KKR Real Estate Finance Fideicomiso Inc. (NYSE:CREF) First Quarter 2023 Earnings Conference Call April 25, 2023 10:00 AM m, eastern time
company participants
Jack Switala - IR
Matt Salem-CEO
Patrick Mattson - President and COO
Kendra Decious - CFO
Conference call participants
Don Fandetti - Wells Fargo
Stephen's Laws - Raymond James
Sarah Barcomb-BTIG
Jade Rahmani - KBW
Steve Delaney - JMP Effects
Rick Shane - JPMorgan
operator
Good morning, and welcome to the KKR Real Estate Finance Trust Inc. First Quarter 2023 Financial Results Conference Call. [Instructions to Trader] Please note that this event is being recorded.
Now he would turn the conference over to Jack Switala. Please continue.
Jack Swatala
Awesome. Thank you, trader, and welcome to the KKR Real Estate Finance Trust earnings call for Q1 2023. As the trader said, this is Jack Switala. I'm joined today by our CEO, Matt Salem; our president and COO, Patrick Mattson; and our CFO, Kendra Decious.
I would like to remind everyone that during the call we will refer to certain non-GAAP financial measures that are aligned with the GAAP numbers in our earnings release and supplemental presentation, which are available in the Investor Relations section of our website. . This call will also contain certain forward-looking statements, which are not guarantees of future events or performance. Please see our most recently filed 10-Q for precautionary factors associated with these statements.
Before I turn the call over to Matt, I'll briefly summarize our results. For the first quarter of 2023, we report GAAP net income of $30.8 million or negative $0.45 per diluted share, including a CECL provision of $60.5 million or $0.88 per diluted share. Distributable earnings for the quarter were $33.1 million, or $0.48 per share.
Book value per share as of March 31, 2023 was $17.16, 4.7% less than the prior quarter. Our CECL allowance increased from $1.61 per share to $2.48 per share last quarter. The increase was mainly due to additional reserves for two office loans with a risk score of 5, where the sponsors have started sales processes for the properties, as well as increasedmarket volatility, uncertainty and reduced liquidity, particularly in the office sector.
Finally, in March we paid a cash dividend of $0.43 per common share compared to the first quarter. Based on yesterday's closing price, the dividend reflects an annualized yield of 15.5%.
With that being said, I would now like to turn the call over to Matt.
Matt Salem
Thanks Jack. Good morning, and thanks for joining us today.
KREF delivered strong distributable earnings this quarter of $0.48 per share versus our dividend of $0.43 per share, as our 100% floating rate portfolio continues to benefit from the high interest rate environment.
As you've heard us say over the years, we've been very focused on our liability and liquidity structure. This approach has resulted in the best non-market financing and very high liquidity levels. Given the current market dynamics, maintaining KREF's defensive stance remains our main focus today.
Rising interest rates and recession risks continue to weigh on real estate transaction volumes and valuations. As of last summer, the banks in the largest money centers were largely inactive. And since our last earnings call, we've seen two major regional bank failures.
While KREF does not have funding or direct exposure to regional banks, we expect this to lead to a tightening of credit conditions as regional banks take a more conservative stance and regulators increase supervision. The expectation of tighter credit conditions has weighed heavily on non-bank financial institutions and has created a narrative around already declining property valuations.
In our own portfolio, the focus of our asset management is on our loans collateralized by office buildings. We increased our reserves this quarter and added two more office loans to our watch list with a risk score of 4. The office sector continues to struggle with limited liquidity and significantly lower values. Given KREF's high liquidity, we have taken a proactive approach to resolving our identified loans with our sponsors.
Our approach was straightforward, leveraging all of KKR's resources to optimize results. But to be clear, we're not going to kick the can down the road. When we find reasonable liquidity and valuations, we will execute trades. However, we are not forced sellers. So if liquidity is low, we take ownership and manage the property on a lower basis. Patrick will explain our watchlist updates later in the conversation.
