Brightspire Capital Inc (BRSP) 2020 Q4 法說會逐字稿

Greetings. Welcome to the Colony Credit Real Estate, Inc. Fourth Quarter 2020 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, David Palamé, General Counsel. You may begin.

Good afternoon, and welcome to Colony Credit Real Estate, Inc.'s Fourth Quarter and Full Year 2020 Earnings Conference Call. We will refer to Colony Credit Real Estate, Inc. as CLNC, Colony Credit Real Estate, Colony Credit or the company throughout this call. Speaking on the call today are the company's President and Chief Executive Officer, Mike Mazzei; 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 including the potential adverse effect of and heightened risks associated with COVID-19. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-Q 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, February 24, 2021, 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 afternoon 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.

And now I'd like to turn the call over to Mike Mazzei, President and Chief Executive Officer of Colony Credit Real Estate. Mike?

Thank you, David. Welcome to our fourth quarter earnings call. On behalf of the CLNC team, I would like to start by wishing everyone well, and I thank you for joining us today. I would also like to welcome Frank Saracino to his first earnings call as the company's Chief Financial Officer.

These past 12 months have been challenging for all of us to say the least. We extend our thanks to those providing support and care on the many different front lines of the pandemic. I also thank our dedicated employees who are rising to meet the challenges they face both personally and professionally.

That said, the CLNC team has accomplished much during this time. First, solidifying the balance sheet by dramatically reducing debt and increasing liquidity, which stands at $689 million today. Specifically, we have substantially reduced our CMBS securities holdings and have fully paid off our CMBS securities repo lines as well as our corporate revolver. Further, the legacy nonstrategic portion of our portfolio has, for all intents and purposes, been resolved. LNS now accounts for an immaterial portion of the total portfolio at less than 1% of CLNC's at-share net book value. And finally, we have begun originating new loans and growing earnings. The culmination of all these accomplishments has resulted in the reinstatement of a quarterly dividend.

With that, I'd like to now cover some of the key financial highlights for the fourth quarter. For the quarter, we had a GAAP and distributable loss per share of $0.41 and $0.20, respectively. Excluding realized gains and losses and fair value and other adjustments, we generated total company adjusted distributable earnings of $0.20 per share. At year-end, CLNC's unrestricted cash position was $473 million or approximately $3.59 a share. Furthermore, our year-end GAAP and undepreciated book value per share were $12.96 and $14.14, respectively.

Now turning to the business. We are executing on our plan to transition our asset base towards floating rate first mortgages. As such, our mortgage origination activity has increased dramatically. Since recommencing with loan originations in mid-September, we have committed $690 million in new loans, of which 9 loans have closed with a total commitment of $335 million and an additional 13 loans are in the closing pipeline, representing total commitments of $355 million. We may utilize some of these new loans as replacements in our current CLO should there be loan payoffs prior to the reinvestment period end date this October. Beyond that, we anticipate generating enough production in order to issue our second CLO later this year.

At this time, we have deliberately focused our loan originations on multifamily and selective office properties. This has been driven both by market conditions created by COVID-19 and our desire to reshape our portfolio. In the last 9 months, overall investment property sales have slowed considerably. There also continues to be a lack of visibility in the recovery time line in a number of asset classes, most notably the hospitality sector. In addition, the retail property sector overall has incurred lasting damage from the pull forward of e-commerce with malls and big-box centers viewed less favorably than grocery-anchored properties.

For these reasons, while many commercial real estate lenders have reentered the market, there is a supply and demand imbalance for credit as well as a capital mismatch across property sectors. Most lenders are focused on multifamily, industrial and select office properties, while being especially hesitant on retail and hospitality. Over the near term, this imbalance could lead to an increasingly competitive lending market. But as a positive offset to this, we expect acquisition activity and loan refinancings to increase in the second half of 2021 as the economy continues to reopen. Therefore, as we see economic conditions improve, CLNC will selectively expand its loan originations to other property types.

