Brightspire Capital Inc (BRSP) 2020 Q3 法說會逐字稿

Welcome to Colony Credit Real Estate, Inc.'s Third Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to David Palamé, General Counsel. Please go ahead.

Good afternoon, and welcome to Colony Credit Real Estate, Inc.'s Third Quarter 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, Neale Redington. Chief Accounting Officer, Frank Saracino, is also on the line to answer questions.

Before I hand over the call, 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 the current pandemic of the novel coronavirus or COVID-19. For a discussion of risks that could affect the 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, November 5, 2020, 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 represent 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 third quarter earnings call. On behalf of the CLNC team, I would like to start by wishing everyone well and thanking you for joining.

After considerable effort from our employees over these past quarters, we have succeeded in solidifying the CLNC balance sheet, including full repayment of our revolving credit facility. I would like to thank this team for their dedication and accomplishments thus far during this difficult period. Of course, the risks and uncertainties of COVID-19 still exist. However, while the team continues to remain focused on asset and liability management, we've also begun to pivot the organization toward offense and on the execution of our business plan.

First, I'd like to cover some of the key third quarter takeaways. For this quarter, we had GAAP and total core earnings per share of $0.04 and $0.30, respectively. Our third quarter GAAP and undepreciated book value per share are $13.25 and $14.53, respectively. These book values have both increased this quarter. Currently, CLNC's unrestricted cash position is $438 million or approximately $3.33 a share. We will seek to redeploy this cash over time into new earning assets.

Regarding core asset sales. In the third quarter, we closed on the last sale of an operating property and realized a gain of $7.5 million. We have also terminated a contract for sale on an owned industrial net lease portfolio. Therefore, at this time, we have no other core assets held for sale.

Last quarter, we took a write-down for the mezzanine loan on the L.A. mixed-use project and stated the project required additional outside capital. I am pleased to inform you that while working closely with the senior lender and borrower, we have successfully closed a third-party recapitalization for $275 million. This was a complex transaction, and I would like to thank the CLNC team and our counterparties for their combined efforts in seeing this through.

There are no changes for the loan status this quarter. I would refer you to our third quarter Form 10-Q filing for more details.

We continue to make progress on the resolution of our legacy nonstrategic assets. We anticipate collapsing a bifurcated financial reporting in this portfolio segment in the first quarter of 2021 as it will have been substantially resolved. This will also simplify our reporting in 2021.

As we begin to pivot towards offense, we have started the implementation of our business plan to build earnings. This entails the reinvestment of our cash balances into newly originated first mortgage loans. Our strategy will be to focus on making floating rate loans to transitional assets as well as fixed rate CMBS conduit loans. We will utilize our warehouse lines for interim financing where we have $1.5 billion of available capacity. We will later contribute these loans into CLO or CMBS securitizations as we expect those markets to further improve in 2021.

Along those lines, we would also like to welcome George Kok as a new member of the CLNC team. George has joined us as our Chief Credit Officer. He has spent 35 years in commercial real estate credit and is a proven leader and business builder. In addition, George will further enhance CLNC's relationships with our banking counterparties and investors.

Lastly, to underscore the progress we've made in stabilizing the financial position of the company in light of COVID-19, we plan to reinstitute a quarterly dividend in 2021, assuming macroeconomic conditions do not deteriorate. We will be addressing this with the CLNC Board of Directors and aim to announce a reinstatement of the dividend beginning with the first quarter.

That said, it is important to note that our decisive actions thus far to protect the CLNC balance sheet during COVID-19 came at a cost to the company in both the form of reduction in NAV and in revenues. We exited and financed certain income-producing assets in order to build cash and liquidity. Thus, earnings have been impacted, and therefore, the initial dividend policy will reflect this.

We also recognize that our current share price is a deep discount to our book value. This discount is also greater than that of our peer group. The current market valuation effectively implies that there are approximately $1.2 billion of future potential losses. We feel the best way to address this disconnect is by shifting the focus and momentum of the CLNC team beyond the challenges of COVID-19 and toward playing offense.

