Franklin BSP Realty Trust, Inc. Q2 FY2023 Earnings Call

Good day, and welcome to the Franklin BSP Realty Trust Second Quarter 2023 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Lindsey Crabbe, Director of Investor Relations. Please go ahead.

Thank you so much. Good morning. Welcome to the Franklin BSP Realty Trust Second Quarter Earnings Conference Call. As the operator already mentioned, I'm Lindsey Crabbe. With me on the call today are Richard Byrne, Chairman and CEO of FBRT, Jerome Baglien, Chief Financial Officer and Chief Operating Officer of FBRT, and Michael Comparato, 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 contained on this call is current only as of the date of this call, August 1, 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.

Great. Thanks, Lindsey, and good morning, everyone. Thank you for joining us today. I'm Rich Byrne, the Chairman and CEO of FBRT. Our earnings release and supplemental deck were published on our website yesterday, so please review them there. We'll begin today's call by going over our second quarter results and then open it up for questions. Starting on Slide 4, FBRT achieved impressive earnings in the second quarter. Notably, our distributable earnings per share rose by 50% this quarter, reaching $0.66 per fully converted share compared to $0.44 in the previous quarter. Our quarterly dividend of $0.355 is well supported by our distributable earnings, which are also well supported by our GAAP earnings. This dividend reflects a yield of about 9% based on our June 30 book value of $15.85 per fully converted share. The significant increase in distributable earnings this quarter was primarily due to the gain from resolving our Williamsburg hotel loan, which sold for $96 million in April. We recovered the full principal of the loan and approximately $20 million in additional proceeds. Jerry will provide further details about the sale and the accounting treatment of the gain later in this call. Excluding the Williamsburg loan's impact, our portfolio performed as expected this quarter, with modest improvements in earnings attributed to higher base rates on our floating-rate assets. Our book value rose by $0.07 this quarter to $15.85. The retention of excess earnings over our dividend effectively offset the increases in our general CECL provisions and a specific CECL provision related to one asset. We adopted a proactive risk management strategy, as demonstrated by the increases in our provisions this quarter, as we have every quarter. Specifically, four assets were added to the watch list this quarter, rated 4 for risk. Of these, two were office loans and two were multifamily loans. A loan related to our Portland office complex, previously on the watch list, was upgraded to a risk rating of 5 and is now non-accrual. We also took an asset-specific reserve for that loan. In total, our watch list includes five loans, comprising four rated 4 and one rated 5, amounting to about $145 million, which is 2.9% of our $5.1 billion portfolio. We believe these additions to the watch list and the associated reserves are appropriate for our portfolio. Mike will elaborate on our watch list loans and credit quality evaluations later in the call. Regarding our REO properties, we have some updates. Our total REO loan positions saw a decrease this quarter due to the sale of our multifamily asset in New Rochelle, which closed in the second quarter. This asset sold for our marked value, so no additional write-down was necessary. Concerning our Walgreens portfolio, we now own all 24 Walgreens properties tied to this loan, with all leases currently having 15-year terms. We plan to begin liquidating the portfolio in the third quarter. The value of these 24 stores is approximately $100 million, composing the majority of our foreclosure REO balance at quarter-end. I'd like to highlight a few more points before handing over to Jerry. Despite a muted transaction environment this quarter, we originated $230 million in new loan commitments, maintaining our portfolio at $5.1 billion. Our portfolio is well diversified across 156 loans, with an average loan size of $33 million. Multifamily makes up 77% of our portfolio, and as stated before, multifamily lending will remain our focus. Mike will detail our recent investments and pipeline in his remarks. We had $1.2 billion in total liquidity as of June 30, including $225 million in cash. This gives us ample flexibility to seize opportunities while also maintaining a robust liquidity cushion to safeguard our portfolio from unexpected credit events. We repurchased $5.5 million of common stock during the quarter. Over the past two years, we have bought back more than $60 million of our shares. We still have $39 million available under the company's buyback authorization and will act to repurchase shares when we believe it is the best use of our capital. In conclusion, while the commercial real estate environment remains challenging, we believe our portfolio is well positioned. We are committed to maintaining a strong capital position, which will enable us to keep investing in our portfolio while also pursuing favorable opportunities for origination. We are confident in our ability to navigate these challenging market conditions and deliver long-term value to our shareholders. With that, I'll turn it over to Jerry to discuss our financial performance. Over to you, Jerry.

