Brightspire Capital Inc (BRSP) 2022 Q4 法說會逐字稿

Greetings, and welcome to the BrightSpire Capital Inc. Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Palame, General Counsel. Thank you, David. You may begin.

Good morning, and welcome to BrightSpire Capital's Fourth Quarter and Full Year 2022 Earnings Conference Call. We will refer to Brightspire Capital as BrightSpire, CRSP or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-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 21, 2023, and the company does not intend and undertakes no duty to update for future events or circumstances.

In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported fourth quarter 2022 GAAP net income attributable to common stockholders of $4.2 million or $0.03 per share, distributable earnings of $34.2 million or $0.27 per share and adjusted distributable earnings of $35 million or $0.27 per share. The company also reported GAAP net book value of $10.77 per share and undepreciated book value of $12.06 per share as of December 31, 2022. With that, I would now like to turn the call over to Mike.

Thank you, David. Welcome to our fourth quarter and full year earnings call, and thank you for joining us today. Over the last year, we have been very vocal about the impact of the Fed's aggressive tightening policies. Therefore, today, I will keep my market comments brief, and I will address current dynamics affecting the office sector and then turn the call over to Andy, who will provide more detail on asset management developments and our balance sheet. Early last year, we decided to not fight the Fed and made a strategic pivot to a risk-off mode. We substantially plotted back our loan originations in order to prioritize liquidity. We turned inward to focus on asset management and engaging with our borrowers. We made certain to apprise them well in advance of the significant increases in interest rate cap costs and the implications of rising rates on future loan extension tests. We believe that these early actions in 2022 helped us to get ahead of the curve.

Turning to 2023, Brightspire's strategic direction will somewhat hang on how long the Fed maintains its restricted policies. The expectation is for the Fed to increase rates another 25 basis points in March and again in May. So while the rate increases are substantially behind us, the #1 question for 2023 is, just how long does the Fed mean when it says higher for longer? We believe that outside of a panic event, higher for longer means through the end of this year. And for what it's worth, we also believe that the Fed will need to change its 2% inflation target. Therefore, as we navigate through this uncertain period of Fed policy, we continue to emphasize maintaining higher cash balances and proactively managing our loan portfolio. Regarding our liquidity, as of today, we have $284 million in unrestricted cash and $449 million of total liquidity. Now turning to the capital markets. There have been some green shoots in the CRE CLO market, which has seen 2 securitization issuances thus far this year. The most recent issuance was met with significant investor demand and albeit while pricing improved from Q4, it's still wide and the transactions do not yet allow for a reinvestment period.

There has been continued tightening of credit spreads in both the corporate bond and CMBS securitization markets. Therefore, we expect to see more follow-on improvements in CLO credit spreads and deal terms through the course of the year. Now I would like to discuss the office property sector. We believe this is a more significant issue in commercial real estate than high current level of interest rates. While rates will inevitably come down and benefit all property types, the headwinds in the office sector are longer term and in some cases, could be more permanent. The work from home model, whether full-time or hybrid has become the new normal. This is impacting all types of private businesses as well as federal and state government agencies. This is also having a concerning impact on city and state sales tax and transit revenues. A major tracking tool for the industry has become office attendance data. While slowly improving, office attendance is generally tracking an average of only 50%. There are also significant disparities. While cities in Texas are experiencing office attendants in the mid-60s, the San Francisco Bay Area and Washington, D.C. are both in the low 40s. In addition, the attendance rates are consistently concentrated midweek. Even New York City is now considering a work-from-home model for its municipal office employees. And all of this is even further complicated in certain large metro markets where quality of life issues, along with higher income taxes and higher housing costs are adding to employee preferences to work from home and whereby home has too often become a completely different state than their employer.

These dynamics are creating leasing headwinds and asset valuation uncertainties that have also culminated into a risk-off environment by lenders who become substantially frozen for making new loans on office properties. In fact, most lenders are now focused on managing office loan exposures in their own portfolios. Shifting to Brightspire, we took into consideration these work-from-home factors in our post-covid office loan originations. We focused on drive to work markets, office properties with diverse rent rolls as well as lower average loan sizes. Portfolio granularity was a major consideration for our strategy. We contemplated the liquidity and dry powder that theoretically might be required, should there be a need to protect the balance sheet for larger multi-hundred million dollar loans. We believe that boxing in your designated weight class for loan-sized concentrations is a critical part of risk management. Hence, our average new office loan size was $32 million. We further recognize that our loans are nonrecourse and that even large institutional borrowers have financial limits and in the end, will act in their own economic self-interest.

