Q4 2023 Bridge Investment Group Holdings Inc Earnings Call

Participants

Bonni Rosen; Head, Shareholder Relations; Bridge Investment Group Holdings Inc

Jonathan Slager; CEO; Bridge Investment Group Holdings Inc

Katie Elsnab; CFO; Bridge Investment Group Holdings Inc

Trauma McCoy; Analyst; Morgan Stanley.

Finian O'Shea; Analyst; Wells Fargo Securities

Ken Worthington; Analyst; J.P. Morgan

Adam Beatty; Analyst; UBS

Bill Katz; Analyst; PD. Cowan

Presentation

Operator

Greetings. And welcome to the Brit Investment Group, 4Q 23 and full year 2023 earnings call time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bonni Rosen, Director of Shareholder Relations. Thank you, Bonnie, you may begin.

Bonni Rosen

Good morning, everyone. Welcome to the Boyd Investment Group conference call to review our fourth quarter and full year 2023 financial results.
Prepared remarks include comments from our Executive Chairman, Robert Morris, Chief Executive Officer, Jonathan Slager, and Chief Financial Officer, Katie Eldon, and we will hold a Q&A session. Following the prepared remarks, I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside the firm's control and may differ materially from actual results, and we do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our Form 10-K.
During the call, we will also discuss certain non-GAAP financial metrics. A reconciliation of the non-GAAP metrics are provided in the appendix of our supplemental slides that supplemental materials are accessible on our IR website at ir dot bridge IG.com.
These slides can be found under the Presentations portion of the site, along with the fourth-quarter earnings call event link. They are also available live during the webcast, I will present our GAAP metrics, and Katie will review and analyze our non-GAAP data. We reported GAAP net income to the company for the fourth quarter of 2023 of approximately $700,000 on a basic and diluted basis, net loss attributable to bridge per share of Class A. common stock was [$0.20], mostly due to changes in noncash items. Distributable earnings of the operating company were $25.3 million, or $0.14 per share after tax and our Board of Directors declared a dividend of $0.07 per share, which will be paid to shareholders of record as of March eighth.
It is now my pleasure to turn the call over to Bob.