Great. Thanks, Rich. I'm Jerry Baglien, 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 5. FBRT generated GAAP earnings of $39.6 million or $0.39 per diluted common share, representing a 9.8% return on common equity. GAAP net income was down quarter-over-quarter as the first quarter had one-time contributions from security sales and gain on debt extinguishment. 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. Our walk through of our distributable earnings to GAAP net 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 to $232 million which kept our portfolio flat to the first quarter at $5.1 billion. Our portfolio size was flat in the quarter, and we maintained 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 2.4x this quarter. We are deliberate in our use of leverage and view it as a structural highlight. Moving to Slide 6. 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. It was downgraded to a risk rating of 5. We engaged a third-party valuation firm to determine the market value of the property. 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 following the adjustment. Mike will share more details on the watch list in his comments. Moving to Slide 7, 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 8 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 the increases in SOFR and LIBOR as our debt primarily floats. 7% of our financing sources on our core portfolio are nonrecourse, non-mark-to-market. As of quarter end, we have reinvested 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 active buyers 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 FL 5 CLO was redeemed. This was relevered 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 to reinvest on our deals. When a loan repays in a CLO, we look to fill it quickly, which keeps this cash balance at 0 or close to it. Our goal is to minimize any cash drag that may occur from the repayment on our loans in the 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.