In closing, we are very pleased with our 2022 results, which reflect our team's ability to quickly pivot the business in a fast-changing market. We closed the year with both solid earnings and increased liquidity. Brightspire is positioned to be opportunistic once we have better visibility. In fact, some of the best lending opportunities will be in the office sector. In the meantime, all things being equal, our bias continues to remain towards maintaining higher levels of liquidity versus making new loans. With that, I would now like to turn the call over to our President, Andy Witt. Andy?

Thank you, Mike, and good morning, everyone. During the fourth quarter, our focus remains on asset and liability management. We received $383 million in repayments and partial paydowns across 12 investments during the quarter compared to $40 million in repayments and partial paydowns across 4 investments in the prior quarter. While we are pleased with the increase in repayments and partial paydowns, we continue to expect loan repayment volume to remain relatively low for the next couple of quarters. During the quarter, we executed on one loan origination, which was done in conjunction with the loan recap and payoff. We closed on a preferred equity loan to support the payoff of the largest multifamily loan in our portfolio, which was $182 million and was originated in 2019. This payoff and recount resulted in a reduction in total exposure and last dollar attachment point from $182 million to its current $22 million preferred position with the last dollar attachment point of $144 million. The senior loan was refinanced with a GSE agency lender and the balance of the payoff proceeds came from borrower equity.

Repayment activity during the quarter resulted in loan portfolio decreasing to $3.5 billion from $3.9 billion last quarter. Total ad share undepreciated assets currently stand at $4.9 billion, down from $5.3 billion last quarter, a direct result of negative net deployment. Subsequent to quarter end, there has been $69 million in repayments and partial paydowns across 3 investments. As previously highlighted, we anticipated loan repayment volume will remain relatively low over the course of the year. We expect sponsors will elect to or have little choice other than to hold properties longer in anticipation of an improved capital markets environment, while continuing to execute on the underlying business plan. Subsequent to quarter end, we had a modification to $116 million office loan, the largest office loan in our portfolio. This modification included the sale of 1 of the 4 underlying office properties, coupled with an equity contribution from the borrower, reducing our exposure to this loan by $29 million. The current balance of the loan post modification has been reduced to $87 million.

With interest rates at current levels and trending higher, we anticipate more loan extensions and modifications within the portfolio. As of December 31, 2022, excluding cash and net assets on the balance sheet, the loan portfolio is comprised of 103 investments with an aggregate gross book value of $3.5 billion and a net book value of $977 million or 86% of the total investment portfolio. The average loan size is $34 million, and our risk rating is 3.2%. First mortgage loans constitute 96% of our loan portfolio, of which 100% are floating rate and all of which had rate caps. The total portfolio has minimal exposure to construction risk and 74% of the total collateral is located in markets that are growing at or above the national average growth rate. Multifamily big asset class BrightSpire has the largest exposure to consists of 59 loans representing 49% of the loan portfolio or $1.7 billion of aggregate gross book value. The loan portfolio composition includes 33% office or $1.2 billion of aggregate gross book value. There are 32 office loans with an average loan balance of $37 million. As Mike mentioned, we are acutely focused on the office portion of our portfolio, given work from home dynamics are greatly impacting certain markets. Despite these headwinds during the fourth quarter, certain borrowers made critical leasing progress in markets, which include 2 office loans in San Francisco proper and 1 office loan in Baltimore, Maryland.

Our office loan portfolio is granular with loan sizes ranging from $12 million to $116 million, which we view as a meaningful risk mitigant. As stated earlier, the $116 million loan was reduced to $87 million subsequent to quarter end. Approximately 58% of our office exposure was originated post coated and adheres to the characteristics Mike highlighted, assets located in high-growth drive to work markets with granular rent rolls and in-place cash flows. The weighted average occupancy across the portfolio is 72%. The remainder of our loan portfolio is comprised of 12% hospitality with industrial and mixed-use collateral, making up the rest. Subsequent to quarter end, BrightSpire made progress on our hospitality exposure through restructuring and mezzanine investment, which included a partial paydown of the senior loan, reducing BrightSpire's last dollar attachment point. Separately, one hotel property is currently being marketed for sale by the borrower. For your convenience, our 2022 Form 10-K filing includes enhanced loan table aggregations by property type, so investors can more easily review our loan data by asset class.

