Anthony Marone: Also, you asked for covenants. We are in compliance with our covenants, and that’s not something that we’re worried about in the near term.
Sarah Barcomb: Okay, great. And then just as a follow-up, in the presentation, you gave some great disclosure on sponsored decision-making in the context of the amount of SOFR caps they purchased in 2023. Looks like those are around a 3.7% strike today. Could you give us an idea of the total cost of those SOFR caps? What did those look like in Q4? How are they shaking out for upcoming maturities? I’m just trying to get a handle on the capital need for your sponsors in the near term here as those rate caps come due.
Katie Keenan: Yes. I mean, I think when you look ahead, the caps, as we provided in the disclosure, they weren’t a real issue in 2023 when rates were going up, and now rates are obviously moving in the other direction and the cost to replace caps are cheaper. I think that when we think about it from the sponsor perspective, the caps are not really a deciding factor. They’re a marginal cost relative to the substantial equity sponsors have in their deals, and it’s effectively just prepaying interest for a year. So, the overall cost of the caps is a factor of where a sponsor buys the strike price on the caps relative to where the base rate is at that time. And so with base rates coming down into the fours, the weighted average cap rate or sort of strike of the caps in the portfolio today is 3.3%.
So, you’re thinking about a 100 basis point sort of magnitude of differential based on sort of weighted average SOFR on the curve and where the caps are today. The cost really isn’t that meaningful, I think, to these sponsors. And as we saw in 2023, the vast majority of them renewed and it wasn’t a real decision point.
Operator: Thank you. We’ll go next to Doug Harter with UBS.
Douglas Harter: Thanks. How are you thinking about ’24 maturities and I guess how would you expect the outcomes for ’24 to look relative to kind of how they looked in ’23?
Katie Keenan: Yes. So, we look ahead at the portfolio and I think that looking at the ’24 maturities, you can see we put some loans on the watch list. That’s really a factor of looking ahead at what we expect. But overall, we have pretty good visibility on the ’24 maturities. We’ve obviously addressed a lot of the watch list loans so far this year. 50% of the watch list we have modified with substantial new equity. There’s a couple more that we’ve moved and that we’re watching, we’re working on. But when we look at the overall scope of the final maturities in 2024, we think we’ve identified where the more challenging conversations should be in the majority of those we have visibility on. And we can see it in our risk ratings, one to three risk ratings, 81% of the overall portfolio. And I think in terms of the performance and our expectations of how those maturities will play out, that’s reflected in the risk rating.
Douglas Harter: Great. And then Tony, did you say how much that will be kind of repaid or how much capital is freed up with the resolution of those four loans?
Anthony Marone: I did not give a specific data point. What I would focus on is the earnings impact. I mean, there will be some liquidity that we’ll pick up from those repayments, being able to repay some debt. But what I would focus on is the earnings impact of unlocking the trapped earnings that we’re going to have in those deals.
Douglas Harter: And I guess, does that earnings come from putting that money back to work or is it immediate once you’ve resolved?
Anthony Marone: It’s immediate once you resolve and repay the debt. So you’ll pick up $0.01 or $0.02 from repaying the debt. And then if we redeploy that, then you’d have further upside from there. But just the repayment of the debt has.
Operator: We’ll go next to Don Fandetti with Wells Fargo.
Donald Fandetti: Can you talk a little bit about the Q1 resolutions? I think you’d mentioned there were four loans resolved. How were those resolved for those property sales, repayments?
Katie Keenan: Yes, absolutely. So as I mentioned, we have one loan that we already sold. We carried that asset unlevered. That was our Upper West Side Rent Stabilized Multifamily Asset, which we sold earlier this quarter. We have two others that are under hard contract for sale. One of those will be a full sale. The other will take back some seller financing at a much more rational level with new equity coming in. And then the fourth is a restructure with one of our borrowers where we’re bringing new equity at a reset basis at a rational anode level where the loan will be performing at an anode level and covering. So it’s really a whole variety. And I think it’s a great example of the fact that we bring a customized approach to each one of these impaired loans.
