Q3 2023 TPG RE Finance Trust Inc Earnings Call

[music].

Good morning.

Welcome to T. P. G Real estate Finance Trust third quarter of 2023 earnings Conference call. At this time, all participants are I listen only mode. A question and answer session will follow the formal presentation should you you require an operator assistance during the conference. Please press star is zero to signal an operator. Please note this event.

It's being recorded I.

I would now like to turn the conference over to Debra Ginsburg General Counsel, Vice President and Secretary. Please go ahead.

Thanks, David.

And thank you for joining.

Welcome to T. P G real estate Finance conference call for the third quarter of 2023.

I'm joined today by debit card, Chief Executive Officer, and Thoughtfully Chief Financial Officer.

Sure some comments about the corner and then we'll open up the call for questions.

Yesterday evening, we filed our Form 10-Q and issued a press release and earning supplemental.

Presentation of operating results.

What's your available on our web site and the industrial relations section.

I'd like to remind everyone that today's call may include forward looking statements, which are uncertain and outside of the companies control.

Actual results may differ materially for.

For a discussion of some of the risks that could affect results. Please see the risk factor section about 10-Q and 10-K.

We do not undertake any duty to update these statements and we will also refer to certain non-GAAP measures on this call and for reconciliation you should refer to the press release and our 10-Q.

I turn the call over to does the card Chief Executive Officer of T. P. G real estate pronounced trust.

Thank you Deborah good morning, and thank you for joining our call.

Over the past quarter risk sentiment in the broader market has demonstrably shifted to negative.

The S and P 500 sold off nearly 10% the 10 year Treasury yield hit an all time high since 2007 of over five per cent.

<unk> remains steadfast in its restrictive policies to slow the economy.

Despite the feds policy.

[noise] labor market has remained resilient the consumer continues to spend in the U S economy, thus far has avoided a recession within.

Within the commercial real estate market, the move higher interest rates and weakening risks sentiment has exacerbated many of the same headwinds facing the real estate sector earlier this year van.

Values are under further pressure liquidity is constrained and transaction volumes remain low.

Furthermore, the secular challenges within the office space continue to grow as fresh equity and debt capital continues to avoid this property sector.

Given the market backdrop.

Posture and strategic position remains consistent with prior quarters.

We maintain elevated levels of liquidity, we are patient on capital deployment.

And we are proactively addressing credit challenged assets across our balance sheet. Fortunately it is challenging investment climates like this where the depth and breadth of T. P. G as real estate investment platforms truly shines with it.

Over 20 billion evaluate them across equity and debt strategies, we valuable insights and perspectives that helped drive our investment decisions.

Over the past quarter.

Or decline in net income was driven predominantly by the sale of two office assets, one of which we mentioned last quarter as a subsequent events.

We continue to reduce our exposure to the office market.

These two sales reduced our exposure to a borrower experiencing significant operational and liquidity issues and reflected our beliefs that selling alone now maximize value for shareholders.

In contrast to those loan sales. We also extended to office loans were in each case, the borrowers shown clear commitment to both executing their business plan and have contributed significant fresh equity to the property over the past year.

These resolutions are consistent with our strategy to resolve credit challenged assets, whether through loan restructuring owning a property via Oreo or alone sale.

We remain incredibly focused on maximizing shareholder value with a keen eye on the long term growth of the company.

Over the past quarter, we we received the repayments totaling $297 million across multifamily hotel them off its exposure refunded.

Refunded 144 billion dollar alone Ah 63, L. T V hotel on a spread of silver plus 455.

Or invest in pace remained slow by choice, but we were made it but but we remain excited about future prospects for the real estate lending opportunities that.

Elevated interest rates widening credit spreads and substantial pullback in lending appetite across the market, particularly by regional banks will benefit T. R. T X over the long term.

That's a sign of the progress we continue to make over the past quarter. We had a 42 per cent reduction in nonaccrual loans on our balance sheet.

A modest reduction in our system reserved and further progress on our office exposure.

While our seats are reserved is elevated we have a consistent record of resolving credit challenged assets substantially in line with our reserves.

To put a finer point on office over the past 18 months.

We have reduced their off the exposure by nearly 1.2 billion or approximately 53 per cent in terms of principal balance and we strongly believe that addressing offs exposure is something to be done now.

In the coming years with a hope that interest rates will drop in the work from home trend will return to pre COVID-19 levels. We are addressing the secular issue head on and we have executed this plan through a diversity of resolution strategies.

Full principal pay offs partial principal paydowns loan modifications loan sales in certain cases taken ownership of assets, if we determined that to be the value maximizing path.

