Q3 2023 Blackstone Mortgage Trust Inc Earnings Call
Participants
Anthony Francis Marone; CFO, Treasurer & Assistant Secretary; Blackstone Mortgage Trust, Inc.
Katharine A. Keenan; CEO, President & Director; Blackstone Mortgage Trust, Inc.
Timothy Paul Hayes; VP of Shareholder Relations; Blackstone Mortgage Trust, Inc.
Donald James Fandetti; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Jade Joseph Rahmani; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Kaili Wang; Senior Associate; Citigroup Inc., Research Division
Richard Barry Shane; Senior Equity Analyst; JPMorgan Chase & Co, Research Division
Sarah Barcomb; VP & and Commercial Mortgage REITs Analyst; BTIG, LLC, Research Division
Stephen Albert Laws; Research Analyst; Raymond James & Associates, Inc., Research Division
Steven Cole Delaney; MD, Director of Mortgage & Real Estate Finance Research & Equity Research Analyst; JMP Securities LLC, Research Division
Presentation
Operator
Good day, and welcome to the Blackstone Mortgage Trust Third Quarter 2023 Investor Call. Today's call is being recorded. (Operator Instructions)
At this time, I would like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead.
Timothy Paul Hayes
Good morning, and welcome, everyone, to Blackstone Mortgage Trust's Third Quarter 2023 Conference Call. I'm joined today by Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Pena, Executive Vice President of Investments.
This morning, we filed our 10-Q and issued a press release and a presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks, uncertainties and other factors outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our 10-Q.
This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent.
For the third quarter, we reported GAAP net income of $0.17 per share, while distributable earnings were $0.78 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the third quarter.
Please let me know if you have any questions following today's call. With that, I'll now turn things over to Katie.
Katharine A. Keenan
Thanks, Jim. Since our last earnings call, geopolitical risk is more acute and interest rates have continued their march higher. The tenure is 4.9%, up 100 basis points in the last 3 months and SOFR is at 5.3%. We believe that higher rates are having the Fed's desired impact with inflation decelerating and economic growth slowing. But we take the Fed at their word and expect rates to persist at these levels and are managing the business accordingly.
Rates impact our lending business in 2 critical and correlated ways. First, as a floating rate lender, we continue to recognize the pronounced benefit in our income from higher base rates, yielding yet another quarter of strong distributable earnings. At the same time, the sustained pressure of high rates and the attendant capital markets illiquidity is weighing on the overall credit environment. Even so, BXMT remains well positioned for a higher for longer period. With our distributable earnings exceeding our dividend, we are able to bolster our book value and significantly offset increasing reserves.
The steps we've taken on both sides of our balance sheet, including proactive asset management, a conservative liquidity posture and a patient approach to new investments, leave us on strong footing to navigate this environment. This positioning is evident in our third quarter results with DE of $0.78 per share, covering our dividend by 126%. Liquidity is still at record levels and a continued reduction in our leverage.
On the credit side, our portfolio remains resilient, 95% performing, notwithstanding some negative credit migration and a continued healthy pace of repayments. And over the first 3 quarters of the year, we contributed over $80 million of distributable earnings in excess of our dividend to book value, cushioning much of the impact of incremental reserves.
Delving deeper on credit, our challenged assets remain a small part of the overall portfolio with just 5% on cost recovery. Our watch list represents an additional 13% of the portfolio, loans which are a focus of our asset management efforts, but remain current and performing. We collected $1 billion of repayments this quarter, demonstrating liquidity and investor demand for the high-quality collateral backing our loan.
We recognized partial paydowns on several large office loans, and we strategically sold a subordinate interest in the U.K. office loan, reducing our basis by 18%, generating $50 million of proceeds and retaining a lower LTV senior loans still earning a double-digit ROI. A separate U.K. office loan repaid post quarter end, selling to an institutional fund at 50% above our basis.
While the office headwinds are well established, high-quality assets continue to outperform. In addition to physical quality, amenities and location, tenants are increasingly focused on the capitalization of office assets when making leasing decisions, a clear advantage for our collateral. Notably, we saw several significant leases signed in our portfolio this quarter, including flagship deals in Chicago, West L.A., Miami and New York. With the slow but steady march of RTO, tenants are transacting, and we expect the demand that exists in the market will continue to concentrate in the best assets.
