Q1 2023 Brightspire Capital Inc Earnings Call
Participants
Andrew Elmore Witt; President & COO; BrightSpire Capital, Inc.
David A. Palame; Executive VP, General Counsel & Secretary; BrightSpire Capital, Inc.
Frank Vito Saracino; Executive VP, CFO & Treasurer; BrightSpire Capital, Inc.
Michael Joseph Mazzei; CEO & Director; BrightSpire Capital, Inc.
Jade Joseph Rahmani; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Matthew Erdner; Research Associate; JonesTrading Institutional Services, LLC, Research Division
Matthew Philip Howlett; Director of Equity Research; B. Riley Securities, Inc., Research Division
Sarah Barcomb; VP & and Commercial Mortgage REITs Analyst; BTIG, LLC, Research Division
Presentation
Operator
Greetings, and welcome to the Brightspire Capital, Inc. First Quarter 2023 Earnings Call. (Operator Instructions) At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press #, 0 on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, David Palame, General Counsel. Thank you. Please go ahead.
David A. Palame
Good morning, and welcome to Bright Spire Capital's First Quarter 2023 Earnings Conference Call. We will refer to Brightspire Capital as BrightSpire BRSP or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei, President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino -- before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-K and other Risk Factors and Forward-Looking Statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, May 3, 2023, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported first quarter 2023 GAAP net loss attributable to common stockholders of $4.1 million or $0.03 per share, distributable loss of $11.5 million or $0.09 per share and adjusted distributable earnings of $34.5 million or $0.27 per share. The company also reported GAAP net book value of $10.41 per share and undepreciated book value of $11.74 per share as of March 31, 2023.
With that, I would now like to turn the call over to Mike.
Michael Joseph Mazzei
Thank you, David. Welcome to our first quarter 2023 earnings call, and thank you for joining us this morning. In my remarks today, I will focus on a few key financial highlights, market conditions and our near-term objectives. Andy will provide an overview of our asset management development, and then Frank will discuss our first quarter financial results. Starting off with some financial highlights. For the first quarter, we reported adjusted distributable earnings of $0.27 per share. Importantly, our loan book, which is 97% floating rate, continues to benefit from higher base rates, and our dividend coverage is now at 1.35x. Our dividend yield on current market pricing is approximately 14%. While share buybacks would be highly accretive, we continue to have a strong bias towards maintaining liquidity and reduce leverage during this uncertain period. Over the past 12 months, we have reduced leverage by approximately 15% from 2.3x to the current level of just 2x. Our current leverage is among the lowest in our public peer group. This quarter, we recorded a $0.32 reduction in undepreciated book value, primarily driven by net increases in our general CECL reserves as well as several specific loan level reserves. Andy and Frank will provide more details on this. In terms of liquidity, as of today, we are at $424 million, of which $259 million is unrestricted cash. We expect to utilize a portion of this cash in the coming quarters as we shift certain loans from their current financing arrangements. In the coming quarters, we also expect to pick up liquidity as a result of certain asset payoffs and resolutions. During the quarter, Digital Bridge completed a secondary offering of their remaining holdings of our stock. We thank them for their support as shareholders and for their assistance and leadership in the internalization of management of the company. This sale not only removed a significant overhang but was also very broadly distributed with over 50 institutional investors participating in the offering, many of whom are new to the BrightSpire name. The transaction has also led to a substantial increase in our daily trading volumes. Now turning to the capital markets. Since our last earnings call, market conditions have certainly gotten more complicated. While the credit markets continue to be challenging, we now have additional turbulence from the recent failures of 3 significant U.S. banks as well as Credit Suisse. While most of us were more focused on the top money center banks, very few appreciated the extent of the uninsured deposit bubbles and asset liability mismatches that existed at some of the larger regional banks. Given these recent bank failures, it has become clear that the regional banking system had significant exposure to both deposit flight risk and long-term fixed rate assets. These issues have been exposed and exacerbated by much higher-yielding U.S. treasuries. We are witnessing hundreds of billions of bank deposits moving at record speed to higher-yielding money market funds. Going forward, many regional banks will need to reinforce their liability and capital structures as uninsured deposits have proven to be an unreliable source of long-term funding. At the same time, regulatory oversight is going to become more restrictive as bank and (inaudible) focus on what went wrong and how to prevent it going forward. The combination of all this means that many regional banks will not be expanding credit lending, but we'll rather be looking to shrink their balance sheets. The repercussions of this will be a meaningful pullback in credit. This will certainly be the case with commercial real estate lending, especially when you consider how regional banks have substantially increased their exposure in recent years, along with deposit growth. For example, Signature Bank became one of the single largest lenders in New York City. And currently, there are local community banks, which have some of the largest commercial real estate loan portfolios in the U.S. Therefore, as the year progresses, the next shoe to drop will be credit issues arising in these regional bank loan portfolios. This only further validates the more conservative approach we at BrightSpire adopted over a year ago to substantially reduce our loan origination and maintain higher levels of cash liquidity. In closing, I believe our prudent and conservative approach to managing our leverage and liquidity will position us well for when the tide turns. When the Fed starts to ease and the capital markets stabilize, we will be in a strong position to deploy capital in what will be an extraordinary lending environment.