To be very clear, we will continue to use every asset management tool at T. P. G disposal tpg's.

D V d's disposal to maximize shareholder value.

I'm pleased to report being executed this strategy work maintaining ample liquidity this.

This quarter, we ended with $571 million of liquidity comprised of 302 million of cash and 238 million reinvestment capacity within our C. A V C. L us we.

We are acutely aware that our liquidity posture waves on their earnings power of the company in the short term. We believe this is prudent from a risk management perspective, and will benefit the company in the long term.

Furthermore, as we weren't early move her to acknowledge the paradigm shift a foot in the real estate market, particularly with an office. We are confident that the investor decisions. We've made over the past year will neighbor will enable our company to take full advantage of the attractive real estate credit environment over the long term.

With that I will turn the call over to Bob to discuss our financial results in greater detail.

Thanks, Good morning, everyone and thank you for joining us.

Regarding operating results Dot net loss to common shareholders was 64.6 million for the third quarter compared to 72.7 million for the second order.

Largely reflects the sale of two nonperforming loans, which January of the losses for gas purposes of 109.3 million in the conversion to arjo of an apartment property in L. A.

January to the job loss of $7.3 million Cecil reserves were previously established for all of these loans.

Interest margin for our loan portfolio was 19.5 million versus $26 $1 million in the prior quarter, a decrease of $6 6 million or eight cents per common share.

Almost entirely to loan repayments during the third quarter loan repayments in full I should say about 261.3 million and in the second quarter of 236 million.

Triple earnings decline quarter over quarter to a loss of 103.7 million versus a loss of 14.4 million.

Prior quarter due largely to the realized losses from the market.

Forming loans and arjo conversion Doug mentioned.

Distributed mornings before realized credit losses was $13.7 million or 18 cents per share as compared to $19.1 million or 25 cents per share.

Prior quarter.

Nonperforming loans declined quarter over quarter by a full 42% to $318.1 million.

92 per cent of our loan portfolio measured by U P. B was performing a quarter and.

Measured by net loan exposure, which is defined as U P. B minus six the reserves.

85% of our loan portfolio is performing a quarter at.

Our seats are reserved decrease quarter over quarter by $41.7 million or 15%.

$236 6 million from $278.3 million last quarter.

Cecil Reserve break declined to 560 basis points from 572 basis points. This decline in dollar terms in basis points reflects our team's progress and efficiently resolving credit challenge loans recovering capital for investment and effective asset management from the remainder of our investment portfolio.

At quarter end book value per share was $12.04. The decline of one dollar and six cents from the second quarter <unk>.

Primarily to a dividend that exceeded pre credit loss of earnings by eight cents a share an additional Cecil reserve related primarily to certain foreign five rated loans.

Regarding liquidity, we maintain high levels of immediate and your your term liquidity roughly 12.8% of total assets to support our asset resolution and load investment strategies cash in your term liquidity increase border over ordered by $27.7 million to 570.6 million, which.

It is comprised of $302.3 million, a balance sheet cash 237, and a half million of cielo reinvestment cash at 30.5 million undrawn capacity under various secure credit pretty much.

Our Thursday yellow remains open for reinvestment through the first quarter of 2024 during.

During the quarter refunded $21.4 million of commitments under existing loans unfunded commitments declined by 52.9 million or 17.6% to $247.6 million, which is only 5.9% of our total loan commitments.

Regarding credit we've made substantial progress during the first three quarters of 2023 and promptly resolving credit challenge loans for which we have concluded that a meaningful recovery and loan or collateral value is unlikely.

Every resolution, whether an amendment modification loan sale discount and pay off for Oreo conversion is evaluated using the same old versus salary investment analysis during.

During the third quarter, we sold two nonperforming loans with an aggregate U P V. A 281.6 million uninsured losses of $109.3 million.

Repaid 197 million of related borrowings best reducing quarterly interest expense by approximately $4.1 million or five cents per share per quarter.

Nonaccrual loans declined quarter over quarter by 42% to $318.1 million versus $546 7 million at June 30th.

After quarter, and we sold one of those nonaccrual loans and $86 7 million dollar loan on an office building in Arlington, Virginia, just across the Potomac River from Washington D. C. The results of those sales will be disclosed in next quarter's financial submissions.

Risk ratings remain unchanged at 3.2 with limited migration between categories in the third quarter two loans were downgraded to five four and five loans will repay to resolve with a weighted average risk rating of 3.6.