As we indicated last quarter, we expect portfolio turnover to be modest in 2023. In the first quarter, we received $87 million in loan payments and financed $204 million in loans previously closed in prior quarters or a net increase of $117 million. Our portfolio is defensively built with an emphasis on resilient real estate segments of the market.
At the end of the quarter, nearly 60% of our portfolio consisted of commercial and multi-family residential properties. We are not taking any new loans this quarter because we want to maintain our strong liquidity position. Our partnership with our manager, KKR, and the power of our real estate platform allow us to stay ahead of the curve in today's work environment. We have a dedicated team of approximately 60 real estate investment professionals.
In addition to KREF, we actively borrow for our bank and insurance SMAs and for our Private Debt Fund. This diversified capital base allows us to remain active in the market and maintain strong client relationships. As a result of our defensive stance, KREF was one of the first mortgage REITs to start lending during COVID, and we believe we are well-equipped to use a similar playbook when the market stabilizes.
Also of note is our manager's long-term holding of 10 million shares in the company or approximately 14% of KREF shares outstanding today. We believe this is the highest percentage of ownership by a servicer in the REIT mortgage industry and demonstrates significant alignment between KKR and KREF.
As I mentioned earlier, we operated KREF with high levels of liquidity at nearly $1 billion as of March 31, including $254 million in cash and our $610 million trade revolver, which was unused at quarter end. As we've discussed in prior quarters, we've added more than $4 billion in additional unmarked-to-market capacity over the past two years with the support of the KKR Capital Markets team.
About $2.5 billion was added in 2022, 2/3 of which was done on a truly bespoke basis with financing providers like foreign banks and insurance companies and away from public capital market sources. 76% of our secured financing at the end of the first quarter of 2023 was not in line with the market and was diversified across a number of facilities, with the remaining 24% being valued solely on credit.
With that, I'll turn the call over to Patrick.
patrick matson
thank you Good morning everyone.
I will focus today on our liquidity and capital efforts. But first, let me give you an update on our CECL watch list and reserve loans. This quarter, we recorded a $60 million increase in our CECL reserve for a total reserve of $172 million or 224 basis points of our loan principal balance. Just over half of our total CECL reserve remains in the two office loans with a rating of 5. At the end of the quarter, we have a total of 7 loans on the watch list.
As we described above, we made a change to a Philadelphia office loan earlier this year and then removed it from the watch list this quarter as expected. During the quarter, we downgraded two office loans to a risk rating of 4. And, consistent with prior quarters, we highlighted those loans in our additional revenue.
With respect to our two 5-rated office loans in Minneapolis and Philadelphia, the respective sponsors have begun the processes of selling the properties and we increased our reserves this quarter to reflect further weakness in the office sector.
As Matt mentioned, we will evaluate the prices and determine the right path to take with the option to sell or own and manage the properties ourselves. In any case, we expect some resolution for both assets in the coming months.
The two new watch list loans are backed by properties in two of the most challenged office markets, Washington D.C. and Chicago. With that being said, both properties have been experiencing positive rental momentum recently. The larger of the two, the DC loan is backed by a well-located Class A office near Dupont Circle and is 84% leased after two recent leases.
The Chicago property is also a Class A asset and is in the Central Loop submarket. After some known vacancy rates, along with 83,000 sf of recent rental, the property is currently 70% rented. Of the 14 office loans in our portfolio, eight loans, representing half of the outstanding principal balance, have a risk rating of 3.
This segment of our office loan portfolio is 89% Class A and 91% leased with a weighted average debt yield of 8.3% and an average remaining weighted average lease term of 8.8 years. The average risk rating of the company's broader portfolio was 3.2, in line with year-end. 87% of our portfolio has a risk rating of 3 and we collect 100% of the interest payments scheduled for the entire portfolio in the first quarter until the April payment date.
A key differentiator for KREF, especially in times of capital market volatility, is the way we finance our senior loan portfolio. At the end of the quarter, our diversified funding sources were $9 billion, with $2.7 billion of unused capacity. 76% of the outstanding financing is totally without market value and the remaining balance is valued only on credit.