Another positive is on the liability side of the balance sheet. Here, we see continued strengthening in demand for CLO securities driven by fixed income investors' increased preference for floating rate bonds. Also, our bank counterparties have been keeping abreast with the market by improving on both their funding costs and loan advance rates. This continued improvement in liability pricing coupled with the expected economic expansion should allow us to maintain satisfactory returns on equity. Overall, we are optimistic in 2021 about CLNC's business model in this type of operating environment.

Finally, while our share prices improved in recent months, we recognize that CLNC continues to trade at a discount to our book value. Building earnings and growing dividends are obvious cornerstones to continuing to improve our valuation. In addition, we have sought to further enhance our disclosures to provide investors with more information. To this end, we have added some additional information on some of our loans and owned real estate assets in this quarter's Form 10-K filing.

In summary, 2020 was a challenging year, but the CLNC team has made a number of key accomplishments. We have stabilized the company's balance sheet, put the legacy nonstrategic portfolio behind us, commenced new loan originations, begun to build earnings and reinstated our dividend. However, as I said in our third quarter earnings call, we are not yet out of the woods. The effects of COVID-19 will continue for many months. We also recognize that in many aspects of our lives, certain changes that have resulted from the pandemic may be permanent.

Therefore, I want to again thank my colleagues and our counterparties for their teamwork and cooperation. We will continue to protect the balance sheet by remaining vigilant in our asset and liability management while prudently redeploying cash. The CLNC team has built great momentum this past year, which has continued into 2021.

With that, I would like to turn the call over to our Chief Operating Officer, Andy Witt. Andy?

Thank you, Mike, and good afternoon, everyone. The focus continues to be on asset and liability management and liquidity as well as new originations and building earnings. Across the total core portfolio, we collected 96% of expected payments throughout the quarter. The uncollected portion is confined to one loan, which we are currently working to resolve; and one net lease real estate portfolio, which was sold subsequent to quarter end.

More specifically, core loan portfolio performance during the fourth quarter remained strong. 97% of core loan portfolio expected cash interest payments were received. There were a limited number of loans which required some form of partial modification of their existing reserves as well as some loans where borrowers have come out of pocket to support their equity. This is a cash collection figure and excludes PIK loans.

Lastly, during the fourth quarter, core loans paid off totaling $101 million of gross proceeds. Within our core net lease real estate portfolio, we collected 95% of expected payments throughout the quarter. The delinquent portion is related to the net lease real estate portfolio which we sold subsequent to quarter end. The company remains current on all investment-level borrowings.

Core portfolio asset sales during the quarter were confined to 9 CMBS positions which sold for $24 million of net proceeds, generating a $10 million gain. Subsequent to quarter end, we closed on the sale of a net lease industrial portfolio within our core portfolio, resulting in a realized GAAP book value gain of approximately $17 million and a corresponding undepreciated book value loss of $33 million. At present, as it relates to the core portfolio, we are in the process of resolving the loan previously mentioned as well as certain CMBS holdings.

During the fourth quarter, we recorded a fair market value adjustment of $58 million or $0.44 per share related to our Dublin, Ireland Project Dockland mortgage loan. The pandemic has resulted in a series of delays in various aspects of the project. In our judgment, these delays necessitated reexamining the business plan and associated time line, which resulted in the carrying value write-down. Additional disclosure on this investment and others are available in past quarterly filings as well as in the Form 10-K, which will be filed tomorrow.

Lastly, as it relates to the core portfolio, our $1 billion managed CLO executed in October 2019 continues to perform and benefit from LIBOR floors at the underlying loan level. We continue to monitor and manage the performance of the trust for both COVID-19-related developments, for example, stress on hospitality assets and office lease-up activities, as well as ordinary course loan payoffs within the CLO.

Shifting to the legacy nonstrategic portfolio, the company has made considerable progress resolving the segment. During the fourth quarter of 2020 and through today, the company sold or resolved 24 LNS investments for an aggregate gross sales price of $169 million and a net sales price of $83 million after transaction costs. This resulted in a book value loss of $8 million.

