Q4 2023 TPG RE Finance Trust Inc Earnings Call
Operator: Greetings and welcome to the TPG Real Estate Finance Trust earnings call for the fourth quarter and full year of 2021. At this time, all participants are in a listen only mode.
Greetings and welcome to TPG Real estate Finance Trust earnings call for the fourth quarter and full year of 2023.
All participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Operator: A brief question and answer session will follow the formal presentation. During the conference, please press star zero on your telephone keypad. As a reminder, today's call is being recorded. It is now my pleasure to turn the call over to the company. Thank you.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, today's call is being recorded it is not my pleasure to turn the call over to the company. Thank you you may begin.
Good morning, and welcome to TPG or you Finance Trust earnings call for the fourth quarter and full year of 2023, we're joined today by Doug Burkhardt, Chief Executive Officer, and Bob Foley Chief Financial Officer.
Operator: Good morning, and welcome to TPG RE Finance Trust's earnings call for the fourth quarter and full year of 2023. We are joined today by Doug Bouquard, Chief Executive Officer, and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments about the quarter, and then we will open the floor for questions. Last evening, the company filed its Form 10-K and issued a press release and earnings supplemental with a presentation of operating results, all of which are available on the company's website in the Investor Relations section. As a reminder, today's call may include forward-looking statements that are uncertain and outside of the company's control. The actual results may differ materially.
Doug and Bob will share some comments about the quarter and then we will open the floor for questions.
Last evening the company filed its Form 10-K and issued a press release and earning supplemental with the presentation of operating results all of which are available on the company's website in the Investor Relations section. As a reminder, today's call may include forward looking statements, which are uncertain and outside of the company's control.
Actual results may differ materially.
Doug Bouquard: For a discussion of risks that could affect results, please see the risk factor section of the company's Form 10-K. The company does not undertake any duty to update these statements, and today's call participants will refer to certain non-GAAP measures. And for reconciliations, you should refer to the press release and the Form 10-K. At this time, I'll turn the call over to Doug Bouquard, Chief Executive Officer. Good morning, and thank you for joining us on this call.
For a discussion of risks that could affect results. Please see the risk factors section of the company's Form 10-K. The company does not undertake any duty to update these statements in today's call participants will refer to certain non-GAAP measures and for reconciliations you should refer to the press release and the Form 10-K at this time.
I'll turn the call over to Doug to card Chief Executive Officer.
Good morning, and thank you for joining the call.
Doug Bouquard: Over the past quarter, the market has rallied broadly, driven by a mix of robust economic growth, a tight labor market, and the expectation that the worst is behind us in terms of both inflation and restrictive Fed policy. Not only is the S&P 500 up about 5% since the start of the year, but it's worth noting that since October 2022, the S&P 500 has rallied a remarkable 40%. In the credit markets, corporate credit spreads continue to tighten in sympathy with the equity market. However, real estate credit spreads continue to underperform on a relative basis, driven by the same themes that have been affecting the real estate market for the last several quarters, broad pressure on values, secular challenges to office, elevated borrowing costs, and reduced liquidity.
Over the past quarter. The market has rallied broadly driven by a mix of robust economic growth a tight labor market.
The expectation that the worst is behind us in terms of both inflation and restricted fed policy.
Not always the S&P 500 up about 5% to start the year, it's worth noting that since October 2022, the S&P has rallied a remarkable 40%.
And credit markets corporate credit spreads continue to tighten in sympathy with the equity markets.
Our real estate credit spreads continued to underperform on a relative basis driven by the same themes that have been affecting the real estate market for the last several quarters.
Pressure on values secular challenges to office elevated borrowing costs and reduced liquidity.
Doug Bouquard: Many traditional providers of real estate debt capital, particularly regional banks, remain defensively positioned. While there are a multitude of dynamics at play within the real estate capital markets, the pace of Fed rate cuts will be a key driver of credit performance, particularly among floating rate lenders. On the positive side, thus far in 2024, credit spreads in the CMBS and CREC low-markets have tightened, with particularly strong demand from the bond-buying community for in-favor property types such as multifamily and industrial. However, real estate as an asset class has lagged the broader market rally.
Many traditional providers of real estate debt capital, particularly regional banks remain defensively positioned.
Well there are a multitude of dynamics at play within real estate capital markets. The pace of fed rate cuts will be a key driver of credit performance, particularly among floating rate lenders.
On the positive side, thus far in 2024 credit spreads and the C and D. S. In CRE CLO markets have tightened with particularly strong demand from the bond buying community for in favor of property types, such as multifamily industrial.
However, real estate as an asset class has lagged the broader market rally.