Our portfolio is far more weighted toward collateral built or substantially renovated since 2015 than the market and is, therefore, well positioned to capture an outsized share of demand today and in the future with very little new office development on the horizon. But despite these bright spots, office overall remains challenging. We downgraded and recorded impairments on 3 of our previously watch-listed loans this quarter, office assets in the Bay Area and Chicago. While these loans were current on interest through the quarter, we are taking a forward-looking approach as we anticipate potential deterioration ahead of maturity dates or other decision points.
We continue to run a robust quarterly process around our risk ratings and reserve levels. We've increased our office reserve by more than 10x in the past year with marks on our 5 rated loans implying an average decline in asset value of over 50%. And collectively, we have now either impaired or watch listed nearly 40% of our U.S. office loans as we continue to transparently identify risk within our portfolio.
But away from our watch-listed assets, our 1 to 3 risk-weighted office portfolio is generally stable. Nearly 60% is backed by new or substantially renovated assets where we are seeing stronger leasing momentum, like the Spiral and Hudson Yards or 545 Wyn in Miami and another 16% benefit from substantial recent equity investments driven by our active asset management approach.
On the asset management side, we continue to leverage the resources of the Blackstone real estate platform to pursue the best outcomes for our shareholders across the portfolio. Last quarter, we highlighted the substantial progress we've made on this front, securing additional capital and improving our credit position. Over the past year, we have secured a total of $1.5 billion of additional equity commitments subordinate to our loans, of which over $750 million relates to 3 and 4 rated office loans as we continue to pursue proactive modifications to place deals on more stable footing in the current environment.
These modifications typically exchange substantial additional borrower capital investment for time and in some cases, rate relief. Prioritizing credit protection over marginal return is irrational trade in the current environment for our borrowers and for us, especially given our substantial dividend coverage.
In more challenging situations, we have focused on ensuring we have maximum optionality to pursue recovery outcomes. With our robust liquidity and long-duration balance sheet, we are never a forced seller. And as the largest owner of real estate in the world, we have a deep well of expertise to take ownership and drive value when appropriate. And at the same time, we will actively pursue sales of challenged assets when the opportunity cost of holding exceeds the return potential. We expect to execute on at least one such sale next quarter on a small multifamily loan where we are appropriately reserved.
In multifamily, more generally, our second largest sector, fundamentals continue to support loan performance with all other multi loans current on interest. In the near term, a pocket of new supply is tempering rent growth. But looking past this year, the supply-demand dynamics are favorable. Multifamily housing starts are down 42% year-over-year and home mortgage rates are at a 23-year high, significantly impacting affordability for potential homebuyers and supporting rental demand.
And further, our loans are typically set up with value-add business plans, allowing for rent and NOI growth beyond market trends. For example, our largest multifamily asset, a newly constructed trophy building in Brooklyn is nearing completion of its lease-up at rents well above our initial underwriting, resulting in a projected debt yield nearly 100 basis points higher than our base case. This quarter, we upgraded 6 multi loan seeing strong cash flow growth through successful execution of such value-add strategies.
The financing market for multifamily also remains liquid, albeit impacted by rates pressuring DSCRs and loan sizing. With a shrinking universe of targeted asset classes, the sector remains squarely in the strike zone. We see this in our multifamily repayments so far this year, $550 million through bank and agency refis as well as sales well above our basis. We expect 2024 may bring further pressure across the sector as many 2021 originations face maturity.
But the combination of robust long-term fundamentals and continued institutional liquidity incentivizes sponsors who have the wherewithal to bridge near-term NOI pressures and protect the substantial equity in their deals. As such, we believe our multifamily portfolio, 68% origination LTV on average, remains well positioned to perform.
In closing, there is no question that we are in a challenging period for the real estate market. Rising rates continue to weigh on credit performance, but as a floating rate lender, our earnings and dividend coverage also benefit. In this environment, current income is a critical component of investor returns. Since the beginning of the year, we have paid out $1.86 per share in dividends, while our book value has declined just $0.36. Our dividend, which we paid for 33 consecutive quarters and covered 130% for the past 4, currently produces a 12.3% annualized yield on our share price.
We've intentionally constructed our business for resilience and performance over the long term, and our approach has supported distributable earnings stability since the onset of the rate cycle. We continue to maintain a high bar for new investments, but we expect sustained rate pressure will spur the need for capital solutions for both borrowers and banks as we move into next year. With a well-structured balance sheet and $1.8 billion of liquidity, we are well positioned to capitalize as this opportunity unfolds.