At present, the LNS portfolio is comprised of 14 remaining positions. This is down from 70 positions initially, and the LNS portfolio now accounts for less than 1% of our at-share GAAP net book value as of December 31, 2020. Additionally, we will collapse the LNS reporting segment beginning with our first quarter 2021 reporting given its limited size relative to the total portfolio and our decision to review and manage the business on a combined basis.

In closing, for the majority of 2020, the company focused its resources on managing the balance sheet and generating liquidity to address potential COVID-19-related demands. While continuing to focus on managing assets and liabilities, the company has begun to make meaningful progress toward building earnings. Since mid-September, we are committed to 22 loans, 19 of which are multifamily totaling $690 million. As we continue to deploy capital into first mortgages, the composition of our portfolio is transforming consistent with our stated business plan to focus on first mortgages secured by high-quality assets and sponsors, generating current and predictable earnings.

With that, I will turn the call over to our Chief Financial Officer, Frank Saracino, to elaborate on the fourth quarter results.

Thank you, Andy, and good afternoon, everyone. Before discussing our fourth quarter results, I would like to draw your attention to our supplemental financial report, which is available on our website. I would also note that our Form 10-K, which will be filed tomorrow, includes further information about January and February interest and rent receipts that Andy mentioned in his remarks. Furthermore, we continue to provide asset-by-asset detail for our core portfolio in our supplemental financial report as well as all holdings in Form 10-K.

Additionally, I would like to briefly comment on our non-GAAP earnings measure core earnings which, starting this quarter, has been renamed distributable earnings. Historically, we have disclosed core earnings as an important financial metric that we use in addition to GAAP net income to assess the financial performance of our business. We want to be clear that this is a name change only and not a change in how we calculate this metric.

We are making this name change following discussions between the mortgage REIT industry and the SEC over the past several months. The purpose of this change is to adopt terminology that is more descriptive of what this metric represents: A measurement of our results anchored in GAAP and adjusted for certain noncash items that aligns with the company's ability to pay dividends. While there may be differences from quarter-to-quarter between our distributable earnings and dividend payments, we anticipate that they will be highly correlated over the long term. With that, let's turn to our fourth quarter results.

CLNC reported a fourth quarter 2020 total company GAAP net loss attributable to common shareholders of $52.5 million or $0.41 per share and a distributable loss of $25.7 million or $0.20 per share. Excluding gains and losses and fair value and other adjustments, total company adjusted distributable earnings were $26.1 million or $0.20 per share. During the fourth quarter, total company GAAP net book value decreased from $13.25 to $12.96 per share, and undepreciated book value decreased from $14.53 to $14.14 per share. This change is primarily due to the fair value adjustment to our Project Dockland loan.

As mentioned at the top of the call, we are reinitiating our quarterly dividend. To preserve liquidity in light of the volatility and unprecedented market conditions arising from the pandemic, in May 2020, we suspended the company's monthly cash dividend. Today, with our improved financial position, operational performance and business outlook, we declared a dividend of $0.10 per share for the first quarter of 2021. This is payable on April 15 to shareholders of record as of March 31. I would also like to note that based on CLNC's taxable income for 2020 and the monthly dividends that were paid prior to the pandemic, the company met the minimum distribution requirement to maintain its status as a REIT for year-end 2020.

Turning to our core loan book. This continues to be the largest segment with a carrying value of approximately $2.3 billion at year-end. The blended unlevered yield on our loan book is approximately 5.8% with an average loan size of $49 million. Furthermore, the loan portfolio remains diversified in terms of size, collateral type and geography with a focus on multifamily and office property. During the fourth quarter, we originated 5 senior loans for initial gross funding of $158 million. And subsequent to year-end, we originated 4 loans for approximately $147 million of initial gross funding.

Also within our core portfolio, net lease real estate had a carrying value of $775 million at year-end. This portfolio consists of industrial and office property with a weighted average lease term of 7.6 years. The net lease assets are core to our investment strategy due to the long-term stable cash flows they provide in addition to the potential for capital appreciation.