Doug Bouquard: I expect 2024 to be a year of increased transaction volumes and price discovery across the sector. In the fourth quarter, TRTX followed through decisively on the strategy that we have steadily articulated to the market. Number one, maintain elevated levels of liquidity given the broader market pressure and uncertainty. Number two, resolve identified credit challenge loans with an eye toward maximizing shareholder value. And number three, position PRTX to take advantage of an attractive investment environment in 2024 and beyond. As I've mentioned in prior quarters, we continue to use every asset management tool at our disposal to maximize shareholder value, including those available to TRTX by virtue of being part of a broader real estate investing platform and a $222 billion multi-strategy asset management platform.
I expect 2024 will be a year of increased transaction volumes and price discovery across the sector.
In the fourth quarter TRT X followed through decisively on the strategy that we have steadily articulated to the market number one maintain elevated levels of liquidity given the broader market pressure and uncertainty.
Number two resolve identified credit challenged loans with an eye towards maximizing shareholder value.
And number three position TR T X to take advantage of an attractive investment environment in 2024 and beyond.
As I've mentioned in prior quarters, we continue to use every asset management tool at our disposal to maximize shareholder value, including those available to T. R. T X by virtue of being part of a broader real estate investment platform and a $222 billion multi strategy asset management firm.
Doug Bouquard: Driven by the hard work and focus of our Asset Management team, we resolved during 2023, and especially in the fourth quarter, all of our identified credit challenge loans at levels in line with our CECL reserves. Consequently, we ended the year with a loan portfolio that is 100% performing, contains no five-rated loans nor non-performing loans, and achieved a 71% reduction in CECL reserves, all while maintaining liquidity of $480 million. Simply put, we were an early mover to identify and address challenges within the sector.
Driven by the hard work and focus of our asset management team, we resolved during 2023 and especially in the fourth quarter all of our identified credit challenged loans at levels in line with our seasonal reserves. Consequently, we ended the year with a loan portfolio that is 100% performing.
Contains no five rated loans, nor nonperforming loans.
And achieved a 71% reduction in Keystone reserves, all while maintaining liquidity of $480 million.
We put we went early mover to identify and address challenges within the sector. Our fourth quarter results exemplify our commitment to getting ahead of them and resolving underperforming credit exposures.
Doug Bouquard: Our fourth-quarter results exemplify our commitment to getting ahead of and resolving underperforming credit exposures. Looking at our asset management progress through a more focused lens, we identified the challenges facing the office market and moved prudently to reduce our exposure by approximately 70% from $2.3 billion to $728 million since early 2022. A substantial portion of that risk reduction came in the form of full or partial repayments from our borrowers. However, in certain cases where we deemed it to be the optimal path for shareholder value, we sold loans or took title to assets. These asset management decisions are rooted in the investment framework we apply to all of our investors.
Looking at our asset management progress through a more focused lives we identified the challenges facing the office market and moved prudently to reduce our exposure by approximately 70% from $2 3 billion to $728 million since early 2022.
A substantial portion of that risk reduction came in the form of full or partial repayments from our borrowers.
However, in certain cases, where we tended to be the optimal path for shareholder value, we sold loans or took title to assets.
These asset management decisions are really in the investment framework, we apply to all of our investments.
Doug Bouquard: Given that TRTX is part of TPG's fully integrated debt and equity investment platform, we are uniquely positioned to manage REO assets and maximize shareholder value. At quarter end, REO assets account for slightly less than 5% of TRTX's total assets. Despite the banking industry's emphasis on reducing direct lending on commercial real estate assets, we continue to benefit from strong demand from our financing counterparties to deepen their lending relationship with TRTF. To that end, we extended a $500 million secured credit facility with Goldman Sachs to 2028 and closed a new financing arrangement with HSBC. We have no material financing maturities until 2026, which provides us with an attractive runway to deploy fresh capital into the real estate credit market. Looking ahead.
Given that T. R. T X is part of Tpg's fully integrated debt and equity investment platform, we are uniquely positioned to manage our REO assets and maximize shareholder value.
Rent Oreo assets account for slightly less than 5% of TRT axis total assets.
Despite the banking industries emphasis to reduce direct lending on commercial real estate assets. We continued to benefit from strong demand from our financing counterparties to deepen their lending relationship with yeah.
To that end, we extended our $500 million secured credit facility with Goldman Sachs to 2028 and closed a new financing arrangement with HSBC we.
We have no material financing maturities until 2026, which provides us an attractive runway to deploy fresh capital into the real estate credit market.
Looking ahead.