Regarding C R. Cecil reserve declined quarter over quarter by 41.7 million do the loan repayments Lone sales 101, arjo conversion offset in part by increases in Cecil reserves, driven by worsening macro economic assumptions and further deterioration in the debt and equity capital markets.

Emily for office properties.

Regarding our liabilities and capital base non mark to market liabilities remain the essential ingredient in our financing strategy.

Porter and non mark to market liabilities represented 68.9% of our liability base as compared to 71.7 at June 30th.

Leveraged declined further to 2.6 to one from 2.794.

During the quarter, we extend it for one year or $500 million secured financing arrangement with Goldman Sachs. We have executed the term sheet and are negotiating documents for another non mark to market known unknown arrangement with a new banking party and then closed it will be our third such arrangement in place.

Market power P. P. G Y capital markets business enables us to source and sustain long David cost efficient capital to support our existing portfolio and selected loan purchases and originations.

A quarter and you have $237.5 million reinvestment capacity available in F. L. Five to refinance existing loans financed elsewhere on the balance sheet or to support new loan acquisitions originations. We expect <unk> utilize this capacity during the fourth quarter, which we estimate general.

Right incremental interest income per quarter.

<unk> seven cents per share and with that we'll open the floor for questions operator.

Thank you at this time, we will be conducting a question and answer session.

You would like to ask a question. Please press star one on your telephone keypad, Hey, confirmation tumble indicate your line isn't the question queue.

And anytime you wish to remove your question from the queue. Please press star too for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question.

Comes from Stephen laws with Raymond James.

Hi, good morning.

<unk> <unk> <unk> <unk>.

Doug I Wanna start with maybe a bigger picture around the three rated loans kind of when you think about a little over 3 billion.

Where do you think you are to identify and kind of you.

You know.

Things that may face future kind of negative rating migrations versus you know you're kind of already passed what you guys believe as a stress point and you feel really good there.

How do you think about that is is a risk.

Sure. So you know I think within our with our three rated loans generally speaking you know that's where we were.

<unk> first of all have confidence that the borrower is.

Executing on their business plan first and foremost secondly from an L. T V perspective, we feel as though we have sufficient cushion in terms of today's values and then and then I would say third you know, we we have a tremendous amount of insight as a function of the sort of broader T. P. G real estate investment platform around.

And you know where where valuation is today. So we of course, you know have have the benefit of those of those insights as we kind of think through risk ratings generally speaking.

Great and then Bob I think you mentioned two new five rated loans can you provide a little color on those.

Sure one.

Is an office building.

On the West Coast.

Where you know the the operator is experience a decline in occupancy which is not you need to this building. It's it's fairly market lives in the Bay area, where it returned to office has been rather slow.

Another Wyoming and the other is a a wellies multifamily property and the west suburbs of Chicago.

Yeah. Both both are instances that we've been tracking for awhile and.

We we have acid resolution plans in place for each of those.

Great and then lastly, I wanted to touch on on earnings and and make sure everything correct. The the repayments of borrowings associated alone sold would reduce interest expenses around five cents and then over the next quarter to rescue.

The full impact of their cielo replenishment. So you know kind of fair to say run rate Shrivel earnings are kind of excluding realize losses it'll flow through depending on resolutions that we sort of seen the trough here given those two dynamics.

Never say never but we do feel like we have uhm fairly good visibility going forward on a number of things.

One is that there are several levels levers that we have available to pull with respect to setting a new <unk>.

Level or equilibrium for recurring range for the company.

One of them is you just mentioned is reducing our.

Non-performing loan balance where on the one side not earning an interesting comment on the other side. We're paying every month interest expense on funding to maintain that loan physician or those not physicians as I mentioned earlier, we cut that quarter over quarter by 42%, So and and in some instance.

Is those positions are financed very cost effectively for example, certain mercy yellows and others. The cost if I'm just a little bit higher so the savings there can be quite substantial.

Yeah, we have 237 and a half million dollars in cash and that's L. Five as I mentioned in the estimated that there was an upside no. There is no around seven cents.

We have substantial liquidity on the balance sheet, which.

Described by choice, we have collected today not to deploy but employing that over the next couple of quarters, Yes, and when we conclude that's the right thing to do.

<unk> really a 10% <unk> market today for making appropriate transitional first mortgage loans with strong sponsors so.

Suitable meaningful upside there.

And I mentioned in my remarks, the company is very.

Very low leopard in comparison to all really of its public peers and so there's an opportunity for upside there too.

Fantastic Thanks for the call or Bob I appreciate that Thomas this morning.

Our next question is from Sarah Barcomb with B T I G.