And with that, I'll turn it over to Tony.
Anthony Francis Marone
Thank you, Katie, and good morning, everyone. In the third quarter, BXMT reported distributable earnings or DE of $0.78 per share, our fourth consecutive quarter of exceptionally strong earnings as the tailwind of rising rates has continued to benefit our floating rate business model. Our 3Q earnings included a onetime $0.02 gain on extinguishment of debt, reflecting our repurchase of $33 million of our senior secured notes at 85% of face which helped offset the impact from 2Q loan modifications, loans placed on cost recovery accounting and net portfolio contraction.
This quarter, we again posted net portfolio contraction and moved an additional 3 loans to cost recovery status as of 9/30, which we collectively expect will impact our go-forward quarterly earnings by $0.03 to $0.05 per share. Our debt repurchase this quarter allowed us to opportunistically deploy capital at an attractive yield, while also taking an additional step as part of our broader strategy to focus on the strength of our balance sheet and maintain a stable yet dynamic posture as this credit cycle evolves.
To that end, we reported our second consecutive quarterly reduction in our debt-to-equity ratio, which is down to 3.6x as of 9/30 from 3.8x at the start of the year. At the same time, we maintained our record liquidity of $1.8 billion, up from $1.6 billion at the start of the year, despite a net repayment of $1.1 billion of debt so far in 2023.
As we have highlighted on prior calls, our balance sheet continues to benefit from our stable capital structure with no corporate debt maturities until 2026, no capital markets margin call provisions across our term-matched credit facilities and fully non-mark-to-market provision on the majority of our liability.
Our loan portfolio decreased to $22.1 billion as of 9/30, with $1 billion of repayments outpacing $440 million of loan fundings. These incremental investments represent fundings under existing loans and our credit facility lenders continue to advance their share of these ordinary course loan fundings, indicative of the strength of our banking relationships and the quality of our overall portfolio.
Our 185 loans are diversified across geographies and property types, and only 5% of our total portfolio is characterized as nonperforming, which indicates a 5 risk-rated loan with an asset-specific CECL reserve. Our total asset-specific CECL reserve increased $108 million to $323 million at quarter end, a reserve equivalent to 23% of the related loans cost basis, and implying a decline of over 50% in the underlying real estate collateral value.
These incremental asset-specific reserves were offset by a $12 million decline in our general CECL reserve for a net reserve increase of $97 million during the quarter. These reserves do not impact DE until they are realized, but do impact GAAP net income, which declined $0.42 this quarter to $0.17 per share as a result. In addition, our aggregate CECL reserve of $477 million does impact our book value. However, our ability to retain earnings in excess of our dividend has limited our book value decline to about 1% since January 1 of this year despite a 39% increase in our total CECL reserve over the past 3 quarters.
Looking at our risk ratings. As noted, we downgraded 3 office loans to a 5 risk rating this quarter. All of these loans are on cost recovery status as of 9/30, which means that any cash interest received is applied as a reduction to our loan basis rather than recognized as income. Year-to-date, we have recorded $41 million of such cost recovery proceeds, representing about $0.19 per share of unrecognized net income. As I've highlighted in prior calls, this income will eventually be recognized as these loans recover or will otherwise reduce future realized losses should credit continue to deteriorate.
Outside of our impaired loans, we only had 2 downgrades and reported 7 upgrades, as the majority of our portfolio continues to perform well and generate compelling returns with comparatively lower levels of risk. Overall, our portfolio average risk rating remains at 2.9, same level we have maintained for the past 4 quarters.
In closing, we remain steadfast in our focus on maintaining a strong balance sheet, finding opportunities to reduce risk in our portfolio and managing our more challenging credits to maximize long-term shareholder value. Our $0.62 dividend is well covered by our distributable earnings and provides a highly attractive, reliable income stream for our stockholders, generating a 12% yield on yesterday's close.
As a final note, we view our recent addition to the S&P SmallCap 600 as an endorsement of BXMT as a valuable long-term investment for our stockholders. The resulting incremental demand creates additional liquidity for our stock, which we believe will benefit our investors across market cycles.
Thank you for joining the call. And I will now ask the operator to open the call to questions.