We continue to manage the liability side of our balance sheet through a combination of financing sources, which include warehouse facilities across 5 primary banking relationships totaling $2.25 billion. As of today, availability under our warehouse line stands at approximately $940 million, which represents a 58% aggregate utilization rate. Additionally, we have 2 outstanding CLOs totaling $1.5 billion. At present, approximately 42% of our loan collateral has been contributed to CLOs. 53% is on our warehouse lines and 5% is unencumbered.

In summary, it was an active fourth quarter, particularly related to assets and balance sheet management. We increased liquidity and address some of the largest loans in our portfolio while increasing earnings quarter-over-quarter. Going forward, we will remain focused on asset management and maintaining higher-than-normal levels of liquidity. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer, to elaborate on the fourth quarter results. Frank?

Thank you, Andy, and good morning, everyone. Before discussing our fourth quarter and full year results, I want to mention that we expect to file our Form 10-K later today. Turning to our fourth quarter results, we reported adjusted distributable earnings of $35 million or $0.27 per share and distributable earnings of $34.2 million or $0.27 per share. Additionally, for the fourth quarter, we reported total company GAAP net income attributable to common stockholders of $4.2 million or $0.03 per share. Quarter-over-quarter, total company GAAP net book value decreased from $10.87 per share to $10.77 per share, and undepreciated book value also decreased from $12.08 to $12.06 per share. The decline is primarily driven by a net increase in our general CECL reserves, partially offset by distributable earnings in excess of dividends declared and the FX translation related to our Norway office net lease assets. It's important to note that while the FX translation did add $0.06 to book value at 12/31, the NOK has since increased in value and would have added only $0.02 using today's foreign exchange rate. Additionally, we sold our remaining CMBS B-piece investment for $36.9 million during the quarter, a slight premium to carrying value.

I would like to quickly bridge the fourth quarter adjusted distributable earnings of $0.27 versus the $0.25 per quarter in the third quarter. The quarter-over-quarter increase is primarily driven by the increase in the benchmark interest rates and higher prepayment income related to loan repayments. When adjusting for the full quarterly effect of fourth quarter repayments as well as the beneficial impact rising interest rates continue to have on our portfolio, our adjusted distributable earnings quarterly run rate is closer to $0.25 per share. We provide more data in our supplemental financial report, but it illustrated a 50 basis point increase in the benchmark rates from the December 31 spot rates would add roughly $4.3 million to our annual earnings or about $0.03 per share. It is also worth noting that half length in the first quarter base rates have already increased by approximately 20 bps. Turning to our dividend. In 2022, we generated full year adjusted distributable earnings of $0.98 per share and distributed $0.79 per share for an 81% payout ratio. Looking at reserves and risk rankings. Our specific CECL reserves ending the fourth quarter was $57.2 million, no change from the third quarter. Our general CECL provision ending the fourth quarter was $49.5 million, an increase of $20.6 million from the prior quarter. This mainly reflects an increase in the general CECL for some office and mezzanine loans, partially offset by loan repayments and lower reserves on certain hotel loans.

Our overall loan portfolio is 99% performing. 2 loans are residential mezzanine loan and an office senior loan moves from a 3 to a 4 risk ranking. Altogether, our average loan portfolio risk ranking at the end of the fourth quarter was 3.2%, an increase in the third quarter's 3.1 risk ranking levels. Our risk ranked 5 loans represent 3% of our gross loan portfolio. 2 are the Long Island City office loans with specific reserves taken in the third quarter. The third loan is a performing $12 million hotel loan that was modified during the first quarter of 2023. The fourth loan relates to the L.A. mixed-use mezzanine loan, which was written off in 2021. 9 loans with an aggregate commitment amount of 17% have a risk score ranking. 4 are office loans and 2 are mezzanine loans. While all are currently performing, we see potential for increased risk and accordingly, are closely monitoring these investments and working with sponsors to ensure the best possible outcomes.

Moving to our balance sheet. Our total at share undepreciated assets stood at approximately $4.9 billion as of December 31, 2022. Our debt-to-assets ratio was 64%, and our debt-to-equity ratio was 2x at the end of the fourth quarter, down from 2.3x last quarter. In addition, our liquidity as of today stands at approximately $449 million between cash on hand and availability under our bank revolving credit facility. At present, we believe the $284 million of cash on our balance sheet in addition to the proceeds available under our revolving line of credit, provide us with the liquidity and flexibility to manage the business. This concludes our prepared remarks. And with that, let's open the call for questions. Operator?

We will now be conducting a question-and-answer session. (Operator Instructions) We have our first question from the line of Steve Delaney with JMP Securities.