Thank you, Bonnie, and good morning to all. Despite difficult fourth quarter results impacted by low transaction volumes as asset prices continued to reset and modest year-end capital raising activity. Weightage continues to have a resilient business with a distinctive competence in targeted real estate credit and secondary strategies. Even with challenging financial results for the fourth quarter, our yearly results and outlook for 2024. Present a brighter perspective. On a general basis, projected growth for alternatives broadly defined remains strong. The bridge brand continues to grow globally and the discipline we practiced in 2023 serves us well as a patient and capable steward of capital financially. For the full year, our fee earning AUM increased 25% year over year to $21.7 billion and recurring management fees increased 18% to $228 million.
Federal Reserve's recent actions and announcements, including an appearance by Jay Powell and 60 Minutes highlight how 2024 should represent a pivot point to interest rate cuts, which in our view, has meaningfully positive implications for real assets transaction markets and the broader private markets ecosystem. While rates may be slow to decline, they are likely headed in a more constructive direction.
With respect to asset price, a departure from the past 18 months. We believe our patience over the last couple of years has been warranted and rewarded and further believe that now is the time to lean in on attractive valuations as an example, we are seeing quality value add residential rental assets, in some cases priced at six plus percent cap rates as difficult as cap rate expansion has been in our portfolios. This has been meaningfully offset by improved operating metrics.
Today, we believe the generational opportunity to acquire at attractive entry prices is compelling. While transaction volumes broadly have not yet recovered we are seeing signs of optimism with bid, ask spreads narrowing and several reluctance giving way to seller capitulation with $3.4 billion of dry powder, we believe now is the time to start wading back into the water. Our recently published 2024 outlook called navigating the curve, outlines our perspective and provides details on why we feel so strongly about investing in the areas where Bridg has developed distinctive competencies.
We see this cycle of opportunities across many sectors of real estate, equity, private credit and private equity secondaries. With this as a backdrop, bridges selected areas of focus, residential rental logistics, private real estate credit and secondaries are poised to outperform.
First, the residential rental sector, a core area of Woodbridge continues to experience robust long-term secular growth drivers. The interplay between chronically low supply growth and durable demographic tailwinds has created a persistent imbalance that is expected to propel rent growth while certain markets experienced overbuilding during the pandemic. Near term, supply pipelines have begun to wane due to higher development costs and lower availability of construction debt and equity capital with the long-term investment thesis intact in residential rental housing.
Our platforms and strategies have a generational opportunity to capitalize on cyclically lower asset values with the ability to further drive above average returns from select distressed situations. Of course, navigating markets, submarkets, asset characteristics and other criteria is neither easy nor straightforward and optimizing what acquires or develops takes, focus and expertise.
Our specialized teams bring these capabilities to every transaction from first look to final disposition in real estate credit, we are equally bullish. We see continued demand through real estate credit in an increasingly bifurcated marketplace. We draw and local bank lenders are effectively out of the markets. Jpmorgan's Jamie Dimon has stated that private debt funds should be quote dancing in the streets close, quote.
And although we are showing some more restraint. We see enormous opportunity to provide critical capital to asset owners at pricing terms and covenants that are attractive with the market options narrowed for borrowers, private credit providers like Bridger at a prime position to be selective, attracting high-quality borrowers under favorable terms. Our historical focus on residential rental lending has the added benefit of strong collateral to protect principle logistics real estate strategies continue to see strong fundamentals. The sector has experienced robust demand tailwinds over the past decade, and we anticipate these will persist with sustained e-commerce growth, global trade alignment, onshoring and the growth in business inventories. Each of these factors highlight the need for logistics infrastructure across the U.S. over the next decade, given the sea change in interest rates with valuations down and increased pressures to create liquidity for some asset owners. We anticipate seeing an increased opportunities for acquisitions at compelling discounts to replacement costs. Of course, like residential rental where one invest is critically important. We field on-the-ground teams in the most attractive markets, notably Southern California, New York, New Jersey, South Florida and Dallas Fort Worth.
And we source much of our deal flow off market. Similarly, our private equity secondaries business is also experiencing powerful tailwinds. The overall secondaries market is growing as private markets become increasingly dynamic and complex driving LP demand for sophisticated liquidity solutions surge in primary investment commitments over the past several years, along with a significant decrease in exit activity and distributions will create meaningful opportunities for the secondary market in the coming years.
Real estate capital raising was challenged in 2020 to reviewed for bridge and the industry in general, characterized by a reset of valuation parameters muted transaction activity and general market uncertainty against this backdrop, which raised $334 million of new capital in the fourth quarter and $1.6 billion for the full year 2023 for most of 2023. Our large flagship funds were in their investment periods and therefore, not actively fundraising.
This has changed for 2024 in the fourth quarter of 2023, we held an initial close for our latest debt strategies vehicle, and we will be actively fundraising for this vehicle throughout 2024 in addition, 2024 capital raising activities will include vehicles from our other four horsemen, including the next vintage of our acclaimed workforce at affordable housing strategy.
The continued marketing of the current vehicles in our Newbury partners' secondary strategy and the current vintage of our logistics value add strategy. Although these strategies will represent the bulk of capital raising focus, we have other attractive vehicles and initiatives to further drive our business and evolution. It wrapped up our 1st year with our secondaries team, and we're excited about the long-term prospects for this strategy 2023 for the strategy was largely focused on integrating new business under the bridge umbrella. We are seeing encouraging capital raising activity with repeat Newbury investors and expect 2024 to be successful for both fundraising and deployment factors.
Looking forward, we are seeing a major shift in sentiment from LPs looking to allocate capital in 2024 versus 2023. Our capital-raising teams are averaging 50 plus meetings per week, which is up materially from last year. In addition, this heightened level of client interaction has progressed LP. due diligence processes across multiple bridge products, including an increase in cross-selling activity. Based on the pipeline we see today, we expect the fundraising trend experienced in the fourth quarter to persist in the first quarter.
However, the high level of activity and constructive dialogue with LPs gives us confidence that inflows should improve over the course of the year. We have continued to invest in and expand our capital raising organization. We're adding sales coverage personnel based in Dubai to deepen our coverage in the Middle East and to enable more focus on Continental Europe and Scandinavia. We will continue to invest in capital raising both in international markets as well as in the US.
Over the last year, we added both senior and junior talent to focus on growing and servicing our large institutional and wealth platform coverage as well as to add true accredited investor retail coverage, one early 2024 bright spot, our wealth platform, which already accounts. Most of the major wealth management platforms is distributors has added yet another in the first quarter. This new relationship has added our current opportunities of vehicle to their client offering, and we're looking forward to pursuing the prospects of additional business with them in the future.
As we have discussed on previous earnings calls, we have been exploring ways to expand our retail capital raising efforts by making certain strategies accessible to accredited investors, thereby broadening our potential investor base. We launched an accredited investor focused product within our net lease industrial income strategy earlier this year. Since inception in 2021, the bridge net lease industrial income team has invested more than $700 million into industrial net lease properties, including sale leasebacks and built-to-suit development projects.
The combination of the attractiveness of the industrial sector, along with the consistent income generation and inflation hedging attributes, will be more attractive to this new constituency with household wealth estimated in excess of $50 trillion in North America alone and the allocations to alternatives less than 5%. The total addressable market is enormous and growing rapidly. We expect in the future to add additional retail vehicles, which offer specialized exposure to areas in which Bridge has demonstrated competitive expertise.
With that, I will turn the call over to John.

Jonathan Slager

Thank you, Bob, and good morning. In the fourth quarter, industry-wide commercial real estate transaction volumes remained at depressed levels as higher interest rates and volatility within the debt. Capital markets continued to weigh on activity for the latest Real Capital Analytics data industry transaction volume for 2023 was down 50% year-over-year.
The sharpest year-over-year decline since 2009 experience from our investment teams in Q4 confirm that data has bid ask spreads remain wide and deals were challenging to consummate with the significant reset in asset pricing and strong long-term demand drivers, particularly for residential logistics real estate. We believe the cost basis for properties acquired in 2024 will look attractive in years to come.
We believe there will be both opportunity and some choppiness in valuation resetting as sales stimulated by interest rate induced liquidity issues hit the market over the coming months. We also see a slowing in operating trends for certain submarkets with near term supply issues. But most of these continue to be high-growth markets where we expect recovery with interest rates now reaching their peak and poised to decline. And given the scale of dry powder in both equity and debt markets for commercial real estate, we anticipate macroeconomic trends to become a tailwind in helping market prices recover and transaction volumes rebound to pre-pandemic levels, even though it will take time, the building blocks for real estate resurgence are becoming evident against this backdrop.
Bridge's deployment during the quarter was mostly centered on our opportunity zone credit and secondary strategies. While transaction activity remains muted, our pipelines are beginning to build, and we have $461 million of equity deployment under our control and subject to due diligence. While we are encouraged by the increased level of deal sourcing, our pipelines remain well below normal activity levels at $3.4 billion of dry powder and deep and long-standing relationships with lenders and owners, we are well positioned to find attractive opportunities as the broader market normalizes. With the exception of office, the operating trends in most of our property portfolios remain healthy, so they may have moderated from their peak levels.
Bridge's vertical integration and operational focus continues to drive results. Multifamily and workforce same-store effective rent growth for Q4 increased 2.2% year over year. Our apartment communities are benefiting from the effects of a strong labor market on our resident base. The levels of supply pipelines will have near-term impacts in certain submarkets. Single-family rental has been a standout from a performance perspective. Fundamentals in our latest single-family rental portfolio are strong with 7% year over year rent growth in Q4 and over 9% in 2023 as a whole,
Investor interest in the sector has rebounded with several large-scale transactions announced recently including an M&A deal and improved debt financing markets in our logistics vertical portfolio continues to experience historically low vacancy rates aided by continued supply demand imbalance supported by e-commerce space demands like multi-family, there have been some markets that experienced high deliveries, but most of them are not submarkets we invest in. And overall occupancies remain at historically high levels in the industrial market leasing outperformance continues to drive portfolio returns with Bridge's portfolio net effective rent exceeding original acquisition underwriting by 25% in 2023.
Now turning to investment performance. Excluding office. Our equity real estate portfolios were down approximately 3% in Q4 and 5.1% in 2023 as a whole, as higher current income was offset by slightly more conservative terminal values and cap rates.
The fourth quarter was characterized by continued uncertainty over asset values in the marketplace as persistent interest rate volatility weighed on price discovery as holders of assets and closed-end funds with long fund durations. We have the wherewithal to withstand short term capital markets volatility as we focus on improving operations at the property level to maximize future exit values in our credit strategies. The increase in base rates has supported a strong distribution yield. Looking ahead, the future earnings of bridge will benefit significantly as real estate transaction markets inevitably recover.
I'll now turn the call over to Katie.