Question and Answer Session
Operator
(Operator Instructions) We'll go first to Stephen Laws with Raymond James.
Stephen Albert Laws
Katie, I guess to start, can you maybe talk a little bit about where you think you are kind of evaluating the 1 to 3? I know you talked about some performance metrics in your comments. Kind of what is the risk of kind of additional negative ratings migration? Kind of how do you feel about the lead time into some of the loans that maybe have original maturity dates later next year that you'll start getting more color on in the coming quarters?
Katharine A. Keenan
Yes. Thanks, Stephen. Thanks for joining us. So it's a great question. And I think that we go through our 1 to 3 in really the entire portfolio in a lot of depth every quarter. I think you can see the proactive approach we're taking, both in terms of how we have treated the 4s and 5s, which really are, in many cases, are really -- in almost all cases, downgrades in anticipation of challenge. And then also the proactive modifications that we have taken on across our office portfolio and anywhere where we see that there may potentially be stress ahead.
So when we look at our 3s and 4s in our office, we've really done proactive mods on many of those loans over the last year. And as a result, we've put those loans in much better position. So we're not waiting around to sort of deal with the 2024 maturity and see what happens then. We've been having conversations with our sponsors about those loans for many months, and that is sort of the result of the $750 million of equity on our 3 and 4 rated office loans that we've brought in over the last year.
So I think when we look at the overall credit environment, we have 200 loans across the portfolio. There's obviously going to be movements in both directions on the margin. But we are very in depth in how we look at these deals, and we're running out multiple year projections in terms of looking at decision points and risk areas. And so our risk ratings really reflect what we see over the future in addition to what we're seeing today.
Stephen Albert Laws
Great. And then as a quick follow-up, can you talk about the repayment outlook, not doing any new originations similar to most peers? Where do you think leverage trends or maybe trough? How do you see that? And then appetite for more loan sales, not a lot in Q3, I don't think. But maybe could you touch on that, please?
Katharine A. Keenan
Yes. So I think that we're really proud of the reduction in leverage that we've had. That's really been a factor of the overall conservative approach we've taken with the business. We've had a very healthy pace of repayments so far this year, $1 billion in the quarter. And I think that's really a result of the quality of the portfolio and the institutional liquidity of the assets that underlie our loans.
And we've seen that continue even this quarter, obviously, when rates ticked up. I think the pace of repayments could possibly slow down as rates are higher. But as I mentioned in the call script, we literally just had an office loan repay this week. So the factor with these loans as they reach the end of their business plans, our sponsors are ready to sell, they're ready to refi. And because our portfolio as a whole is low leverage and we're lending on high-quality assets that have business plans that are generally working, we do see that continued liquidity. So we expect repayments to continue. And I think that as far as looking at -- and the leverage will sort of continue in the range it is as a result of that.
Looking at new investments, we are actively looking at new investments. We have plenty of liquidity. Our balance sheet is in great shape. And it's really a factor of overall transaction volume and making sure the investment opportunity is clear of the high bar that we have set for ourselves, both from a return perspective and from a credit perspective.
So with overall transaction volumes down 40% to 60% across the market, the addressable universe is smaller, but we're very actively out there with our big origination team looking for deals. And I think that as the market continues to persist through this period and reaches more potential decision points coming into next year, I think there will be more opportunities, and we'll certainly be looking for them.
Operator
We'll go next to Steve Delaney with JMP Securities.
Steven Cole Delaney
So I know a lot of focus probably today on the 3 new office downgrades. I'd like to flip it over though and ask a question about the 7 upgrades. Were they mostly loans that were moved from a 4 to a 3? Are there any large loans in there? And is there a common theme in those 7 situations? I know every loan is unique, but what is improving generally on those 7 loans that is causing you to upgrade them?
Katharine A. Keenan
Yes. Thanks, Steve. Great questions. So those loans really primarily fall into the category of multifamily, and they're primarily 2 to -- sorry, 3 risk rating to 2 risk rating loans. And I would say generally, our risk ratings have been pretty sticky over time. We have a lot of loans in the 3 category that continue to perform on their business plans.
But with some situations where we just see really continued outperformance, strong debt yields, getting into the zone where we feel very, very good about the execution on the credit, we moved those types of loans to 2s and in some cases 1s if it's sort of another leg up from that. So these are multifamily assets, business plans completed, strong rent growth, strong debt yields and really just working in terms of their business plans and benefiting from the leverage level that we have on them.