Thank you, 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. Today, I'll focus on key aspects of our commercial loan portfolio, current market opportunities, and provide an update on our watch list assets. As in previous quarters, our collateral remains primarily in the multifamily sector, accounting for 77% of our exposure, which was also our largest addition this quarter. We continue to balance the portfolio with multifamily as our core asset class, while also including some hospitality, industrial, and retail assets. Hospitality was our second-largest addition this quarter. Unfortunately, we have not seen improvement in the Office sector. We have noted that the Office sector is undergoing an identity crisis, and this situation seems to be worsening. We expect significant Office loan defaults in the coming years as many owners are already walking away from their properties at loan maturity. During the quarter, we downgraded two of our Office loans to a risk rating of 4 and increased our reserves to reflect the anticipated weakness. Fortunately, our Office exposure is only 6% of our overall portfolio, which is performing well at the asset level. Geographically, we continue to focus on the Southeast and Southwest. You may notice that we have added a state-by-state breakout in our presentation this quarter for greater transparency into the portfolio, and we will keep providing clarification in future quarters. We do not plan to add international exposure to our portfolio in the near future. Moving on to Slide 13, we can discuss specifics regarding our quarterly originations and current market quality. We originated seven loans this quarter with a weighted average spread of 432 basis points. The credits we are issuing today are among the highest quality we have seen in years. Market conditions are creating opportunities, making deals more appealing. Banks are clearly on the sidelines in terms of new direct originations. Many of our competitors in the mortgage REIT and debt fund sectors are more focused on legacy portfolio issues rather than taking on new risk. With about $1.5 trillion of commercial mortgage real estate loans maturing in the next three years, we believe the environment is favorable for well-capitalized alternative lenders like FBRT. While acquisitions overall are slow, we are seeing improvements as the bid-ask spread between buyers and sellers narrows. Multifamily transactional volume for the first half of 2023 has been the lowest since 2011. However, we are beginning to see more acquisitions and some price discovery within the stabilized multifamily market. For several quarters, we have noted that negative leverage is leaving the system before transactional volume returns to historical levels. In the stabilized multifamily sector, buyers are increasingly accepting 1 to 2 years of negative leverage with the expectation of achieving positive leverage by year 3 and onward, utilizing 10-year low leverage interest-only fixed-rate agency debt. Conversely, transitional multifamily transactions continue to exhibit significant negative leverage. The deals we are currently observing seem to involve more forced sellers rather than willing ones. The Office sector remains a significant concern in the industry. Obtaining debt is more challenging now than it has been historically, except perhaps in 2009. Passive tenant retention is reaching unprecedented levels, some being non-economically rational, amid ongoing uncertainty. Will the Office sector present an opportunity in the future? Yes, but we will be very selective. It is not attractive at previous pricing levels. However, if appropriately priced in relation to other market risks, we may consider it. As Jerry mentioned, we have actively purchased CRE CLO bonds, acquiring AAA-rated bonds with 7 to 8 handle coupons that yield leverage returns exceeding 20%. It is difficult to contemplate writing a loan on an office building when a AAA bond can deliver equity-like returns. Finally, I would like to review our watch list loans. Let's look at Slide 14. As Rich mentioned, we currently have 5 loans on our watch list as of June 30. Two loans were removed from the watch list in the second quarter. The Walgreens loan was fully transitioned to REO, and the Williamsburg Hotel reached a positive resolution in April. One loan added to our watch list in the first quarter, an office complex in Portland, has been downgraded to a rating of 5. Jerry shared information regarding our mark and the asset-specific reserve for this loan. We are actively in discussions with the borrower and expect to take ownership of the property as REO in the third quarter through foreclosure. The new loans added to our watch list 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. Altogether, these four new watch list names amount to $113 million in principal balance. Our reserves have been increased this quarter to reflect changes in credit quality. We maintain close communication with the borrowers on each loan to determine the best path forward for resolution. The team is experienced in swiftly addressing watch list loans, and our asset management group is actively involved in all cases. I would like to take a moment to discuss the methodology behind our risk ratings. A loan rated at 4 indicates it is not meeting its business plan at the time of initial origination. This does not necessarily imply that we expect to incur a future loss on the loan. For instance, the loan I referenced in Arlington, Texas, which we added to our watch list this quarter, is underperforming relative to its original business plan. However, it is set to receive a paydown this week and has a nonrefundable contract for sale, which would allow for full repayment of our loan upon the sale closing. Each quarter, we conduct a thorough review of all assets and take a disciplined approach to adjusting our general and asset-specific reserves as needed. We proactively manage potential risks in our portfolio and have made incremental enhancements to our credit positions through loan modifications during this quarter. Our goal is to identify issues and resolve them quickly, minimizing the number of concurrent matters for our asset management and senior management teams. We believe the current composition of the company's portfolio will sustain our position as an industry leader, enabling us to pursue opportunities while many of our competitors are unable to do so. I will now turn it back to the operator to begin the Q&A session.

Our first question comes from Sarah Barcomb with BTIG.

So we saw some multifamily assets go on watch list. One of them will see a near-term repayment for us. 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.

Sarah, 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, particularly 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 next several quarters, we're going to continue to see new additions to watch list loans, resolution of watch list loans, and then dealing with a new subset of watch list loans. So I think it's just the reality of the environment that we're in. When rates go from sub-3% coupons to 8% 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 the multifamily market has probably witnessed a 20% to 30% correction in valuations. Twenty percent likely more for newer vintage assets in larger markets, probably closer to 30% for some older vintage assets in 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, Arlington being an example, above our debt basis. 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.

Okay. And maybe just switching over to the debt side. You touched on CLO capacity as well as 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 how we should measure the amount of real estate owned that can come on to the balance sheet at once? Maybe with some further commentary on the broader Benefit Street platform and the capabilities there. Curious for your thoughts there.