With that, I would now like to turn the call over to our President, Andy Witt. Andy?
Andrew Elmore Witt
Thank you, Mike, and good morning, everyone. Throughout the first quarter, the BrightSpire team remained focused on asset and portfolio management. We expect this to be the case for the foreseeable future. The combination of our vertically integrated asset management team and high-touch approach gives us the ability to identify and address potential challenges early. Our team has deep experience working with borrowers dating back to the great financial crisis when this team was responsible for managing portfolios of CRE debt acquired from the FDIC and other financial institutions. As an example, throughout the course of any given year, we have interim maturities, which require the borrower to purchase an interest rate cap and in many cases, meet certain extension hurdles, we believe the best outcomes are derived from timely and open communication. For 2023, we are in the fortunate position of only having 4 final maturities accounting for approximately 4% of the total portfolio. During the first quarter, we received $101 million in repayments and partial paydowns across 4 investments. This was in line with our expectation as we expect loan repayment volume to remain relatively low for the next couple of quarters. Now I would like to highlight a few updates within the portfolio. The office real estate sector has experienced persistent work-from-home dynamics. As we discussed during our last call, a significant portion of our office assets are located in high-growth drive-to-work markets with granular rent rolls and current in-place cash flow. The challenges we have experienced within the portfolio to date have largely been confined to precoded loans in major central business districts where office attendance remains low and vacancies in sublet space are at record highs. During the quarter, in cooperation with our Long Island City borrower, we marketed 2 office properties for sale, the failure of New York-based Signature Bank disrupted that process. While discussions are ongoing, we are preparing to take back the property. For that reason, in April, we placed the second of our 2 Long Island City office loans on nonaccrual status and increased the specific reserve against this loan. With regards to the Washington, D.C. office loan, the fact that federal government employees have not returned to work has profoundly impacted the office sector. This property is 51% leased. In addition to vacancy issues, the property has known vacates at the end of 2023 when certain tenant leases expire. Therefore, after conversations with the borrower, we have commenced a foreclosure process during the first quarter. We placed this loan on nonaccrual status, moved the risk rating from a 4 to a 5 and recorded a specific reserve. The most probable outcome for this asset is a conversion to residential. The final update within the office portion of our portfolio was discussed on the fourth quarter call. During the first quarter, we completed the modification of the largest office loan in our portfolio, which reduced our exposure by $39 million to $76 million for this loan. Now turning to hospitality. The portfolio has exposure to 3 significant Northern California loans on 2 properties. The Berkeley hotel investment, which consists of both the senior and mezzanine loan is now under contract to be sold. We are expecting a full payoff within the next 30 days. And as a result, we have reduced the risk rating from a 4 to a 3. The San Jose hotel property performance continues to improve, but not without its challenges. The City of San Jose office attendance rate is among the lowest for major cities nationally. The 805 room property consists of a main hotel tower and the second expansion Annex tower. At present, the borrowers in the process of marketing for sale the Hotel annex tower, which is comprised of 264 rooms. A buyer has been selected and terms have been agreed to. This prospective sale has the potential to meaningfully improve the credit profile of our remaining investment for the time being, the loan remains risk rated 4. Lastly, in April, we effectuated a restructuring of the Milpitas development mezzanine loan. The property development was delayed due to COVID and is now complete. It consists of 213 residential units and ground floor retail. The residential units are now substantially leased -- as part of the restructuring, the loan was bifurcated into a mezz A and mezz B to facilitate a new money equity contribution by the borrower. The terms of the extension is coterminous with the senior loan, which was extended as part of the restructuring to March 2026. In connection with this restructuring, we moved the risk rating to a 5 from a 4, recorded a specific reserve and in April, placed the mezz B note on nonaccrual status. For your convenience, additional information is available as part of the MD&A contained within the Q1 2023 Form 10-Q. As of March 31, 2023, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 100 investments with an aggregate carrying value of $3.4 billion and a net book value of $926 million or 87% of the total investment portfolio. The average loan size is $34 million, and our weighted average risk