Katie Elsnab

Thank you, Jonathan. For its delivered resilient performance for 2023 amidst a challenging external operating environment. Recurring fund management fees increased 18% year over year, and fee-earning AUM increased 25% year over year to $21.7 billion, aided by the acquisition of our secondaries business fund management fees in Q4 were negatively impacted by a $5.7 million write-off related to office fund one fees deemed uncollectible management fee revenue was also lower due to the timing of higher placement agent fees that were noted on last quarter's earning call.
Adjusted for the prior period, office write-up management fees would have been $60.7 million the headwinds in the office sector have been well documented across the industry. By the end of 2023. Office Fund One was unable to align with a significant portion of its lenders on our restructuring plans. Market conditions have deteriorated further such that it is unlikely that we can create needed liquidity with additional asset sales or incremental equity infusions discussions with lenders also continue to be inconclusive, which has led us to assume that we can no longer expect to collect management fees for Fund one, while market conditions have limited out our options in the near term.
We will continue to work closely and cooperatively with our lenders and pursue any avenues positive outcomes for our investors going forward. We do not expect to recognize further management fee revenue on Office Fund one. As such, recurring management fees from the office vertical will decrease from approximately $2.3 million in Q3 or 3%, 3.7% of recurring fund management fees to approximately 729,000 a quarter or 1.2% of recurring fund management fees.
This will continue to be less meaningful as other parts of our business grow from a fee earning AUM perspective, Office Fund One was small at 2%. Additionally, our balance sheet commitment Fund One is comprised entirely of an unsecured loan to the fund for $15 million, which generated approximately 711,000 of interest income during 2023 and is included as a receivable on the balance sheet based upon the equity in the fund, the loan is collectible as of December 31st, 2023. However, as conditions in the office sector do not improve.
The recoverability of the loan is uncertain office and two, which was generally invested as a more favorable vintage during the pandemic. At current market, valuations has positive performance in spite of market headwinds within the office sector, while the assets are performing relatively well operationally, if the current market conditions continue into 2025, fund may be constrained by limited liquidity.
Our fee earning AUM exposure to office went to a small with fee-earning AUM of $184 million, representing just under 1%. Our balance sheet commitment to Office Fund two is comprised of a GP. equity commitment of $15 million and a $13 million unsecured loan to the fund, which generates 565,000 of annual interest income. We continue to recognize interest income on this. Bob, while we remain committed to protecting investor capital markets vertical, the vast majority of our AUM and profitability has been in our other real estate equity and credit and secondary strategies.
Moving further in our results, fee-earning AUM decreased slightly by $75 million from last quarter, primarily due to a $461 million decrease in fee-earning AUM related to bridge Office Fund one, partially offset by inflows, which Bob described earlier, over 97% of our fee-earning AUM is in long-term closed-end funds that have no redemption features and a weighted average duration of 6.8 years. Fee-related earnings to the operating company were $28.5 million in the quarter, down $7.5 million from Q3, mostly driven by the impact of Office Fund one and lower transaction revenue and partially offset by lower fee related expenses. Lower fee related expenses were impacted by the slower operating environment during the quarter.
While the organization remains disciplined on expense management, we would expect an increased fee related expenses more in line with inflation to begin the year. While Jonathan noted that we've seen transaction activity is beginning to pick up, that will take time before we start to see a material financial impact. As such, we expect a more muted level of transaction revenue in the near term. Fee-related margins will continue to be impacted to the extent we have lower transaction catch-up fees. As transaction and capital-raising volumes normalize, you will see a movement of our margins towards our longer-term average of 50% distributable earnings to the operating company for the quarter were $25.3 million with after-tax DE per share of $0.14, a decrease of 8.5% from last quarter, mostly due to the items discussed previously, $0.03 from Office Fund, one impact, $0.03 in lower transaction fees and $0.03 in lower net realizations, offset by lower fee related expense of $0.015. Realizations for the quarter were mostly comprised of tax distributions within the debt strategies, well, election revenue in the near term is expected to remain subdued. However, we are well positioned for an eventual acceleration in the context of improving liquidity in the real estate transaction market.
Net accrued performance revenue on the balance sheet stands at $382 million. Net insurance income decreased during the quarter related to new stop-loss policies that plants front-loaded during the contract period, which runs from June to June.
Finally, our Board of Directors declared a dividend of $0.07 per share payable to shareholders of record on March eighth. This dividend represents a lower percentage of our distributable earnings than in previous quarters, and the retained cash will allow us to invest in our business and strengthen our balance sheet.
With that, I'd like to now open the call for questions.