 Look, a very solid quarter and obviously challenging markets. So good job keeping it heading down the right way. Just curious, heavy repays, that's always, I think, in this market, that's a good sign, frankly, because of liquidity. But $383 million, can you comment, Frank, in terms of the magnitude of prepayment fees associated with that $383 million.

 Sure. I can give you that number if I can find it handy in 1 second, I got I can give it to you. So total prepayment fees for the quarter, I'm not going to find it handy see if I'm going to have to get to you. Actually, I have a $1.8 million of prepayment fee.

Okay. Great. That's helpful. And Mike, just my follow-up question is to you. Obviously, really strong dividend coverage where you are at 135%. You made it very clear about the need for liquidity and building liquidity, I think we would all agree that's necessary in this market. What has your conversations been with the Board in terms, okay, we're going to keep the dividend where it is, but we need to recognize our stock is trading this morning at like 60% of UTPB. Any thoughts about buybacks and remind me if you do actually have a buyback authorization in place?

Steve, we've said before in terms of buybacks, we're prioritizing defending the balance sheet first and foremost. As someone who's worked in credit for my entire career, it's not the type of message you want to telegraph to our warehouse lenders that we're buying back stock at this time in the market. I think it is much more important that we're telegraphing that we're protecting the balance sheet. So that's priority #1. In terms of the dividend, we have a pretty solid buffer on the dividend. I don't think right now that there's a conversation going on about raising that dividend. I think that we understand that a lot of that has to do with rising interest rates, with rising interest rates, a lot of our brethren talk about. That's great for EPS. I have a more sober view of that and that rising interest rates put more pressure on properties and more pressure on borrower liquidity and there's growing credit risk as interest rates continue to go up. So we're going to continue to emphasize liquidity. We -- in terms of raising the dividend and stock price, right now, all of the market is substantially below their book values. And the market really is saying that there's an issue regarding credit. We want to make sure we understand the credit profile. There's been a lot of movement along the sector in terms of CECL reserve increases, a lot of questions about the office sector. So right now, I think the price is really reflecting credit and managing the balance sheet and protecting the balance sheet before it just looking at are you going to increase your dividend?

Yes. No question. I think people are more worried about dividend cuts than I think you'd be wasting your $0.02 or $0.03 to increase it in this market with the skepticism just about the economy and about real estate values. Thank you both for your comments.Â

We take our next question from the line of Eric Hagen with BTIG.

Maybe a little bit more fleshing out the liquidity. Just how do you think about the liquidity relative to the size of the CECL reserve? Like what would drive you to hold even more liquidity from here? Like the reserve has gone up, but it's still relatively modest as a percentage of your total assets. It looks really manageable. So I'm just trying to square up like how you think about the approach to your liquidity relative to the size of what you're reserving for?

Okay. So thank you for the question. This is Mike. Let me give you a little clarity on the reserves. We have $107 million total in reserves, roughly about $0.82 a share. Of that, $57 million of it was taken against the 2 Long Island City assets, both of which we've got cooperation agreements with the borrower, the same borrower on both assets, both of which where we've hired a sales adviser and both assets are being marketed now in a short sales structure. In terms of the balance of the reserves, roughly $33 million, I believe, is in the risk-weighted risk ranking for category, of which a substantial amount of that or a good chunk of that is against one asset and office asset in D.C. I can't give you the amount exactly, but it's a more substantial reserve. In terms of liquidity going forward, we -- it would be unreasonable for anyone in the space, in the real estate lending space to say that they don't anticipate some future credit issues going forward. We do anticipate that there will be some movement in risk weight 3 assets to potentially 4. That just is not an unreasonable thing to think. But really maintaining liquidity is about moving assets around and potentially delivering assets and protecting the balance sheet. And that is just an unknown right now. I think it's very hard to sit here over the next 12 months and say we know what the Fed is going to do, we know when they're going to give relief. We don't. And that's being reflected in the market today. So I think holding on more cash until we see that visibility is less to do with write-downs and more to do with just maintaining liquidity on the balance sheet to maneuver assets if they need to be moved around.