Hey, good morning, everyone. So you said Sarah How're Ya.

Hey, good morning, so you've been removing the more difficult credits from that portfolio Uhm violence houses here and you've brought in a couple of new loans with the proceeds but repayments had been strong as well. So the portfolios contracting should we continue to assume that part of the dividend will be paid out of book value.

You given run right earnings are are shaking out you know a little bit below run rate the ear, how how should we think about that.

Alright, I'd say, you know consistent with prior quarters. The the decision relating to the dividend is is a board level decision and and that decision of course will be a function of our view of the earnings power of the company as we work through credit challenged assets and then also the uhm available investment opportunities Kung Fu.

Four but again, that's a that's a board level just add.

Decision.

Okay Uhm semi follow up it's with respect to the the five rated loans uhm. The specific Cecil stayed about the same at 175 million, but the total principal balance if that group came down. So my question is to do the two loans that came into the five rated pool carry higher.

Lots of assumptions any existing assets or did your outlook for those three five rated loans that were already in their last quarter worse than how should we think about that dynamic across those five loans.

Hi, Good morning, Sir it's Bob happy to answer that question.

You're correct there were two loans that moved into five and so they effectively brought with them the.

Allocated Cecil reserve associated with each there were a small number of loans that were already in the specifically identified pool, where we did a slightly increased the reserves primarily office and primarily for the reasons that commented on earlier.

But relative to the renewables frankly that resulted from the one resolution said she during the quarter they were relatively modest.

Thank you.

Thanks, Sir.

Our next question is from Rick Shane with J P. Morgan.

Hey, guys. Thanks for taking my question I need to <unk> before Sarah cause she really hit my primary topic in terms of dividend, but would love to explore this just a little bit more obviously with the realized losses that creates an opportunity to really rethink the dividend, but even if.

We just start to normalize for recurring spread income.

It's unclear whether or not 24 cents is is the right run right can you talk about both the dynamic in terms of realized losses and also the ongoing <unk>.

Spreading come to support the dividend <unk>.

Sure and and happy to provide a little more contacts there so.

Just to.

<unk> some of the important components of that determination, which again is done in a board level, but you know we look at.

Current liquidity are are targeted liquidity levels expectations on credit challenge loans, and then ultimately it comes down to a capital allocation decision to.

To put some numbers around it wreck to your question you know net income before credit losses is it really range between 18 to 25 cents per share and we believe that this is an important precursor to establishing.

Sustaining earnings power once we substantially complete our acid resolution strategy, Oh, I think that Bob had mentioned within you know his comments at the beginning of the call that you know just in deploying to capital within our Seery Cielo, which again has substantial amount of available reinvestment that that alone will add approximately seven cents.

For sure. So I think that that that metric I think is important that'd be really think about you know again, establishing the sustainable earnings power of the balance sheet as these as we've worked through some of the credit challenged assets.

Unknown Executive: [inaudible] you to welcome you to the TPG Real Estate Finance Trust 3rd quarter of 2020 Earnings Conference Call. At this time, I would like to welcome you[inaudible] Over the past quarter, our decline in net income was driven predominantly by the sale of two office assets, one of which we mentioned last quarter as a subsequent event. As we continue to reduce our exposure to the office market, these two sales reduced our exposure to a borrower experiencing significant operational and liquidity issues and reflected our belief that selling the loan now maximized value for shareholders.

Got it and <unk> look I understand the balancing act Karen I I appreciate that you guys had been.

Forward leaning in terms of building reserve transparency and.

You know resolving.

Ah troubled loans and and you know we may be in an environment, where first losses best Lawson, it's a little bit painful to watch right now, but we look at the disconnect between book value per share and D, where the stock trading and a dividend policy.

That allows you given the losses, probably to retain more capital why not be a lot more aggressive on the buyback side at this point then on the dividend side.

<unk>, we're always looking at ways in terms of Optimising capital allocations I think that you know our main focus over the past few quarters. As you know has been you know really preserving liquidity keeping our art liquidity elevated is really allowed us to navigate credit challenge loans, you know frankly.

<unk> and I think that's really been at the top of the list I think as we work through our our our credit challenge loans, which again, we've made a lot of progress, particularly this quarter and and I stuck next quarter as well, we will we will always be thinking about what the appropriate capital allocation is in terms of cash on our balance sheet.

Okay. Thank you very much.

Thanks, Thank you.

Our next question.

Is from Erin <unk> with city.

Thanks, I wanted to touch on on credit migration trends in and how.