Question and Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you would like to remove your question from For participants using speaker equipment, it may be necessary to pick up your handset. We're pressing the star key One moment, please, while.
Perfect.
Thank you. Our first question comes from the line of Trauma McCoy with Morgan Stanley. Please proceed with your question.

Trauma McCoy

Hey, good morning. Thanks for taking the question. As such, like we have Morgan Stanley standing in for Michael Cyprus.
Just a quick question on your access to financing. This is interested in some of the comments you made about inconclusive conversations with the banks. So just remind us how reliant you are on bank financing generally speaking across the business? And how are those relationships now relative to say, a year ago?
And what sort of conversations are you having with your banking partners and how different is that by strategy or how would you characterize that both

Good morning, Joe. Thank you thank you for the questions, Bob, more speaking, and I'll start out and Katie, I'm sure will have some comments as well. That's a complex question in an evolving and evolving marketplace I think in general, our relationship with our leverage providers broadly defined is are quite good. There are multiple elements of that. We have we have some term leverage at our public company level on with a number of insurance companies.
And those relationships, of course, remain strong. We have a line of credit as well, and we finance at the asset level we finance with a variety of sources and the fund level. We finance our residential rental, our assets primarily with agencies, Fannie and Freddie, and they are open for business actually their pipelines are not are not terribly large in their own and their appetite is strong, particularly on the workforce and affordable housing side and where it's a priority for them as well as for us to finance workforce and affordable housing assets and in capacity across our other verticals, we we rely on a variety of lenders on some of some agency, some securitization market some direct lending with the with different different banks, local banks, regional banks, subdebt funds, et cetera.
And in general, the market is returning to some health at this point, it's very different depending on the depending on the strategy, the amount of appetite for office assets is pretty low, quite low, be up. The appetite for logistics assets, residential rental assets from the financing vehicle we have in place for our for our net lease for our net lease activities is quite strong as well. We've worked hard over the years too, create a diverse and robust universe of lenders across the different parts of the business that we pursue. And those relationships have had have certainly paid dividends in the more difficult times of 2022 and 2023 like many markets. And like our remarks suggested, the financing markets seem to be on a path towards a more normalization. At this point, we're seeing some lenders who actually are professing an increased appetite to work to increase exposure with us and undoubtedly with others as well as so as markets normalize.
Katie, would you add anything to that or anything?

Katie Elsnab

I think that I would add is that, yes, we do have a relationship with a lending relationship with them, a 40 financial institutions. And related to that, we pride ourselves in making sure that we communicate clearly and accurately to our investors. And we tried to be very good lending partners, and we worked very well with them.

Trauma McCoy

Excellent. Thank you both for the color there. And as a follow up, I just wanted to turn to Sunrise. I hear you on the Q1 will be a bit lighter and then you should expect that's a pickup as you go through the year.
Just curious, how would you characterize the total quantum of fundraising you're expecting for 2024, I guess, in the context of is it the sort of $4billion to $5 billion range you did in '21 and '22 understanding, of course, that you had multifamily, your flagship in the market than for those for that period.
Just curious, how should we think about that relative to the no call it, just under $2 billion needed for that 23, how should we think about '24 at

$2 billion, $2 billion for 2023 was was a struggle and it was a struggle, as we said, because the markets were not terribly interested in real estate at that point. And the day the funds that we had on offer, the vehicles that we had an offer were we're not necessarily our flagship vehicles. We're entering. We've entered 2024 with a with a with a lineup of investment vehicles that are out there that are later in their series well performing popular, et cetera. We think that the fundraising market has as has improved as the calendar page has turned on. And certainly that is reflected in the amount of dialogue that we've been having.
It's also a product of the investments that we've made in our Client Solutions Group, both domestically as well as as non US. in a lot of respects, we have high aspirations in terms of fundraising for for 2024 and beyond. We think that we think that our funds and we think that our investment vehicles offer a great opportunity and home and have residents across the across the suite of investor sectors, if you will. We referenced and the the continued interest in pursuit of a of a retail investment vehicle and on and that obviously on would represent a significant expansion of the potential investor base as well.

Trauma McCoy

So what so So while we don't necessarily guide the future in terms of what we've accomplished in the past. We certainly don't look at that at the past as a limit to what we can do in the future.
Thank you very much, Rebeccamycin.

Operator

Thank you. Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Saeed, with your question.

Finian O'Shea

Hey, everyone thinks and good morning. So first question on the office fund. I appreciate your color there and but a lot of value went away quickly. And it sounds like this is still a risk without an improvement in liquidity conditions, as you've cited, is, does this mean that the bid-ask spread is just still really wide. And if so, are you able to get, I guess, sort of in front of the wall here to preserve value through through refinancing or secondary capital or so forth on even if that feels a little bit more painful today. And then on the this sort of a follow-up there in terms of how idiosyncratic or one-off this event hopefully was are there enough other situations that that give you comfort on where you've say received maturity extensions or found refinancing capital? Or was this kind of the first test against some a larger financing wall. Thank you.

Thanks, Vinny. And Jonathan, do you want to do you want to tackle that question?