rating is 3.2. First mortgage loans constitute 96% of our loan portfolio, of which 100% are floating rate and all of which have rate caps. The portfolio has minimal exposure to construction risk and 75% of the total collateral is located in markets that are growing at or above the national average growth rate. Multifamily, the asset cost BrightSpire has the largest exposure to consists of 56 loans representing 49% of the loan portfolio or $1.7 billion of aggregate gross book value. The loan portfolio composition includes 32% office or $1.1 billion of aggregate gross book value. There are 33 office loans with an average loan balance of $33 million. Our office loan portfolio is granular, which we view as a meaningful risk mitigate. The weighted average occupancy across the office portfolio is 77%, excluding the risk rated 5 loans. The remainder of our loan portfolio is comprised of 13% hospitality with industrial and mixed-use collateral, making up the rest. Stepping back, we believe the composition of our portfolio, including the average investment size, property type and regional diversification are strong defensive attributes that position us well in a volatile and potential recessionary environment. We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across 5 primary banking relationships totaling $2.25 billion. As of today, availability under our warehouse line stands at approximately $968 million, which represents a 57% aggregate utilization rate. Additionally, we have 2 outstanding CLOs totaling $1.4 billion.
With that, I will turn the call over to Frank Saracino, our Chief Financial Officer, to elaborate on the first quarter results. Frank?
Frank Vito Saracino
Thank you, Andy, and good morning, everyone. Before discussing our first quarter results, I want to mention that we expect to file our Form 10-Q later today and that our first quarter 2023 supplemental financial report and investor presentation are available on the Investor Relations section of our website. For the first quarter, our adjusted distributable earnings were $34.5 million or $0.27 per share. First quarter distributable loss, which includes $55 million of specific loan reserves on 3 loans was $11.5 million or $0.09 per share. Additionally, for the first quarter, we reported total company GAAP net loss attributable to common stockholders of $4.1 million or $0.03 per share. GAAP net loss also reflects a $55 million of specific on reserves. Quarter-over-quarter, total company GAAP net book value decreased from $10.77 per share to $10.41 per share. Undepreciated book value also decreased from $12.06 to $11.74 per share. The decline is primarily driven by increases in our CECL reserves, net stock award activity and the FX translation related to our Norway office net lease assets. This decline was partially offset by a onetime gain from dispute resolution proceeds related to a Los Angeles mixed-use project and adjusted distributable earnings in excess of dividends declared. The first quarter adjusted distributable earnings of $0.27 was flat to the fourth quarter. We earned higher-than-expected modification income during the first quarter and also benefited from the increase in the benchmark interest rates. When adjusting for repayments, the nonaccrual loans mentioned earlier as well as the beneficial impact of rising interest rates continue to have on our portfolio, our adjusted distributable earnings quarterly run rate is closer to $0.24 per share. Turning to our dividend. For the first quarter, we declared a dividend of $0.20 per share, in line with fourth quarter dividend. Our dividend remains well covered at 1.35x. Looking at reserves and risk rankings. As Andy mentioned in his comments, during the first quarter, we placed the Washington, D.C. office loan on nonaccrual. And in April, we placed the Mezz B related to the Milpitas development mezzanine loan as well as the second of the Long Island City loans on nonaccrual status. Our specific CECL reserves ending the first quarter were $112.2 million, an increase of $55 million from the fourth quarter. The increase reflects the 3 assets Andy discussed earlier, the Washington, D.C. office loan, the Milpitas Development mezzanine loan and one of the Long Island City ones. Our general CECL provision of $34.1 million, a decrease of $15.4 million from the prior quarter. The lower general CECL is primarily driven by the elimination of the general CECL reserves associated with 2 loans mentioned above. Excluding these 2 loans, our general CECL increased by approximately $8 million. The combination of asset specific and general CECL reserves at quarter end was $146.2 million, an increase of $39.6 million or 37% from the fourth quarter of 2022. As a reminder, these are point-in-time assessments that we evaluate each quarter. Looking at changes in risk rankings during the quarter. Our review resulted in 5 loan downgrades, 3 residential and 2 office loans and 3 hotel loan upgrades. These upgrades reflect the migration of our portfolio as certain loans remain challenged while others either advance their business plan or improve their credit position. Altogether, our average loan portfolio risk-ranking at the end of the first quarter was 3.2, flat with the fourth quarter's risk ranking levels. Our