KREF is distinguished by the diversity and resiliency of these resources, which include not only two managed CRE CLOs, but also multiple custom financing lines backed by a number of financial partners. We do not depend on a type of financing without excessive exposure in any of these categories.
Additionally, in the first quarter, we extended a two-year $600 million repurchase facility through December 2025 and a $500 million escrow facility through March 2026. In a challenging macroeconomic and banking environment, we were able to raise a total of $1.1 thousand million in financing over approximately 2.5 years between the two facilities.
KREF is well capitalized with a debt to equity ratio of 2.2x and a total leverage ratio of 4x at the end of the quarter. As of March 31, we had $254 million in cash and $610 million in unused commercial revolving capacity. In addition, we had $100 million in senior uncommitted and uncommitted loans, as well as underutilized capacity in our credit facilities, bringing our total liquidity position to nearly $1 billion.
As noted, we have cash on the balance sheet plus enough capacity in the revolver to retire our May 2023 convertibles due next month. After the convertible bond loan's maturity date and excluding equal-term secured funding, KREF has been debt-free for nearly 2.5 years.
Thanks for joining us today. Now we will be happy to answer your questions.
questions and answers session
operator
[Operator instructions] And the first question comes from Don Fandetti of Wells Fargo. Please continue.
don fandetti
Can you talk about the new 4 rated loans and what prompted you to change them? And then, I think, we're just looking at a scenario where you get a quarterly migration to the 4s and 5s. Why don't we create more reserves today, given the economic climate and office pressures?
Matt Salem
Don, I'm Matt. Thanks for participating. I can start to answer the first question about the new loans that we've moved to a risk score of 4. When you think about the overall exposure of the offices, it's certainly not our expectation that we're going to be around to see all of those loans migrate. And I think Patrick did a good job of summarizing why some of the loans that are still a trio within our office portfolio are well-leased, have long-term leases, and some of which are also in extremely strong markets, as well. from the perspective of the office.
So just when you start thinking about the transition and certainly not our expectations, we look at it every quarter and look at all the loans in the portfolio for changes, but there's a big component. About half of that right now, which we're still very comfortable with on the office side.
In terms of those of us that have transitioned, I think those 2 in particular are in some of the weaker markets for offices, obviously DC has the impact of the GSA and those tenant work-from-home policies. And Chicago is also a very weak market. And that was a big part of why they were transferred at the time, despite the leasing momentum that we've seen with those assets.
don fandetti
Gracias.
Matt Salem
Gracias.
operator
And the next question comes from Stephen Laws from Raymond James. Please continue.
bet esteban
Hello good morning. Matt or Patrick, can you comment on the reserve and how we should think about that split between the 5 and 4 versus maybe a general for the rest of the portfolio? And then when we read that kind of new. we read that sort of rough allocation, what valuation does that mean for the rated 5 asset versus the source valuation?
patrick matson
Stephen, good morning, this is Patrick. I'll take that question. So yeah, if you think about our 5, what we had indicated was about half of our total reservation, a little over half of our total reservation is allocated to that. And then if you just apply the math there, that means a loss on those loans in the range of 25% to 30% compared to those 5-rated loans. If you remove those loans from the portfolio and move them into our residual CECL, that's about 1% of all our remaining assets.
Now obviously there is some concentration with our 4 as they attract a higher booking than our active three. But I hope that gives you a sense of direction. Obviously, as assets go from four to five, we see an increase in our reserve and sort of an expectation of loss, and that is reflected in our reserve analysis.
bet esteban
That's useful. I appreciate that, Patrick, the comments there. With the many assets coming due specifically next month, I think, and maybe even applying a little more broadly to watch list loans. But how can you guide us through the process of determining what makes the most sense as an REO, how to find a new sponsor, maybe recap one of these offers and provide seller financing? How soon can you start those discussions before the due dates for these watch list issues? And maybe some color on how that process will play out for this handful of loans in the coming months.