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. Watch list assets and REO, we have the same view: fix them fast and move them fast. Unless we see meaningful upside in holding an REO asset, 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. If we take something REO, it's either a quick liquidation at a price that we think is acceptable to us, or if we believe that we can get better execution in the future, whether that's from market improvement or improvement 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.

Yes. And then just in terms of our ability to finance things. I think we've spoken tons about our ability to reinvest into our CLOs. We're going to have that capacity for some time to come across the four that still have reinvest. 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 relatively short-term capacity that we can take things off warehouse lines and free up space there. We can use those warehouse lines to, in some cases, take back assets if we need to. We can hold a decent amount on leverage too. 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 too, if we want to add debt in other ways. There are 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. 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. We're very proactive in monitoring our portfolio and trying to work through things in advance of them becoming issues that end up on the balance sheet directly as REO or unlevered loan positions. I think that's probably the most productive way to stem off the secondary part of your question, which is how would you deal with the liability side. I think proactive asset management involvement is probably the key part of that.

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 or portfolio monitoring? Could you just expand on that a little bit, please?

Sure. I don't think we have a dollar amount circled at this point. Our co-CEO, David Manlowe of overall BSP has made it a very front burner big-picture initiative for the firm. It's across the entire platform where we're turning attention to AI and how it can add alpha to every aspect of our business. We are already utilizing it in some capacity within our origination platform. We're looking to see how it can add value, whether it be as 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 early days of AI, but we want to be on the forefront of technology and using it for 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.

Awesome. That's helpful. And then going to REO and other expenses, would that be where the REO expenses were for the quarter?

Yes. That's generally where they're going to flow through.

Okay. And then do you know the percentage of what that was for the quarter for REO?

I don't have that number in front of me right now. It's relatively small if you think about what we hold. 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. The balance is going to be from the St. Louis office, which is a pretty small position. So once the multi-assets gone, it's going to be a very small contribution to expense in terms of what REO is generating on the balance sheet, because the $100 million of that number is triple net. So it has virtually no bearing on expense.

Congratulations on resolving Williamsburg and the net lease portfolio. Just to clarify, regarding the Williamsburg resolution, did you need to provide any financing to the new property owner, or did they secure their own financing?

Thanks, Steve. It's Mike. We had a subordinate lender in the original loan that we mentioned to the borrowers. That lender provided an acquisition loan for the new buyer. Then we provided financing to that lender. So we have an incredibly low leverage exposure to the hotel through leveraging the mortgage asset.

It sounds like you worked well with your original mezz lender to clear the first loan off your books, so great job on that. As you mentioned, you achieved a nice gain and received all your accrued interest and fees, which is commendable. Mike, I want to hear about the conduit outlook for the second half of this year in terms of the overall market. How do you perceive liquidity and new issuance? It seems like you’ve been steadily generating a few million dollars in fees. What are your expectations for FBRT's activity level in the upcoming quarters? Should analysts anticipate continued fee income gains in the near term?

Yes. 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 increase cycle has pushed us through the five stages of grief and we're finally at acceptance. Borrowers are accepting the fact that they just can't borrow at 3% and 4% anymore. Rates are where they are. So I can't directly answer the question regarding what I expect for the second half. I will say 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 actively hiring new origination staff 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.

I want to start by congratulating you on strong quarters. Can you discuss the current lending market and your main competitors, given that many commercial mortgage REITs are not currently active in new originations? Additionally, what differences in spread are you observing across various property types as you assess deals in the pipeline?