risk-rank 5 loans represent approximately 4% of the total loan portfolio carrying value. Two are the Long Island City office loans. The third is the Washington, D.C. office loan and the fourth relates to the Milpitas development mezzanine loan. Nine loans equaling 13% of the total loan portfolio carrying value of Risk rank 4, 5 are office loans, 2 are hotel loans and two are multifamily loans. While all are current performing loans, we see potential for increased risk and accordingly are closely monitoring these investments and working with sponsors to ensure the best possible outcomes. Moving to our balance sheet. Our total at share undepreciated assets stood at approximately $4.8 billion as of March 31, 2023. Our debt-to-assets ratio was 64%, and our debt-to-equity ratio was 2.0x, both flat to last quarter. In addition, our liquidity as of today stands at approximately $424 million between cash on hand and availability under our revolving bank credit facility. At present, we believe the $259 million of cash on hand, in addition to our $165 million fully undrawn corporate revolver provides us with the liquidity and flexibility to manage the business.
This concludes our prepared remarks. And with that, let's open it up for questions. Operator?
Question and Answer Session
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a questions please press #, 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press #, 2 if you would like to remove your question from the queue. We do ask participants to please limit themselves to one question and one follow-up and then requeue for any additional questions. Again, that is #, 1 to register a question at this time.
Today's first question is coming from Sarah Barcomb of BTIG.
Sarah Barcomb
So first of all, I appreciate the easy quarter-over-quarter risk rating comparison in the presentation. So thanks for that. On the topic of risk ratings, we've seen some discrepancy among the peer group with respect to risk rating migrations in the quarter. And some companies are applying a 1 or 2 on their more stable loans versus the standard 3 rating that you and some other peers typically apply. We're also seeing, again, relatively stable ratings despite higher rate fall and credit uncertainty during the quarter and modest CECL reserve increases. So with that said, could you just take some time to talk about the Bright Spire philosophy toward risk ratings and CECL reserve migrations?
Michael Joseph Mazzei
This is Mike. I'm sure the operator is cringing when she heard you say it takes some time to answer that question. So I don't want to be too long-winded on something like that. First of all, I think the watchword for us is to avoid surprises. We do not want to see loans go from a 3 to a default. And we think that in this market, especially a tough market, credibility is key. And a way to partly establish credibility is through your risk ratings and your disclosures because that's the best way to telegraph to investors what they need to basically underwrite the company. While there'll always be legitimate unexpected negative outcomes that occur that even we will be surprised at, you need to have earned credibility in order to get a pass when those things do occur. And as you said, like some others, we provide risk ratings and the changes on our risk ratings on every single loan. We do not utilize summary tables. We do not give you the risk ratings on the top 15 and a summary of the next 50. We give you a risk rating on every single loan. And as I said, we know and acknowledge that others in the peer group do do that. We are on the side of being more conservative in our risk rankings. And as we said in the prepared remarks, this quarter, we had 3 performing loans that we felt there was some increased risk around, and we downgraded those loans to a 4. All of those loans are current and each one of them could have a positive outcome in the coming quarter, but we felt given the increased risk profile, some borrowers are behind on their business plan, some borrower they ask us to look at potentially a modification, waiving extension tests or things like that. And the key is that we don't want to see a loan, if we're wrong and the loans have a substantially more increased risk from here, we don't want to see a surprise in that. So in doing that, we also provide the narratives, as Andy said in our 10-Q. We will go there and we'll list a loan, and we'll talk about what is occurring so you can get some insights as to what we are seeing, and we use the MD&A to communicate what we're talking about during the quarter. Regarding the risk-weighting buckets 1 and 2 -- some use different definitions. We acknowledge that. We don't utilize anything in that bucket. We basically feel that if a loan is a 1 or a 2, if a loan is outperforming its original underwriting when we took the loan in, then we expect the loan to pay off. And so we think the next train stop from the 3 is a payoff. And we think that when you have 1s and 2s, it distorts the average risk rating, and we think that you all and our investors really don't look at the average risk rating. We think they're highly focused on the 4s and 5s and worried about what loans are ranked to 3 that can go into default. And so we are really