In our effort to close this gap, we are committed to continuing to protect the balance sheet while redeploying capital into new investments, building earnings and reinstituting a quarterly dividend.

In summary, while not fully out of the woods, we have accomplished many of our goals during this challenging time. We are now focused on executing our business plan to grow earnings. We have already begun to originate new loans while continuing to remain vigilant on asset, liability and cash management. The continued risks of COVID-19 can, by no means, be dismissed. However, through the efforts of the CLNC team and the support of our counterparties, CLNC is now in a position to lean forward.

At this time, 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 of this past quarter and subsequently has continued to be asset and liability management. More recently, we have begun to turn our attention toward new originations and building earnings. The company highlights this past quarter include CLNC's current liquidity position is $609 million, which includes cash on hand and availability under the corporate revolving line of credit; 98% of core portfolio cash interest payments expected during the quarter have been paid; outstanding borrowings on our whole loan warehouse lines currently stand at $551 million; and securities repo has been reduced to $19 million.

Efforts to resolve the LNS portfolio continue. Currently, this segment of the portfolio consists of 6% of total company GAAP net book value. And lastly, CLNC has actively quoted new loans, and we are pleased to report, subsequent to quarter end, one new deal closed for approximately $23 million in committed capital. Additionally, we have 3 loans under application, totaling approximately $94 million in committed capital.

Loan portfolio performance during the third quarter and October remained strong, 98% of core portfolio expected cash interest payments were received. There were loans which required some form of partial modification of their existing loan 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. Our owned real estate assets, inclusive of the legacy nonstrategic segment, performed well. We collected 93% in the third quarter and October. Core portfolio collections were higher, 98%. CLNC remains current on all investment-level borrowings on our owned real estate portfolio.

Since last reporting, core portfolio asset sales included the sale of an equity investment in a portfolio of industrial properties, resulting in $109 million of gross proceeds. Four core portfolio loans paid off or were resolved for $260 million of gross proceeds. Following quarter end, CLNC also executed on a discounted payoff, resulting in $12 million of proceeds. Currently, there are no core portfolio investments for sale or targeted for disposition, except for certain CMBS holdings. Neale will address the CMBS portfolio more specifically in his prepared remarks.

Core portfolio liabilities, including the loan repo and securities repo, stand at $551 million and $19 million, respectively. Underlying portfolio performance has been solid, and the advance rates are relatively low, 67% on hold on repo and 40% on securities repo.

Lastly, as it relates to the core portfolio, the managed CLO 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 COVID-19-related developments as well as ordinary course loan payoffs within the underlying portfolio.

Since our last reporting period, there were 2 loan payoffs within the trust for a total of $78 million. It is worth noting the loan collateral was replaced concurrently with the payoffs or shortly thereafter. The managed aspect of the CLO provides for flexibility to introduce replacement collateral to address ordinary course payoffs and other collateral events. Currently, the portfolio underlying the trust consists of 21 first mortgage loans.

Turning to the LNS portfolio. Resolving the remainder continues to be a focus of the company. To date, we have monetized $235 million or 57% of the LNS portfolio. During the third quarter of 2020 and through today, the company sold or resolved 16 LNS assets or a $1 million premium above carrying value for an aggregate gross sales price of $23 million and a net sales price of $22 million after transaction costs. At present, the LNS portfolio accounts for less than 6% of the total company GAAP net book value. We expect meaningful resolution activity between now and the end of 2020, with 9 assets currently in execution with an aggregate net book value of approximately $76 million. As Mike noted, we anticipate collapsing the reporting segments in the coming quarters as the LNS portfolio is further reduced in size relative to the total portfolio.