Doug Bouquard: Uncertainty continues to permeate the broader real estate market. For TRTX, due to the substantial progress made over the past year in reshaping our loan portfolio, our strong liquidity, and low leverage, we are confident in our ability to navigate the current environment. From an exposure perspective, our loan portfolio is 49% multifamily, which we believe is a sector with positive long-term tailwinds despite the near-term pressures of new supply and elevated short-term borrowing costs. Our multifamily book is 100% performance.
Uncertainty continues to permeate the broader real estate market.
Our tier TX due to the substantial progress made over the past year and reshaping our loan portfolio, our strong liquidity and low leverage we are confident in our ability to navigate the current environment.
From an exposure perspective, our loan portfolio was 49% multifamily, which we believe is a sector with positive long term tailwind. Despite the near term pressures of new supply and elevated short term borrowing costs.
Our multifamily book is 100% performing.
Doug Bouquard: Furthermore, 100% of our multifamily borrowers who are required to replace their interest rate caps in 2023 did so by either renewing, replacing a cap, or funding an interest reserve, which is a positive signal of borrower commitment, the strength of our collateral, and the overall credit quality of our balance sheet. While slower-than-expected interest rate cuts may put pressure on the sector and our borrowers, we continue to favor the housing sector and believe this will be an area for attractive new investment in the coming quarters. Against this improving backdrop, our current share price represents approximately 50% of book value.
Anymore, 100% of our multifamily borrowers who are required to replace their interest rate caps in 2023 did so by either renewing replacing a cap or funding an interest reserve, which is a positive signal towards borrower commitment construct of our collateral and the overall credit quality of our balance sheet.
While slower than expected interest rate cuts may put pressure on the sector and our borrowers we continue to favor the housing sector and believe this will be an area for attractive new investment in the coming quarters.
Against this improving backdrop, our current share price represents approximately 50% of book value. So there remains a clear disconnect from the company's fundamentals, including a significant progress made in 2023, and our 100% performing loan portfolio.
In simple terms with $480 million of available liquidity.
A conservative leverage ratio of two five to one our balance sheet with 100% performing loans and the deep investment experience of Tpg's Global real estate platform.
Doug Bouquard: So, there remains a clear disconnect from the company's fundamentals, including the significant progress made in 2023 and our 100% performing loan portfolio. In simple terms, with $480 million of available liquidity, a conservative leverage ratio of 2.5 to 1, a balance sheet with 100% performing loans, and the deep investing experience of TPG's global real estate platform. We believe that our shares offer compelling value at today's price, although we acknowledge the real estate sector remains under pressure.
Leave that our shares offer a compelling value at today's price.
We acknowledged the real estate sector remains under pressure.
And that credit performance may be heavily dependent on the pace of future interest rate cuts. However, we are pleased with how we are positioned to navigate 2024 and beyond with that.
I'll turn it over to Bob for a more detailed summary of this quarter's performance.
Thank you guys. Good luck.
Everyone. Thanks for joining us our results for the fourth quarter and full year illustrate our success in executing our 2023 operating.
Robert R. Foley: And that credit performance may be heavily dependent on the pace of future interest rate cuts. However, we are pleased with how we are positioned to navigate 2024 and beyond. With that, I will turn it over to Bob for a more detailed summary of this quarter's performance. Thank you, Doug. Good morning, everyone.
Which ways to efficiently resolve or identified credit challenge loans, primarily office at the best values available in the market.
Sustained high levels of liquidity.
Colin or reduce our already low leverage levels and position Trc accident year and to play offense defense what about 2024.
Regarding our operating results GAAP net income attributable to common shareholders was $2 6 million for the fourth quarter as compared to a loss of $64 6 million for the third quarter.
Robert R. Foley: And thanks for joining us. Our results for the fourth quarter and full year illustrate our success in executing our 2023 operating plan, which was to efficiently resolve or identify credit challenge loans, primarily office, at the best values available in the market. To sustain high levels of liquidity, maintain or reduce our already low leverage levels, and position TRTX at year-end to play offense, defense, or both in 2024. Regarding our operating results, gap net income attributable to common shareholders was $2.6 million for the fourth quarter, as compared to a loss of $64.6 million for the third quarter.
Net interest margin for our loan portfolio was 21.
Versus 19 5 million in the prior quarter and.
An increase of $1 8 million or two cents per diluted share.
Due largely to repayment of borrowings associated with nonperforming loans resolved during the fourth quarter.
Distributable earnings before realized credit losses was $24 1 million or 31 cents per common share as compared to $13 7 million or 18 cents per common share in the prior quarter.
Distributable earnings before realized credit losses averaged 23 cents per quarter.
For the full year, 2023, which we view as a solid foundation from which to build in 2024.