focused on making sure that we are conservative around that potential. Ergo, this quarter, as I said, we downgraded several performing loans, each of which could have very well have a positive outcome and resolution and getting them back on track. Loans ranked 4 do not have to end badly. And as Andy mentioned, we had the Berkeley hotel loan, which is $145 million combined first mortgage and mezz as a great example. That loan was risk ranked 4 since COVID, and we held it out a four. And the hotel has been performing better every quarter. And that hotel has been up for sale in the process for 6 months. We were notified about a contract and a hard deposit 3 months ago, but a lender was not yet identified. So we kept the loan out of 4. And then very recently, the deposit was again substantially upsized and that is a hard contract deposit, and we were notified by the borrower that there's a closing date that should occur this month. That actually gave us a day. And so we felt that, that loan should be upgraded from a 4 to a 3 .We do expect some other upgrades. We have that Baltimore office loan, which is now substantially leased. We're holding it at a 4 because the borrower needs to perform on getting the TIs done. So that tenant could be in place. In fact, the tenant asked for more space just recently, but we'll keep it at a 4. It will have a 10 debt yield. But when that borrower gets substantially along with completing the TIs to put that tenant in place, we'll probably migrate that loan 2 or 3. And we think there will be others that will improve for upgrades in the coming quarters. So we at BirghtSpire, we're really not focused on loans that are rated 1 or 2. We will earn on the side of a loan downgrade, and we'll deal with the headline consequences and the effect on the average risk rating, but Again, we use the risk ratings as a way to telegraph more transparency as we're focused on avoiding surprises. And hopefully, in doing so, we can build some credibility. I hope that answers your question.
Sarah Barcomb
Yes. I really appreciate all the color there. And I agree that the loan by loan risk rating is much more important than a weighted average number on the portfolio. And then just one more quick follow-up for me on a different topic. So you recently announced that new $50 million stock repurchase program. Could you talk about your thoughts with respect to stock repurchases at the current valuation discount on the common stock?
Michael Joseph Mazzei
Yes. As we said in the prepared remarks, we've said this previous quarters. We had a secondary offering by Digital Bridge. We were asked to participate in that to assist with it. We have held firm. We believe that for the same reasons our stock is attractive at this level are the same reasons why you need to hold on to cash. And while it's very alluring and could be one of our best investments to buy back the stock so far below book value, and the implied losses are just Epic in terms of what the market is imputing at the stock price, current level, it is very compelling. But at this point, we still feel, given the uncertainty in the market and all the things that we said in the prepared remarks about the regional bank sector that right now, protecting the balance sheet and being disciplined around that and not being impulsive around buying back the stock is more critical than the minor accretion you'll get by spending that money on buying back stock.
Operator
The next question is coming from Jade Rahmani of KBW.
Jade Joseph Rahmani
I wanted to ask what are you hearing from the banks, the offline providers, repo providers. You made some extensive comments around the regional banks, but just wanted to get an update as to what you're hearing there.
Michael Joseph Mazzei
We're getting telegraphed that those banks are in business. They want to see new loans. They want to grow that business. They get very, very favorable treatment in that business as well, the warehouse business. It's been a relatively safe business for them based on the haircuts that they get on these loans. And so they're open. The problem is I think for them is they're not seeing a lot of activity. In fact, what we're hearing back is that the same bank that may have warehouse lines with several mortgage REITs or opportunity funds, debt funds, they're seeing the same loan from multiple sources, and they sense that there's a dearth of activity in the market by the fact that many, many of their constituents are focused on the same deal. So there's really not that much out there. I think that's frustrating for them, but they're open for business. And it's been us and the market, our desire to be more conservative and maintain cash balances and the fact that there's just a dearth of activity out there. So despite the will that they have to be in the business and grow the business, even though the CLO market really isn't effective right now, there's been very little activity for them to benefit from. But so far, very positive.
Jade Joseph Rahmani
And so as the cycle unfolds, as we see some credit pressures growing, do you anticipate the warehouse providers, the repo lenders to protect themselves to become more defensive, require margin call? And are you surprised we haven't seen that as yet.