In closing, CLNC is now playing offense originating new loans. As a company, our objective is simple: build earnings with a focus on current and predictable cash flows generated through high-quality real estate sponsors. We began quoting new loans in September. And subsequent to quarter end, we closed one new investment for approximately $23 million in total committed capital. We also have 3 loans under application, totaling approximately $94 million in total commitments.

With that, I will turn the call over to our Chief Financial Officer, Neale Redington, to elaborate on the third quarter results.

Thank you, Andy, and good afternoon, everyone. Before discussing our third quarter results, I'd like to remind everyone that further information will be included in our Form 10-Q filing tomorrow. I would also like to draw your attention to our supplemental financial report, which is available on our website. And finally, we continue to provide asset-by-asset details for our core portfolio and our supplemental financial report as well as all holdings in our Form 10-Q.

With that, let's turn to our third quarter results. CLNC reported third quarter 2020 total company GAAP net income attributable to common stockholders of $5 million or $0.04 per share and total core and LNS earnings of $39.7 million or $0.30 per share. Excluding realized gains and mark-to-market losses on CRE debt securities, provisions for loan losses and fair value adjustments and a onetime tax benefit, adjusted total core and LNS earnings were $31 million or $0.24 per share.

During the third quarter, total company GAAP net book value increased from $13.06 to $13.25 per share, and undepreciated book value increased from $14.43 to $14.53 per share. Earlier this year, we concluded that it was in the best interest of the company to conserve available liquidity due to the volatility and unprecedented market conditions arising from the pandemic. We suspended the company's monthly cash dividend beginning with a monthly period ending April 30, 2020, given that our financial position, operational performance and business outlook have improved significantly since the onset of COVID-19 pandemic.

As Mike mentioned, we will be reviewing our dividend policy with the Board of Directors with the intent of resuming dividend payments to stockholders for Q1 2021. That being said, the company continues to monitor its taxable income and will ensure that the company meets the minimum distribution requirements to maintain its status as a REIT for year-end 2020.

We continue to make good progress in reducing our commercial mortgage-backed securities exposure. During the third quarter and subsequent to quarter end, CMBS sales generated gross proceeds of $44 million, with $9 million in realized net gains. With these sales, we paid down a total of $20 million on our CMBS repo facility, leaving a current balance of just $19 million.

Turning now to our book value. Core portfolio undepreciated book value stands at approximately $1.7 billion or $13.13 per share, unchanged from the second quarter. Our loan book continues to be the largest segment with a carrying value of approximately $2.3 billion at quarter end. The blended unlevered yield of our loan book is approximately 5.8%, 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 office and multifamily.

Also within our core portfolio, net lease real estate had a carrying value of $746 million at the end of the third quarter. This portfolio consists of industrial and office properties, a weighted average lease term of 7.4 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.

Turning to our legacy nonstrategic portfolio. This segment is predominantly composed of operationally intensive and real estate, full retail and certain other legacy loans originated prior to the formation of CLNC. Total GAAP net book value for this portfolio stands at approximately $99 million or $0.75 per share.

Moving to our balance sheet. Our total at share assets stood at approximately $4.3 billion as of September 30, 2020. Our debt-to-assets ratio was 56%, and our net debt-to-equity ratio was 1.1x at the end of the third quarter, down from 60% and 1.4x for the end of the second quarter.

Since the first quarter, we have substantially reduced our recourse debt exposure from $718 million to $171 million, and current liquidity stands at approximately $609 million between cash on hand and availability under our revolving credit facility.

Turning to risk ratings. We increased our risk ratings earlier in 2020 for a number of assets because of COVID-19 concerns, and we are reducing some of those ratings in the third quarter given the continued good payment history from our borrowers. As such, our overall risk rating at the end of the third quarter was at 3.8% compared to 3.9% at the end of last quarter.

Finally, at the end of the third quarter, our CECL provision was $40 million and represents approximately 1.7% reserved against our loans.