With respect to the legacy nonstrategic portfolio, we have made substantial progress over the last year resolving this subset of our portfolio. Year-end total GAAP net book value is now an immaterial part of our overall portfolio. As Andy mentioned, this will be our last quarter reporting the LNS segment, and this will simplify our reporting going forward.

Moving to our balance sheet. Our total at-share assets stood at approximately $4.1 billion as of December 31, 2020. Our debt-to-assets ratio was 55%, and net debt-to-equity ratio was 1.0x at the end of the fourth quarter. This is down from 56% and 1.1x at the end of the third quarter. Since the first quarter of 2020, we have substantially reduced our recourse debt exposure from $718 million to $134 million. Current liquidity stands at approximately $689 billion between cash on hand of $588 million and availability under our revolving credit facility.

Turning to risk ranking. Our overall risk ranking at the end of the fourth quarter remained relatively consistent with that of the third quarter. Our fourth quarter risk ranking is 3.7 compared to 3.8 at the end of the third quarter. Finally, at the end of the fourth quarter, our CECL provision was $38.5 million and represents approximately 1.6% reserved against our loans. This is a slight decrease of $1.6 million as compared to the third quarter. The difference is primarily driven by an improved long-term macroeconomic outlook, which was partially offset by increased reserves on our hospitality loans.

This concludes our prepared remarks. And with that, let's open the call for questions. Operator?

(Operator Instructions) Our first question is from Stephen Laws with Raymond James.

Mike, you touched on this -- I guess, you and Frank both touched on the prepared comments, but wondering if you can maybe quantify the outlook for portfolio growth. You target senior loans. You mentioned aggregating more for CLO later this year. So I guess 2-part question. How big do you expect the loan portfolio to get either a leverage target or just to assets? And then kind of how do you see CLO as a mix of total financing of the senior loan portfolio?

Thanks. Thank you for joining us. Thanks for your question. I think -- can you hear me okay, Steve?

I can, Mike, yes.

Okay. Thank you. Okay. I think that we are repositioning the portfolio. We want to do more senior mortgage loans. Of the loans that we've done, you could see that we've done $700 million of 22 loans and commitments since September. So we're at a pretty good run rate. So it's not -- it's totally doable to do over $1 billion in loans originations this year and maybe $1.5 billion. The question is are we able to get there. We do want to use the CLO, to answer your question directly, as a financing model. So we'd like to do a second CLO. We do think that right now, we're getting roughly 11% ROEs, and we can probably increase those ROEs if we can get a CLO done.

But how big we grow, it depends on a couple of things, Stephen. One, it depends on loan repayments that we have in CLO 1. We want to maximize that vehicle. As I said in the prepared remarks, there is an October reinvestment horizon this year. So we've had some loans pay off in the CLO, and we've replaced them already. Some of that was with collateral that we had in the portfolio, but we may use some new loans to replenish loans that pay off in the CLO we have any more loans payoff between now and October. So that could affect the timing of a second CLO.

The other thing that can affect the CLO is the need for cash. We raise cash for reason to defend the balance sheet. As I said, we're not yet out of the woods, and we're trying to make sure that we understand what assets may need potentially delevering in the future. And we want to make sure that we have adequate funds on hand to move assets around on the balance sheet should we have to delever those assets. So those are 2 things that could affect our speed to the market in terms of growing the balance sheet and doing a second CLO. So those are slightly difficult, I appreciate, from your side to model.

The second -- the other thing I'd add is we do have some nonearning assets that we would like to repatriate those dollars, for instance, like the L.A. mixed-use project and the project in Ireland that we took the write-down on. And we would like to repatriate those if possible, monetize those if possible at some point, and then reinvest that cash because that's just basically dead money right now. So there are a number of moving parts here. I hope that answers your question.

It does, and those 2 assets were kind of next up. Any color around the timing of when you might be able to reallocate that capital?

That's -- so the timing on reallocating cash, we have the cash, and that's just going to be over the next 6 months us trying to understand what assets, if any, might need moving around and then just how much cash would we like on balance sheet versus the portfolio. And maybe at the end of the day, that number could be $100 million in cash on hand, but we might want a little bit more than that over the near term to make sure we can manage through things.