Robert R. Foley: The net interest margin for our loan portfolio was $21.3 million versus $19.5 million in the prior quarter, an increase of $1.8 million, or $0.02 per common share, due largely to repayment of borrowings associated with non-performing loans resolved during the fourth quarter. Distributable earnings before realized credit losses were $24.400, or $0.31 per common share, as compared to $13.7 million, or $0.18 per common share, in the prior quarter. Distributed earnings before realized credit losses averaged 23 cents per quarter for the full year 2023, which we view as a solid foundation from which to build in 2024. Distrutable earnings declined quarter-over-quarter to a loss of 159.7 million, 159.7 million, 159.7 million, versus a loss of $103.7 million in the prior year due entirely to realized losses incurred from the resolution of all of our non-performing and 5-rated loans during the fourth quarter.
Distributable earnings declined quarter over quarter, so a lots of $159 7 million.
So it's a loss of $103 7 million in the prior.
Due entirely to realized losses incurred on the resolution of all of our nonperforming and five rated mountains during the fourth quarter.
The realized losses recognized in the fourth quarter were nearly identical to the CECO reserves associated with the resolve.
Our CFO reserve decrease quarter over quarter by $166 8 million or 75% to $69 8 million from $236 6 million as of September 30th 2023.
Cisco reserve rate declined to 190 basis points from 560 basis points. This decline reflects 466 million of loan resolutions during the fourth quarter involving identified credit challenged models, including the elimination of call hybrid bonds.
Nonperforming loans, so we have no specific reserves for loan losses.
Book value per share is $11.86 a decline of 18 cents per share.
And four cents in the third quarter.
Some important data points.
Robert R. Foley: The realized losses recognized in the fourth quarter were nearly identical to the FISA reserves associated with the resolved loan. Our CSO reserve decreased quarter over quarter by $166.8 million, or 70.5%, to $69.8 million from $236.6 million as of September 30, 2023. Additionally, our CECL reserve rate declined to 190 basis points from 560 basis points.
We reduced nonperforming loans to zero from a peak of $558 9 million at March 31st 2023.
Our $3 7 billion loan portfolio was at year end, 100% performing.
100% floating rate and.
And 100% first mortgage.
Resolved 466 million of identified credit challenge lines in the fourth quarter and 951 million during the entire year.
Quarter the loan resolutions included one office one soul.
Robert R. Foley: This decline reflects 466 million in loan resolutions during the fourth quarter involving identified credit challenge loans, including the elimination of all fibrated bonds and non-performing bonds. We have no specific reserves for bond losses at U.S. The put value per share is $11.86, a decline of $0.18 per share from $12.04 in the third quarter. Some important data points. We reduced non-performing loans to zero from a peak of $558.9 million on March 31, 2023. [inaudible] and 100% first mortgage. Resolved $466 million of identified credit challenge loans in the fourth quarter and $951 million during the entire year. For the quarter, the loan resolutions included one office loan sold, three office loans converted to REO, one multifamily loan sold, and one multifamily loan converted to REO. Excluded from these amounts are $70 million of regular way loan repayments in full on one hotel loan and partial repayments of $30.2 million across three loans.
Three Apis all converted to our yeah, one multifamily loans sold and one multifamily was converted to Oreo.
Excluding these amounts our $70 million regular way longer payments.
One hotel loan and partial repayments of $30 2 million across three of them.
To accomplish our goal we incurred realized losses during the fourth quarter of $184 1 million and for the year of $334 7 million.
These losses were within 3% for the quarter and 95% for the full year aggregates use of reserves related to those resolved.
The small quarterly decline in book value in the face of $184 1 million of realized losses reflected our seasonal reserve that already largely captured the eventual losses.
Upon resolution.
And getting our balance sheet at least identified credit challenged mountains. We also shipped $280 6 million of borrowings used to fund those non earning assets and $6 9 million of related interest expense or approximately eight cents per share per quarter.
Multifamily.
Now represent 49, 2% of our own portfolio office has declined 68% there'll be.
For the past eight quarters to 19, 9%.
Robert R. Foley: To accomplish our goal, we encourage realized bosses during the full exporter of $184.1 million and for the year of $347.7. These losses were within 3% for the quarter and 9.5% for the full year, but the aggregate diesel reserves were dated to those resolved. The small quarterly decline in book value in the face of $184.1 million of realized losses reflected our CESA reserve that had already largely captured the eventual losses realized upon notice of the. In reading our balance sheet of these identified credit challenge loans, we also shed $280.6 million of borrowings used to fund those non-earning assets and $6.1 million of related quarterly interest expense, or approximately $0.08 per share per quarter. Multifamily loans now represent 49.2% of Office has declined 68% over the past eight quarters to 19.9%.
Life Sciences is 11%.