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

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

Mike and team, nice job getting a lot done. I know you've been there about 6 months or 8 months now and picked an interesting time to join, Mike. But good to see that you're shifting here to offense and then starting to pivot in that direction.

You mentioned one loan, I think, is already closed and a pipeline building. Can you talk about -- maybe if you look out 6 or 12 months, what would the new portfolio look like? Is it going to be exclusively CRE loans? Or are you looking at other type real estate investments is all first? Or will you look at mezz? Can you talk a little bit about the focus on the origination side on a go-forward basis?

Thank you, Steve, for joining the call, and thanks for the question. Going forward, on the short term, as we deploy the cash, first part of that is going to be how much of the cash we can deploy. And so there's really one leg in new business and one leg watching in the portfolio and watching COVID. And as we get more visibility on the cash needs in terms of protecting the balance sheet, we'll be able to deploy more of that, almost $0.5 billion in cash.

So let's say, we're looking at deploying the first slug of $100 million of the cash and that will take us a couple of months, and we'll look down and see what it looks like at that point and how much more we can deploy.

In terms of what we're going into, well, right now, by definition, there are some segments you're probably avoiding, probably hotel, and definitely hotel and retail. And maybe there's some retail we can do highly selectively. But right now, we're focusing on the other categories, multifamily and suburban office. And that's what the loans that we've got under application consist of, office and multifamily. And we're seeing transactions at a 65% to 75% leverage pricing -- floating rate pricing on a rate basis is probably in the 4s, low 4s to high 4% rate. ROEs are probably 11% levered. And we're looking at assets that we would look at for a CLO contribution. And so as that market improves, we'll put these on our financing lines, but we're going to look to exit through a CLO. Or quite frankly, as loans come out of the CLO that we currently have, we'll place those loans, some of which we've already done.

The things that we are also avoiding in terms of trying to change the mix of the portfolio, we're keeping into loan sizes that are probably $25 million to $75 million in size and really don't want to go much above that. That would be really exceptional. We want to make sure that any loan that we do, if we lever it, we can cure it. If there's a problem, we could take it off the line. So we're going to avoid big 9-figure loans. We're going to avoid predevelopment. We're going to avoid ground-up construction. The transitional that we're doing is really acquisitions, with maybe some new tenancies or taking out an existing construction loan where lease-up has begun, and we're going to step in and continue taking the lease-up risk. And that could be with the existing developer or with a new one. I think many of the loans we're looking at our acquisition.

The investment market has slowed down considerably because folks just don't know how to price assets right now given COVID-19. So right now, the demand for credit is not super high, but we're excited about what we're seeing.

So I think as we move forward to close the answer on that, it will be a lot what Andy had been doing when Andy was involved and transitioning the firm in 2019 with the team where they were focused on CLO assets. And we're going to be doing that. With the addition of George Kok, which I think is a major coup for the firm, we'll also have the ability to do securitized loans in the CMBS market. That may take us 90 to 120 days to get the plumbing in place to do that, but we'll try to augment the business with a higher ROE in that as well.

Great. Appreciate the color on that. And as we, I guess, shift a little towards the existing portfolio, can you talk about maybe a near term, so say, 3- to 6-month outlook on expected commitments from an unfunded commitment standpoint that will need to be funded and then repayment outlook? Do you have any visibility on loans that are maturing here in the next 1 to 2 quarters and how repayments are looking on that front?

In terms of future fundings, that is a number we can give you. I'm going to say that total is probably something under $200 million all the way out past 2021, in fact. So you might want to cut that number in half for 2021. It's not a big number for us in terms of future fundings. We have seen some loans pay off in the CLO, and we have replaced those loans with loans from the balance sheet. There are some loans that could continue to go away in the CLO, and we'll continue to do that. Where if we're originating current loans, the CLO is a great liability structure in terms of cost. I think it's got like a LIBOR plus 159 cost basis. So anything that comes out of that CLO, we'll look to put any new originations in as long as they meet the guidelines in terms of weighted average maturity and things like that.