Matt Salem
Certainly. It's Matt. I can handle that. Thanks again for the question, Esteban. So specifically for Minneapolis and the two 5-rated loans and also our Philadelphia assets, those are cases where the existing sponsor is doing a full sales process. And obviously we can make changes and grant short-term extensions to achieve those trades. And we can also provide the market with information about where we are willing to provide financing for the potential acquisition. So there's a lot of flexibility there.
In terms of how we think about the property versus potential sale and financing, we're doing a very detailed analysis similar to what the real estate team within KKR would do in terms of what the future looks like from a performance perspective, obviously taking take into account the current lease market environment and the type of improvement costs and lease fees and cap rates. So we're looking at all of that information to make a buy or buy or sell decision right now.
bet esteban
Awesome. Appreciate the color in that Matt. Thank you.
operator
And the next question is from Sarah Barcomb from BTIG. Please continue.
Sarah Barcomb
Hello, thank you all. So, as you discussed earlier, both KREF and its peers are playing defensive right now with regards to preserving liquidity, and although it did execute some quarterly funding earlier, it appears there were no new origins in the quarter. Can you talk about the offers you may have seen that didn't quite make it to the finish line and why they might not have seemed as attractive even with the spreads where they are now? Or was it primarily a function to maintain liquidity given the watch list migration? Thank you.
Matt Salem
Sara, I'm Matt. I can handle that. Thanks for the question. I think for KREF in particular it's more the last point of your question. It's really about maintaining liquidity until we get to a more normal market environment. So we weren't looking for a lot of new financing for the quarter. Of course, as we mentioned on the call, we have a larger home loan company here at KKR in addition to KREF. We borrow on behalf of banks. We take loans on behalf of insurance companies.
We have private debt funds that we lend to and all three are active in the lending market. We like the market. We find it attractive. And I think, despite some of the headlines that you can see, it's a fair and competitive market. And insurance companies are very active, foreign banks are very active, regional banks are very active.
So I would say pretty much everyone - all types of loans are still actively borrowing in the market, albeit on a lower basis because values have gone down and the market is a little more conservative so LTVs are low. So we think it's a pretty attractive overall credit market right now. And of course, if things stabilize, we expect KREF to be one of the first to start lending again within the mortgage REIT segment.
Sarah Barcomb
Awesome. Thank you. And another quick. So he talked about how the remaining office book, that segment with 3 ratings, 90% Class A, 90% rented. Are there indicators of upcoming lease expirations that investors should be aware of? Or any other signs that you think there may be increasing NOI risk at the ownership level of that segment?
Matt Salem
I mean, these are, just given the, I think we call it the middle wealth, which therefore, for the most part, these are very well rented for quite a long time. But some of them are multi-tenant and have. I'm sure there's a lease expiring any time soon, but nothing I can think of in terms of one that we're focusing on primarily from a re-lease perspective.
Sarah Barcomb
Well. Thank you. That's it for me.
operator
And the next question is from KBW's Jade Rahmani. Please continue.
Jade Rahmani
Thank you. Starting with the CECL reserve, it looks like you've taken significant reserves on loans with clear risk rating 5. The loans at risk 4, some calculations I was doing, assuming 50% to 75% of the $60 million provision of this quarter would imply a loss of 10% to 15%. That surprised me, since those are less than 60% LTV. But then address your comment about CECL's residual reserve of 1%. I mean, that's well below the bank's reserve levels in its CRE portfolio. Just two examples, USB at 2.5% and Wells Fargo at 1.76%. Can you comment on the overall adequacy of the reservation and how you feel about it?
patrick matson
Jay, I'm Patrick. I'll take that. So yeah, in terms of, I think, the last part of his question, I think it really reflects where we would see ourselves in this progression. Obviously with the asset earlier this year where we had a realized loss, as you pointed out, we have higher losses on these 5 qualifying loans.