How how they're moving about within the portfolio is is still kind of coming from loan maturity's that are forcing the sponsors to to make a choice or is their actual kind of deterioration within some of these individual underlying assets.

Good morning, Erin Thanks for your question I I think that migration is.

Reset it's it's been pretty stable, we review every home every quarter.

And.

Look we have materially reduced office, we got.

By choices significant investment position in multifamily loans and and this Doug described earlier performance there against business plan has been quite good clearly rent growth has slowed but.

Three point, there and frankly, the remaining mark to market and a lot of those positions is quite.

Quite strong so we've just not.

Yeah, we feel good about where we are.

Quote unquote, Mark in terms of risk ratings situations change, but that's yeah that sounds to you right now.

Okay and then.

In the fourth quarter. It looks like you have a few maturities, including a couple of five have you had any early indications on on how those might play out in the corner.

Well, yes <unk>.

Very proactive.

And I think the.

Uhm resolutions over the last number quarters reflect that so <unk>, we do have some more maturity coming up in the fourth quarter and.

We expect it will be employing all of the energy like described earlier.

You may see some extensions we miss you some resolutions in the form of sale.

Unknown Executive: In contrast to those loan sales, we also extended two office loans where in each case, the borrower has shown clear commitment to both executing their business plan and have contributed significant fresh equity to the property over the past year. These resolutions are consistent with our strategy to resolve credit-changed assets, whether through loan restructuring, owning a property via RIO or a loan sale.

Or are you a conversion and you may see some of the payments as well.

And it will be fixed.

Excited and pleased to report on all of that when we speak again, I guess that'll be February.

Okay. Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Doug a card for closing remarks.

Doug Bouquard: We remain incredibly focused on maximizing shareholder value with a keen eye on the long-term growth of the company. Over the past quarter, we received repayments totaling $297 million across multi-family hotel and office exposure. We funded $144 million a loan, a 63 LTV hotel loan at a spread of so for plus $455. Our investment pace remained slow by choice, but we remain excited about future prospects for the real estate lending opportunity set.

Thank you.

Okay I just wanted to thank everyone for taking the time and we look forward to keep me update on our progress. Thank you very much.

This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.

Mmm.

[noise].

Doug Bouquard: Elevated interest rates widening credit spreads and substantial pullback and lending appetite across the market, particularly by regional banks, will benefit TRTX over the long-term. As the side of the progress we continue to make over the past quarter, we had a 42% reduction in non-accrual loans on our balance sheet, a modest reduction in our seasonal reserve and further progress on our office exposure. While our seasonal reserve is elevated, we have a consistent record of resolving credit-challenged assets substantially in line with our reserves.

Doug Bouquard: To put a finer point on office over the past 18 months, we have reduced our office exposure by nearly 1.2 billion or approximately 53% in terms of principal balance. And we strongly believe that addressing office exposure is something to be done now, not in the coming years with a hope that interest rates will drop and the work from home trend will return to pre-COVID levels. We are addressing this secular issue head on and we have executed this plan through a diversity of resolution strategies.

Doug Bouquard: Full principal payoffs, partial principal paydowns, loan modifications, loan sales, and in certain cases take an ownership of assets if we determine that to be the value maximizing path. To be very clear, we will continue to use every asset management tool at TPG's disposal to maximize shareholder value.

Doug Bouquard: I'm pleased to report we've executed the strategy while maintaining ample liquidity. This quarter we ended with $571 million of liquidity comprised of $302 million of cash and $238 million of reinvestment capacity within our serious yellows. We are acutely aware that our liquidity posture weighs on the earnings power of the company in the short term. We believe this is prudent from a risk management perspective and will benefit the company in the long term.

Doug Bouquard: Furthermore, as we run early mover to acknowledge the paradigm shift of foot in the real estate market, particularly within office, we are confident that the invested decisions we've made over the past year will enable our company to take full advantage of the attractive real estate credit environment over the long term.

Doug Bouquard: With that, I will turn the call over to Bob to discuss our financial results in greater detail. Thanks, Doug.

Bob Foley: Good morning, everyone, and thank you for joining us. Regarding operating results, gap net loss to common shareholders was 64.6 million for the third quarter compared to 72.7 million for the second quarter. This largely reflects the sale of two non-performing loans, which generated losses for gap purposes of 109.3 million. And the conversion to RIO of an apartment property in LA, which generated gap loss of 7.3 million. Cecil Reserves were previously established for all of these loans.

Bob Foley: Then interest margin for our loan portfolio was 19.5 million versus 26.1 million in the prior quarter. A decrease of 6.6 million or 8 cents per common share. Due almost entirely to loan repayments during the third quarter, loan repayments in full I should say of 261.3 million and in the second quarter of 236 million.