What's how is 10, 6% and no other property type comprises more than three 1% of our portfolio.
And finally commitments total $183 3 million.
5% of our total loan commitments.
We further delever to two and a half to one which is defensive but gives us ample room for growth when warranted.
We have $4 9 billion of total financing capacity across 13 different arrangements.
During the fourth quarter, we added a non mark to market financing arrangement with a new counterparty.
And shortly after year end, we extended our existing $500 million secured credit facility with Goldman Sachs.
For two additional years through 2026 and tacked on a two year term acquisition through 2028.
Our only scheduled debt maturity in 2024, it was $1 8 million under our credit facility.
Back to extend.
Regarding how are you.
Our strategy is to resolve credit challenge lounge, and recycle capital was to convert certain loan investments.
Which gets to your T X sole control of the properties and their desktops.
During the fourth quarter, we converted the RVO for loans three office properties and one multifamily property.
Robert R. Foley: Life Sciences is 11%, Hotel is 10.6%, and no other property type comprises more than 3.1% of our portfolio. Unfunded commitments total $183.3 million, only 5% of our total unfunded commitments. We further de-levered to two and a half to one, which is defensive but gives us ample room for growth when warranted. We have $4.9 billion in total financing capacity across 13 different delainies. During the fourth quarter, we added a non-mark-to-market, note-on-note financing arrangement with a new counterpart. And shortly after year-end, we extended our existing $500 million secured credit facility with Goldman Sachs for two additional years through 2026 and tacked on a two-year turnout provision through 2028.
Our holdings at year end comprised five properties for office and one multifamily with.
With a total carrying value of $199 8 million.
Our blended current annualized yield of 6% and average basis per square foot for office at $121 per apartment units at $274000.
Refer to footnote four of our financial statements for a snapshot of our Oreo portfolio.
We're using the broad resources at TPG real estate $18 billion real estate platform P.
T G I.
Including platform companies owned by equity funds senior advisors.
And partners and Counterparties to optimize our returns, giving due consideration to investment alternatives cash on cash returns.
Capital requirements.
He actually acts as experienced owning effectively managing and harvesting how yeah hi.
Robert R. Foley: Our only scheduled debt maturity in 2024 is $1.8 million under a credit facility we expect to expand. Regarding REO, one of our strategies to resolve credit challenge loans and recycle capital is to convert certain loan investments to REO, which gives PRTX sole control over the properties and their investments. During the fourth quarter, we converted to REO for a loan. Three office properties and one multifamily property. Our holdings at UNM comprise five properties, four office and one multifamily. With a total carrying value of $199.8 million, a blended current annualized yield of 6%, an average basis per square foot per office of $121, and per apartment unit of $274,000.
Prior to the fourth quarter of 2023, we've taken title to four properties, one land to office and one multifamily.
We sold the land within 14 months of acquisition for a gain of $29 1 million.
We sold one of the office properties in the fourth quarter of 2022, or a net loss of roughly $200000 with.
Which translated into a recovery against our Preforeclosure U P b abruptly at 95%.
Refinanced returned the second office building, which we own today and to operate and which generates a 9% yield.
And we sold in November just three months after acquisition.
All of that family property for all cash no seller financing and generating a $7 million gain compared to RVO.
With total proceeds roughly equal to what people closer and all of that.
Robert R. Foley: Refer to footnote 4 of our financial statement for a snapshot of our audio portfolio at the end. We're using the broad resources of TPG Real Estate's $18 billion real estate platform and TPG, including platform companies owned by equity funds, senior advisors, partners, and counterparties to optimize REO returns, giving due consideration to investment alternatives, cash-on-cash returns, capital requirements, and holdings. TRTX is experienced in owning, effectively managing, and harvesting REO. Prior to the fourth quarter of 2023, we've taken title to four properties. One acre of land, two offices, and one Mopec dam. We sold the land within 14 months of acquisition for a gain of $29.1 million. We sold one of the office properties in the fourth quarter of 2022 for a net loss of roughly $200,000.
The game is reflected in our results of operations for the fourth quarter.
Regarding credit risk ratings improved to three <unk> from 3.2, due almost entirely to loan resolutions during the fourth quarter.
Refer to pages 70, 374 of our Form 10-K, great details recap of risk weighting changes during the quarter.
Regarding our liabilities and our capital base non mark to market liabilities from that an essential ingredient and our financing strategy.
At quarter end non mark to market liabilities represented 73, 5% of our liability base as compared to 68, 9% at September 30th.
Leverage declined further to two and a half or two six to one at September 30th and 2.8 to one at June 30.
We were in compliance with all financial covenants at December 31st 2023.
At quarter end, we had $247 2 million of investment capacity available NFL five to refinance existing loans.
