Our cost recovery accounting election will continue to negatively impact earnings until these loans are resolved through sales or other transactions. In the fourth quarter, we incurred interest expense related to these loans of $0.08 per share, net of incentive fees, which represents a potential immediate uplift to our recurring earnings power upon resolution of these loans and repayment of the attendant financing. Redeployment of our capital invested in these loans could also generate an additional $0.02 to $0.04 per share of quarterly earnings, assuming returns in-line with our typical investments, reflecting further upside as we move through the credit cycle. Looking at 1Q, we expect to resolve four loans currently on cost recovery, which will partially offset the impact of the three new loans placed on cost recovery at year end.
Earnings will also be impacted periodically as impaired loans are resolved, and we realize losses through distributable earnings upon a sale, DPO, or foreclosure of an asset. In general, we expect such realized losses to align with our CECL reserves with minimal impact on gap earnings or book value, which validates the accuracy of our reserve estimates. Taking into account the assets we have under contract to sell in a small office loan that we will likely take REO, we expect to recognize between $70 and $80 million of realized losses, likely in the first half of the year. Importantly, the majority of these come in concert with resolutions that allow us to unlock earnings from the assets currently on cost recovery. When we think about our $0.62 dividend, which we have paid consistently for 34 consecutive quarters, we primarily focus on our distributable earnings for any such realized losses.
We consider a variety of factors as we assess our ability to generate earnings over time, including changes in interest rates, a range of credit outcomes, and the environment for new origination. As in the past, we will make decisions regarding our dividend with this long-term perspective in mind, rather than reacting to any short-term changes in earnings that we believe are temporal in nature. Lastly on earnings, $504 million, or 99.7% of the interest income we reported in Q4 was paid current, with tick income representing only 0.3%. This quarter, we enhanced our disclosures by adding a discrete line to our audited statement of cash flows in our 10-K, so stockholders can clearly identify the tick versus cash components of our income. We continue to manage our balance sheet conservatively, repaying over $1.4 billion of our asset and corporate level financing in 2023, and reducing our leverage to 3.7 times from 3.8 times at the start of the year.
Importantly, we achieved this result while increasing our liquidity to $1.7 billion at year end, and remaining comfortably in compliance with all financial covenants. With ample liquidity, stable term-matched financing for our assets, and no corporate debt maturities for the next two years, BXMT is well-equipped to meet our future funding obligations. We currently have $1.2 billion of net future fundings under existing loans in our portfolio, which are generally subject to conditional asset performance and distributed over a weighted average term of 2.6 years. Our portfolio is supported by $16 billion of term-matched asset level financing, where we have maintained a low cost of capital despite more challenging market fundamentals. And as noted on previous calls, we have zero capital markets marked to market exposure throughout our entire capital structure.
A key component of our portfolio financing is our CLOs, which provide stable funding source for a portion of our U.S. loan origination. Over time, these payroll pools naturally concentrated down, and today are over 60% U.S. office, two and a half times our exposure outside of these vehicles. Looking at our portfolio, overall credit performance remains strong, with 93% of our loans performing at year-end and a weighted average risk rating of 3.0, up modestly from 2.9 last quarter and at the beginning of the year. We upgraded four loans, including a $361 million Spanish hotel loan that had been on the watch list since COVID, but has since recovered, leading to its upgrade to a risk rating of three this quarter. We also had 11 loan downgrades this quarter, including five U.S. office loans moving to a four rating and the three new five-rated loans that we impaired and placed on cost recovery at year-end.
These loans were all previously watch listed and include two San Francisco hotels and one New York office and retail asset. As it stands today, 7% of our portfolio is risk rated five and impaired by 22% on average and by 26% for office loans specifically, reflecting sober assumptions around collateral value that imply valuation declines of more than 50% from origination. Another 27% of the portfolio is risk rated one or two, reflecting their continued strong performance. The bulk of our portfolio, 55% overall, is risk rated three, loans that continue to demonstrate business plan progression and are performing in line with expectations. Over 60% of these loans are in multifamily, hospitality, and industrial, sectors demonstrating consistent fundamental performance.