We have assets where we see a good, appropriate valuation level in the market and where we’re prepared to exit at those levels. Sometimes that’s a full sale. Sometimes if we like the asset with new equity coming in, we can stay in at a lower leverage level either as an anode or as financing on it. And then sometimes we’ll take a longer term approach. I think one of the biggest competitive advantages of running this business at Blackstone is we can look at all of these deals and think about what is the best way to maximize returns over time. Do we want to sell the assets today? Do we want to invest capital, implement a business plan, bring to bear all of our operational expertise? And we’re really taking that approach on a deal by deal basis and thinking about the best results.
But I think that having the option of all three of those or even more broad options is a real advantage. And I think the fact that we’re resolving four of our impaired loans, generally just at our reserves, is a real positive in terms of looking at moving forward in the portfolio and freeing up earnings on those deals.
Donald Fandetti: Got it. What’s the sort of tone, Katie, in office in general? I mean, obviously still under significant pressure. I mean, are you seeing any signs of capital coming in, financing availability, or is it still, continues to be very difficult?
Katie Keenan: Yes. I think it’s interesting. I mean, obviously the bifurcation is really continuing. You’ve got, the older vintage, more challenged assets, certain markets like San Francisco where we continue to see real challenge. But I think that, as we’ve seen over the last year in terms of fundamental performance, and also we’re now seeing it in the capital markets, the high quality trophy assets are, they’re really continuing to show performance both on leasing occupancy as well as on the capital markets. just by way of data point, trophy CMBS capital structures today are 50 bps to 75 basis points tighter on spreads than they were three or four months ago. You can obviously see it in the office read stocks. And there’s been a lot of news about capital formation coming into this space.
So I think that it’s pretty clear that there is a segment of the office market that is going to work going forward and pricing is starting to reflect that, as we’ve talked about in the past, the vast majority of our office portfolio is newer build. We have a lot of new construction assets, new build assets and Hudson yards, et cetera. And so I think that, the capital markets are coming around to the value and the investability of those assets. And I think that, the market’s getting a little bit more rational.
Operator: We’ll go next to Stephen Laws with Raymond James.
Stephen Laws: Hi, good morning. First question. I’d like to follow up on the, on the cap. Can you provide a little additional color on the weighted average duration of the caps? And I know you said 97% of performing loans have a cap kind of, when do we think about the expiration of those?
Katie Keenan: Yes. So, the caps, the way the caps are structured are generally co-terminus with, the initial term of the loan and then the extension test. So, we’re going to expect to see that, the caps will continue to roll in similar magnitude to the $15 billion of caps that we saw roll this year. And I think, as I mentioned, I think we expect to continue to see, a similar result. So, the vast majority obviously of the caps that rolled this year were replaced. we, we look forward and, and don’t see any real change to that other than the fact that rates are coming down. And so the overall cost differential is, is going to be less. The average caps are, as I mentioned, 3.3% in terms of, the, the cap expiration and, and that’s for the 2024 rolls. And so, look at that relative to where SOFR is and other base rates, it feels quite manageable.
Stephen Laws: Great. Appreciate the color there, Katie. And as a follow-up, you talked about new origination starting to sort of pass the test, I guess, to, to use some liquidity. How do you think about the right time to do that? Is it, is it looking at leverage? Is it based on these resolutions in the first half? Is it more of an adjusted leverage adding back just the general or maybe the total reserve? How do you think about the right amount of liquidity, the right size of, of the balance sheet with respect to, to doing some new originations as we move through the year?
Katie Keenan: Yes, well, I think a big part of it comes down to the investment opportunity. And I think right now is a really compelling time to be a lender. You have a competitive environment that is much more favorable, banks pulling back. You also have fundamentals, which we see on the ground improving. And yet, as is obvious from the last week, you have real volatility and sort of real pockets where we think we can make interesting risk-adjusted returns. So, we feel that now is a really compelling moment to be a lender in our space. And of course, we’re also looking at the balance sheet liquidity leverage. We have plenty of liquidity. We have plenty of, capacity in terms of our facilities. We also have various ways we can finance these deals, how we can participate.