About that point, and that's why we stress the granularity of the portfolio. We don't have any battle ship size loans. And as I said in the prepared remarks, we stayed within our boxing weight class, meaning we look at our loan sizes relative to our shareholder equity and make sure that the concentrations never get so large that if you have to move an asset that was not performing up to its business plan that it would not affect the entire balance sheet of the company. And so we have made sure that our average loan sizes were small enough and granular enough so that we can move loans around. We do have stuff that is still weighted in risk ranking 4 and 5. We do expect to see some movement there in the future. We have some assets that are in the risk ranked 5 a mezz loan on a hotel in New York City that's actually doing quite well right now. So we'll see some migration in improved rating there. There's a large hotel loan, our second largest hotel loan in the portfolio where it's been in the market for sale for quite a while, and we believe I can't speak for the borrower, but we believe that, that hotel is now under PSA to be sold, and we expect that loan to be paid off. And we also did see some good leasing in some of the risk rated 4 office loans, as Andy said in his prepared remarks, in San Francisco, believe it or not. And in Baltimore, believe it or not, we got very good leasing on some of those assets that brought them to almost 100% occupancy in San Francisco and I think, low 80s in Baltimore.

So the 72% average occupancy that Andy threw out, I think, in his prepared remarks, you'll see some improvement there. And that occupancy is probably skewed down by the fact that the Long Island City assets, one of which was the office space is substantially vacant. As I said, those are up for sale. So I've been long-winded here. I apologize. I think there'll be movement in the risk rankings. And I think our liquidity really is not about reserves. It's about making sure you can protect the balance sheet.

Yes. That's helpful perspective. Thanks for flashing that. I appreciate that. A follow-up here. I think you noted the Carlsbad office loan was partially paid down and modified. It sounds like there were maybe 3 more assets in that portfolio. Is the plan to get additional paydowns from asset sales what's the outlook there just generally in that one credit?

Andy, would you like to address that?

Sure. Thank you, Mike. So as you noted, we had a pay down. The business plan going forward is to release one of the remaining buildings. And otherwise, it's substantially leased, and then the borrower will look for liquidity, whether that's through the sale of additional single assets, single properties or through a refinancing or sale of the remaining 3 assets. So that's the current plan.

We take next question from the line of Jade Rahmani with KBW.

This is actually Jade's associate Jason Sabshon. So it was my first question. We're starting to see a few cases of what looks like strategic defaults from borrowers in order to extract concessions from lenders since they know lenders don't want a foreclosure on their hands. For example, there's a large Blackstone multifamily deal that had special servicing. So are you seeing that dynamic in your portfolio at all?

Well, I'm not going to comment on Blackstone. We have a lot of respect for that organization. But as I said in my prepared remarks, these are nonrecourse loans. And we expect when we make these loans that every borrower at the end will act in their own economic self-interest. There are borrowers who want to protect brand and name recognition. But in a market like this, we've got such a dislocation in interest rates that's affecting the entire market and issues around the office sector. We expect those borrowers to feel like they have a whole way pass regarding brand. Having said that, every borrower is going to act in their own economic self-interest. So this notion that, and we've heard this many times, we have institutional blue chip, deep-pocketed borrowers. That, to me, is always in my career, been a policy in the sense that if there's equity to protect, they will act in their economic interest and protect it. And you have to have eyes wide open when you're making the loan, and you have to have eyes wide open when you're asset managing the loan as to what you think those borrowers will do. So in terms of strategic defaults, we just think borrowers are going to act in their own self-interest and you're really not a prepared lender, if you're not on the other side of that, expecting the borrower to do so as to gain theory out the outcomes.

We've got a number of situations here, for instance, in Long Island City, where we have cooperation agreements with the borrowers to work with them on trying to use them and help their assistance and their knowledge of the asset to have a more seamless sale. So we will cooperate with the borrowers. And then maybe some concessions that you make with them in doing so. But it's all part of the alignment and trying to maximize the financial return. So this whole notion that people are doing that just to see what the lender will do. I honestly think that in some scenarios, most scenarios, this is reality. Some lenders are unable to get refinancing and they're looking -- borrowers who are unable to get refinancing and they're looking to their lenders for assistance. And I think that's going to be the case for the next 12 to 24 months.

Got it. So as a follow-up to that, just more generally speaking about the market, are there any particular asset types or geographies where you're particularly concerned about credit other than office, which has really been at the forefront?

Well, I've been listening to the calls that have happened prior to us and Jade has made reference to certain markets where we're finally starting to see development going on in the southern markets that have experienced some net breaking rent growth. And while we do recognize that there are rents that are potentially going slightly downward in areas like Phoenix, for instance. When you look at markets like that, multifamily in Phoenix probably has roughly 40,000 plus or minus 50,000 units under construction right now, but they've got a population growth that is surging still. And right now, population and the larger Phoenix market is probably $4.5 million, $5 million and is expected to grow over the next several years to something like $7 million. And so when you look at the number of units under construction versus the population surge, we still think that those markets are better markets to lend into, albeit while there is some supply coming and albeit some softening of rents temporarily.

