID, Zoom, Teams, all of these video conferencing innovations that we've had have probably forever changed the business traveler and the office industry overall. So our focus has really been on leisure-oriented and non-business traveler hotels, and they've done really, really well.
Matthew Hall
Makes a lot of sense. And I'll sneak one more question in if you don't mind. The modifications you did in the quarter, you said it clearly improved the quality. So I'm assuming there's an equity contribution and just go over again, what are the terms for grain modification? Thank you very much.
Rich
Yeah, no problem. I think we've long held going back to the beginning days of COVID that we're going to try to be an accommodative lender through What we all acknowledge is difficult times, but that starts with a conversation reminding borrowers that we are their lender and we're not their partner, right? When equity investors, you know, 2X and 3X their equity in the good times, I've yet to get the call from the borrower saying, hey, we want to pay you a little extra because we did so well. The same thing works on the way down. We just have to say it gently. But our expectation is if you're looking for accommodations from us, that usually involves showing up to discussion with your checkbook. We want to be problem solvers. We want to fix assets, but it's not going to be a one-way street where it just fixes things for the borrower. We want to improve our credit position and our credit quality. So that's the mindset that we have throughout the organization as we walk into a modification is, You know, be reasonable, be respectful, understand the other side situation. But at the end of the day, our duty is to our shareholders, and we need to make our credits, you know, incrementally better than they were before that conversation started. And that can mean a myriad of things, from paydowns to getting recourse to getting, you know, better covenants. Like, there's many different tools in that toolbox. Excellent.
Operator
As we have no further questions, this concludes our question and answer session. I would like to turn the conference back over to Lindsay Crabb for any closing remarks.
Lindsay Crabb
Thank you for joining our call today. Please reach out if you have any further questions. Thanks again.
Operator
This concludes our presentation. Thank you for joining. You may all now disconnect.
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