JER Investors Trust Inc. Q1 2008 Earnings Call Transcript

JER Investors Trust Inc. (JRT)

Q1 2008 Earnings Call

May 12, 2008 11:00 am ET

Executives

Jeff Cirillo - Vice President

Joe Robert - Chairman and CEO

Mark Weiss - President

Mike McGillis - CFO

Analysts

Michael Moran - Moran & Osborn

Steven Jones - Grandville Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 JER Investors Trust Earnings Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Jeff Cirillo, Vice President. Please proceed.

Jeff Cirillo

Thank you. This presentation will include statements that constitute forward-looking statements, including with regard to the company's revenues and earnings per share, the anticipated effects of today's announcements, and the company's growth. Wherever possible, the company has identified these forward-looking statements by words such as anticipates, believes, intends, estimates, expects, projects and similar phrases. These forward-looking statements are based upon assumption the company believes are reasonable, and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Because such statements inherently involve risks and uncertainties, actual or future results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to changes in economic conditions generally and the real estate and bond markets specifically, legislative and regulatory changes, the availability of capital, our ability to obtain future financing arrangements, changes in interest rates and interest rate spreads, changes in Generally Accepted Accounting Principles, market trends, policies and rules applicable to REITs, the application and interpretation of the rules and regulations of the Investment Company Act, the subjectivity inherent in any weighted analysis underlying the company's assumptions and estimates with respect to the future, and other risks detailed in the company's periodic filings with the Securities and Exchange Commission.

The company cannot predict what factors may arise or how such factors may cause its results to differ materially from those contained in the forward-looking statements. Any forward-looking statements speak only as of the date on which the statements are made. The company undertakes no obligation to update these statements with revisions or changes after the date of this call.

In addition, this presentation includes non-GAAP financial measures. In accordance with Regulation G, a presentation of the most directly comparable measures calculated and presented in accordance with GAAP, as well as a reconciliation of the differences between such measures are available on the company's website at www.JER.com.

With that, I would like to now introduce Joe Robert, Chairman and CEO.

Joe Robert

Good morning and thank you again for participating on this morning's conference call to discuss the First Quarter '08 Results for JER Investors Trust.

As you are probably aware, difficulties in the credit markets continued through the first quarter, with increased volatility and expansion of credit spreads. In fact, the first quarter was marked by the most significant spread widening we have seen during this protracted credit crunch. This resulted in reduced mark-to-market valuation for our assets and ultimately resulted in significant margin calls on our repo lines over the past several months.

On the positive side, we've been proactively managing our credit and liquidity and we were prepared for this environment. In terms of liquidity, during the first quarter we were able to meet these margin calls and bolster our cash position. As part of this strategy, we decided that it would be prudent to sell our remaining 50% interest in one of our assets to Charter School portfolio.

As a result, even after meeting $83 million of margin calls over the last four months, we currently have a $33 million cash position. As I said, we've been focused on liquidity and credit, one example of our ability to manage credit was our one investment in Florida based garden-style apartments which were being converted in the condominiums. This loan had its final maturity in April, is now fully repaid. The loan was never delinquent and we earned a return in excess of 25% on that investment. That's one example we, with our history and being able to manage credit, resulted in a successful outcome even in a challenging market.

While we've been in a very difficult environment, we also recognize that there are opportunities that arise and along those lines JRT co-invested and is co-managing a fund that is investing in new acquisitions currently. We are currently approximately 50% invested in the fund and are pleased we can take advantage of the opportunities we're seeing in the marketplace.

Now as I usually do, let me introduce you to the management team that's with me on the conference call. First Mark Weiss, our President. Mark will talk about three major topics credit, liquidity and capital. First Mark will further discuss the current credit spread environment. He and Keith Belcher who heads our CMBS Investments will discuss our CMBS collateral continues to perform in line with our initial expectations and our delinquency rate remains well.