Michael Joseph Mazzei
Look, first of all, again, back to almost the comments I made with Sarah, transparency with your line lenders is so critical. If a line lender feels as though that someone is trying to smooth the rough edges out on a loan that could end to a very bad result. So we have a tremendous amount of dialogue with our line lenders almost on a daily basis. In this market, yes, loans can deteriorate. And the reason for holding on to the cash is to make sure you can defend loans. And as I said in the prepared remarks, in this coming quarter, we expect to move loans off of some financing arrangements we would have the cash to do so. We also expect more liquidity to come into the firm based on resolving loans. We have REO that we'll hopefully resolve. We have loans that we think are going to, in fact, pay off. Andy mentioned that on one of our large hotel loans, there's a prospective buyer for one of the towers at the property, which could lead to a substantial paydown on that -- a partial paydown in that loan. So we think we'll be coming into more liquidity. But yes, I think in this market, you've got to be budgeting for that potential outcome. And that's why when we go back to the question about buying back the stock, we are refraining from doing that because we want to make sure that we are prepared and have enough cash to defend the balance sheet if we need to reduce the leverage on loans or move loans off of their current financings into cash before the result.
Jade Joseph Rahmani
Next question -- last question for me would just be on the net lease portfolio, the owned real estate portfolio. What are your updated thoughts there? Is that a source of value? Do you think that the carrying value is in line with the market values for there? And is that a source of capital? Or do you think it's a meaningful contributor to earnings and something you want to keep longer term?
Michael Joseph Mazzei
Well, they vary. So we have some small -- not net lease, but real estate that we own in office buildings are incredibly well leased in very good markets. bring off very high cash flow, maybe something like $0.06 a share combined for 2 assets that actually have almost 0 book value against them. So that's one example. That's very good. Then we have the larger one, which is the Albertsons warehouse distribution centers that we lay out in a lot of detail in our Q. We own those at circa a 7 cap. They are potentially merging with Kroger, and so there could be an upgrade in that rating to investment grade in the coming year. That is a source of liquidity. At one point in time, it probably was a source of a gain, but given where the market rates have gone and the defeasance is more than offset by the interest rate effect on the value of the property. But there's still a very good source of capital there that we can tap into, probably anywhere between close to maybe $100 million of capital that we could tap into if we sold the Albertsons equity portfolio. But that is one right now that we do not have on the radar screen. The last one, the other big one is we've documented that in great detail for over 2 years now in our MD&A filing, and that is the Norway net lease deal to the state oil company of Norway. And the issue there has nothing to do with the credit. It's a great credit. It's a AA credit. It's the oil company of Norway. So it is the driver behind everything that is Norway. But the issue is the term of the lease versus the maturity on the debt. The debt matures in 2025. The lease expires in 2030. We're in dialogue with the company on hold, waiting for them to respond to us about what their intentions are about remaining at the property. And the value of that is dependent upon what the tenant wants to do. Hence, why we gave substantial disclosure on that, I think, over 2 years ago, Frank, on that deal. So investors can look at that and understand the risks that we see in the renewal of that asset. We do not have that risk in the other real estate that we own or the Albertsons deal, quite frankly, the opposite. That leases an incredibly long-term lease. We wish that lease was a lot shorter. But in the Norway transaction, the issue is the remaining lease term relative to the maturity of the debt. Only 5 years lease term remains when that debt matures in 2025, and that's the issue.
Operator
The next question is coming from Matthew Howlett of B. Riley.
Matthew Philip Howlett
First on the liquidity that you're preserving to buy out loans of financing, are you referring to the master purchase facilities of the banks or the 2 CLOs.
Michael Joseph Mazzei
I would say both. I really don't want to comment on the CLOs because they are securities that trade in the market. So I would just say, generally, to buy back, I really don't want to comment on public securities. But I would -- I want to add to you the fact that when people -- when -- those in the peer group refer to non-mark-to-market financing, I will say that in some cases, the CLO gives you a lot less flexibility than our warehouses. And this connects back to a question that we had about our warehouse lenders. Our warehouse lenders give us a lot of flexibility when we have to deal with loans. If you want to reduce a coupon, if you want to do an AB note, you can have that conversation with our warehouse lenders. The CLO is much more restricted. And so when those refer to -- we have CLOs outstanding, and this is now mark-to-market, I would say, except in the loan default. In a loan default, you're buying that loan back in full at par. And so this whole notion about CLOs being nonrecourse, non-mark-to-market. That's not the case if you ever want to issue a CLO again. So we will be moving loans out of their arrangements. It's well anticipated, and we will utilize cash for that. But as I said in the prepared remarks and earlier, we do expect more cash to come in through some assets that we are expecting payoffs on and resolutions on. It will just be some timing difference.