Bob Foley: Distributable earnings decline quarter over quarter to a loss of 103.7 million versus a loss of 14.4 million. And the prior quarter due largely to the realized losses for the non-performing loans and RIO conversion, Doug mentioned. Distributable earnings before realized credit losses was 13.7 million or 18 cents per share has compared to 19.1 million or 25 cents per share in the prior quarter. Non-performing loans decline quarter over quarter by a full 42% to 318.1 million.

Bob Foley: 92% of our loan portfolio measured by UPB was performing at quarter end. If measured by net loan exposure, which is defined as UPB minus Cecil Reserves 95% of our loan portfolio was performing at quarter end. Our Cecil Reserves decreased quarter over quarter by 41.7 million dollars or 15% to 236.6 million from 278.3 million last quarter. Our Cecil Reserv rate declined to 560 basis points from 572 basis points. This decline in dollar terms and basis points reflects our team's progress in efficiently resolving credit challenge loans recovering capital for investment and effective asset management of the remainder of our investment portfolio.

Bob Foley: At quarter end, book value per share was $12.04, a decline of $1.06 from the second quarter due primarily to a dividend that exceeded pre-credit loss earnings by 8 cents a share and additional Cecil Reserv related primarily to certain foreign-fiberated loans.

Bob Foley: Regarding liquidity, we maintain high levels of immediate and near-term liquidity roughly 12.8% of total assets to support our asset resolution and low investment strategies. Cash and near-term liquidity increased quarter over quarter by 27.7 million to 570.6 million, which was comprised of 302.3 million of balance sheet cash, 237.5 million of COO re-investment cash, and 30.5 million of undrawn capacity under various secured credit agreements. Our third Cecil remains open for re-investment through the first quarter of 2024. During the quarter, we funded 21.4 million of commitments under existing loans, unfunded commitments declined by 52.9 million or 17.6% to 247.6 million, which is only 5.9% of our total loan commitments.

Bob Foley: Regarding credit, we've made substantial progress during the first three quarters of 2023 and promptly resolving credit challenge loans, for which we've concluded that a meaningful recovery in loan or collateral value is unlikely. Every resolution, whether an amendment, modification, loan sale, discounted pay off or audio conversion was evaluated using the same bold versus sale reinvestment analysis. During the third quarter, we sold two non-performing loans, but an aggregate you've paid $181.6 million and incurred losses of $109.3 million.

Bob Foley: We repaid $197 million of related borrowings, thus reducing quarterly interest expense by approximately $4.1 million or $0.5 per share per quarter. Not a cruel loans to crying quarter over quarter by 42% to $318.1 million versus $546.7 million at June 30th. After quarter ends, we sold one of those non-cruel loans and $86.7 million loan on an office building in Arlington, Virginia, just across the Potomac River from Washington, D.C., the results of those sales will be disclosed in next quarter's financial submissions.

Bob Foley: Risk ratings remained unchanged at 3.2 with limited migration between categories. In the third quarter, two loans were downgraded to $5.4 and $5 loans were repaid or resolved with a weighted average risk rating of 3.6. Regarding CISIL, our CISIL reserved declined quarter over quarter by $41.7 million due to loan repayments, loan sales, one REO conversion, offset in part by increases in CISIL reserves driven by worsening macroeconomic functions and further deterioration in the debt and equity capital markets, especially for office properties.

Bob Foley: Regarding our liabilities and capital base, non-marked market liabilities remained the essentially ingredient in our financing strategy. At quarter end, non-marked market liabilities represented 68.9% of our liability base is compared to 71.7 at June 30. Leverage declined further to 2.6 to 1 from 2.7.9 to 1. During the quarter, we extended for one year our $500 million secured financing arrangement with Goldman Sachs. We have executed a term sheet and our negotiating documents for another non-marked market known on note arrangement with a new banking party and when closed, it will be our third such arrangement in place.

Bob Foley: The market power of PPG's firm-wide capital markets business enables us to source and sustain long-dated cost-efficient debt capital to support our existing portfolio and selected loan purchases and originations. At quarter end, we had 237.5 million of reinvestment capacity available in FL5 to refinance existing loans, finance elsewhere on a balance sheet or to support new loan acquisitions or originations.

Bob Foley: We expect to promptly utilize this capacity during the fourth quarter, which we estimate will generate incremental interest income per quarter of roughly $0.7 per share.

Unknown Executive: And with that, we'll open the floor for questions. Operator? Thank you.