Mark will then review with you our liquidity and repo position and our access to capital. And after Mark you will then hear from Mike McGillis, our Chief Financial Officer. Mike will describe the overall financial performance of our company during the first quarter of '08, with a particular focused on the impact of our adoption of FAS 159 and highlighting what we believe are our most relevant financial reporting metrics, namely adjusted funds from operations, our book value and our estimated fair value of equity.

Our objective is to make our operating performance and equity measures as transparent as possible for our investors. And with that I will turn it over to Mark.

Mark Weiss

Thank you, Joe. I will cover three main topics. The general market update, the credit performance of our portfolio and liquidity in capital. First, let's discuss the market and market spreads. And we've been talking to you for the past several months about the dramatic widening we've seen in credit spreads, which as roots began in the sub-prime market. The first quarter of 2008 represented the greatest amount of spread widening we've seen to-date over this extended period of market volatility and disruption. By way of example at December 31, 2007, BBB minus CMBS spreads were about 900 basis points.

By March 31, of this year these had widened an additional 900 basis points to approximately 1800 basis points. This compares to about 100 basis points at March 31, 2007. On the positive side, since the end of the first quarter, we've seen an improvement in credit spreads at the higher parts of the credit curve and a stabilization of the spreads at a non-investment grade levels. This is not to say that spreads can't or won't widen out further but at least for the moments credit spreads appear to have stabilized. What we haven't seen is a pick-up in use of the primary lending or the securitization markets.

One objective indicator is CMBS issuance volume. Through April 30, we have seen approximately $10 billion in issuance. And this compares to approximately $80 billion in the first four month of 2007 or a drop of 87%. Based on a continued reduction in headcount at the leading securitization shops and the corresponding lack of new origination activity, it does not appear that the securitization volume will pick-up anytime soon.

Now we're continually asked, isn't the dramatic increase in credit spreads indicative of significant deterioration in the underlying credit of our real estate assets and that commercial real estate is going to be the next sub-prime. Now we do believe that overtime if we have a weakening economy and a lack of liquidity in the lending markets continue, real estate valuations will be negatively impacted.

That being said to-date our CMBS portfolio has continued to perform inline with our original underwriting. Through our Special Servicer, we manage approximately 3,500 loans in the CMBS pools totaling approximately $48 billion in face value. The sheer size of this portfolio gives us a good window into the health of the underlying fundamentals of the commercial real estate debt markets.

Currently for the B-Piece investments, where we own the first-loss positions, our cumulative 60 plus day delinquency rate is only 36 basis points. In addition, we have not seen any obvious delinquency trends from either a geographic or asset class perspective. While we expect more delinquencies as our portfolio ages, we are very pleased with its performance to-date.

Now, as we mentioned in our last call, our portfolio has limited exposure to near term maturities. The average maturity on our CMBS first-loss portfolio is approximately seven years with no loans maturing in 2008 and less than 2% of the portfolio maturing in 2009. On the real estate loan portfolio, no loan is maturing in 2008 with only one loan for $30 million maturing without that extension options in 2009. This lack of near term maturities in today's difficult lending environment should result in less strain on borrowers who with otherwise have to refinance in this difficult market.

At this point, I would like to turn it over to Keith to give you some specific of our assets and our Special Servicing portfolio. Keith?

Keith Belcher

Thanks, Mark. And as Mark indicated, our current delinquency rate of 36 basis points on the CMBS portfolio remains very low. In terms of the current loans in Special Servicing, out of a total portfolio of over 3,500 loans, we have 20 loans totaling $206 million on unpaid principal balance which includes a couple loans that are current, as well as those are in default. This is actually down from $225 million at the time of our last call. In terms of the actual loan losses, earlier this month we resolved a loan through a discounted payoff and we realized a small loss of approximately $900,000, which brings our total realized losses to-date to just over $2 million. This compares very favorably with our underwriting and our projected future loan losses are modeled into our projected future cash flows on the CMBS portfolio.