And of the 30% in office, more than half is in Europe where market dynamics are stronger. The last segment of our portfolio, 12% of the total, is our $2.7 billion watch list. Over the past 12 months, we have modified 40% of our watch list loans, bringing in $335 million of additional equity commitments from borrowers and putting them on more stable footing. Another 22% has exhibited steady performance despite being on the watch list for seven years, several years. The remainder, about $1 billion of loans, is where we most directly focus our asset management efforts today. Reflecting the credit migration in the portfolio and continued pressure from higher rates, we increased our CSR reserves by $115 million in the fourth quarter and $250 million throughout 2023 to $592 million at year-end.
On the other hand, we retained nearly $100 million of excess earnings throughout the year, so our book value declined by only 3%, notwithstanding this substantial increase in our reserves. In closing, BXMT’s business model continues to deliver resilient results during a period of greater uncertainty and pressure for commercial real estate investors. Our balance sheet held firm, our earnings remained strong, and while the pressures of the rate environment weighed on credit performance, the overall impact of book value and dividend coverage was manageable. With a well-structured balance sheet and near-record liquidity, we entered 2024 on strong footing to maximize value for our stockholders. Thank you for joining the call. I will now ask the operator to open the call to questions.
Operator: Thank you. [Operator Instructions] We’ll go first to Steve DeLaney with JMP.
Steve DeLaney: Good morning, everyone. Thanks for taking the question. Appreciate the update on credit. Could I just confirm that currently, as far as real estate owned, that there is no REO on the books as of year-end 23? Is that correct?
Anthony Marone: That’s correct.
Steve DeLaney: Okay. And, Tony, in your comments, you were talking about, you gave us some information about realized losses, $70 million to $80 million. Just from an analyst’s standpoint of projecting, would you suggest we just split that in half as far as in terms of our DE, distributable earnings? Would it make sense to you if we just split it in half over the first and second quarter of the year?
Anthony Marone: I think that’s a reasonable assumption. It’s hard to predict when you’re talking about a handful of discrete events. More could land in the first quarter, more could land in the second quarter. So, I think if you want to just split the baby, that’s probably reasonable.
Operator: We’ll go next to Sarah Barcomb with BTIG.
Sarah Barcomb: Hey, everyone. Thanks for taking the question. So, we obviously saw a significant dividend reset last week from one of your peers. I was just hoping you could talk about your go-forward expectations for interest income in the context of both your income covenant and your dividend coverage. You’ve obviously highlighted that sponsors are coming to the table, they’re buying new rate caps. The multi-family portfolio is performing quite well. But we’re still seeing some pressure on net interest margin, and it looks like the performing portfolio came down from 95% to 93%. We also, we’re going to see some REO potentially here. So, with all that said, I’m just hoping for some more detail on your expectations for go-forward earnings. Should we be modelling further contraction and pressure from NPLs, or how should we think about that?
Katie Keenan: Sure. So, I think just to level set, we covered our dividend by 123% over the year and 111% in the fourth quarter. And as we went into in some detail, we think our fourth quarter earnings are encumbered by about $0.10 to $0.15 from non-accruals and excess liquidity. So, those will both be gradual, but they provide a tailwind over time. I think as far as REO, that loan is already on non-accruals, so there’s no incremental impact from taking that loan from cost recovery or impairment to REO. And I think that as we look at the overall portfolio, the 95% going to 93%, I think Tony laid out sort of where we’re focused as far as the watch list. The overall impact is pretty manageable. The other big picture factor is obviously rates.
And I think we’re all watching what will happen with rates, but while lower rates could impact income, they also alleviate credit pressure and potentially accelerate some of these impaired asset resolutions. So, they provide a bit of a natural hedge. So, we look at the dividend on a long-term basis. We’re thinking about our current income levels, where we see the potential for resolutions and incremental investments, and obviously sort of how we get there along the way. And I think that that’s the big picture view of how we’re looking at it.