There's also 1 select-service hotel, which I think would -- I didn't talk as much about hotels this quarter, but we have seen continued strength on the hotel side, especially in the sectors that we're focused on. I think that like everything, we'll see some deceleration over time, but select service in good markets, resorts in good markets, those assets are performing as well. And so one of our upgrades was a select-service hotel as well.
Steven Cole Delaney
Got it. So on the multifamily, really, just strong leasing, solid year-over-year rent increases and basically just achieving at plan or even better than planned expectations. So leads you to think that at the basis you're in, the owner will probably comfortably be able to refinance. Is that the right way to think about that? And that loan is probably going to be off your books in a year or so.
Katharine A. Keenan
Yes, it's a good question. I would say our 2s and 1s are easily refinanceable in this market. I think the question for our borrowers and what we've seen over the course of the last year, it really comes down to their business plan. So if they've reached the end of their business plan and their next capital markets activity is selling, it's likely that they're just going to keep our loan in place for longer. It's unusual for someone to go out and refi if they think they're going to sell in a year or 18 months, the costs just don't really make sense. So we have a lot of borrowers that are sort of just waiting for a window in terms of sale.
And in the meantime, we have these very high-quality stabilized assets sticking around in our portfolio because people aren't going to try. If they have a good quality deal, they've done a good job on, they're not going to sell into a more challenging market. They'll just wait. These assets have decent cash on cash. The spreads on the loans in the portfolio generally are probably lower than where they could achieve elsewhere in the market. But the capital structures are set up the right way because they've created value. And so I think these loans will stick around for longer, and that's certainly what we've seen so far.
Operator
We'll go next to Sarah Barcomb with BTIG.
Sarah Barcomb
So I would just like to talk about office color generally. So from where we sit post-Labor Day 2023, do you think the weakness in office fundamentals and refinanceability are more entrenched in work-from-home policy or overall economic weakness at this point? And if the latter worsens next year as more pre-COVID office leases expire at the same time, should we expect to see additional reserves taken on that asset class? And at what point do you think we would start to see REO come onto the books? Or would we see more modifications like we saw this quarter? Can you talk about that balance as we head further into next year?
Katharine A. Keenan
Sure. That's a lot of questions. I'll try and hit all of them, and let me know if I miss anything. I think as far as the broader outlook on office, it's pretty interesting because there are 2 sort of counterbalancing effects. There's certainly the risk of cyclical downturn, although the economy has been remarkably resilient to date. And if you look at the main users for the types of office buildings that we make loans on, whether it's the FIRE tenants, sort of creative marketing, content creation, even the tech industry, which is obviously pulling back from office a lot right now, but the business itself actually in recent earnings looks to be doing pretty well, those industries seem to be pretty resilient in the face of the overall macro.
And we've seen job growth there as well, which historically has been an indicator, a leading indicator of demand growth. Now of course, there's also the countervailing factor of return-to-office, which has marched along sort of slow and steady positively, but of course, it's still below pre-COVID levels and overall sort of space rationalization.
I would say when we look at the statistics, and there have been a number of third-party market reports out there this quarter, you can see that tenants are making space decision, return-to-office continues. There's a lot of tenants out there that have instituted new return to office policies this quarter or starting next year. Sort of every quarter, there is more of that. But I think that there's certainly still a question as to where that ultimately settles out.
For our portfolio, I think the big question is the concentration of demand in which office buildings and how does that overlay with what we have. And 60% of our 1 to 3-rated office is sort of post-2015 vintage, which is much higher than the market as a whole. And one of the statistics I saw recently, which I thought was really interesting was that 90% of office vacancy is in like 30% of office buildings.
And so when you think about that relative to the concentration of where demand is going, and there's lots of statistics like that in terms of net demand, et cetera, we just have to make sure that our office buildings are well positioned in the market to capture a disproportionate share of demand because there's going to be these sort of broader market dynamics in terms of demand. And I think it's candidly very hard to predict where those level out.
I think as far as more reserves and as we look forward to next year, every single one of our assets is a facts and circumstances like bottoms-up deal decision. So when we approach each loan and each conversation with a borrower, whether it's proactive, a year ahead of time, trying to get capital in the door, whether it's looking at making sure the asset is appropriately capitalized to capture those leases in the market, which is something we're very focused on, or whether it's thinking that we may be in a better position to maximize value for the asset in an REO situation than our borrower for various reasons, we're really looking at each one of those and just using all the tools we have, whether it's our expertise, our capital, the strength of our balance sheet to just make sure that we're maximizing value over time.