Of those 20 loans in Special Servicing, two loans totaling 23 are in current, 15 loans totaling a $170 million are delinquent and three loans totaling $13 million have been foreclosed. Included in that portfolio, as we noted on our previous quarterly calls, are several loans to a common borrower, MBS that defaulted on a majority of the Texas multifamily assets last fall. One of these loans totaling $23 million has been kept current and is now being returned to the Master Servicer since our last call. That leaves us with five remaining MBS loans totaling $78 million, of these the two smallest loans totaling $9 million have been foreclosed and we expect small losses on those.

The last three MBS loans totaling $69 million are in the process of being recapitalized or assumed and we have appraisals of broker valuations above the respective debt amounts. For these MBS loans as well as the rest of the Special Servicing portfolio, we continually update our loss assumptions and again, those losses assumptions are incorporated into our future cash flow projections at the individual bond level.

And now back to Mark.

Mark Weiss

Thanks, Steve. Despite fact that some of these statistics seem to be encouraging, we remain extremely proactive at managing our portfolio. We perform active surveillance on our portfolio in order to get ahead of any asset that we think may have issues and we update our losses reserve estimates on a quarterly basis as part of our surveillance process.

Our Special Servicer is only one of six that carried the highest ratings from both S&P and Fitch. We believe that our company is properly positioned and has the appropriate expertise and resources to work with troubled borrowers or troubled assets to maximize the value for JRT shareholders.

Now, let's talk about liquidity. We closed the sale of the Charter School on April 2nd and net of repo paydowns and in May dividend payment we have approximately $33 million in cash on hand today. We currently have a $179 million of outstanding balances on our repo facilities. The $179 is against collateral with the original cost basis of approximately $423 million and a current indicative market value of $282 million. This is approximately a 42% loan to cost and 63% loan to current indicative value. In addition, cash interest coverage on these facilities exceeds three times. As spreads have stabilized, we've had a decrease in the pace and size of margin collectivity. However, we recognize this can change quickly and we continue to manage our liquidity being mindful of potential fusion margin call exposure.

Given our focus on credit and liquidity, we've continued to maintain a defensive posture. Investment activity during the quarter was limited to new investments in the debt fund that we formed with CalPERS and JER partners at the end of the fourth quarter or JRT benefits from the management fees it generates, due to promote as well as JRTs participation in the fund itself. From an investment perspective we continue to see activity from what I term distress sellers. These are dealers who have originated product with liquidity still strong, but they must be sold at a significant discount in order to generate attractive returns to buyers like the aforementioned debt fund.

Today as Joe mentioned the fund is approximately 50% invested and we continue to see excellent opportunities to deploy capital with an attractive return profile. And from a capital raising perspective we've seen a number of our peers access the capital markets. We're constantly evaluating new sources of the capital whether on or off balance sheet and we will seek to opportunistically tap these markets as available.

To summarize, we are investing cautiously and continuing to position our balance sheet to be successful for the long-term. Our team remains diligent in terms of monitoring our portfolio, monitoring our liquidity, and opportunistically taking advantage of investment opportunities.

And with that, I'd like to turn it over to Mike McGillis to review the financials. Mike?

Mike McGillis

Thanks, Mark and good morning everybody. Let me start off the discussion on our financial condition and performance for the first quarter of 2008 with our balance sheet, and highlight the impact of our January 1, 2008 adoption of FAS 159, as well as some other changes to our financial reporting model.

Effective January 1, 2008 we adopted FAS 159 and elected the fair value option for all financial assets and liabilities related to our two CDOs. As a result of adopting FAS 159, our GAAP shareholders equity increased by $246 million as of January 1, 2008 to $256 million or $9.92 per share.

We believe that our GAAP book value now more closely approximates the company's economic book value than under previous GAAP reporting models. The financial assets and liabilities we've elected to account for using the fair value option include our CMBS Investments financed by CDOs and our real estate loans held for investment which are all currently finance by CDOs, our CDO notes payable and CDO-related interest rates swaps that hedge certain floating rate CDO notes payable.