When we start to wind down that book, we would expect to hit a more normalized number of losses. Think about what that portfolio looks like, also when you start to remove some of those office assets, we're already 60% multi-family and industrial, remove the office component or a good chunk of it, and that's a pretty significant percentage of our whole book. .
I think in terms of the change this quarter, obviously a lot of it, as we said, was in these 5-rated assets. But the 3- and 4-rated assets saw an increase, and I think this is just a reflection of a market that has continued to deteriorate since the fourth quarter. And so those losses or reserves of losses continued. So right now, we feel like we're reserved enough in the portfolio. Of course, we will continue to evaluate the next quarter and we will make the necessary adjustments. But right now, we feel like we're at the right level.
Jade Rahmani
Regarding the office portfolio, you mentioned some statistics on the eight risk 3 loans. Those seem pretty committed to the current market or fully leased to it. Bond yields appear to be somewhat close to office capitalization given the uncertainty surrounding secular changes there. So what is the outlook for the performance of those deals? Do you expect further deterioration? Just wanted to mention that there's another DC office loan in that 3 risk portfolio. The Plano, Texas deal also came just before COVID. And finally, if you could call Bellevue, Washington, that would seem like a great construction loan. I think Amazon is the main tenant there. What are the prospects there, since Seattle has a lot to offer?
Matt Salem
Sure Jade. It's Matt. I can take that. So this only works the other way around. I think you dismissed some of those offers. But if you think about that construction loan, he said in Bellevue, Washington, he identified the tenant there as Amazon, obviously very strong credit and they have a lease, a signed 16-year lease on that property.
So I think we feel good about the prospects for that particular deal, given the lease term and the strength of the tenants, they're going to actively build that space, and we expect them to occupy it. So that would be the Amazon Plano deal. That is an asset that has been done extremely well.
We really like the Dallas market. In fact, we have a couple of other assets in the portfolio in Dallas that are a little bit closer to the rental and uptown of Preston Center. But all 3, I would say, have seen very strong lease rates and leasing momentum. And that's why... and that deal also has some long-term leases. So I think that's why we stayed, we stayed at three, and we continue to have confidence in that asset.
And the office market in D.C. it's definitely a tough market. That's two of our loans, our fully qualified loans are in D.C. Again, I mentioned the GSA comment above. But that particular asset that you highlight is still a three because we have a very long weighted average remaining lease term to the US government.
So we feel good about the credit. And we've got plenty of length there, decent debt yield as well. So every deal is going to be a little bit different, but a lot of how we charge for this obviously is what the cash flow is and how sustainable is that for how long. And those, I think in all three of us we have quite long, very long leases.
Jade Rahmani
And what do you think of that, if only the return on debt is close to the capitalization of the office?
Matt Salem
Well, I mean, certainly, we've seen the leverage, our implicit leverage on these loans, as well as we've seen the widening, as you mentioned, of these cap rates, not just for the office but for everything, given the environment of the interest rate, obviously sharper in the office, sure. But when we look at our values, when we revalue assets and do a lot of work on a quarterly basis to understand where we think the value is in each individual deal. Certainly looking at these 3-rated loans, we don't think we're above asset value at any point.
Jade Rahmani
Gracias.
Matt Salem
Thanks Jade.
operator
And the next question is from Steve Delaney of JMP Securities. Please continue.
steve delaney
Thank you. Hello, everyone. And thanks for answering my questions. So I guess I'll give you a break from the office chatter. The West Hollywood multi-family home, $2.8 million per unit, is clearly a good asset. Can you give us some insight into what's going on, on the ground, in terms of the attractiveness of the project or the units? And are there any circumstances related to homelessness or crime that could affect that property?