So do I think that we could potentially have some assets come on to REO or some more of those conversations over time? Of course. In this market, that's definitely very likely to happen. But I think that we have the tools, and we've really been ahead of the game in terms of reducing our basis in these deals and making sure that they're appropriately capitalized and also coming up with our contingency plans, our business plans, putting the right team in place to make sure that if we end up in those situations, we'll be ready to hit the ground running and maximize our potential recovery.
Sarah Barcomb
Okay. Great. And then just one more from me. You mentioned during Q&A that you guys are actively looking at new investments, given how strong liquidity is. So I was just curious if you could give a bit more color on what's looking interesting right now, whether credit or equity. I know we're focused on BXMT right now, but maybe some perspective from the broader Blackstone platform. Just maybe some detail on what looks interesting from a sector or a geography perspective.
Katharine A. Keenan
Yes, absolutely. I think it is a really interesting time to invest. And as a whole, at Blackstone, we are really focused on the credit opportunity. We think it is a tremendously interesting time to be a credit investor. You're inherently investing at a discount to asset value that creates a defensive position. And the returns available, you can see it in our results and really across the board in credit, especially floating rate credit, are just historically attractive in terms of the risk return you can achieve.
So we think credit is really interesting. That's certainly a posture of our business and across the firm. And I think on the real estate side, as far as sectors, we're excited about -- the demand growth in data centers has been phenomenal. That's an area we've been very active in, on the equity side as well as on the debt side. Student housing continues to be very strong, certain lodging and leisure sectors and obviously, on the credit side, multifamily continues to be a good area at the right basis, and we'll be focused there, too. And I should say industrial is obviously -- continues to be a good sector.
Operator
We'll go next to Jade Rahmani with KBW.
Jade Joseph Rahmani
I was wondering about asset management and loan resolutions. Are you seeing any sponsors take an interest in buying into some of your debt position in order to reduce their leverage and hence, their basis? I noticed you sold a $51 million junior loan interest, and I was thinking that this could be a way to facilitate modifications, workouts, loan resolutions.
Katharine A. Keenan
Yes, Jade, I think you're really on point. And really, a lot of the capital we brought in, a lot of the mods we've done so far this year have been exactly that. So sponsors who look at deals, continue to believe in their business plans but effectively want to pay off the bottom of their debt capital structure or effectively buy back the mezzanine portion of our loan. So what we'll do is they'll effectively buy the bottom 10% or 15% of the loan. They buy it at a double-digit 12%, 13% IRR, whatever we think is appropriate for the deal. They're effectively paying off the most expensive part of their debt capital structure, reducing the debt balance, reducing the carry cost, putting the asset on stronger footing in terms of deleveraging the asset going forward and enhancing their return potential.
And for us, we're reducing our basis. We have so much built-in earnings in the portfolio because base rates are 500 basis points higher than when we set up these deals. So we're earning much more on these loans than we set them up to than we expected. So for us, making the trade of reducing our basis, reducing the overall gross coupon of the loan but still earning more than what we expected to when we set the loan up, that's a very rational trade. And a lot of our borrowers are taking advantage of that.
Jade Joseph Rahmani
I also wanted to ask on cash flow performance, something I've been focused on, and I know investors are too. Cash flow from operations declined quarter-over-quarter. However, it looks like there was a working capital headwind to the tune of around $21 million. Wondering if there is any specific seasonal items to point out and your overall thoughts on cash flow performance.
Anthony Francis Marone
Jade, it's Tony. I wouldn't say that there's anything particularly notable in terms of cash flow from operations that I would flag as far as seasonality. As we've mentioned, we're getting paid, generally speaking, on all of our loans, and we have plenty of cash flow to cover our dividend, not just from an earnings perspective, but importantly, there is not a significant amount of interest or deferred interest that's elevating our net income relative to our cash flow.
So I think what you're probably seeing is just some inherent lumpiness in cash flow from operations, that's ordinary course in any business. But no issues there or anything that I would flag. And I think we're very comfortable with the level of cash flow of operations we're generating.