I think the thing we are going to focus on is really trying to repatriate the low-yielding, underperforming assets and try to monetize those. And it doesn't necessarily mean to sell them, but it means that we do have a slug of assets, whether it's the L.A. mixed-use, which is nonaccrual. We put the water-front property, which is described in the Form 10-Q. You'll see tomorrow, it was in the previous filings. That is not accruing at this point in time. So we haven't -- in the CMBS, we turned off taking the interest carry on that, and we're writing down the basis. So we've got a slug of assets that are underperforming, and it would really move the needle for us if we can repatriate that capital and put that back out in the market.

Yes. Makes sense. I appreciate that color. On the dividend and returning capital to shareholders, kind of, I guess, a 2-part question here, but -- and then I'll wrap it up.

But Mike, if you could talk a little about how we should think about framing the dividend. Should we look at the adjusted core LNS EPS? I know you said it probably gets more straightforward on a reporting basis next year. But is this something where you're going to have positive REIT distribution requirements as opposed to losses that carry forward? Are you looking to pay a yield that's 2 or 3x the S&P? Or can you talk a little bit about how you're thinking about framing the size of that dividend?

I think that we're not looking at a yield on day 1. We are looking at -- when we fully deploy capital and we repatriate some of the assets on the balance sheet, trying to figure out where we think that will bring earnings in terms of that yield. But on day 1, I think we're looking to pay a dividend. So we're not looking or shooting for a metric.

When we look at the -- when you look at the prepared remarks, you see -- I mentioned that we sold core assets. We've sold some at the discount and took a hit on NAV. We've done that financing, and those were not to no effective of earnings. They had an impact on earnings. And in fact, given the sales that we just had recently that have just closed, you'll see earnings continuing to drift down a little bit further as those things work their way through our financials.

So earnings will continue to come down a little bit and will start to now trend up as we build earnings back and redeploy capital. But our dividend, I think, is not -- it's going to be obviously much less than what we had in the past. And I think it could potentially increase over the course of the year. We'll talk to the Board about what the starting point is. But I think it will be a nominal dividend to get us started, so we can say that we have a quarterly dividend that we think we can rely on and build from there.

Great. And I guess lastly, I think I asked this every quarter. But considerations around stock repurchase, is that something you look at? Do you feel that the dividend is better for shareholders or new investments are more attractive than repurchasing stock? I do think it's of note that the book value ticked up slightly, which I think is good to see, nice to see some stability and actually a slight increase there. So with the stock trading at 60% discount to book, maybe just your general thoughts on why reinstating a dividend is more attractive than a stock repurchase here?

Right. So with book value at $13.25 GAAP and $14.53, undepreciated, a sub $6 price is compelling. So let's not mince words around that. That is very compelling. It's a huge ROE.

Having said that, first out of the gate, as we amended our line during the course of the year, we were -- had a restriction regarding buybacks and leakage of dividends beyond what's required for REIT status. So we are -- we have a restriction on buybacks. Now that could be a discussion that we have with all lenders at a later date. But I also note that -- so while the ROE is compelling, the capital is gone. And we're on a size right now where I think shrinking the firm -- to move the needle, you really have to -- you have to buy back a lot of shares. And if you do that, the percentage of ownership by Colony Capital increases. You have more overhang there. And from what we've noticed in the buybacks, which have been nominal in the sector, they really -- other than giving confidence to shareholders, which we want to do, it's a very short-term effect in terms of moving the stock. Now obviously, it has a long-term effect on EPS because you're taking shares out of the market, but we don't see necessarily the pop in that. So that's why I specifically stated in the prepared remarks, we recognize that there's a discount but we think the plan to get the discount gap closed is not going out and buying shares of the market one-time and having a 1 or 2-day effect on the stock but rather to effectuate the plan and use the capital to effectuate the plan.