Matt Salem
Yes. I can answer that. And Steve, thanks for the question. Kill again. So that, you're right. It is a relatively high loan amount per pound. And that's because it's basically the best-in-class trophy asset on the market. It was built for the sale of apartments. So it's a very nice project. It is well located, does not care at all about crime or homelessness. But I think it's very well located. And we had moved it to four because we were in some change discussions with that particular sponsor about an interest rate cap. So this is not necessarily an asset or stock issue, and we hope to resolve it here soon.
steve delaney
Understood. It sounds more technical than fundamental. So thank you for that color. Just for your training in the Philadelphia office loan. Just to confirm, its junior mezz or I think we want to call them hope notes. There's no book value for that on your books right now, right? Do you use that?
Kendra Decio
Steve, I'm Kendra. That's right. That was written out entirely of the $25 million in the senior mezz.
steve delaney
Well. Understood. So would he be clearly below the senior mezz put up by the sponsor?
Matt Salem
That's how it is. The new money coming in improves that.
steve delaney
Yes, good. Awesome. And then if you could, on the loans that are rated 4, we would have to assume that the four loans, the fact that it's still four and not five, do you accrue interest or does the borrower pay interest on those loans on a monthly and quarterly basis?
Kendra Decio
Yes. So Steve, Kendra again. On loans with a score of 5, we are still current. Sponsors still pay us interest every quarter. As you will see in the financial statements, we have broken-even both loans. So as you know, that means the interest doesn't go through the interest income line. It's actually held at the book value of the loan until there's resolution or until we believe there are indicators that we can go ahead and start taking that interest income again.
I can tell you that the interest accrued on the two 5 rated loans, the interest income is about $7 million per quarter. And on a quarter-over-quarter basis, because we faltered a bit when the two loans didn't go up. The difference in quarter-over-quarter interest income from the fourth quarter to the first quarter was approximately $3 million. And you'll see another $3 million spent on cost recovery in the second quarter. And then it's at that point, it stabilizes on those loans.
steve delaney
Well. Thank you. My apologies Kendra no because I actually asked about the 4 rated loans and the ---
Kendra Decio
I'm sorry.
steve delaney
No, no, I probably didn't make it clear, it's not a big deal, but I just wanted to assume for Kendra that loans rated at 5 each would be a special situation. But as far as the 4 rating, I just wanted to confirm that this is all interest or borrowers paying interest one way or another.
Kendra Decio
That is, complete things are correct, grow and receive.
steve delaney
Well, thank you very much everyone. Appreciate the conversation.
Kendra Decio
Gracias.
operator
Thank you. [Trader Instructions] The next question is from Rick Shane of JPMorgan. Please continue.
rick shane
Thank you all for answering my questions this morning. Look, I want to talk a little bit about capital allocation. The dividend yield is now in its mid-teens. To support the dividend in accounting terms, you need to generate an ROE of north of 10%, which is a pretty high return even in this high-rate environment. At the same time, the stock is trading at a significant discount to its book value. Does it make sense to earmark a portion of the distribution or return of capital to shareholders, cut dividends, and be more aggressive in share buybacks?
patrick matson
Thanks Rick. I appreciate the question. Matt, I can handle that. Just as far as the dividend and hedging, I think you asked about that. Obviously this quarter, as we've seen in recent quarters.
And if we look a little further ahead, we're really benefiting from the current interest rate environment. And so this quarter we easily hedged the dividend of $0.48 per share of distributable earnings versus the $0.43 payout. And so, I think we feel good about the earning power of the business based just on operating profit. And that's probably the biggest consideration when we start thinking about the dividend.
rick shane
But yeah, I mean, I get it. But if we think about the reserves and the implication that the reserves will manifest in depreciation. And then there's this... there's a distributable income accounting story that distributable income is the basis for the dividend and it's not and it's affected by depreciation, not provisions. But over time, the accounting also suggests that distributable earnings and GAAP income should converge. And that will probably happen in the second half of this year. And so you can end up in a situation where the distributable profit is below the dividend. Why not get ahead of that and also give yourself the opportunity to buy the shares at this discount?
patrick matson
Yes. I mean, let me talk about the share buyback. I think we've been pretty consistent in terms of, certainly relative to the set of peers in repurchasing shares when we thought it was attractive. I definitely think the stock is attractive right now. We have weighted liquidity a bit more given what is happening in the banking industry and the general volatility of the market, and I think we will continue to prioritize liquidity here in the near term.