Jonathan Slager

Yes, happy to and thanks for the question on. I'm going to have clarified that with respect to that bulk of our portfolios, which is non-auto, so industrial, flash logistics and some multifamily and other residential that we have significant liquidity and we have some there's there's no concern with respect to our ability to manage our liquidity in those portfolios with respect to office, in particular, office is in a very unique situation where on almost overnight, it went from a circumstance where and there was continued activity, liquidity, both on the debt and the equity markets to where the market's just basically seized up. And and as a result, I think both lenders and equity investors have been trying to figure out how to proceed and what the market should be. And what was unique about Fund One was that it was literally in its sort of harvest period where it had maturities in a lot of the debt was structured.
So that it would mature at the time we were liquidating the assets, the time we were liquidity dating the assets was just as this the market was just completely seizing up and so in a normal circumstance, you would be liquidating strong assets where you had significant equity value that would create liquidity to restructure, refinance, anything that needed to be done to extend it. But when you're in a situation where there's neither equity nor debt liquidity and the lenders are unclear.
And I think what we were alluding to with respect to fund one was that the lenders have just been unwilling to give us feedback or, you know, provide us with enough guidance to be able to structure anything. And so we're sitting here kind of as these as these loans continue to mount in a situation where we just we don't know how that proceeds and the B no equity continues to erode in that fund and so that's why we've made the difficult decisions that we've made.
We think that, you know, we've pretty much taken most of the issues that we're going to take now with respect to Fund two, which is a much smaller fund and a really small part of our continuing ongoing AUM as a business. I'm not sure there's a possibility that if the market doesn't know on the office side, if the market doesn't clear and we don't start to see more and more sources of capital, either equity or debt or a combination thereof that.
Yes, that could start to be a problem with respect to that. But again, with as that relates to bridge investment group or BRDG., it's a relatively small item as it relates to our reputation with our LPs. It's very important. And so we're working really hard to do everything we can. But we as Bob said, we've continued to be super transparent. Everybody see the effort. We're continuing to be committed to doing everything we can to to return capital to LPs and to support our bank and lending relationships which would seem to have survived really well because they're all very understanding of this larger. Probably it's not a bridge problem. It's a larger problem in the office market overall.

Katie Elsnab

Thanks David. And I think one other thing that's helpful to add. If you look at yield bridge and exclude the office assets, we have less than 10% of our loans maturing in the next 12 months as very helpful.

Finian O'Shea

Thank you, both. And just a follow up, I guess on the broader portfolio that are the core multifamily business lines, you've generally described your strategy as value add, which to our understanding can be more light or more heavy, but translates to a lower cash flowing issuer profile on you're putting money into reservations. And then you're dependent on the output of higher achieved rents after executing the plan.
Correct me if I'm wrong. So how are you navigating like the market liquidity headwind specifically our hard cash constraints at the property level, stalling your value-add plan execution and our exit rents expectations holding up to underwriting.

I think what was the last part was you asked us to I can clarify, Finian, did you ask about the exit plan expectations? Is that what you that?
We grant? Yes.

Finian O'Shea

So just sorry earlier, are you able to are you able to enact your value-add plan. And.
Yes, I can't. But okay. Thank you.

Jonathan Slager

Yes, we're we have a very robust and part of what I think distinguishes bridges its integration between its asset management and its property management on the ground. And we have really sophisticated tracking mechanisms to determine whether we are getting paid for making the investment in the value add improvements.
And in terms of you know that it's a case-by-case basis market by market basis, and we always adjust based on what's happening in the market. Broadly speaking, we are, you know, in the strongest of the markets, we are continuing to grow, see SIGNIFICANT value in doing the renovations, but there are also a lot of markets where there's supply issues, which we've alluded to in some of our comments that we think are near term because these are high-growth markets where there's a lot of demand. And so as we adjust and moderate accordingly.
In terms of liquidity, if that's the question or availability of capital to do it, we don't rely on leverage to do those plans. Those are those are funded out of subsequent equity. And we continue to have sufficient capital in each of our funds to support our original business plan. As long as the market continues to support

Finian O'Shea

Its very helpful. Thanks, Nino affinity.

And I would I would add, and I believe this is something that we alluded to in our prepared remarks that when we when we look at the results of our value add process. We of course, when we when we acquire an asset, we have a detail projected pro forma in place, the costs out, everything that we're going to do that attribute revenue two to the actions that we undertake, et cetera. And we would characterize those as as achievable, but in part aspirational in some respects and overall were double digits ahead of those of those pro formas.
In terms of the actual NOI. created at our at our residential rental multifamily assets, that varies a little bit by fund. But the but the overall trend is a positive trend. And I think it comes from comes from understanding what resonates with residents and potential residents is it comes from being cost effective in implementing those. Those those renovations come in both in the common areas early on in the ownership of an asset and as units become vacant in the in the ongoing ownership of an asset and and making sure that and making sure that we're getting paid for what we're doing.
But we think that the value-add process and our on our day-to-day management of that value add process really creates a meaningful amount of alpha at the at the asset level over the course of the last year or so, maybe more than a year, we've seen cap rates increase as interest rates have gone up. In some instances, those cap rate increases have have been offset and in some cases meaningfully offset by the NOI increases that the value add process has created at the at the asset level. So it's a it's a process that pays dividends in good times and in more difficult times.

Finian O'Shea

Awesome. Thank you.

Jonathan Slager

Thanks for the question.

Operator

Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Proceed with your question.

Ken Worthington

Hi, good morning. I'm so performance is holding up well in certain of your verticals under pressure elsewhere. And I know the focus has been office this quarter. But as we look to multifamily five, it seems that fund continues to struggle. You have dry powder, but there seems to be a pretty big hole here. How does a more benign interest rate environment for time or investment resolve the performance here or given the depth of the hole, is this fund sort of destined be a poor performance?

Jonathan Slager

We don't really do that one, Bob,

You have once you start, Jonathan, please?