In addition we have discontinued hedge accounting for our non-CDO related interest rates swaps, due to uncertainty related to our ability to achieve the originally anticipated levels of long-term match funded financing. As a result of one, the adoption of FAS 159; two, discontinuing hedge accounting for our non-CDO interest swaps; and three, classifying certain of our real estate loans as held for sale which we started at the end of 2007, essentially all of our financial assets and liabilities except for our junior subordinated debentures are now being reported on a fair value basis.

We believe that this results in more transparent balance sheet reporting and reported stock holders equity will more closely reflect the current fair value of all of our assets and liabilities. However, these changes result in significant GAAP earnings volatility, as we required to recognize changes in values of these financial assets and liabilities through our income statements. As a result of this GAAP earnings volatility, we consider adjusted funds from operation or AFFO an important supplemental measure of our operating earnings for investor to consider as they evaluate our profitability and our ability to cover our regular dividend from operating cash flows.

The other result in financial reporting change is that, net cash payments are received on all of our interest rates swaps which were previously included in interest expense now are included as a component of other gains and losses. Note that we continue to view these interest rates swaps as economic hedges and any net cash payment receives on our interest rates swaps will continue to be included in the determination of AFFO.

With that, let me start by reviewing our balance sheet. At March 31, 2008 we have total asset of approximately $1 billion. Our cash balance was $13.8 million and include $1.1 million in restricted cash. As discussed by Mark, due primarily to proceeds from the sale of our remaining interest in the Charter School joint venture margin proactivity in Q1, 2008 dividend payment, our unrestricted cash position at May 8, 2008 was approximately $33 million and restricted cash was $1 million.

Our primary asset class continues to be CMBS. At quarter end CMBS represented $497 million in fair value or 49% of total assets. During the first quarter, we recorded unrealized losses of $174.8 million on our CDO-related CMBS, and a $99.6 million impairment charge on our non-CDO related CMBS. The impairment charge includes unrealized losses of $54.5 million that were included in accumulated other comprehensive income loss as of December 31, 2007.

In addition, $97.5 million of the $99.6 million impairment charge was solely due to management's assessment of the severity and duration of the unrealized losses on these investments and is not a result of declines in future projected cash flows. In fact, our CMBS portfolio cash flow projections generally continue to be in line with our original underwriting and delinquencies and underlying collateral remain at low levels.

With respect to returns, as a result of adopting FAS 159 and recording a certain temporary impairment charge, we have reset the cost basis on our CMBS to fair value, and also reset the GAAP yield on our CMBS at a discount rate used to derive our CMBS value at March 31, 2008, which is 20% on a weighted average unlevered but loss adjusted basis.

The 20% GAAP yield already incorporates significant projections of losses on the underlying loans in CMBS pools, based on management surveillance and due diligence processes. From a taxable income standpoint, no loss yields continue to approximate 11%. However, it's based on a tax cost basis that approximates $1.05 billion compared to the revised GAAP cost basis of $497 million and the revised GAAP yield of 20%.

Now turning to real estate loans, we ended the quarter with 16 loans totaling $506 million in cost basis net of premiums and discounts, which we carry on our balance sheet at fair value of $450 million or 44% of total assets. Note that our real estate loans held for investment are financed by our second CDO and pursuant to FAS 159 we've elected to account for these investments using the fair value option effective January 1, 2008.

At March 31, 2008 the carry on our balance sheet at fair value was our real estate loans held for sale are carried at the lower of cost of fair value on our balance sheet. The weighted average interest rate based on the cost basis of our portfolio to 16 real estate loans at March 31, 2008 was approximately 6.2%. The only investment made during the quarter ended March 31, 2008 was $0.4 million capital contribution to the recently formed US Debt Fund and we do expect further capital contributions to occur this quarter. During the same quarter we received net principal repayments on real estate loans of $4.1 million related to two real estate loans.