Elsewhere on our balance sheet or to support new loan acquisitions for originations, we essentially utilized $71 2 million of his capacity and intend to fully utilize the remaining $176 million before the outside reinvestment date.
Robert R. Foley: This translated into a recovery against our pre-foreclosure UPD of roughly 95%. We financed Return, the second office building, which we own today and operate, and which generates a 9% yield on equity. And we sold in November, just three months after acquisition. The multifamily property was sold for all cash, no seller financing, and generated a $7 million gain compared to our REO carrying. With total proceeds roughly equal to a pre-foreclosure amount, the game is reflected in our results of operations for the fourth quarter. Regarding credit, risk ratings improved to 3.0 from 3.2 due almost entirely to loan resolutions during the fourth quarter.
At April <unk>.
We estimate total incremental quarterly interest income of approximately seven cents per share.
So having liquidity, we maintain high levels of immediate and near term liquidity roughly 11, 4% of total assets.
To support our asset resolution about investment strategies.
Cash and near term liquidity remains substantial at quarter end at 408 million comprised of $206 4 million of cash.
$247 2 million of CLO investment cash.
And $26 4 million of Undrawn capacity under our secured credit agreements our third CLO remains open pretty investments through mid April of this year.
And during the quarter, we funded $34 6 million of commitments under existing loans and.
Robert R. Foley: Refer to pages 73 and 74 of our Form 10-K for a detailed recap of risk weighting changes during the quarter. Regarding our liabilities and our capital base, not marked market liabilities remain an essential ingredient in our financing strategy. The quarter-end non-mark-to-market liabilities represented 73.5% of our liability base as compared to 68.9% on September 30th. Leverage declined further to 2.5 from 2.6 to 1 on September 30th and 2.8 to 1 on June 30th.
With that we'll open the floor to questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line isn't the question queue. You May press Star two if you would like to move your questions from the queue for participant.
It's using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
Our first question comes from the line of Adam <unk> with Citi. Please go ahead.
Thanks, I guess, maybe now that you've worked through some of your most challenged loans are is your time now just focusing on realizing the value of the Oreo or can you start to get on a more offensive footing in and start to look at investing in some new loans as well.
Robert R. Foley: We were in compliance with all financial covenants at December 31st, 2023. Additionally, at quarter end, we had $247.2 million of reinvestment capacity available in FL5 to refinance existing loans, finance elsewhere on our balance sheet, or to support new loan acquisitions for Richard. We have since utilized 71.2 million of this capacity and intend to fully utilize the remaining $176 million before the outside reinvestment date of mid-April. We estimate total incremental quarterly interest income of approximately $0.07 per share.
Thank you for the question.
On that point, you know I think based on where we are.
As a company, where we're in a really unique spot where we actually are able to start and play frankly, a lot more offensively.
Our record in terms of managing and owning Oreo I know that Bob you spent some time.
Repaired remarks speaking to our experience there but.
But from a capital allocation perspective.
Robert R. Foley: Starting with liquidity, we maintain high levels of immediate and near-term liquidity, roughly 11.4% of total assets, to support our asset resolution and loan investment strategy. Cash and near-term liquidity remains substantial at quarter end at $480 million, comprised of $206.4 million in cash.
We will be deploying capital into new loans in 2024.
Part of that of course will be by deploying our CRE CLO reinvestment capacity and then beyond that we will have the ability to deploy excess cash.
Operator: $247.2 million of CLO investment cash and $26.4 million of undrawn capacity under our Secure Credit Agreement. Our third CLO remains open for reinvestment through mid-April of this year, and during the quarter, we funded $34.6 million of commitments under existing, Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone. A confirmation tone will indicate your line is busy. You may press star 2 if you would like to remove your questions from the list of participants using speaker-equipped phones. It may be necessary to pick up your handset before pressing the start button.
Which which of course can help drive earnings power of the company.
I guess on that last point, I guess, where we stand at the end of the year or today, where is the earnings power that you see right now now that you've kind of had a lot of.
Activity in the fourth quarter.
Sure.
I think to maybe anchor everyone for a moment one thing that we mentioned earlier in the call is that when you look at our average distributable earnings before credit losses in 2023 on a quarterly basis, we averaged about 23.
And that 23 cents of course was during a period of time, where we were generally playing I'd say more defense had elevated cash levels. So I think kind of starting from that 23 cents per share number is I think a.
A relatively good.
And then really from there I would really describe it as our having kind of three levers a promise. We can we can build the earnings power of the company up.