Matthew Philip Howlett
And you said you had $200 million of unrestricted cash. The rest is probably what restricted cash in the CLOs? Is that the mix the difference?
Michael Joseph Mazzei
We don't -- that's another misnomer. When we refer to liquidity, we refer to cash, and we refer to our revolver. And we always tell you which one is which. This whole notion about capacity in the CLO, that is not liquidity. You can't take money out of CLO and use it to pay down a warehouse line. You could only originate a loan or have a loan that's in another financing vehicle go into the CLO. So you could have a loan that's financed at a 70% haircut, a 70% advance rate with a warehouse lender and a loan payoff in a CLO, a different loan that may have had an 80-plus percent advance rate. And if that loan on a warehouse line is eligible to the CLO, you can move that into the CLO and net, you'll get 10% more cash. But to refer to CLO reinvestment capacity as liquidity is just false.
Matthew Philip Howlett
Right. What I'm leading towards is how much are you willing to let the -- I mean, from a shareholder perspective, I think they're quite happy with you just deleveraging and at some point buying back stock. I would say it's highly accretive. This discount to NAV is the most accretive thing a mortgage REIT can do is buy back stock 50% below book. But when you look at how much are you willing to let the company delever? And at what point -- what do you need to see to start originating again? Would you start -- are you out there with Rate sheets? Are you still talking to people? Just talk to me about where you think the portfolio -- how much it could go down before you feel comfortable enough? And at what point would you start originating for buying back stock?
Michael Joseph Mazzei
Okay. So I would say that in this type of market, the management team of the company's first duty is absolutely unequivocally to defend the balance sheet. I don't think anyone has seen market conditions quite like this, where we've had bank failures, foreign and domestic and other banks who are trading very poorly and a debt ceiling coming up in June, which is more frightening than the debt ceilings that we've had in the past. There's a tremendous amount of uncertainty. So I think in this market, any management team's #1 priority. I would say #1 through #5 priorities are defending the balance sheet. How far will we let the deleveraging occur? We'll let the deleveraging occur for as long as needed to defend the balance sheet. Now practically speaking, I would say that as we migrate through the year and we get to the end of the year and we -- as I said in the prepared remarks, where we see the Fed is starting to telegraph rates coming down. Hopefully, they don't do so in a panic situation, but rates coming down. We see the capital markets start to stabilize -- and we feel that we've gotten in a very good place where we've gotten through a lot of loan modifications as needed. Our warehouse lenders have been addressed. And we feel like there's some certainty around the need for cash. I think at that point in time, our first goal would be to deploy capital into new loans. If the stock is continuing to trade at this level, yes, I think we would absolutely consider buying back more stock at that point in time. I would say these things are probably more kind of fourth quarter, not second or third quarter, not second or third quarter events. Are we watching very closely that as we delever what the effect will be on our dividend coverage, we are. Do we know that dividend coverages have been boosted across the board because of the decrease in rates, absolutely. So we're planning for that. That's one of the reasons why we did not increase the dividend from $0.80 we held fast when we have the capacity to do so. And now we have a 1.35x dividend coverage. So we do expect that over the course of the year, certainly into next year that you can see an erosion of that coverage, but we don't think the dividend will be challenged, quite frankly, until 2024, unless we have unexpected myriad of loan defaults that occur that affect our income. So to summarize, defend the balance sheet one, probably not look to redeploy capital until we get certainty and we don't think that certainly comes -- my guess is at least until the fourth quarter of the year. As we said earlier, all line lenders are telling us this. They're seeing the same loan from multiple lenders. So right now, there's really a scarcity of lending activity. I think others have telegraphed that they've done a couple of loans in some very nice spreads to SOFR. We think the amount of business out there is a single percentage of what it was in a normal market. So we don't think we're really missing any big opportunities at this point. And we think given what's going on with the contraction and regional bank lending that will occur, we think there'll be plenty of space to operate in when we reopen maybe Q4 or Q1.