Operator
We'll go next to Don Fandetti with Wells Fargo.
Donald James Fandetti
Yes. Of the 3 office loans that were downgraded, can you provide a little context in terms of fundamentals at the property level? And also what sort of brought things to a head from a reserving perspective and risk...
Katharine A. Keenan
Sure. Yes, absolutely. So obviously, each deal is specific. But I would say generally, really the 2 factors are rates, not surprisingly, and then 2 of the 3 assets, the 2 larger ones are in the San Francisco Bay Area. And so we have 1 in San Jose, 1 in Silicon Valley. Both very nicely, recently renovated, very high-quality assets. But as I think mentioned in the Q&A, tech, which is 40% of the market in San Francisco has just been really challenged in terms of office use. It's by far the biggest driver of negative net absorption across the country.
If you look sort of more sector-specific, there's a pretty big difference between tech and any other industry. And San Francisco has just always been kind of a company town. So we see historically in San Francisco, it's sort of a boom-and-bust cycle. When tech is working, it's extremely positive for the market. And when tech is pulling back, it's an overhang. And so you have that now and you also have some quality of life issues, but I think there's a lot of focus on addressing, but will take time because of the way the sort of political system works in San Francisco and the Bay Area.
So that's really what was driving most of the challenges with those assets. we do feel good about the long-term performance of that market. As I said, it's really been a very cyclical market, and tech as a whole, we believe in, and we believe in San Francisco. But it's going to take time. And in the meantime, those are assets that have higher carry cost today because of where rates are. So it's really the confluence of those 2 factors.
The third (inaudible) is just a very small office deal in Chicago, where we've been pretty successful over time reducing our basis, but it's sort of a small deal and a relatively old fund and it's hitting its maturity. So we'll evaluate the best option there.
Operator
We'll take our next question from Rick Shane with JPMorgan.
Richard Barry Shane
Look, the difference between distributable earnings, dividend and GAAP earnings really highlights some of the timing differentials inherent in the business model in terms of recognition of credit expenses, both from a distributable and a taxable perspective versus the sort of implicit or assumed credit expenses over time. We can look back and basically the dividend on any sort of 1-year basis or 2-year basis splits GAAP net income and distributable.
The question really becomes twofold. One, when you think about the reserves, presumably, you believe that they're conservative. How conservative or how much cushion do you think you have in them? But more importantly, when do we expect to really see some of those realized losses come through? Is it a 1-year horizon? Is it a 5-year horizon? So we can start to reconcile that differential.
Katharine A. Keenan
Thanks, Rick. I think that it's hard to say because it really depends on the individual assets, right? So we have a hotel deal, for example, that we took a reserve on in the COVID period that has continued to perform at its reserve level, recovery and performance. That's continued for a while. We have other assets, as I mentioned, where we are looking for more of a near-term sales situation.
So the timing really could extend over quite a prolonged period of time. There may very well be assets where we think the right answer is to take them over as REO and operate them for the foreseeable future. So I think it's hard to peg sort of a definitive time period and certainly, we'll be fighting for value recovery in those types of situations.
I think the other very important dynamic is that every passing quarter, our earnings of the majority of the portfolio, the 95% of the portfolio that is performing and that is earning a very strong amount of net income relative to what we expected and relative to the overall portfolio, we continue to see the benefit of that earnings on a quarterly basis, both in terms of the dividends we pay out to our shareholders and in terms of our ability to accrete the excess into our book value.
So I do think that this is all going to take time to play out. We're going to want to implement the best recovery strategy. The capital markets are moving very slowly in all cases. And so all of this is going to take time to play out. And in the meantime, we're going to continue earning the very strong distributable earnings profile we have from the portfolio that allows us to cushion a lot of the impact here.
Anthony Francis Marone
The other thing that I would add, Rick, is because -- sorry, just to add one further thought as you're correlating DE, dividends and GAAP, everything that Katie was just discussing gets into the timing of how some of these reserves are recognized. As it relates to the dividend, that's driven by our requirements as a REIT as it relates to taxable income, which is also influenced by this timing. But it's important to recognize that our dividend level is very stable in that at the moment, we're well out earning the dividend. So there's no downward pressure for us to have to cut it. We're far, far away from that.