With regard to the nonearning assets, some of that is out of our control, and I don't mean to be passive in that regard. I wanted our shareholders know we're actively managing those positions. But for instance, the L.A. mixed-use, the update on that is that the hotel at the L.A. mixed-use project has been completed. It has received its TCO. The developer has basically delivered it to the hands of the hotel operator and manager. I don't know exactly if the hotel -- I don't think the hotel is actually open for business today. But I do know that there have been some closings -- and this is all public information, by the way, closings on the hotel -- some hotel condos and we'll mention that in our 10-K filing. Not a substantial number, but it's -- the plumbing is beginning to work.

I think the biggest thing with regard to the liquidity of that position will be whether or not the developer or owner/operator sells the hotel. And I do believe that there will be a marketing process on the hotel that commences shortly. I can't tell you what the outcome of that will be. But if the hotel were to sell and the proceeds were used to pay down the senior debt, it would very much put our position in a much more favorable position to monetize. But those are things that are out of our control at this point.

With the project in Ireland, we had substantial delays on that because of COVID. As you can imagine, CEOs and real estate facilities people are not rushing to ink new deals and sign big leases. So there's been delay there regarding signing up an anchor tenant for the project. And so time does hurt deals. And we relooked at that, and we ran some various types of outcomes on that to sensitize it. And we came up with a markdown because of the delays, which I think are substantially driven by COVID.

So is it possible that there could be a monetization of that in 2000 -- that's a co-lending position with our affiliate at Colony Capital, and that's something that we can discuss with them. But we're very much -- it's a nonearning asset. It's dead money on the balance sheet from that regard, and we're very focused on it, but not totally in our control.

Got you. And lastly, can you talk a little bit about the dividend policy? And looking forward, how did you guys arrive at the $0.10 level? Was above what I was looking for. But can you talk about, is that going to be revisited annually? Is that something you'll grow quarterly as the portfolio ramps up? How do you think about the dividend policy now moving forward?

Sure. This is Frank. I'll answer you. So look, the dividend was established at a sustainable level with a view towards growing it as we deploy cash and repatriate and deploy our capital from our performing and nonaccrual loans as Mike said. So yes, it will be visited on a quarter-by-quarter basis.

Our next question is from Randy Binner with B. Riley.

I -- yes, so a lot of good information. I'm just trying to kind of summarize it a little bit on some of the credit adjustments. So the big gains, the realized gains, which were relatively small, were mostly from exiting CMBS. And then the mark on the fair value adjustment was primarily due to the Dublin project, and that's still sitting at $20-some-odd million. Is that fair?

Yes.

Okay. And so -- and then I guess, Mike, you had mentioned that the timing of the CLO depends on cash allocation and kind of what else in the portfolio might need to be delevered. So this -- I guess the category #5 that you all lay out in the slide deck seems to be the kind of leading indicator of where that need would be. Is that what we should look at in conjunction with the 10-K? I'm just, in this format, trying to kind of think about what might be next before things turn more kind of clearly positive on originating loans in this CLO 2.0.

All right. So it's -- there are loans that -- in the underperforming bucket, let's say we have about $250 million of that. It's the Docklands piece, it's Century and a couple of other assets. I think total of about 5. We have CMBS that's not earning, of which we can sell some. There's a risk retention bond that we will hold. So if we can repatriate that cash, we could add -- you could do the math and put a 10 or 11 on that, a couple of hundred million bucks and that -- we could put that to work.

The rest of it really is -- it's just -- it's loans that are performing today where we have to just have a watchful eye. I mean we have -- as Andy said in his prepared remarks, we have borrowers that are coming out of pocket on some loans. I think generally in the industry, across everyone's portfolio, if you have hotel loans or you have heavily transitional assets that required substantial lease-up, those business plans are behind. And those borrowers are scraping together to make debt service. Some have been loans that have been -- we've had reserves repurposed.