Thanks for the question, Mike. As I mentioned earlier, banks have mostly pulled back from direct origination. Many mortgage REITs and debt funds are focused on legacy issues and aren't looking to take on new risks right now. We originate a wide range of loans across different asset classes and are also involved in bridge, construction, and permanent financing, which means our competitive landscape is quite different in each area. In construction loans, more debt funds are entering the market, while in bridge lending, we’re seeing new vintage debt funds actively lending from their latest funds. It's really dependent on the specific circumstances. However, I can say that over the last few months, spreads have tightened. This tightening isn't necessarily due to credit quality but rather a shortage of available product. Everyone knows the characteristics of good credit, and when capital providers recognize it, we end up competing for top-quality loans. Today, multifamily loans are trading around $325 to $350 million for transactions over $20 million, likely closer to the $325 million mark. For hospitality, we're looking at about $450 to $500 million for the highest leverage loans we would consider, and retail is in a similar range but there isn't much activity on that side currently. As for office loans, the situation remains unclear, making it difficult to determine the borrowing costs for office portfolios. I appreciate the color on that and certainly understand the last point. As a follow-up, I'd love to shift over to the security side. You guys added some in Q2. 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? What type of deals or collateral are you looking for? As you think about the bigger picture in the CLO markets, Mike, I think everything has been static deals so far; 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 in the CLO market? I mean the rally that we've seen, I think, throughout the stack has been pretty impressive in just a matter of weeks. 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. I think we would be open to reinvest with issuers that we think highly of. On the flip side, we hope the market thinks highly of us. 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 those. We really like the flexibility and the duration of managed deals. In terms of overall exposure, I would say we're probably getting closer. We like the relative value. We like the returns we generate today. Obviously, the flip side of that is these are mark-to-market assets. If you're using leverage, that leverage can go away relatively quickly. 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. I'll probably look to sell into the strength if we think we can originate loans to offset kind of that net interest margin that would be coming off through bond sales.

Steven, it's Rich. I assume your question reflects the same confusion we've been experiencing, which is that most of our public comps in the commercial mortgage REIT sector are not engaging in much origination. This is puzzling because, as Mike mentioned, the deals we are currently observing are of high quality, and this environment allows us to take advantage of opportunities with minimal competition. The reason for this situation is unclear. From our viewpoint, we have ample cash, well beyond what we believe is necessary to address any unexpected credit issues. As we've discussed regarding Walgreens, those investments represent appealing, investment-grade, triple-net assets. This could potentially add $100 million in liquidity for us soon. As our multi-portfolio continues to pay down, we face a question: if we don’t spend money, what’s the alternative? Will it be cheaper in the future? It's uncertain, but it's challenging to justify not being an active participant in today’s market. As Mike noted, conventional competition, including banks, is largely absent. I expect this will change, as many may be pulling back due to concerns about future credit issues. The reality is that we provided a debt maturity schedule this quarter in our earnings supplement. Like other commercial mortgage REITs, we typically make 3-year loans, and with rates rising last year, we anticipate that our books will mature in the coming years. This will be a challenge regardless of the level of Office exposure. We believe most commercial mortgage REITs are focused mainly on this issue and secondarily on others. From our perspective, we have significant liquidity, and the market appears quite affordable. We can purchase securities, but our core business of making loans seems like a solid investment right now, particularly since companies like ours are benefiting from higher rates and are already covering our dividend. Therefore, what you are investing in is genuinely opportunistic.

The next question comes from Matthew Howlett with B. Riley. All mortgage REITs are primarily focused on that and secondarily focused on everything else. Our perspective is that we have a lot of liquidity. The market feels pretty cheap. While we can buy securities, we can also focus on our core business of making loans, which seems like a solid opportunity right now, especially since firms like ours are benefiting from the advantages of higher rates, and we are already covering our dividend. Therefore, what you are investing in is genuinely opportunistic.

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? You have all these options. You can buy back stock, you can buy securities, you can do other things with your excess capital. (Inaudible) Is there a target on the core loan portfolio by the end of the year or next year?