Finally, with respect to debt and other liabilities, we ended the quarter with total liabilities of $760 million consisting of $439 million of CDO notes payable at fair value with a corresponding face amount of $975 million, $196 million of repo bonds which now have been paid down to a $179 million, $62 million of junior subordinated debentures, $57 million of liabilities representing the fair value of our interest rates swaps, and $6 million of miscellaneous trade payables and accrued interest payable.

The stockholders' equity at March 31, 2008 was $256 million or $9.88 per share. The $246 million increase in stockholders' equity on January 1, 2008 resulting from the adoption of FAS 159, primarily relates to one adjusting the carrying value of our CDO notes payable to fair value which increased equity by $268.4 million, adjusting the carrying value of our real estate loans held for investment to fair value which reduced equity by $9.3 million and writing up previously deferred debt issue cost related to our CDOs which reduced equity by $13 million. Overall, the ratio of total liabilities to stockholders' equity on a GAAP basis was three times.

You will note in our earnings release that we discussed our pro forma stockholders' equity reflecting the estimated fair value of stockholders' equity and adjusted stockholders; equity. Our estimated fair value balance sheet and related fair value of stockholders' equity at March 31, 2008 is approximately $285 million or $11 per share. The primary difference between our GAAP equity and the estimated fair value relates to marking our junior subordinated debentures to estimated fair value and writing off the remaining balance of deferred debt issue costs.

At the end of March 31, 2008 earnings release or schedules that reconcile our GAAP balance sheet and stockholders' equity to our fair value balance sheet as well as a reconcile of our GAAP stockholders equity to adjust it's stockholders' equity which is relevant to certain of our financial covenants and our repurchase agreements. All of our borrowing facilities are currently in compliance with the requirements, the applicable loan documents, and there are no outstanding or current defaults or delinquencies.

With the respect to the statement of operations, in comparing our first quarter 2008 results versus the first quarter of 2007 results, AFFO increased to $10.6 million or $0.41 per share from $10 million or $0.39 per share. The increase in AFFO was primarily due to higher fee income and lower operating expenses, primarily G&A costs and management incentive fees. We report AFFO because we consider it meaningful supplemental measure of our operating performance and believe it's more reflective of our operating cash flows than net income or loss determined in accordance with GAAP.

At the back of the earnings release is a reconciliation between GAAP net income loss and AFFO. With respect to our GAAP net loss of $66.8 million or $2.60 per share for the quarter ended March 31, 2008 is primarily the result of other losses which total $79.4 million on a net basis. These consist of unrealized gains in our CDO related financial assets and liabilities of $66.9 million related to adopting FAS 159, unrealized losses on loans held for sale of $28.4 million, non-cash impairment charges on CMBS of $99.6 million, non-cash charges related to discontinuing hedge accounting for a non-CDO related interest rate swaps at $15.6 million, and the amortization related to in cash payments on our interest rates swaps of $2.8 million.

In our earnings release is a table which breaks down the composition of the $79.4 million of other gains and losses into the following categories. One, changes in fair values during the three months ended March 31, 2008 contributed a net loss of $10.8 million to this amount. Two, recognition of unrealized losses previously deferred and classified within accumulated other comprehensive income loss as of December 31, 2007 contributed $65.9 million to this net loss. Net cash payments on our interest rate swaps during the three months ended March 31, 2008 contributed a net loss of $2.1 million and other items contributed a net loss of $0.6 million. The unrealized gain net of $66.9 million on our CDO related financial assets and liabilities consists of unrealized gains on our CDO notes payable of $266.7 million, unrealized losses of $174.8 million on our CMBS financed by our CDOs, unrealized losses on our real estate loans held for investment of $4.9 million, and unrealized losses on our CDO related interest rates swaps of $20.1 million.