Jonathan Slager

Yes, yes. I mean, can that, you know, no one has the crystal ball, but I think we're sitting here our perspective is that there's been what I would consider an overcorrection in the multifamily valuation. I think that broadly spin, you know, when you look at the compression, the expansion of cap rates and the impact on values on, you know, kind of like for like net operating income, it's about a 30% drop, which is which is very meaningful when you think about especially with respect to leverage. That being said, we have a very strongly held house view that that interest rates, you know, are going to come back down as inflation comes down as the Fed makes their moves, yield curves normalize we think that will contribute.
But we also see significant amounts of dry powder and long-term secular demand in the multifamily sector that will also drive cap rates back down. So we expect them to kind of move back down and mean revert that will recover a lot. And as Bob alluded to, we are well ahead on our RNOI. targets and our underwritten operating performance at the asset level. And the combination of those two things we expect will generate some positive recovery of the existing portfolio. And then we've got the remaining half of the portfolio where we're able to buy, we think assets at what will look like incredibly attractive positions. And so when you start taking those two together, we still have hopes very, very high hopes that the performance of this fund will be will be solid and will it be as good as some of our highest performing vintages?
No, but not all vintages are created equal, but I do think it will be an outperformer relative to its peers in the same vintage, which at the end of the day is probably how the market will measure us.

Katie Elsnab

And I think some additional color. And this also relates to your previous question is just how the value add strategy is playing out and Multifamily Fund five right now at today know, we're seeing a 16.4% return on investment and the 3,000 assets that we've upgraded so far. So we are seeing that play out in the fund strategy as well.

Ken Worthington

Okay, thank you.

And not to pile on too much, but the tailwinds in the fundamental tailwinds in multifamily are are enormous. We're in an era today where it costs so much more to own than it does to rent. There are a number of aspirational homeowners who are now renters by necessity. There are a number of people who just choose to choose to rent for extended periods of time over there over their life cycles.
And and we have a housing shortage in the in the US. So we think we think that our ownership and operation of these communities really speaks to the the needs of folks who comprise that great big cohort of the U.S. population we think that we also have developed over the decades and ability to very cost effectively manage these these communities on behalf of our investors on behalf of our residents to provide a great experience for the or for the residents, and that's reflected in very high occupancies.
It's reflected, as Katie said, in the in the in the metrics around around financial performance and Tom and the Multifamily Fund five vintage started off at a at a peak time, but it's ending ending up and with the with investments at some pretty attractive values. So when you average that out and you and you overlay the the operating metrics and performance that we that we seek to achieve, it should be a should be, as Jonathan said, a very, very solid vintage in and certainly for something that was sort of in the in the apex of the market, if that's the if that's the downside, it's we think it will be very solid.

Ken Worthington

Okay, great. Thank you. And maybe a question just on on how your clients are reacting. So if if office is struggling and I carry on multifamily maybe at the it seems to be struggling now to what extent is the bridge brand being impacted here by a couple of these areas that are struggling and does the performance in these verticals flow through to impact fund raising in 2024 in areas that, you know, are more in favor of performing better like cross-sell, like we think like Uber Eats like cross-sell is a factor here for secondaries and some of the other verticals. Are you are you seeing or hearing any flow through from there investors in these struggling areas may be impacting your aspirations in it?

The other areas? It's interesting. It's a really good question. It's a question that we that we care deeply about or an issue. We care deeply about in terms of what our brand is and how we how we maintain and enhance the value of our brand. We start off with with a comprehensive and transparent communication and the view that that bad news doesn't get better with time and we seek to We seem to be very transparent in terms of what we do on one one, Vignette I was with I was with a a significant investor of ours as well as others. And we were talking about this very issue.
And I had mentioned the difference in performance between a couple of vintages of of one of our funds. And they stopped me and said, if you're about to apologize, do not apologize. Your relative performance has been so much stronger than the other than the other entities in which we've invested four for the same strategy. So my point is relative performance matters. And we think in good times, we will outperform. And in in our in our areas of competitive differentiation, we think in bad times we will outperform not not as much, but certainly on a relative basis out outperformance well, um, we we we have a amongst other things. We have the next vintage of our workforce can affordable housing investment vehicle that that is in the market. Now the early returns are very, very strong with So with with respect to that. And that's a pretty cost barrier to all the experiences in multifamily.
And as Jonathan said, there's there's in the Or maybe said another way in the in the in the 10s from 2014 to 2020 or so, there was really very little J-curve as it related to one to two investment vehicles when they were launched because asset values were going up and now they're now there. There is a J curve again. And we think that we think that the back end of that J curve will result in some pretty significant, pretty significant relative and absolute value.
That's that's created for investors as it as it relates to the brand, um, we we we we have found and over the course of last year and this year and in the past as well, that the value of our brand continues to grow. The recognition amongst the most prominent among institutional investors, continues to grow the network of wealth management platforms with whom we have a dialogue and on whom were distributed continues to grow. We mentioned that in our prepared remarks and and in each case, institutional investors, wealth management platforms, everybody have a lot of choices and we seek to be we seek to be a good solid choice that that people can provide and us with their capital and know that that that come good times and bad, we will do as well as possibly can be done with that with that capital.

Ken Worthington

Great.Thank you very much.

Operator

Thank you. Our next question comes from the line of Adam Beatty with UBS. Please proceed with your question.

Adam Beatty

Thank you. And good morning. I just wanted to ask about the 3% mark down across the portfolio in 4Q. I'm just thinking back to the environment at that point. It seems like the rate outlook was getting better public markets. We're definitely optimistic.
So just wanted to understand the dynamics here because the 3% was sort of the better part of the 5% for the full year. So and that might have been a little bit unexpected. So just if you could a little bit about what would drive the mark down to get a little bit worse in 4Q and also maybe which subsectors or verticals might have driven that thinking?