But on the other hand, we do have some different tax attributes that is allowing us to retain those earnings, and so we don't expect to add to our dividend or make a special dividend. So I would view the dividend as very solid at $0.62 where it is for the near term. And then you're going to see the variability in GAAP and DE as those different timing elements that Katie mentioned earlier play through those metrics. But the dividend, you could think of it as pretty solid.
Richard Barry Shane
I think that's totally fair. I'm going to try to frame my follow-up question and get 2 in. Interestingly enough, with all of the headwinds in terms of office, it's going to be multifamily where you guys have cited you're going to take your next potential realized loss. Is that because those are easier to exit in this environment because the market is more robust?
Katharine A. Keenan
Thanks, Rick. I think that there's potentially some element of that, although, as I mentioned, we've gotten $800 million of multifamily repayments so far this year. So we are seeing -- I mean, sorry, $800 million of office repayments so far this year, so we are seeing decent liquidity in office. And I think that really there, it's a question of spot pricing versus recovery when we think about our -- the long-term plan for our office assets. And of course, liquidity is worse than -- in office.
This deal, the multifamily deal, it's small. It's one of the very few rent-stabilized exposed assets in our portfolio. It's gone through sort of a storied history, and it's just an asset that we have been looking to move on from for a long time. So I think it's a little bit idiosyncratic, and we're hopeful that we can execute on the transaction with a good buyer there.
Richard Barry Shane
Got it. And then last question, I couldn't read my own handwriting so I couldn't figure out what I wanted to ask you. But when you -- if you take REOs, would you take write-offs immediately associated with them based upon revised appraised values?
Anthony Francis Marone
I think under our DE definition, it would depend. The way we characterize distributable earnings is it's reduced by a realized loss. So that would typically be an actual contractual change in loan terms or at the point of a sale of a property. However, we do have the ability if we think that, that loss is -- I think the language we have in our Q is nearly certain or all but certain to take it. So I'd say it's more facts and circumstances and not something that I would say is programmatic based on an appraisal at the time of a foreclosure.
Operator
We'll take our final question from Arren Cyganovich with Citi.
Kaili Wang
This is Kaili on for Arren today. Maybe if you could give an update on the risk-rated 5 loans that are coming due for the next couple of quarters? It looks like you have the Orange County and New York office loans due in 3Q and the Chicago office loan due early next year. Do you expect to do additional maturity extension with the loans? Or should we just model a near-term write-off related to the loan?
Katharine A. Keenan
Yes. So I think as far as the 5 rated loans, those are the ones I mentioned we're really focused on maximizing recovery. I would say the maturity dates, they really are what's driven the downgrades. The one you mentioned, the Chicago loan, is the one I was mentioning earlier that we've downgraded ahead of a conversation around that maturity date.
For some of the other ones, we're engaged in active discussion with our borrowers in terms of modifications or creating the best plan for recovery there. I think the maturity dates are a factor but not the primary factor. We're really just focused on how do we get to the best path for recovery for those assets over time. Or a sale if we think that's the right thing. But we'll really evaluate that just based on the ability to create the most value and with -- and also thinking about opportunity cost over time.
Kaili Wang
Got it. Okay. It looks like you have 1 mixed use and 1 hospitality loan in Spain that are on risk rated for as well. So maybe if you could talk about what you are seeing with the domestic market versus outside of the U.S.
Katharine A. Keenan
Yes. I would say that what we're seeing generally in Europe is pretty stable. And I mentioned that we've had some good liquidity on U.K. office loans or Europe office loans even this quarter. I would say we see the macro there in terms of fundamentals for our real estate. It's pretty positive. The Spanish hotel market has really recovered very strongly that, that particular asset is doing quite well.
So I think that what we've observed over time and what we've really liked about the market in Europe is leverage has always been lower. So I would say, by and large, the leverage on our assets there, it's just at a lower LTV to start. The macro demand picture for the assets that we've lent on has been pretty stable, notwithstanding some of the pressures more broadly in the market. And we've obviously been quite selective there over time as we have been in the U.S., too, but very selective in terms of sponsorship quality of assets, et cetera.
So I would say that Europe, both from a capital markets perspective and from a fundamentals perspective, has performed really quite well over the last year, and we see those dynamics continuing.
Operator
That will conclude our question-and-answer session. I'd like to turn the call back over to Tim Hayes for any additional or closing remarks.
Timothy Paul Hayes
Thank you, operator, and to everyone joining today's call. Please reach out with any questions.