The unrealized loss on real estate loans held for sale is due to declines in the estimated fair value of such loans due to spread widening during the quarter ended March 31, 2008. Of the non-CDO or CMBS impairment charge of $99.6 million, just to highlight this again, $97.5 million relates to the severity and duration of unrealized losses on our non-CDO CMBS, although our cash flow projections on these investments continue to generally be consistent with our original underwriting, and $2.1 million was due to decreases and the projected net present value of future cash flows from five different CMBS bonds.

Note, that $54.5 million of this loss was included in accumulated other comprehensive income loss on our December 31, 2007 balance sheet. The unrealized loss on non-CEO related interest rate swaps of [$6 million] is a result of discontinuing hedge accounting on such swaps and consists of $4.2 million attributable to changes in the value of these swaps from December 31, 2007 to March 31, 2008, as well as the recognition of $10.8 million of unrealized losses on these swaps that was included in accumulated other comprehensive income loss on our December 31, 2007 balance sheet. So overall, the GAAP net loss for the quarter was $66.8 million or $2.60 per diluted common share.

Finally, in April 2008 we declared our first quarter 2008 regular cash dividend of $0.30 per outstanding share which we paid on May 6, 2008. With that operator, let's go to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Michael Moran of Moran & Osborn.

Michael Moran - Moran & Osborn

Yes, gentlemen.

Joe Robert

Good morning.

Michael Moran - Moran & Osborn

Good morning. I want to just discuss a little bit or ask a little bit about the reduction in the dividend? Given that you are required to maintain a certain pay out, to maintain your REIT status? Is it the decrease in the dividend going to really be made up later on in a special dividend assuming the income stays constant?

Mike McGillis

Let see, the REIT dividend requirements are based on a test for the full-year.

Michael Moran - Moran & Osborn

Right.

Mike McGillis

Obviously our AFFO this quarter was higher than the dividend we declared. But we tried to reset the dividend at a level that's representative of what we think is our sort of future operating cash flow run rate, given that we have recently sold 50% of our interest in our Charter Schools and may potentially sell some more assets over the remainder of the year. At the end of the day, how much of that what the special dividend could be at the end of 2008 remains to be seen. There is a lot of factors that go into that, including the level of actual losses we incur on the collateral for our CMBS investments.

Michael Moran - Moran & Osborn

And I guess really what my questions get into is, did you perceive the decrease in the dividend and effort to conserve cash given that you're getting the marginal calls and getting the turmoil in the CMBS market, or did you perceive it as an attempt to -- that because of the margin calls, because you had the de-lever a little bit with the repo lines that your earnings power was going to be decreased at least for the short-term.

Mark Weiss

It's Mark Weiss. I think the answer is a little bit of both. Again, we may have to have; we may have a special dividend in the first quarter of next year to make-up for the REIT income test, but the reality is that's obviously you are nine months away and there rather has been cash for the next nine months. In addition to as Mike said, trying to more closely match the operating performance of the portfolio now that we sold some assets.

So it's a combination of the two. And again, I think, the husbanding cash at this point in time is always a good thing until we're through the credit cycle. As I mentioned, while we've seen spreads stabilized I don't think we've seen credit comeback into the marketplace, and we certainly want to see some of that come back into the marketplace, before we start getting anymore comfortable with our current position.

Michael Moran - Moran & Osborn

Okay, one other question about, I guess the actual loss is versus the projected losses in calculating AFFO? I remember from an earlier presentation that you had expected actual or projected losses on your CMBS portfolio of something like $50 million as of the end of 12/31/08. And obviously, you are at $2 million level. I am assuming, a, that's one of the primary differences between the REIT taxable income test and your AFFO calculation. I would like you to comment on that. You've seen we are doing much better than projected and how does that point out?