So we have an idea of what that universe might be. Those loans are performing today, but we have to be mindful that we have -- of the cash that we have, you might have to have a couple hundred million of that cash ready to move assets around. That's why the money was raised, so that we don't have to worry about moving assets off of warehouse facilities or out of the CLO should a loan, down the road, default. We don't know that, but we have to have a watchful eye for that. So that -- those are the headwinds.

As we deploy cash, we need to have a head check to make sure we have enough cash on the balance sheet to protect against those. So right now, that could be a couple hundred million dollars out of what we have. And right now, we are deploying the cash, as you can do the math, and we've done $700 million loans since starting from a cold stop in September. So it's not implausible that with the cash we have on hand that we can do double that again, right, depending on how much the CLO 1 needs, if loans pay off, and depending on our need to utilize the cash elsewhere.

We're going to do what you would agree with. At all times, we're going to protect the balance sheet. We -- as I said in the third quarter earnings call, raising this capital came at a price. And so we're going to make sure as we deploy it that we don't have to go back to raise more capital. We want to make sure we have enough to defend the balance sheet.

No, that's really helpful. The 200 -- a nice way to think of it. So the CLO 2.0, there's obviously a lot of variables. But do you think of it as being bigger than the first one or smaller?

No, I would say we'd want to hit the market sooner. And by the way, when I say that loans can [prepay] off and get reinvested by October in the first CLO, that doesn't mean that we would necessarily wait that long to do the second CLO. I think the second CLO could be smaller than the first. We're doing, as Andy said, 19 out of the 22 loans, Andy, on multifamily?

Correct. Yes. About 80% of the deployment has been in multifamily.

All right. And Andy, I mean, it might be worth giving a few statistics on the loans we've originated because I do think that it's a much different portfolio. You've got no hotel, no retail and the configuration might lend itself the average loan sizes are smaller. Andy should give a little synopsis of what we've been originating and the coupons and spreads we've been getting to give you a better feel of what that second CLO can look like. Andy?

Great. So since we originated or recommenced originating in September, we put to work about $690 million. Over 22 loans, 9 have closed. Of that, 80% of the loans have been in multifamily, the other 3 in office. The average loan size has been approximately $31 million. So one of the things that we're focused on now is the dispersion of the loan size, so not getting too much exposure to any one position. So the dispersion is really between $11 million and $72 million. In terms of the all-in rates, we're kind of seeing [about] 4%, and that's with our line advance rate and cost of funds generating approximately 11% ROE. So our view is to move those loans potentially into a CLO and increase that ROE. So...

So given...

That's super helpful. What's the office? Like is it suburban or somewhere where office is working, I presume?

Yes. It's non-gateway. It's office. It's very -- well, very targeted deals where we like the tenancy. We like the area. It might be a suburban market in an office -- at a major MSA that we like. So it's been very select. But I think when you -- when Andy gives you the rundown there, you're kind of seeing the average loan size is smaller. And so you could do a deal that's $750 million and avoid the concentration risks and get the right scoring from the agencies to give you a good advance rate and good execution on the deal.

So I don't think we would wait to hit the ground running. Now to get to $1 billion, you get better economies of scale from your issuance cost, but I think we would want to probably try to hit the window earlier if we could. We do think there's some franchise value -- I think there's some franchise value for the firm to print its second CLO rather than wait for that incremental couple of hundred million dollars of assets.

Yes. Yes. I would agree.

And our next question is from Tim Hayes with BTIG.

My first one, just to expand on the pipeline here a little bit. You mentioned that the ROE you're achieving there is pretty in line with the portfolio average right now. But you're rotating more senior. You're focusing on more defensive assets and -- where I'd expect there'll be more competition. So just curious if -- and you mentioned some comments earlier about increased competition. So I'm just curious if you see a negative impact on asset yields in the back half of the year as more capital comes back into the market and things get a little bit more competitive and if you think that should be offset by just what you're seeing on the liability side of things.