Doug Bouquard: One moment, please, while we poll for questions. The first question comes from the line of Arren Cyganovich with Citibank. Thanks. I guess maybe now that you've worked through some of your most challenging loans, is your time now just focusing on realizing the value of the REO, or can you start to get on a more offensive footing? Thank you for the question. On that point, I think based on where we are as a company, we're in a really unique spot where we are actually able to start and play, frankly, a lot more offensively.
The first of which as I mentioned is deploying the series CLO re investment capacity, which work well in the process of it.
Bob mentioned, we have $274 million of capacity within those T. L. O as we have already deployed thus far about $71 million of that and we fully intend to to fund that remaining amount.
Secondly.
We may look to deploy excess cash into investments as well.
We are fortunate to have a series of financing counterparties that we'd like to continue to grow our relationships. So from a from a back leverage perspective, theres ample liquidity, so again sort of lever too would be deploying excess cash and then third just from a leverage perspective, we are relatively low levered. When you look at really across the landscape. We're levered at two.
Doug Bouquard: Our record in terms of managing and owning REO. I know that Bob spent some time in his prepared remarks speaking to our experience there, but from a capital allocation perspective, we will be deploying capital into new loans in 2024. Part of that, of course, will be by deploying our CRE CLO reinvestment capacity, and then beyond that, we will have the ability to deploy excess cash, which, of course, can help drive earnings power. I guess on the last point, where we stand at the end of the year or today, where is the earnings power that you see right now, now that you've kind of had a lot of, Transcription by CastingWords So, I think to maybe anchor everyone for a moment, one thing that we mentioned earlier in the call is that when you look at our average distributable earnings before credit losses in 2023, on a quarterly basis, we And that $0.23, of course, was during a period of time when we were generally playing, I'd say, more defense, and had elevated cash levels.
Two five to one so.
We do have the opportunity to potentially have a bit more leverage.
At our at our company level.
Thank you.
Thank you.
Thank you.
Minded to all the participants that you May press star one to ask a question next question comes from the line of Stephen laws with Raymond James. Please go ahead.
Hi, good morning.
Congratulations.
Morning, a busy busy fourth quarter and in a lot of progress.
You know.
I wanted to touch base, Bob revisit I think you said seven cents per share or is that a quarterly number.
I guess, you won't get a full quarter impact of later this year, but.
Is that a full quarter impact.
<unk> wants to see all of those are topped off.
Yes, that's correct Steven.
I just wanted to clarify that.
Yeah, $2 47 was.
Uninvested at yearend.
Doug Bouquard: So I think kind of starting from that $0.23 per share number is, I think, a relatively good base. And then, really, from there, I would describe it as our having kind of three levers upon which we can build the earnings power of the company. The first of which, as I mentioned, is deploying the Series CLO reinvestment capacity, which we're well in the process of. As Bob mentioned, we have $274 million of capacity within those CLOs. We have already deployed thus far about $71 million of that, and we fully intend to fund. We may look to deploy excess cash into investments as well.
Uh huh.
Absolutely it about $71 million since.
So that leaves about $176 million. So we're all that deploy.
Based on where we're originating loans today in the first quarter and that's that's how you get to the seven cents.
Great that does it.
Great lead into my next question. So the 71 million tonnes, so far where those new originations closed this year with those existing well and other facilities and you know what are you looking at in the current new investment pipeline, that's likely to go into those CLO vehicles.
Yeah. So there's those two investments were both.
Those were both new investments.
And.
Both both within the multifamily sector and I think as we think about deploying capital in 2024.
Doug Bouquard: You know, we are fortunate to have a series of financing counterparties that would like to continue to grow our relationship. So, from a back leverage perspective, there's ample liquidity. So, again, sort of, you know, lever two would be deploying excess cash. And then, third, you know, just from a leverage perspective, we are relatively low levered when you look across the landscape. We're levered at 2.5 to 1.
We still do prefer.
Prefer housing as a broad theme you know, while we do acknowledge that there are parts of the multifamily market, which are under pressure due to either increase the amount of supply in certain markets and then and then sort of on the borrower level in some cases.
Seeing pressure with elevated short term rates, but.
Beyond those two factors, we really do like the multifamily space specifically longer term.
Doug Bouquard: So, we do have the opportunity to potentially have a bit more leverage at our company. Thank you. Thank you. A reminder to all the participants that you may press star and 1 to ask a question. The next question comes from the line of Stephen Laws with Raymond James. Hi, good morning.
So I.
My expectation is that we will be deploying capital.
Within the housing sector, but when we look at the.
Current leverage point that we're able to we're basically able to lend at in today's market. We are I would say generally lending at a lower going in loan to value that I think a lot of where the market was lending in 2021 22.