Mark Weiss

Yeah. And listen, knock on wood, we are very pleased with the performance here. You are right, your numbers are right. We did base it on an underwriting expected $50 million in losses by the end of this year, and I think we're at $2.1 million at this point with a $900,000 addition this quarter. I guess the answer is, we're still, I think we have, a little over $200 million in Special Servicing and as Keith mentioned, we expect a bunch of those to go get resolved and go back into performing status. But you never know. And something can come out of the woodwork with a big loss that we hadn't predicted yet. We are only at early in May, so we still have close to eight months left in the year. And so, we are going to wait and see and while obviously we hope the number is less than 50 but that obviously will have an impact as you pointed out. The difference is in the tax and GAAP income.

Michael Moran - Moran & Osborn

And do you ever update your projections? Or is that just, instead of saying, notwithstanding your rational loss ratio?

Keith Belcher

Excuse me, this is Keith. We do update them on a formal quarterly basis and within the quarter as events arise. We actually are re-underwriting our portfolios on an ongoing basis. We have a formal surveillance committee process. We monitor what's in the Special Serving portfolio very closely as well as the changes in the underlying financials on the loan. So, we do constantly update those numbers.

Michael Moran - Moran & Osborn

And that goes into the AFFO calculation?

Keith Belcher

That's correct.

Michael Moran - Moran & Osborn

Okay. And I guess this is my last question. Beside the fund that you started, is there any other way that you see yourselves playing off in, I mean, you played, done a good job playing defense in preserving cash, meeting your margin calls and selling the Charter Schools. And I guess the capital spend is the start to playing off and so how else do you see yourself playing off into taking advantage of the turbulent credit markets?

Mike McGillis

Well, I think, yeah, the good news is we still have a little bit over a $100 million of equity in the CalPERS fund to invest. So we can take advantage of opportunities we see today. On a go forward basis, we'll look at on balance sheet and off balance sheet opportunities as they potentially arise. But really, if you had said to me, three months ago, could you raise equity? The answer would have been probably no. It would have been very difficult and we've seen, as I have mentioned in my speech, that we have seen some of our competitors access the capital markets recently. And so it really depends on that moment in time whether we do it on balance sheet or off balance sheet, there is virtues to both. And again, the good news is we still have a $100 million plus of equity to invest right now, so again, the opportunities that we see today we can take advantage of.

Michael Moran - Moran & Osborn

Okay, thank you.

Operator

Your next question comes from the line of Steven Jones of [Grandville Partners].

Steven Jones - Grandville Partners

Good morning, gentlemen.

Mike McGillis

Good morning

Steven Jones - Grandville Partners

Would you please comment on the risk that you see, if any, to your cash flows as a result the Fitch downgrade of CDO II?

Mike McGillis

Sure. Yeah, the interesting thing about the downgrade is and as we commented numerous times today, we've really not seen any underlying deterioration of the performance of the portfolio in terms of increasing defaults, increasing watch list. Fitch, as you may know, puts basically the entire sector under review, all the CDOs that had subordinate CMBS and then they basically downgraded all of them. I think it was more the methodology change than anything else, certainly in our case, other than changes in delinquencies. It has no impact to us in terms of cash flows. We continue to model the bonds at the individual bond level in terms of the cash flows including the loss assumptions that we've talked about earlier.

Steven Jones - Grandville Partners

So it has no impact on the overcollateralization test?

Mike McGillis

No.

Mark Weiss

No. The day over-collateralization tests are specified test which are a function of the cash flow of the underlining assets. And as Keith mentioned, we've seen virtually no change in the cash flows of the underlying assets. So therefore the OC test are still have plenty of room on them and the downgrade has nothing to do with that.

Steven Jones - Grandville Partners

Thank you.

Operator

And we've no question at this time, I will now turn the call back over to management for closing remarks.

Jeff Cirillo

Well, we'd just like to thank you for joining us on this call. We look forward to communications with you in the future and we'll talk to you soon.

Operator

Thanks for your participation in today's conference. This concludes the presentation. And you may now disconnect.

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