We many, many of our and I'll start there. And Jonathan, I'm sure will have some things to add as well from the the E when you refer to the to the improving outlook, I think as it relates as your comments relate to broad market indices, that's that that's absolutely true. And that's that's the crux of what we think creates the opportunity in real estate today on the you have broad market indices, whether it be the S&P 500, whether it be NASDAQ, Dow or whatever that are at or near all-time highs. We'll see when the market opens in three minutes, whether Nvidia's blowout results are going to are going to create new all-time highs.
And and and at the at the same time in an environment of rising interest rates, you have real estate values that have that in our view, continue to reset over the full course of 2023, including including the fourth quarter on. And it's there are there aren't many asset in our view there aren't many asset classes like real estate that have pretty substantially reset. And we were in at the at the 2021 peak when when cap rates for different types of assets were bumping around what have what now are interpreted as as cyclical lows, those those cap rates have increased in some cases as much as as high as 202 hundred, 53 hundred basis points over the course of the interest rate rises.
And that's what, in our view creates the opportunity for some generationally attractive entry points in in real estate at this point, part of the part of the valuation process, which which which we go through certainly acknowledges the cap rate increases from the selected transactional activity that occurred over the course of the fourth quarter 2023 and earlier quarters as well. It also it also incorporates some of the operational improvements that we were able to achieve at our assets. And so that 3% that a net of that. But more broadly, we think that that read that, that resetting of of valuation parameters has created a pretty terrific entry point in our view and makes it appropriate to start wading back into the water.
Jonathan, any incremental comments to that?

Jonathan Slager

No, I think you did I think you did a good job, Bob, I think the bulk of it really is in the multifamily side, which obviously that's the largest part of our AUM. And I think I guess the perspective that we have held is we took a lot of time on valuations because there's so little there's a little clarity. I think that's a simple truth. There's very low transaction volume. The transactions that happen.
The cap rates that are evidenced are very broad and very wide, even within the same market and similar vintages, similar quality assets. So So we spent a lot of time with our audit partners. We spent a lot of time with. I can tell you right now, the normal best information comes from the brokerage, our industry and the brokers are they're just throwing up their hands saying we don't really know. So I think that's what gets me kind of marking things challenging.
We've always prided ourselves on trying to be as conservative as we can in marketing without being extreme. And we hope we found the balance here and the year end of that. That was how the numbers came out. I would add one other thing which was interesting, which was Q4, even though it seemed that there was some relief in sight with interest rates starting to do move. We also started to see them move in a different direction.
And so we what's happened to every time we felt like we were getting to a place where the volumes were starting to return and people were ready to transact as the Fed says, okay, we're going to probably be at the end of our hiking cycle and all of a sudden sellers pulled properties off the market saying, well, maybe the values are going to be better next year, so we'll wait.
So it's been really interesting both in terms of trying to understand when when transaction volumes will recover and exactly where we're trades are trying to put good marks on things. And candidly, on a positive note, we are under no pressure in any of our funds to trade in this market unless we get a great price that we've gotten the few assets sold that we felt like we had really attractive pricing and we got really great returns on it, just to kind of start to realize some of the some of the assets in our older portfolios. I think we did a really successful recapitalization of our Fund three vintage two to print, a really good total return for our investors.
And so I think overall, it's just right now the bulk of those marks really are related to multifamily and as I said in our remarks, fulfilling that's going to be we're going to see recovery on that as far as the debt market stabilize as interest rates come down, which they inevitably will.

Adam Beatty

That's great. Thank you for all those details. I appreciate that. And then just a quick follow-up on just those latest remarks, because Bob and prepared mentioned seller capitulation and so it seems like, you know, as the rate outlook changes, maybe sellers are capitulating around capitulating or what have you, but just wondering what you're seeing and what areas in particular you're seeing more capitulation, which maybe while painful maybe healing for the market ultimately? Thank you.

Jonathan Slager

Yes, we're I think right now the capitulation is really slow, I guess, is the best way, I could say it. And I think that we have a that that the time when we're actually going to see the market opening up more broadly is asked after we start to actually see some sort of movement on the interest rates. And we see the broader debt markets really start to stabilize. And the same thing when we talk about the dry powder on the equity side. We also see dry powder on the private debt side where there's a lot of lenders that are starting to say, hey, I want to I want to get aggressive in trying to get some transaction volume even in a slow market. So we're seeing them start to tighten their spreads a little bit and the indexes need to kind of improve a little bit and we need to get a more normal yield curve and we'll get all that, that we're going to start to see volumes return value start to recover between now and then it will be the lenders are starting to and lenders are starting to bring us things. And we're starting to see some interestingly structured portfolios that that really where you saw regional sponsors who didn't have the wherewithal to raise new capital into their vehicles. And the just rapid rise in interest rates have essentially and cap rates have essentially wiped out most of their equity and made it impossible for them to continue to service debt. So we're starting to see some of that happening with lenders but but we haven't seen it in any large volume. And I think it's going to take another it just like you saw with the GFC.
I think it's going to take the next 18, 24 months for that to really disperse itself into the market. But but again, on a really positive note, I would say we do think that once the market starts to open back up. There's going to be a little bit of a rebound effect, right? Because there's been almost there will have been almost two years of they're a very slow transaction volume well below kind of, call it market norms.
And that will be a lot of pent-up demand for regular way selling for people who are just at a point where they need to realize their assets and they have good basis and they can make maybe not as much profit as they would have at peak, but a nice profit and we'll start to see some of that. You know, those challenged assets flow through the system, either either through short sales or through lenders, taking things back. And we are the great thing about bridges. We are in active dialogue, have great relationships across all of the owners and sellers as well as this broad base of lenders that we have deep and long relationships with. So so we're in the middle of all of it, and I think we're going to see benefit to that. But the question really becomes that happen next quarter, than the following quarters later this year, you're going to get that sense what we don't know. But we know it's coming and we're excited for it.