On the other side of that, there are markets that we would avoid and I hate to single out a state, but we will not lend in the state of Illinois because the migration out of the state is high. It's reaching a tipping point in terms of corporate real estate and personal income taxation and the services that the state is offering and certainly the city of Chicago that offering are diminishing in the light of a shrinking population and growing tax burdens. And so it becomes very difficult to make a loan where when you're looking ahead 5 years, you're saying the population is going to be several percentage points lower and taxes and property taxes, particularly are unknown. So there are states like Illinois and New York and California and New Jersey, which become difficult. Having said that, in California, we've had some good experiences in San Francisco. We've got good experiences in Los Angeles. We have an Oakland asset that's very small, low leverage office asset that's struggling in terms of its leasing. But generally speaking, as I said in my prepared remarks, we are recognizing the fact that in our lending, that not only is there a work-from-home issue with office, but there is a migration shift and a lot of that has to do with not just taxes and work from home, but also quality of life. And we're seeing that net-net, I would rather lend at a low cap rate in Arizona than lend at a very high cap rate in Illinois, all things being equal because I think that ultimately, population can bail out a mistake that you may have made in a state like Nevada, Arizona or Texas versus Illinois where the headwinds are just against you for the life of the loan.

(Operator Instructions) We have next question from the line of Jason Stewart with Jones Trading.

This is Matthew on for Jason. What are you looking for in terms of opportunistic development, more visibility in the portfolio or from the Fed? And then given that, where do you think the opportunities will be in the expectation for going in and exit cap rates?

Okay. There's a lot there to unpack. In terms of -- and I may have to retrace that question with you to make sure I address it. In terms of opportunities, as we said in the prepared remarks, when you get a shakeout like this, the goal is you make it to the other side and you have liquidity on your balance sheet and you can start lending again. And as we said, we do think that given the dislocation that could occur in the office sector and continued uncertainties, we think some of the bigger opportunities will be to lend in the office market. And there may be a new dynamic in terms of how to price that right now that's still in the state of flux. Most lenders are on the bench and kind of frozen out of the market. But we do think that the cost of capital in the office sector is going up. And that's going up largely driven by the leverage. Leverage will become more conservative. Leverage will be lower. And it's not necessarily about the rate. The rate may stabilize, but the leverage point will probably get a lot lower requiring more equity and thus putting a weight on equity returns for that leverage amount which can drive cap rates up. So we do think that cap rates in the office market will have a bias toward increasing in the face of this uncertainty, even as rates come down as long as this work from home environment that we discussed continues to persist, which we anticipate it will. Is there anything else in your question? I don't think I addressed the whole thing. Is there anything else that you want to go back on specifically?

 Yes. You addressed the first half pretty well. But the second part was kind of going in and exit cap rates. So I guess, where would you guys look to enter in at? And then where would you look to exit that on some of these opportunistic offices?

That's really -- I hate to say this, but that's almost not really answerable right now. It's so dynamic. It depends on the individual office asset in this market as it always does. But then in terms of where rates are, where the CLO market is are going to be big driving factors. So I'm going to try to bring that back to a more concise answer. That is why today, that market is substantially frozen. And the transactions you're seeing really cannot persist. For instance, there was a CMBS securitization recently done with an office portfolio where the debt yield was like in the high teens. I'm going to throw out 18% as a number that sticks in my head and like a sub-40% loan-to-value. That type of lending is going to happen in this market, but those situations are going to be needles in the haystock and not representative of the market. There's also some balance sheet lending that's going on in the office market, where assets are being lent on it at basically land value. And that is really a complete derisking and not representative of where we think lending will be in the future. So we think what's going on today is sensibly due to a market being frozen in a state of flux. And as the dust settles over the next year, 1.5 years, we think those loan to values that may have been the 70% may kind of pull back to 60% of value. And then what value is at that time will be based on where the tenure settles out. My guess is that we're not going to see a 10-year rate at a one handle again if we do things are really bad. We're probably going to see 10-year rates somewhere in the 3% handle. So you'll probably see debt yields somewhere in the low double digits.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the floor back over to Mike Mazzei for closing comments. Over to you, sir.

Thank you. And thank you for joining us today, and we look forward to our quarter 1 call with you early May. Thanks, again, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation