Mar 17, 2009
Executives
John Klopp - Chief Executive Officer Geoffrey Jervis - Chief Financial Officer
Analysts
David Fick - Stifel Nicolaus Omotayo Okusanya - UBS
Operator
Hello and welcome to the Capital Trust Fourth Quarter and Year End 2008 Results Conference Call. Before we begin, please be advised that the forward-looking statements expressed in today's call are subject to certain risks and uncertainties including, but not limited to, the continued performance, new or origination volume and the rate of repayment of the company and its funds loans and investment portfolios, the continued maturity and satisfaction of the company portfolio assets as well as other risks contained in the company's latest Form 10-K and Form 10-Q filings with the Securities and Exchange Commission.
The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. There will be a question-and-answer session following the conclusion of this presentation.
At that time, I will provide instructions for submitting a question to management.
John Klopp
You're Okay?
Operator
I will now turn the call over to John Klopp, CEO of Capital Trust.
John Klopp
Okay. Thank you.
Good morning, everyone. Thank you for joining us and for your continued interest in Capital Trust.
And thank you for your patience, when we need to reschedule this conference call from last week to today, in order to complete some very important work. Last night we reported our results for the fourth quarter and full year of 2008 and filed our 10-K.
Geoff will run you through the detailed numbers in just a moment. But first, I want to get right through it and focus on the debt restructuring that we completed over the weekend and announced last night.
On our last call in October, I told you that we were in a street fight, battling against declining property values, deleveraging financial institutions and a capital market that had virtually ceased functioning. As the fourth quarter progressed the bad news just kept coming from all directions and we found ourselves in the fight of our loss (ph).
In the aftermath of Lehman's failure, the entire global financial system seemed on the edge of meltdown prompting serial government bailouts of many of our largest financial institutions and desperate attempts to restart the market. Credit spreads blew out, liquidity evaporated, rating agency downgrades accelerated and margin calls from CT's secured lenders rolled in.
With few exceptions, our assets continued to perform but our liquidity was rapidly being drained through debt repayments triggered by mark-to-market. In the fourth quarter alone, we paid down our secured debt facilities by over a $117 million.
With our unsecured credit facility also coming due in March, we decided that we had to act and approached our lenders with a coordinated restructuring plan. The primary objective of the plan was time; gaining the time for us to do our job of managing and collecting CT's assets.
The provisions of the plan are outlined in the press release and laid out in great detail in the 10-K. But the essence is as follows: The maturities of $580 million of our secured repo debt and the $100 million unsecured facility were tended for one year, plus two additional one-year extension options with the first option exercisable by us as long as we have met pay down targets and the second at the discretion of the lenders.
Cash margin call provisions in our restructured repo facilities were eliminated and replaced by pool-wide collateral valuation tests which are based on the performance and value of the underlying real estate collateralizing our loan, as opposed to the liquidation value of our loans in this dysfunctional market. If we breached the test going forward, we can be forced to liquidate assets.
We agreed to lock down the balance sheet, making no new investments, incurring no new debt, paying only those dividends necessary to maintain our REIT status and dedicating all of our efforts and our free cash flow to reducing debt. In return for these modifications, we agreed to a 125-basis point increase in the pay rate on the unsecured facility and added and accrual feature to that same facility.
In addition, we issued approximately 3.5 million warrants to the participating secured lenders who float their rates at their current levels. Separately, we exchanged approximately a 100 million of our trust preferred securities for new instruments increasing the principal balance by 15%, leaving the maturity basically unchanged and cutting the pay rates from roughly 7.25 to 1% for the next three years.
And lastly, we swapped assets for debt with two of our secured lenders which painfully resulted in a $48 million hit to book value that was run through the fourth quarter financial statements. The only good news here is that these asset rates eliminated approximately $30 million of unfunded loan commitments which we otherwise would have been obligated to fund.
When the dust settled, we had modified or terminated over $880 million of recourse debt with 13 separate lenders, all of which had to close simultaneously. The terms of the restructured debt are predictably tight and tough, requiring us to meet to stiff amortization hurdles along the way.
But we believe that the plan provides the needed stability to the right-hand side of our balance sheet that will allows us to continue to fight on. We have no delusions that the next year or two will be easy for Capital Trust.
Real estate fundamentals continue to deteriorate rapidly and cash flows from virtually all types of property will come under increasing pressure as this recession grinds on. Washington's attempts to restart the credit markets have so far been ineffectual, but more programs are underway.
If the economic environment does not improve and the capital markets remain closed, our assets will encounter performance issues. But we believe that we can manage our way through this crisis ultimately producing real value for our shareholders.
And we believe in the strength of our people and our platform, which at the end of the day are our most valuable assets. I want to thank the entire CT team, our outside counsel Paul Hastings and yes, even our lenders for their tireless work to pull off this remarkably complicated and difficult transaction.
With that, I guess I'll turn it over to a very tired Geoff Jervis, to run through the numbers. Then we'll come back and open it up for any and all of your questions.
Geoff?
Geoffrey Jervis
Thank you, John and good morning everyone. While I know that the primary order of (ph) business is a further description of debt restructuring, I'd like to briefly summarize our operating results, balance sheet activity and liquidity before we dive into the terms of our debt restructuring.
For the full year ended December 31st, we reported a net loss of $57.5 million or $2.73 per share. And for the fourth quarter, our net loss was $51.2 million or $2.30 per share.
The net loss for the year was primarily the result of a $26 million or 29% decrease in net interest income relative to 2007 driven by lower asset level and lower LIBOR levels. Impairments and reserves of $66.5 million as we recorded allowances on five loans and one bond at a valuation allowance of $48 million associated with the loan sales that are part of our debt restructuring.
While these items were partially offset by increased fees from our investment management business, gains from the forgiveness of debt and reductions in G&A, the net impact was a significant loss for the company. From an operating standpoint we have two segments, balance sheet investment and the investment management business.
CT Investment Management Co. or CTIMCO a wholly-owned subsidiary of Capital Trust is the entity through which we execute the management of six private equity funds, six CDOs and our public company parent.
All of the employees of Capital Trust are employees of the CTIMCO and for the year, on a deconsolidated basis, CTIMCO had base management fee revenue of $20 million. Our investment management platform has $5 billion of asset under management and through our two active funds, CT Opportunity Partners I and CT High Grade Partners II we've $1 billion of equity capital available for investment.
Over to the balance sheet: Our CMBS portfolio stood at $852 million at year end and our portfolio experienced downgrades on 13 bonds and upgrades on 6 bonds during the year. One of our bonds, a $6.2 million C-rated security was deemed other than temporarily impaired and we recorded $900,000 impairment against that security.
From a fair-value standpoint, our CMBS was estimated to have a market value of $583 million at year end, or 68% of our carrying value. 88% of our CMBS is in our CDOs, so the impact of these changes in market value have been muted.
Over to loans; our $1.8 billion portfolio comprised of 73 loans, shrunk by 21% or $466 million primarily as a result of repayments of $255 million, the reclassification of a $141 million of loans as loans held for sale and reserves of $63.6 million. This quarter, we began to disclose the Watch List.
The Watch List is derived from our internal risk-rating profit and at year end, we had 15 loans with a carrying value $377 million on that list. Loans held for sale, a new classification for the company, resulted from our decision to sell four loans with a carrying value of $141 million for $92 million in connection with our restructuring plan.
While the sales occurred after year end, GAAP required the financials to reflect our intention to sell these loans with a reclassification of these loans out from our health maturity classification. Equity investment reflects our co-investments in our investment management funds, and increase as we funded a portion of our $25 million commitment to the Opportunity fund, offset by fair-value adjustments in that fund that flow through under the equity methods.
Another new classification on the balance sheet is real estate held for sale; an account necessitated by our taking possession of a multi-family property in Southern California, it had been collateral for an $11.9 million loan. The $9.9 million carrying value reflects an impairment charge we recorded as we adjusted the value of this investment through our expected sales proceeds.
On the liability front, we experienced significant pay downs on our secured credit facility in association with repayments and margin calls from our lenders. At year end, our secured debt balance totaled $699 million, a $213 million or 23% reduction from 2007.
Our CDOs remained relatively constant. However, from an operational standpoint we breached the over-collateralization tests in our CDO II.
This breach redirects our cash flow on the CDO to de-leverage the structure and will end the investment period of this vehicle. Furthermore, our CDOs require the collateral assets that are impaired in our case primarily performing CMBS securities that have been downgraded, have their income redirected to repay senior note holders.
This redirection will have varying degrees of impact on all of our CDOs. Our $100 million unsecured facility that was set to mature later of this month has been extended pursuant to our debt restructuring.
Our junior subordinated debentures that we also refer to as trust preferred securities were also partially restructured. Interest rate hedges and contingent liability decreased in value by $29 million and the changing value is picked up as an increase in the liability account with an offsetting decrease to equity.
Finally, our shareholders' equity account ended the year at $401 million, translating to on a diluted basis, book value per share $18 million and... sorry $18.01.
The company paid dividend of $2.20 per share in 2008, representing regular quarterly dividends for the first three quarters. In the fourth quarter, the Board of Directors chose not pay a dividend as previous distributions were sufficient to satisfy REIT requirements and the Board looks to preserve liquidity.
Going forward, our ability to pay cash dividend will be governed by our debt restructuring. Total liquidity at year end was $64 million comprised of cash and restricted cash and today liquidity stands at $39 million.
Our liquidity reductions were primarily driven by payment we made yesterday of $22 million to our lenders in conjunction with our restructuring. Yesterday, after several months of work with our lenders, we executed restructuring of substantially all of our secured recourse credit facilities, our unsecured credit facility and over 80% of our trust preferred securities.
The restructuring accounts for over 95% of our non-CDO interest-bearing liabilities. As John mentioned, restructuring was developed to stabilize our liability in order to allow us for the orderly collection of our assets.
While there can be no assurances that the restructuring will be successful, management believes we have significantly improved the opportunity for shareholders to preserve the value of equity in it. At year-end, we have secured lending (ph) relationships with six financial institutions, JP Morgan, Morgan Stanley, Goldman Sachs, Citigroup, Lehman Brothers and UBS.
In late February we terminated our $10 million debt obligation with UBS. UBS financed a single $15 million asset and we sold the asset to UBS for proceeds sufficient to repay our obligation.
This transaction generated a loss of $5.5 million as we sold the loans for below its carrying value. Yesterday, we terminated our $88 million debt obligation with Goldman Sachs.
Goldman financed four assets for us with a carrying value of $142 million. Our termination involved repurchasing one $17 million our loan for $2.6 million, free funding $2.4 million of an unfunded commitment associated with another loan, and selling the remaining assets to Goldman Sachs for proceeds' decision to repay our obligations.
This transaction generated a loss of $42.8 million as we sold the loans for below their carrying value. While we've not entered into any agreement with Lehman Brothers and $18 million lender secured by a single $26 million collateral assets we're in negotiations to either modify or terminate our obligation under this facility.
The remaining three lenders, JP Morgan, Morgan Stanley and Citigroup, with balances (ph) yesterday of $580 million, $583 million at year end, entered into an amendment to their existing credit facilities with substantially the same term. The material terms of the amendments are as follows.
The maturity dates on all facilities were modified to March 16, 2010, with two one-year extension options. The first extension is at the company's option subject to our meeting a 20% pay down hurdle including any pay downs that we made yesterday.
In total, the 20% pay down hurdle equals a $118 million. The second extension can be granted at the lenders discretion.
The term extension is designed to run long enough to allow us the opportunity to collect our loans as the bulk of portfolio matures in 2010, '11 and '12. In return, the company agreed to accelerate amortization as follows: payments at closing yesterday of $17.7 million reducing the facility amounts by roughly 3%; monthly payments of 65% of the net interest margin from each lender's collateral pool; direction of a 100% of principal proceeds from each lender's collateral pool from repayment, sales or refinancing; corporate cash flow sweep in the event if the company's cash balances exceed $25 million plus amount necessary to fund unfunded loans including investment commitments in our fund.
All of these amortization payments, except the upfront payment made yesterday, are expected to be funded out of future operating or principal cash flow. One component of principal cash flow may be assets sales and/or refinancings.
In such event, we have minimum relief price mechanics with our lenders ranging from their assessment of market value to a floor of the amount we borrow against each asset. The company also agreed to eliminate the lender's obligations to fund a portion of the company's unfunded loan commitments.
Today, after giving effect to loan sales, unfunded loans driven totaled $23.6 million and fund co-investments driven totaled $19 million. These commitments are expected to be funded over time and through our unrestricted existing cash balances, currently $20 million, sales of unencumbered assets $21 million of carrying value and net operating income going forward.
A critical element of the restructuring is the elimination of our current margin call and mark-to-market provisions. The restructuring provides for no mark-to-market through September this year, than monthly valuation tests of the portfolio.
So long as our loan to collateral value representing our lenders loan amount against their valuation of the portfolio does not exceed 115% of the ratio as of today, there is no impact to us. In the event that we fail such a test, we will be required to bring it back into compliance through additional collateral proceeds or more likely asset sales.
In addition, and very important to us is the amendment to the valuation methodology used by our lenders in calculating this debt. Pursuant to the plan, the banks will no longer derive value based upon the liquidation value of our loans but rather based upon real estate fundamentals and performance at each underlying property or portfolio.
As part of the plan, the secured lenders agreed to keep their interest rates unchanged and finally the last under the secured lender plan the company issued approximately 3.5 million warrants to the three secured lenders at a strike price equal to $1.79 per share which was the closing price on Friday. We also amended our $100 million senior unsecured credit facility that was set to mature March 22nd.
Terms of the modification negotiated in conjunction with the senior lender amendments are as follows. Maturity date on this facility is extended to March 15, 2010 with two-one year expansion options granted to the company as long as the secured lending group extends their maturity dates, ensuring that the unsecured facilities is in place so long as we are being extended by the secured lenders.
In return, the company agreed to increase the cash interest rate from LIBOR plus 175 to LIBOR plus 3% and add a quarterly accrual feature at the rate of 7.2% less the cash rate financial actually each period. We pledged as collateral for the unsecured lenders all of the company's encumbered CDO interests from its four balance sheet CDOs.
Going forward the cash flows from these CDOs will continue to flood the company subject to the amortization test described above. Starting now, we will begin making quarterly amortization payment to the unsecured, that will sum to on an annual basis, the greater of the 25% of the cash flow from the CDO securities mentioned above of $5 million.
As part of the restructuring, we eliminated the financial covenants in the participating secured and the unsecured credit facilities and replaced them with the following new covenants. No new investments without concern of the lenders other than protecting investments on our existing portfolio, generally limited to $5 million per protective investment and a controlled circumstances additional co-investments in future investment management fund.
No additional debt other than replacement debt, debt on unencumbered assets and subordinated debt. Limitations on cash dividends other than those necessary to maintain REIT status, subject are using to the maximum extent available stock dividend rules, minimum liquidity of $7 million in 2009 and $5 million thereafter across all provisions with a $1 million and going forward the CEO, COO and CFO will be subject to certain cash compensation and employment restructuring.
Compensation for all other employees is subject to a predetermined pool. We also modified a $103 million of our $125 million of junior subordinated debentures or trust preferred securities.
The modifications is in the form of an exchange for 100% of our $50 million 2006 issuance of trust preferred securities and 71% or $53.1 million of our 2007 issuance of our trust preferred securities, in return for new a single security. The terms of remaining trust preferred securities $21.9 million of the 2007 issuance remain unchanged.
Terms of the exchange security are a three-year rate reduction from 7.23% to 1%, an immediate trade balance increase of 15% and the new securities have been made senior to the remaining unmodified trust preferred securities. As I mentioned earlier, we believe that this restructuring represents the best deal available for the company and will allow us the opportunity to repay all of our lenders and realize value for our shareholders.
With that said, the success of this plan will be dependant upon among other things asset level performance, repayments and/or liquidity of our loan portfolio and the lenders valuation as modified of our assets. With that I will turn it back to John.
John Klopp
Thank you, Geoff. Hopefully we provided a lot of detail on a very complicated transaction but nevertheless we are ready to take any and all of your questions.
Katie, could you open it up.
Operator
(Operator Instructions). Our first question comes from the side of David Fick of Stifel Nicolaus.
Please go ahead, your line is open.
David Fick - Stifel Nicolaus
Good morning. Congratulations, I guess given the mark that you took on the Goldman and UBS facility is roughly 33%, what are the assets covered on your current secured facilities based on your asset value?
You implied mark-to-market in your other facilities that your equity in those of zero.
Geoffrey Jervis
Well the collateral pool... Is that the end of our question?
David Fick - Stifel Nicolaus
Yes.
Geoffrey Jervis
The collateral pool that secures the three participating lenders, JP Morgan, Morgan Stanley and Citi is 100% performing. The advanced rate on that pool is roughly 50% of our face values.
And we believe that there is cushion in that collateral pool as do the lenders.
David Fick - Stifel Nicolaus
Against the mark.
Geoffrey Jervis
Yes.
David Fick - Stifel Nicolaus
Okay. Any idea, how much that cushion is?
Geoffrey Jervis
To a certain extent it doesn't matter because what we have moved from is a liquidation value mark system to one in which the collateral value test perform going forward are based primarily on the underlying collectibility performance of our loans.
David Fick - Stifel Nicolaus
Okay.
Geoffrey Jervis
So, that was the entire purpose really or certainly one of the primary purposes of the restructuring that we have put in place.
David Fick - Stifel Nicolaus
Alright. If I heard correctly, you no longer have access to any unfunded elements of your CDOs.
Is that correct?
Geoffrey Jervis
Correct.
David Fick - Stifel Nicolaus
Well, okay.
Geoffrey Jervis
You know, actually it's... we soon will have no further access to the unfunded loans of our CDOs.
John Klopp
And we only have one CDO that that applies to which is CTCO II. CTCO I investor period ended last year in normal course.
David Fick - Stifel Nicolaus
Okay. And you don't have at this point or, let me just ask, what is the cash flow status going forward?
What should we be modeling in terms of cash flow out of any CDO source, I'd presume zero?
Geoffrey Jervis
No I think that what we said is that CDO II will have its cash flow redirected to amortize the structure. So while the cash flow is not coming to us, it is redirected to our benefit by de-leveraging the pool of assets.
And then on the other three CDOs, it's varying impact across each CDO by mostly driven by rating agency activity in the last two or three weeks, particularly Moody's activity and we're working through the exact impact with the trustee now. But I would not assume it.
David Fick - Stifel Nicolaus
Okay. Can you just walk us through the funding commitments and how you expect...
you've got roughly $76 million forward funding with $45 million of cash and your cash flow is now essentially being locked if I understand that correctly. How you are you funding that, what are the banks to assist you there?
Geoffrey Jervis
David as I said in my script, while we did eliminate the lenders obligation to fund any post of our unfunded commitments, that after the loan sales in particular the sales to Goldman, our unfunded commitments dropped down to $23.6 million. That $23.6 million we expect to fund out over the next three plus years, so it's all in '09 or even in the two years, and we do have control over some elements of those funding.
And in addition we have $19 million funding commitment to our private equity fund. We expect to fund this through our $20 million current cash balance, the sale of $21 million on a carrying value basis of unencumbered assets and net operating income going forward which we believe to be a significant amount of cash going forward.
David Fick - Stifel Nicolaus
Okay. Can you -- I guess this is for John -- just briefly address the business plan given that you've essentially put the company in the hands of the lenders in terms of any significant decisions?
I don't know if you want to characterize it this way but I'll characterize it as a conservatorship situation where you're working on behalf of the banks going forward. What is the case for shareholders here or is there a case for shareholders here in your stock?
And what is -- or how do you run this company or how do you staff, how do you motivate people given that your hands are so tied?
John Klopp
That's your characterization and certainly not mine. We don't believe that we are in conservative shift but instead believe that we have made a necessary transaction with our lenders that should, and we expect will, allow us to collect our assets in an orderly fashion in the normal course with the ultimate endpoint being we want to, retain as much of the book value of the company which is $400 million, $18 a share as we possibly can.
We believe that we have the operational flexibility and the capacity to do so, subject obviously to the market. Our assets, just like everybody else's, anybody else's, are subject to what's going on in the world right now which is a tough place to be exposed to commercial real estate as we are.
But with that caveat, we believe that we have a business plan. That business plan is to continue to move forward and collect our assets and repay our debt and realize as much of our book value as we possibly can.
At the same time we have very vibrant investment management business that has over $1 billion of capital included in existing funds. And we intend to be an active participant in the markets taking advantage of some of the opportunities that are created by the pain that we're otherwise suffering on our legacy portfolio.
David Fick - Stifel Nicolaus
John, it would appear if there is a lot of that opportunities out there but given co-investment requirement in those funds and restrictions on your ability to access that, can you describe what conditions would be -- for you to be able to make net investments in advance?
John Klopp
Yes. But there are 60 some people on this call and this is the last conversation -- we -- that you can call me separately and ask any number of questions.
David Fick - Stifel Nicolaus
Okay, thank you
John Klopp
We are unconstrained as to our ability to deploy equity capital that is committed into these two funds that have the billion dollars of capital, it's a 100% available to us and 100% in our discretion to make investments on behalf of our partners in those funds and take advantage of those opportunities. We're constrained that I think you may be referring to as part of the restructure debt deal is a constraint on our ability to make co-investments in new yet to be created funds going forward, which certainly will to some extent, impact our ability to continue to grow our investment management business.
We have no impact on our ability to deploy that equity capital. But thank you for your many questions, Mr.
Fick.
David Fick - Stifel Nicolaus
Thank you.
Operator
We'll take our next question from the site of Tayo Okusanya from UBS. Please go ahead, your line is open.
Omotayo Okusanya - UBS
Hi yes. Good morning and my congratulations and that's creating some sense of (ph) kind of work through what you are trying to do.
A quick question, have you guys come up yet with an estimate of given all the pay-down kind of tied towards the new debt restructuring, just how much cash flow that's going to require of you over the next one year? And if you could give us a sense of potential sources of cash that you are looking in order to be able to cover that so that at least you get the next year extension.
John Klopp
I think that sort of quantifying piece by piece our uses of cash flow on this call s probably not the thing to do but I would say there are sources of cash flow as I mentioned in my script, cash, the sales which we have some are pending now of our unencumbered assets and operating income. And operating income is as I mentioned earlier a significant number and those three sources we actually expect to build or maintain our cash balances over the term of this plan.
Geoffrey Jervis
Yeah, we've got -- look, we have got a tough road to halt. There is no question about it.
We've got amortization requirements on the restructured secured debt and an amortization requirement on the restructured unsecured debt but we were able to essentially trust our cash interest to carry as part of this overall transaction. And we believe that with some aggressive action on our part post repayments to sell some loans if we need to and we're relying on our existing resources if we make it.
Omotayo Okusanya - UBS
Okay, it's fair but I guess the math I was trying to do in my head and kind of walk me -- kind of just tell me where I am wrong is planning you're kind of at the cash on hand and about $15 million, of about $45 million. And then I looked at your cash from operations last year, $54 million which kind comes up close to $100 million or so.
But to get the extension on the debt you have to pay it down by at least 20%, it's going to cost about $120 million of cash you need to come with, I guess I'm just coming with that debt that are (ph) where the plug comes from.
Geoffrey Jervis
I think with respect to the secured facilities we expect the lion share of it to come from repayments and/or sales to the extent necessary of collateral. And we believe that as I mentioned in the script other than the upfront payment we made yesterday, we should have no obligation, out of our cash balances with respect to secured lenders.
But that our amortization requirement should be met through portfolio cash flow and portfolio capital events. With some factor to our amortization obligations on the unsecured, those are covered by at least the margin today at four times with respect to cash flow.
So it is net that actually flows -- if you want to think about cash balances, operating income, it does flow to us off the secured loans and the net of the CDO cash flow, including our management fee revenues from other sources of cash into the corporate account.
Omotayo Okusanya - UBS
Okay. One more question, how much of unencumbered assets you guys have at this point?
Geoffrey Jervis
$21 million at carrying value.
Omotayo Okusanya - UBS
Great. Okay.
Thanks very much. Thanks a lot.
John Klopp
Thank you.
Operator
(Operator Instructions) Our next question comes from the site of Fred Stein from Monness Crespi Hardt. Please go ahead, your line is open.
Unidentified Analyst
Hi. I know you guys have very tough job and you did a great job restructuring, I think.
Do you have an opinion on what you see in the marketplace? Do you see any sign of stability or any sign of stability in price or a modification of the decline in commercial pricing?
John Klopp
Honestly not yet. I think that the fundamental I think during the course of last year what we had basically obviously was a credit crisis and a liquidity crisis.
While we have rolling through commercial real estate right now is a fundamental issue again. As the economy continues to link or deteriorate along, the impact is on the fundamentals of real estate right now, occupancy, cash flow.
And I don't think we're done with that yet. We've obviously seen kind of first hotel can hit in the budget, and expectation for 2009 across pretty much the entire lodging sector is grim.
It hits hotels relatively quickly because of the duration of the leases, if you will, overnight. But it's rolling through the other property categories and the truth is that unfortunately winning is going to get worse before it gets better and haven't seen a really the impact of stimulus and all the other programs yet that are coming out of Washington, really impact the liquidity of commercial real estate yet.
Transaction volume is way down. Lending volume virtually nil and liquidity in the market is very tough right now.
I can't give you a more positive answer but the truth is we think it's going to get worse before it gets better.
Unidentified Analyst
On that front, let me just follow up with this question. You probably, I am sure, in your modeling did a best probable and worst case.
In your worst case, are you still equipped to handle this over the next 12 to 18 months without a really major impairment to your book value and your operating capabilities?
John Klopp
Well I guess that depends on what your worst case is. I am not sure what the worst case is in this environment.
We've certainly done a lot of modeling, a lot of expectations. We believe that in the band where we expect the world to end up that we will be able to work our way through this but it is very tough, there is no question about it and it's very tight.
I mean, I don't know what exactly how to model a so called worst case, but in the worst case scenario, we would have, we would expect fairly significant write-downs and losses on some of our loans, that could and would impact book value, you don't think that's likely but it's possible.
Unidentified Analyst
Thank you very much.
John Klopp
Thank you.
Operator
Thank you. Our next question comes from the site of John Spread, a Private Investor.
Please go ahead John, your line is open.
Unidentified Analyst
Congratulations in terms of your restructuring, given the circumstances, would you consider a report out to investors on a monthly basis versus the quarterly basis?
John Klopp
I guess the one word answer is no. I think we're going to stick to our reporting.
We've tired over time to be prepare (ph) our reporting and put as minor detail in it as we think is commercially reasonable. But I think that the answer is, we're going to stick to our quarterly reporting cycle.
Operator
(Operator Instructions). And it appears that now we have no further questions at this time.
John Klopp
Well, then thank you all. We'll talk to you again soon.
Have a good day.
Operator
This concludes today's program. You may disconnect at anytime.
Thank you and have a great day.