Adam Beatty

John, I think you have a clear picture of an unclear situation. Really appreciate it.

Jonathan Slager

Thank you, Brett.

Operator

Okay. Thank you. Our next question comes from Bill Katz with PD. Cowan. Please proceed with your question. Okay.

Bill Katz

Thank you, very much and good morning, everybody. A couple of nested questions. So I apologize in advance. I'm sort of thinking through some of your balance sheet exposure here and maybe a two-part question. The first question is, can you sort of review what your sort of max exposure is in terms of on the asset side? And then I think within that you'd mentioned that there's some GP. equity at risk here as well. Would that influence any kind of pressure to adjust your FRE. related compensation built on?

I'm sorry, maybe I don't know. I don't understand the first part of the question as it relates to mention what I'm sure has.
Sure.

Bill Katz

Sorry, Jeff, you, Bob. So the and thanks for the clarification. So you mentioned a couple of loans that are on your balance sheet that may not be fully recoverable. So I'm sorry, I'm looking through your balance sheet. Just trying to understand what kind of risks there might be in terms of a write off related to that? And then secondarily, I think you mentioned that there's some GP. equity within the fund as well. I'm just sort of wondering to the extent that there needs to be any kind of adjustment to compensation to offset the lost earnings associated with that and I can answer the second part of the question.

Katie Elsnab

And Katie, you might want to you might want to touch on the first part of the question until you for your reference build those two loans outstanding to our office fund Office Fund One has a $15 million loan outstanding, and that's really the loan that we're monitoring for impairment and we'll continue to provide an update on the second loan is Office Fund two, which has a $13 million loan. And based on the performance right now, there are no indicators of potential future impairments. And as it relates to bridges and balance sheet GP investments, we do have a $15 million commitment in the Fund two for the office strategy.

And Bill, we have we have significant GP contributions of both from existing employee owners into our funds as well as selected GP contributions from from bridge into our funds as well. The typical fund terms we call for a minimum of of X million per fund. Generally speaking, we will exceed that minimum and often those those those those GP commitments come from from individual individual investor employees who are who are enthusiastic about the fund on those, those in the aggregate across all of our funds past and present those aggregate to the 100 literally to the hundreds of billions of dollars.
So there's a pretty think that there's a very significant alignment between between us as as as managers of investment vehicles and at our LPs. And that's something that we think is valuable. We think it's we think it's something that's expected and it's something that sharpened focus in in a lot of respects as it relates to as it relates to compensation and adjusting compensation either related or related to any issues, including the issues around office one compensation is a product of a lot of different factors. It's product do firm performance, product of individual performance. It's product of the performance of the vertical that done. And we we have a we have a what we think is a very informed and sophisticated process that that allows us to have to appropriately compensate our employees and us and our colleagues.
And that compensation has a number of different elements to it. As you would expect. And there's been a lot of dialogue across alternative asset investment managers about what the right structure of compensation is. It's kind of interesting from our perspective as as we see that dialogue because I think we've been we've been early adopters of the of the some of the thought that that employees should should benefit when are when our LPs and shareholders benefit and And that alignment should be should be pretty significant. And so this particular incident, I don't believe will impact our compensation philosophy on the the it's way too early in 2024 to have any meaningful thoughts about where compensation will be in the in 2024. We run a very tight ship in terms of how many people we employ some of how how we how we structure our funds management infrastructure and investment teams in order to deliver really good results with the with an appropriate cost burden related to that. We are we think that we're we think that we're amongst the leanest in the in the industry as it relates to that. And so we can deliver a really good waterfall of gross to that and over the course of what we do.
Great, thank you.And pay bills.
Are you concerned about?
Bill, were you?

Bill Katz

I'm just wanting to clarify whether we really answered the question you were asked or I mean, are you concerned about the impact of FRE going forward?

Jonathan Slager

Is that kind of what you were driving at why I was just wondering if there's going to be a need to make up if you had to write off against splits Fund two's and maybe I'm making more it needs to be. I think I'm going that question.
My second question is just in terms of your of your balance sheet and can you remind me of what the debt covenants are around the debt? And then relatedly, I guess, how are you adjusting your your dividend payout ratio? And also, I know is this particular quarter, but it looks like a much lower payout just on normalized earnings. So how do we think about the payout rate? And then just remind me of what the debt covenants are on your own debt be happy to take us one.

Katie Elsnab

So I think for your reference, the primary cover that your token be focused on would be and as defined in terms of the agreement at 3.75, our debt leverage ratio.
Yes, at this point in time you were you were approximately a three times ratio. So we are very much in compliance on. And then if you will what about a second part of the question.

Bill Katz

Yes, I'm sorry for the next set of questions point. Just in terms of the dividend payout policy, it looks like it moved around a little bit this quarter. I'm assuming your has been the more capital or how to think about that payout ratio in light of just sort of the depressed earnings, the conversation this morning and the need to reinvest back in parts of the business. Thank you.

Katie Elsnab

If you think of about once, we actually our distribution this quarter was really based upon the cash. And so it did include the adjustments for the one-time charges. And so ultimately, it was about a 70% payout ratio, which and obviously our dividend is subject to our Board approval. But in the near term, I think that it's reasonable to expect a similar type ratio, right?
So we are we are adjusting we're still trying to distribute reasonable amounts, but we're trying to moderate that so that we have additional strength on the balance sheet. So that's really the goal.

Bill Katz

Thank you.

Operator

There are no further questions at this time concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation patients.
Goodbye.