Unknown Executive: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star-1 under telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star-2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Keith.

Steven Laws: Our first question comes from Steven Laws with Raymond James. Hi, good morning.

Doug Bouquard: You know, Doug, I want to start with maybe a bigger picture around the three rated loans. Kind of when you think about a little over three billion, you know, where do you think you aren't identifying kind of, you know, things that may face future kind of negative rating migrations versus, you know, you're kind of already passed what you guys believe as a stress point. You feel really good there. You know, how do you think about that as a risk?

Bob Foley: Sure. So, you know, I think within our, within our three rated loans, generally speaking, you know, that's where we, we are first of all have confidence that the borrower is executing on their business plan, first and foremost, secondly, from an LTV perspective, we feel as though we have sufficient cushion in terms of today's values. And then, and then I would say, third, you know, we, we have a tremendous amount of insight as a function of the sort of broader TPG real scene investment platform around, you know, where, where valuation is today. So we, of course, you know, have, have the benefit of those of those insights as we kind of think through risk rating, generally speaking. Great.

Bob Foley: And then Bob, I think you mentioned two new five rated loans.

Bob Foley: Can you provide a little color on those? Sure. One is an office building on the west coast where, you know, the operator has experienced a decline in occupancy, which is not unique to this building. It's been sterling market wide in the area where return to office has been rather slow. And underwhelming and the other is a, a well least multi family property in the west suburbs of Chicago. You know, both, both our instances that we've been tracking for a while.

Bob Foley: And, you know, we, we have asset resolution plans in place for each of those. Great.

Bob Foley: And then lastly, I wanted to touch on, on earnings and make sure you correct the repayments, the barring to socio alone sold would reduce interest expenses around five cents. And then over the next quarter, the full impact of their CLO replenishment. So, you know, kind of fair to say, run rate, sugar learnings are kind of excluding realized losses that will flow through depending on resolutions that we sort of seen the trough tier given those two dynamics.

Bob Foley: Well, never say, never, but we do feel like we have fairly good visibility going forward on a number of things. You know, one is that there are several levels levers that we have available to pull with respect to setting a new, you know, level or equilibrium for recurring range for the company. One of them, as you just mentioned, is reducing our non performing loan balance, where on the one side, we're not earning an interest income, and on the other side, we're paying every month interest expense on funding to maintain that loan position or those loan positions.

Bob Foley: I mentioned earlier, we cut that quarter of a quarter by 42%. So, and in some instances, those positions are financed very cost effectively, for example, certain of our CLOs and others, the cost of funds is a little bit higher. So the savings there can be quite substantial. So, you know, we have 237 and a half million dollars of cash and FL five, as I mentioned, and we estimate that there's an upside no there of, you know, around seven cents.

Bob Foley: We have substantial liquidity on the balance sheet, which as I described by choice, we have elected to date not to deploy, but, you know, employing that over the next couple of quarters, if and when we conclude that's the right thing to do. You know, it's really a 10% ROE issue market today for making, you know, appropriate transitional first mortgage loans with strong sponsors. So there's considerable, they're meaningful upside there. And I mentioned in my remarks, the company is very low leverage in comparison to all really of its public peers. And so there's an opportunity for upside there.

Bob Foley: Fantastic. Thanks for the color, Bob. Appreciate the comments just wanted.

Sarah Barcomb: Our next question is from Sarah Barcomb, with BTIG.

Bob Foley: Hey, good morning, everyone. So you've been removing the more difficult credits from the portfolio by alone sales this year. And you've brought in a couple new loans with the proceeds. But repayments have been strong as well. So the portfolio is contracting. Should we continue to assume that part of the dividend will be paid out of book value given run rate earnings are shaking out, you know, a little bit below run rate DE or how should we think about that?

Bob Foley: I think, you know, consistent with with prior quarters, the decision relating to the dividend is a board level decision. And that decision, of course, will be a function of our view of the earnings power of the company as we work through credit challenge assets. And then also the available best and opportunities going forward. But again, that's a that's a board level decision.

Sarah Barcomb: Okay, so my follow up is with respect to the five rated loans. The specific Cecil stayed about the same at 175 million. But the total principal balance of that group came down.

Bob Foley: So my question is do the two loans that came into the five rated pool carry higher loss assumptions on the existing assets, or did your outlook for those three five rated loans that were already in their last quarter. How should we think about that dynamic across both five loans?