So right now, I think the buybacks are probably something that we're not highly focused on. Certainly, we are restricted on doing it so that would have to be remedied. But even if we didn't have the restriction, I think we'd rather reinvest this into the business. And I think we're at a point where given the equity size of the firm, I don't know if that makes sense to shrink the size of the firm in terms of economies of scale, in terms of where we are with shareholder equity.

The next question is from Randy Binner from B. Riley.

So I'm going to try and ask a couple, kind of, to dimension the dividend, the best I can. So I guess, first, Mike, when you said you were deploying $100 million, was that generic? Or does that map to the $23 million and $94 million identified in the supp on Page 5?

Right. So that would -- that does not. That is -- that's a very good question. So if you look at leverage of around 70%, 75%, that could be probably something like $300-and-something million in loans. So on the $100-ish million that we're deploying right now, that may be $30 million out of the first $100 million slug. And we don't have any clearcut we're doing $50 million to $100 million. What we're basically saying is we're gradually deploying cash. And as we're deploying that cash, we're also closely monitoring the portfolio to make sure that there are no delevering needs elsewhere on the portfolio. And as we get more confidence around that, more of that $400 million will make its way into loan. So if you took all $400 million, you could just multiply that by 4 and you got your loan amount.

Now if we get into the CMBS conduit business, Randy, we could -- that probably uses $50 million to $100 million in capital because you're turning over loans every 2, 3 months and getting that capital back and recycling it. So there may be a portion of that $450 million that we allocate to the conduit business, but that's probably not till late fourth quarter, early 2021.

Okay. So then back just to the income statement, the interest income and property and other income have been running, yes, a little ahead of plan. Is there a way to -- it's going to come down, though, as legacy stuff comes off and you put new stuff on. But is there -- can you roughly size -- if you took what you've done year-to-date from a top line perspective or what you think you'll do this year and think about 2021? Is there -- can you size how much lower you think '21 would be versus what you were able to accomplish in '20?

So Randy, maybe I can jump in on that one, if it's helpful. So I think you know how we've described the reduced adjusted earnings per share, right? So we're down to the $0.24. And I think that tells you the adjustments that we had during that period. What you then need to build in is the transactions that have happened during Q3 that will come out, right, because there was some partial income that was recognized during that period, and that will come out. And we then have a number of sales that are taking place, primarily in the LNS book during Q4 as well, which will further reduce income. So I think you have to sort of think through those components to keep driving that $0.24 downwards to form a base for Q1 where we would set a dividend. And then as Mike said, we'll be deploying either through our existing commitments or through newer deals that we pick up, and that would give us an opportunity to grow during the year or later in the year, but we did a sort of a baseline at Q1.

All right. That makes sense. And then whatever that base is, Mike, you said there's no -- you're not thinking of metrics. But I mean, is it reasonable to think of it being like a 90% or 100% payout ratio, if I want to think of it just generally?

I mean, ultimately, it will be, if we don't get there by the end of the year. But I think our goal is to start off with something that we know we can pay. And then as we redeploy capital and we're confident around other issues around the balance sheet, if there are any, is if COVID persists. So it's really -- what we're trying to do, Randy, is, I think the initial dividend start, that's where we're opening up. We don't want to go backward. So we'll open up there. And if during after a quarter or 2, we have confidence that we're redeploying capital and the use of our capital elsewhere is not needed, then that dividend is going to come up.

And again, I have to comment that we -- this is a discussion that we have to have with our Board. They know that we're saying this, obviously, that we want to reinstate the dividend. But we have to have -- in the fourth quarter kind of resolved where that starting point will be, and it's going to start off with confidence level that we're not going backwards. This is a base. It will only grow from here.

Yes, yes. This is helpful. And so then the noncore being collapsed, that kind of $0.75 in book value, that still remains. When you say that's collapsed, I guess, how should we think about what happens to that $0.75? Is it basically disposed of and monetized between now and whenever noncore is collapsed next year? Is that the easy and right way to think of it? Or is there some other way to think of what happens to that portion of book value?