And I understand the math that you're thinking about in regards to what is the sustainable earnings power of the company. And certainly if we thought that would drop significantly and we wouldn't be able to sustain the dividend, we would look at that. And, of course, the dividend is a board-level decision.
But right now, from what we're seeing with the existing portfolio, with the current interest rate environment, and even thinking about the curve going forward, which is obviously flattening a little bit towards the end of the year. We don't see what you're describing in terms of the earning power of the company at this point. So again, if it starts to happen or manifest, then it would be something we should evaluate, but not in our current projection, it's not what we're seeing.
rick shane
Understood. Fair and square. And look, after all, having too much liquidity is a situation that you can quickly remedy, as choosing not to have enough liquidity is much more difficult to resolve quickly.
patrick matson
100% agree.
rick shane
Thanks guys.
patrick matson
gracias
operator
And the next question is a follow-up question from KBW's Jade Rahmani. Please continue.
Jade Rahmani
Thanks for following up. In terms of liquidity, how do you feel about the dynamics there after conversion redemption? That will obviously reduce your cash. Is there any good news in the portfolio in terms of deals that have worked very well in your business plan that you hope to pay off or sell, things of that nature, refinanced that would create liquidity or maybe it's…those the deals are getting more agile?
Matt Salem
Yes, Jade, I'm Matt. I can handle that. Like us, I would say, we expect to get full refunds in our portfolio this year, even though the first quarter was a light year, a light quarter of the refunds. If you look at what we have in our portfolio, our largest property type is of course multi-family homes.
And if they stabilize, I can guarantee you that we are not the most efficient financing for a stabilized multi-family home, especially given the lending institutions in the market today and where we see insurance companies borrow while we compete against them with our insurance capital, et cetera. .
So there is plenty of liquidity for the preferred asset classes right now. It really is a tale of two cities in terms of haves and have-nots, with the office clearly siding with the have-nots. But I think we will get quite a few bailouts over the course of the next few quarters, which will increase liquidity. And of course there are also opportunities for us in the capital market. So, but right now, with the conversion, it's obviously a small, just $144 million, a small slice of the overall capital structure. So like you said, we have cash to pay for that.
Jade Rahmani
And what capital market opportunities do you think would be interesting? Is there an opportunity to issue a CLO with very low leverage and a very high return guarantee? Or is there an opportunity to take your best assets, sell A-bonds to the insurance company, do affiliate transactions, shares and the like?
Matt Salem
I mean, the securitization market is open. So if we wanted to go down that road, I think we certainly could. I don't think that's a route that we would explore at this point because we have our existing CLO facilities that are still in the reinvestment period and are quite attractively priced.
So I don't think we need one that new. I think it would be more like a company, sort of a commercial financing opportunity for us, more options for us. And we could certainly consider selling some of the existing loan portfolio. I don't think we need to cut him notes. I think we could sell part of the entire loan.
And, but again, we're not, I don't think we're in this scenario right now that we're in, we need that level of liquidity. So right now, we're enjoying the higher gains a little bit. We have a lot of liquidity. I mean, we have almost a billion dollars in liquidity. So it's not something we're actively pursuing. But if the market was open and we had an attractive option, we could go that route.
Jade Rahmani
Just to go on, would that presumably be a preference or maybe another convert?
Matt Salem
Yeah. I mean, you've seen what we've done in the past, right? So we made preferences. We have made converts. We made a Bs Term Loan. Those... one of those three options that we would consider.
Jade Rahmani
Gracias.
Matt Salem
Thanks Jade.
operator
And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference over to Jack Switala for any closing comments.
Jack Swatala
Awesome. Thank you, operator, and thank you all for joining us this morning. Please contact me or the team here if you have any questions. Greetings.
operator
The conference has already ended. Thank you for attending today's presentation. You can now disconnect.