Matthew Philip Howlett
Look, I really appreciate how you're positioning the company and defending the company for shareholders. Thanks for answering that, Michael.
Operator
Once again, that is #, 1 for any questions. The next question is coming from Matthew Erdner of Jones Trading.
Matthew Erdner
It's Matthew on for Jason. Could you talk a little more about the D.C. office and the foreclosure process, I guess, as much as you can disclose there. And then the probable outcome of converting it to residential. Are you guys planning on getting rid of it in a sale or taking control of it?
Michael Joseph Mazzei
Andy, would you like to take that? Or you want me to? Up to you.
Andrew Elmore Witt
Sure, Mike. So we are in the process of foreclosing on the asset, and that's obviously a public process. In terms of converting to residential, we do think this particular property has the potential to convert to residential as a result of the physical plan and the way the building lays out. It's a question as to whether we are the right folks to participate in that conversion process or rather sell the asset to somebody who may pursue that as a business plan. So that is a little bit of a to be determined outcome. But we think, generally, there's a good opportunity for a conversion to residential for this property.
Michael Joseph Mazzei
Let me just add to that. We we take very seriously that we had 2 loans that we had taken reserves against one in Long Island, the DC loan. We did that in the previous quarter, and then we did it again this quarter. And I want to make sure that we telegraph that we do not like a death by 1,000 cuts in terms of how you're reserving for loans. What happened on the DC loan is we market to a BOV as an office from I think, $56 million to $39 million in the first train stock. And as we did more work, we realized that despite the location of the asset in a very good area in Street in D.C. The Destiny as an office building was very weak. The vacancy rate for B-office in that market is eye-popping. And we began to do more work on this and we realize that given the asset has small floor plates -- it's a corner asset, Windows on 3 sides with the creation of windows on the fourth side, very easy. And we started dealing with those in the market that we're doing these types of conversions because we want to be clear, very few office buildings can be converted to multifamily apartment residential, very few, maybe single digits. This one is on a good quarter in a great location, but the next train stop for that valuation was basically land plus concrete. So that is currently marked at about $150 a foot, and that's where assets are trading for development into apartments. So we went from the first train stop 39 from 56 because we evaluated at the low end of the BOD range for office and a quarter later, as we spent time in the market, we said this is not going to be an office. You're not going to invest CapEx in this property and run the risk that you're going to lease that property and what's a 40% vacancy in the office space. So we think this is -- we've done work with architects. We've done work with some operators in the market that are doing these very types of assets. And we are engaged in conversations with someone that could result in a partnership or a sale of the asset once the foreclosure is completed, and that will be to an apartment conversion.
Matthew Erdner
That's helpful. And then speaking on that same asset, is there a time line that you would expect it to convert to an office or I guess, 2 years or so? Or what's the general expectation for converting these?
Michael Joseph Mazzei
And that's since embedded in the pricing is because anybody who does this will take -- you're able to do it as a matter of right. 8% of the square footage would be dedicated to affordable. So it has to get factored into your potential rent income on the asset once converted and how many units you can get out of the asset. And then from there on, there is about a year's planning process. Part of that is not to get entitlement as of right, but really because we're in a historic zoning district. So there is some weigh-in by City Council as to what, in fact, you're going to be doing with the property. And that could take about a year's worth of planning. And so anybody who buys this is going to be funding this asset for a year before they go out and get a construction loan and then recapitalize it as a development deal. So that 1-year period does affect the valuation, which we think we've put into this 27 that we have today.
Operator
Thank you.
At this time, I would like to turn the floor back over to Mr. Mazzei for closing comments.
Michael Joseph Mazzei
Great. Thank you. Well, in closing, I want to again thank Digital Bridge and give a special thanks and shout out to Marc Ganzi, the CEO; and Jacky Wu, the CFO, for their support and leadership. They are one floor above us, we have in this building. We hope to see them often, and we thank them for what they've done for us over the past years. We also want to again welcome our many new shareholders that took part in that secondary offering in digital sale of the stock, and we look forward to having many more one-on-one meetings. Please do not hesitate to reach out to us, especially if you're a new shareholder, we'd like to meet you and understand what your goals and objectives are. We know that one of them is we want the price of the stock to converge with book value. We understand that. Thank you for joining us on today's call, and we'll see you next quarter.
Operator
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and enjoy the rest of your day.