Sure. So I'll try and take that in pieces. I think what we're seeing generally in our pipeline is about 80% of what we're evaluating is really in the multifamily and office sectors. So all the activity is being concentrated in those 2 sectors for the obvious reasons. We are seeing pricing come in a bit. But what we're also seeing is our line lenders bringing their pricing in, so we're able to achieve our kind of all-in ROEs. In terms of the back half of the year, I think that's going to be largely dependent on the amount of competitors that enter the market and where that activity is concentrated. So you may see sectors like hospitality, retail open back up, which may provide for a larger playing field and less concentration within those 2 asset classes.

Okay. Yes. That's helpful...

So I think we've also been -- yes, we've also been focused on path of growth. I mean we really have been looking at areas like Arizona, Texas, some areas of Georgia, the Carolinas. We're looking at states where we feel as we -- we're doing loans of probably, call it, 75% loan to value, maybe a little less in some cases. They're mostly acquisition loans, so there's hard equity behind us. But when looking at assets -- and they're also, in terms of the actual commitment versus future funding, much more narrow, probably more like a 7%, 8% gap where it's really more value-add as opposed to transitional.

Now at some point, we got into the market early, which is great, and we got a great start and we'll get more competitive. There may be opportunities down the road, quite frankly, where we will do a hotel loan that is an acquisition loan, and we can find the right one. There may be some retail assets at a grocery anchor that we like. Right now, we haven't had the need to do that. But as the markets reopen and there's more certainty about pricing as the economy reopens, we'll have more confidence on how we can evaluate those assets. But right now, we've been finding the low-hanging fruit, and we've been going for it.

Yes. That makes sense. And you mentioned just that your average loan size has come down. I mean has that been a function of the pricing you're seeing at that end of the market versus the higher end of the market? Or again, just trying to look for some color as to how your pipeline is holding up from a yield perspective.

I think as Andy said earlier, we're really -- we're trying to -- here's what we're not doing. What we're not doing is we're not doing 9-figure loans. We're not doing mezz right now. We're not doing ground-up construction, and we're not doing predevelopment. And we are trying to do average loan sizes where when we talk about earlier about how we need to have cash to defend the balance sheet, we have some larger loans, and you could see that in our filings.

And so right now, what we're also trying to do is as I mentioned, we're trying to -- this is the market. These are the conditions. Mostly, multifamily is getting done. That's what's out there. That's what's being sold right now. And we also want to rebalance the portfolio. And so we're -- as -- if you roll this forward 6 months from now, you're going to see heavily skewed toward more senior first mortgages, a lot more multifamily and you're going to see the average loan size coming down dramatically.

And the reason for that is we want loans that we can defend. We want loans that if something goes awry -- in credit, things go awry when you're a holder of credit, things will happen. And we want to make sure that we're doing loan sizes that no one loan will really affect us and that we can manage our asset liabilities better by having smaller average balances. And so that's -- now there are also maybe some better price points there, and so be it. But no matter what, that's the area of the market we prefer to be in.

Yes. That's helpful. Appreciate it. And then can you just confirm or maybe -- I know you mentioned the Dublin loan, but were there any other loan impairments or meaningful increases in specific provisions outside -- on any loans outside of that asset?

No. This is Frank. No, there wasn't.

Okay. And then my last question here, to the extent you can disclose this information. Can you just maybe give the net equity that you have in those 5 rated loans, the Dublin loan? And then I'm -- and if you could confirm, I just don't remember off the top of my head if that L.A. loan, if there's any leverage on that. I know it's a mezz loan. But if you could just confirm the net equity -- go ahead.

There's no leverage on the L.A. fixed loan, and there's no direct leverage on these loans. However, if you go through the filing that we make, the 10-K, I said we're breaking out some additional information. We did do a preferred financing, I think, in the second quarter. And some of these assets were part of that vehicle, and you will see them -- you'll see that outlined in the filing. So we -- not only did we provide some more information on some loans and on some real estate owned, we also provided some more information on that vehicle. And so that, while it's not like a warehouse facility or a CLO type of pledge, if there is an equity-like pledge of those assets that we have -- that you could see in the 10-K filing, that will be a direct answer to your question.