Let me begin by providing an initial response, and then Jerry or Mike may want to add more. First and foremost, I believe that all the points mentioned are relevant to us. We will utilize our capital in ways that maximize shareholder value. For a period, that meant repurchasing our stock. We were very active in buying our shares when prices were low. We even bought back some of our bonds at a favorable discount. These actions were accretive and yielded great returns. Additionally, we have been using our cash for lending purposes. As I previously mentioned and as Mike noted, the recent vintage of loans has been among the best we've encountered, possibly ever. Therefore, we will continue to deploy our cash actively. Jerry can provide more specific insights on our approach to leverage, but we currently have $225 million in cash and over $1 billion in liquidity. As I pointed out, we anticipate additional cash inflows, including loan repayments, assuming everything proceeds as planned. It feels somewhat like being on a hamster wheel, continuously moving without significant change. We aim to maintain a minimum portfolio size, and if growth opportunities arise, we will pursue them opportunistically. As I mentioned, we are already covering the dividend, but Jerry or Mike, feel free to offer any specific guidance you'd like to share.

Yes, I'll start, and then Mike can add his thoughts. For me, the concept of target portfolio size is more about targeting return on equity rather than a specific number for loans outstanding. The yield we are generating is significantly higher now due to the increase in base rates. Currently, we have a $5 billion loan portfolio that comfortably covers our dividend. This gives us flexibility, which can be directed into securities or loans as Mike mentioned. We may even have some room to let the portfolio size decrease slightly while still covering the dividend. This situation provides us with a great opportunity to be selective in our origination process and pursue credits we find appealing. If we identify strong opportunities, it allows us to increase our overall return on equity. Our main concern is ensuring we maintain the yields promised to our investors through our dividend. When we come across favorable bonds or loans, we add them, and we hope our earnings will grow as we move forward. That's the high-level perspective I have on the matter.

Yes. And I don't want to add too much. 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. 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. 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 and the condition it's in, the cash position and the condition it's in, this is a very, very exciting time, I think, for the group at FBRT.

I want to acknowledge your decision to buy back stock, as it's a move that only a few REITs are making in the current environment. I appreciate your comments. You mentioned that multifamily will be the main asset class, but I noticed you also did a hotel loan. I'm interested in your thoughts on that asset class. Are you focusing on a specific geography or a particular type of hotel? I'm curious because the spreads must be quite attractive.

Yes. I would say overall, hospitality is performing exceptionally well, particularly 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 all-time highs. Looking across all travel segments, whether it's TSA checkpoints, or airlines that are recording record revenue, everybody on this call has probably stayed in a hotel in the U.S. in the past 6 to 12 months. The rates are mind-blowing. So the hotels really have pricing power right now and are doing exceptionally well, again, 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, moving in the right direction post COVID, but it is not anywhere close to recovering to full COVID levels. If you were that generic salesman who used to see your client four times a year, 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 there by some means of virtual conference. I just think that COVID, Zoom, Teams, and all of these video conferencing innovations that we've had 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. 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 assuming there's an equity contribution, can you just go over again what are the terms for gaining modification? We've always believed that during challenging times, especially since the onset of COVID, it's important for us to support our borrowers as a lender. This begins with clear communication, reminding them that while we are here to help, we are not partners in the same way they may view it. In prosperous times, we don’t typically hear from borrowers offering to share their success; similarly, during downturns, it’s important for us to convey this gently. If borrowers are seeking accommodations, it generally means they should approach us prepared to invest in the solution. Our goal is to resolve issues and enhance the assets, but this should not be a one-sided effort. We aim to strengthen our credit position and quality as well. This approach is consistent throughout our organization when considering modifications: we strive to be reasonable and respectful while also being mindful of the other party's circumstances. Ultimately, our first responsibility is to our shareholders, and we must enhance our credit situation compared to where it was before discussions began. This improvement can take many forms, including debt reductions, securing recourse, or enhancing covenants; we have various strategies at our disposal.

As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Lindsey Crabbe for any closing remarks.

Thank you for joining our call today. Please reach out if you have any further questions. Thanks again.

This concludes our presentation. Thank you for joining. You may all now disconnect.