Over time, it will be transitioned into cash. But in the interim period, it will be grouped in with total assets. So we just won't call it out separately. So it's not a reduction in book value as that goes away, it's a conversion of book value from LNS assets to just sort of included within total assets as we collapse the entire balance sheet back together and ultimately cash. And sorry, Andy, I jumped in. I don't know if you had other commentary on that?

No. I think that covers it. I think the story is today that, that portion of the book stands at about 6% of net book value. And what you can expect to see over the coming quarters is a meaningful reduction of that at which time we'll collapse the reporting, but continue to manage the underlying assets to maximize value.

The next question is from Steve Delaney from JMP Securities.

Mike, it's good to be on with you, and congrats to you and Andy and Neale on the progress that you guys have made and exciting to go into 2021 with the new game plan.

Steve, thank you for joining us. It's a pleasure to have you.

It's my pleasure, all mine. George Kok's name is very familiar, but I apologize, I just googled him, but I couldn't find him. Can you just tell us like where he's been the last 5 or 10 years?

It's actually -- he'd be very flatter that you asked 5 to 10 years.

I know, but I'm an old -- I'm not going to paint him as an old guy like me.

George has spent years at major financial institutions, initially Morgan Stanley, where he ran the securitization debt platforms there, then he went to Merrill lynch prior to the financial crisis. And then after the financial crisis, when I was at BofA, George and I worked together there. He rejoined the firm. And then George and I also worked together at Ladder Capital for a period of time. And then unfortunately, we lost him to -- back to Morgan Stanley, and we got them off the bench recently. So he's spent decades at major institutions in this business.

Well, between George and yourself, you guys shouldn't have much trouble getting back into the conduit club, I wouldn't think, with your relationship. So that's a great development, and congrats on that.

So I just have one other quick thing. You described your first few loans $20 million, $30 million type loans. I mean, it kind of feels like what I call middle market. But the real question is, historically, we always talk about property types, multi-family, industrial. So how much are you thinking about geography these days and just a combination of things like rent controls, social unrest, urban flight? You've got a choice to where -- which geographies you want to expose your capital to. And I'm just curious it's your thoughts about that today with what we've been through with COVID and everything are different than they might have been 2 or 3 years ago.

Thank you. Well, I think that plays in. Well, first of all, we're -- for the time being, the property types that we're focused on, given what's going on in the market, have narrowed, and that's the theme that exists everywhere. And that will hopefully change as we get a better idea of how retail is affected certainly. I actually think that retail will have a longer effect -- impact than the lodging business. The lodging business will come back. Those assets, people want to go and travel and be at an asset for a reason. You may get some changes because of remote working and the ability to telecommunicate, whatever. But we think that the hotel business will eventually come back. So there are states. The growth states we love, and you're seeing that flight going on. So whether it's in the Southwest, Southeast, Texas, all those states are positive on our radar screen. We'll do business in any state and any location based on the loan metrics, but we are -- there are concerns that there are some states where taxes are going up, and there is a shrinking population. And that is an overriding concern that we look for. And so there have been some transactions we've looked at where we've -- all things being equal, we say that's an area that's a state that's a city where taxes could be going up dramatically. We don't know the state of play.

In terms of social unrest, I think we think this is a piece of short-term phenomenas and these are (inaudible) they're not going to deter us from doing transactions. But generally, we're trying to stay middle market. So doing a deal in major MSAs, where you're doing bigger loans, probably something we avoid. So something we're doing, as I said, $25 million to $75 million loan sizes, more middle market, more secondary cities is probably the initial focus.

This concludes the question-and-answer session. I would like to turn the conference back over to Mike Mazzei for any closing remarks.

Well, thank you for joining our call today, and we look forward to updating you on the fourth quarter results in February. Thank you very much. Stay well.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.