Bob Foley: Good morning, Sarah. It's Bob happy to answer that question. You're correct. There were two loans that moved into five. And so they effectively brought with them the allocated Cecil reserve associated with each. There were a small number of loans that were already in the specifically identified pool, where we did slightly increase the reserves, primarily office and primarily the reasons that commented on earlier. But relative to the removals, frankly, that resulted from the loan resolutions achieved during the quarter, they were relatively modest.

Unknown Executive: Thank you. Thanks, Sarah.

Rick Shane: Our next question is from Rick Shane with JP Morgan. Hey guys, thanks for taking my question. I need to queue in before Sarah because she really hit my primary topic in terms of dividend. But would love to explore this just a little bit more. Obviously with the realized losses that creates an opportunity to really rethink the dividend. But even if we just start to normalize for recurring spread income, it's unclear whether or not 24 cents is the right run rate.

Bob Foley: Can you talk about both the dynamic in terms of realized losses and also the ongoing spread income to support the dividend? Sure, and happy to provide a little more context there. So just to, you know, reiterate some of the important components of that determination, which again is not on the board level. But, you know, we look at current liquidity, our targeted liquidity levels, expectations on credit challenge loans and then ultimately comes down to a capital allocation decision.

Bob Foley: To put some numbers around it, Rick, to your question, net income before credit losses has really ranged between 18 to 25 cents per share. And we believe that this is an important precursor to establishing sustaining Erning's power once we substantially complete our asset resolution strategy. I think Bob had mentioned within his comments at the beginning of the call that just in deploying the capital within our Siri CLO, which again has substantial amount of available reinvestment, that alone will add approximately seven cents per share. So I think that metric I think is important as we really think about, you know, again, establishing the sustainable earnings power of the balance sheet as we've worked through some of the credit challenge assets.

Bob Foley: That's got it. And look, I understand the balancing act here. And I appreciate that you guys had been forward leaning in terms of building reserve transparency and, you know, resolving troubled loans. And, you know, we may be in an environment where first loss is best loss. And it's a little bit painful to watch right now. But we look at the disconnect between book value, per share, and the word stocks trading and a dividend policy that allows you, given the losses, probably to retain more capital.

Bob Foley: Why not be a lot more aggressive on the buyback side at this point and the dividend side. Look, I mean, we're always looking at ways in terms of optimizing capital allocations. I think that, you know, our main focus over the past few quarters, as you know, has been, you know, really preserving liquidity, keeping our liquidity elevated has really allowed us to navigate credit challenge loans. You know, frankly, and I think that's really been at the top of the list.

Bob Foley: I think as we work through our credit challenge loans, which again, we've made a lot of progress, particularly this quarter, and I expect next quarter as well. We will, we will always be thinking about what the appropriate capital allocation is in terms of cash and our balance sheet.

Unknown Executive: Okay. Thank you very much, guys.

Unknown Executive: Thank you.

Aaron: Our next question is from Aaron. So you got to fetch with city. Thanks.

Doug Bouquard: I want to touch on credit migration trends and in how they're moving about within the portfolio is this still kind of coming from loan maturities that are forcing the sponsors to make a choice or are there actual kind of deterioration within some of these individuals. The individual underlying assets. Good morning, Aaron. Thanks for your question. I think that migration is, as we said, it's been pretty stable. We review every loan, every quarter.

Doug Bouquard: And look, we've, we've, we've materially reduced office. We've got by choice a significant investment position and multi family loans. And as I described earlier, the performance there against business plan has been quite good. Clearly ranked growth has slowed that our entry point there. And frankly, the remaining market market in a lot of those positions is quite strong. So we've just not, you know, we feel good about where we're, quote unquote, marked in terms of risk ratings situations change, but that's, you know, that's how we see it right now. Okay.

Doug Bouquard: And then in the fourth quarter, it looks like you have a few maturities, including a couple fives. You know, I view, had any early indications on how those might play out in the quarter. Well, yes, you know, we're very proactive, and I think the resolutions over the last number of years reflect that. So, you do have some long attorneys coming out in the fourth quarter, and, you know, we expect that we'll be employing all of the energy that Doug described earlier.

Doug Bouquard: We may see some extensions, we may see some resolutions in the form of sale, or audio conversion, and we may see some repayments as well. And we'll be, you know, excited and pleased to report on all of that when we speak again. And I guess it will be February. Okay. Thank you.

Unknown Executive: Ladies and gentlemen, we have reached the end of the question and answer session.

Doug Bouquard: And I would like to turn the call back to Doug Bouquard for closing remarks. Thank you. Again, I just wanted to thank everyone for taking the time, and we look forward to keeping the update on our progress.

Unknown Executive: Thank you very much.

Unknown Executive: This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.