Okay. Yes. I'll have to look for that in the filing. And then would you be able to disclose the specific reserves you have against those loans?

You mean in terms of CECL?

Yes.

Those -- we don't -- well, we don't disclose particular loans. Remember, the CECL reserve is kind of a portfolio [look] loan, so we don't necessarily have particular reserves against them.

But just to get back to the point, I mean, we -- on the 2 largest loans in that nonearning bucket, we marked Century back substantially -- L.A. mixed-use, I should say, back substantially last quarter. And then we have the Project Dockland we did this quarter. So you're seeing those already have their asset-level write-downs have occurred on those.

(Operator Instructions) And our next question is from Steve Delaney with JMP Securities.

Mike, congrats to you and Andy and Frank on all the progress over the last 6 months. It's nice to listen to the update this evening. You touched on this. I had not thought about the preferred financing in the second quarter. But I wanted to talk to you about your balance sheet and corporate debt, unsecured debt. The preferred financing, does that work a little bit like a term loan B where you just kind of got a wrap around everything that doesn't have a first lien? Or is that preferred claim? Is that just assigned to certain assets that you have?

It's the latter. It's...

Good. Good.

It is not a term loan B. It's specifically assigned to 5 assets, and that will be -- and what we did, Steven -- and by the way, thank you for joining us. Great to hear you. And that, I would say, in this 10-K filing, I would -- not to avoid the question here. You'll be able to go to the filing and have a precise answer to your question in the filing this quarter.

Great. Great. And is that...

But it is not a term loan B type. It is 5 discrete assets pledged in a (inaudible) like vehicle.

5 assets. Perfect. So this gets me to congratulate you on the 6 months past. It sounds like you've got good half year to still kind of get where you really want to be. It's great that you're lending. But you look out to second half of this year and further normalization and assuming progress in the economy. It just seems to me -- I look at your balance sheet now that you're going to have one segment. It's easy for that analysts -- equity analysts, like for everybody, to monitor the company and get it comfortable with financial ratios, trends, et cetera. It just seems to me you don't have any preferred equity, and most commercial mortgage REITs don't because the coupons are just too high if it's retail.

But the thing I'm really thinking about is corporate debt, unsecured senior notes 3, 5, 7 years. The longer end is moving higher. But [shoot], the 3- to 4-year range hasn't moved much, and who knows where rates are. But just thinking ahead in terms of how you grow your balance sheet, do you consider the use of a little bit a modest amount of corporate debt on top of your almost $2 billion equity base, how that might work and allow you to just kind of give you another little boost to put on the new good assets you want to put on? That's my only question.

That's a great question. And the answer to the question is yes, that doing a term loan B, like some of our peers have, and then some of our peers are substantially unsecured in their liability structure, there's a lot of flexibility in that. And so that when you go through periods of time like this, I think you need to look at what was your true cost of capital. Well, we raised capital in a crisis, right, and that was not cheap. So when you look backward, you look at the cost of capital and say, "Gee, had you had more unsecured debt or term loan B, that might have been less expensive."

And then looking forward, when I talk to you about having cash on the balance sheet, well, that cash on the balance sheet comes at an opportunity cost. So we have to factor that cash in and say, "Could we have less cash if we had more unencumbered assets where we can move things around and have more flexibility with our balance sheet?" So I do think that having only secured debt is -- has its costs in operation versus a term loan which might be more expensive in coupon on face and might look dilutive to discrete assets you're putting on. But I think overall in your corporate structure, I think that is something that has to be looked at. And so I do think that as we progress later in the year and towards the back end of the year, that may be something that as we get everything else settled, that may be something that we take a much closer look at. I agree with you.

All right. Great. Well, listen, all the best for 2021.

Thank you for the question.

And we have reached the end of our question-and-answer session. And I'll now turn the call over to management for closing remarks.

Well, I want to thank everyone for joining the call. I would encourage everyone to look at our 10-K filing for the additional information that we provided there. We think it is very worthwhile. And we look forward to you joining us again in early April for our first quarter 2021 earnings call. Thank you very much. Bye.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.