Operator: Congratulations. Morning. A busy, busy fourth quarter and a lot of progress. I wanted to touch base, Bob. Revisit. I think you said $0.07 per share. Is that a quarterly number? I guess we won't get a full quarter impact until later this year, but is that a full quarter impact?
I appreciate the color there and then on the Oreo I know one of your assets. It's probably there was some reading fairly attractive return, but can you talk about the timeline of maybe moving the others off the balance sheet or are they assets you need to lease up over time and stabilized or are there some that may.
Find other home sooner.
And then others can can you give us a little color on that.
Robert R. Foley: All right. Yes, that's correct, Stephen. Yeah, 247 was uninvested at year end. And so that leaves about $176 million. So we're all that deployed based on where we're originating loans today in the first quarter. That's how you get to the seventh down.
Sure Bob why don't you start.
That one.
Stephen we at year end, our Oreo portfolio was comprised of a five properties.
One of which is an office building in Houston that rebounds.
Since earlier in 2023.
And as you just mentioned.
Generates a very attractive nine plus percent Roe.
Robert R. Foley: Great, and that is a great lead-in to my next question. So the 71 million done so far, were those new originations closed this year? Or were those existing that were on other facilities?
For each of the others and we.
We have all the time, we have evaluated our alternative business plans for each that was an important part of that.
Robert R. Foley: And, you know, what are you looking at in the current new investment pipeline that's likely to go into those CLO vehicles? Yeah, so those two investments were both new investments.
Employing the investment framework to determine whether we were in fact in our foreclose or pursuing other resolution strategy for Egypt, whereas now or no.
I would say generally speaking.
Doug Bouquard: Both within the multifamily sector, and I think as we think about deploying capital in 2024, we still do prefer housing as a broad theme. While we do acknowledge that there are parts of the multifamily market that are under pressure due to either an increased amount of supply in certain markets and, then sort of on the borrower level, in some cases, seeing pressure with elevated short-term rates. But, you know, beyond those two factors, we really do like the multifamily space, specifically longer term.
Properties that we own that.
Now generate less current cash we require more capital or investment.
And have a longer hold.
Hold period in order to fully realize the investment probably have a higher return bar.
And therefore are likely to be owned for shorter periods of time and the opposite would hold true. So for example.
We now own a very nice class a multifamily project in the western suburbs of Chicago.
Hum.
That properties completed several years ago and Lisa.
Robert R. Foley: So, my expectation is that we will be deploying capital within the housing sector. But when we look at the, you know, current leverage points that we're able to – we're basically able to lend in today's market, we are, you know, I would say generally lending at a lower loan-to-value than I think a lot of where the market was lending in 2021. We appreciate the color there.
We've actually improved occupancy by about five or six points in the seven weeks since we acquired it.
That's probably something that we lease up stable.
Stabilized and that's out there or some other assets that may have more complex business plans and we'll report back to the market.
We worked through those.
Great and one last quick one the K mentioned the interest coverage ratio covenant reverts back to one four at the end of this quarter.
Can you give us an update on where you stand on that with that moving from one three back to one four in any moving pieces, we need out there.
Robert R. Foley: And then on the REO, I know one of your assets that's currently there is generating a fairly attractive return, but can you talk about the timeline of maybe moving the others off the balance sheet? Are they assets you need to lease up over time and stabilize? Are there some that may find other homes sooner than others?
Sure absolutely.
Absolutely correct in your assessment, we're obviously monitoring that closely.
In constant discussions with our lenders about a number of things, including Matt but.
Robert R. Foley: Can you give us a little color on that? Sure, Bob, why don't you start that one? Stephen, on your end, our REO portfolio was comprised of five properties, one of which is an office building in Houston that we've owned, and as you just mentioned, it generates a very attractive 9 plus percent ROE. For each of the others, you know, we have evaluated alternative business plans for each. That was an important part of that.
But we don't expect that that won't be an issue.
Alright common movie.
Just wanted to add one more thing in response to your question.
Retiring the substantial borrowings that we had in connection with the Npls.
We no longer have.
It was an important point and addressing.
The interest coverage ratio.
And the other thing I would just remind our investors and analysts is the best.
Robert R. Foley: Employee Investment Framework to determine whether we were in fact in a foreclose or pursue another resolution strategy. I would say, generally speaking, properties that we own that, you know, generate less current cash, we require more capital for investment, and have a longer hold period in order to fully realize on the investment, probably have a higher return bar, and therefore are likely to be owned for shorter periods of time. And the opposite would hold true,
First as a trailing four quarter test how would you sort of earn your way into it.
Thanks Steven.
Thanks, Bob I appreciate the comments.
Thank you.
A reminder to all the participants that you May press star one to ask a question.
Next question comes from the line of Steve Delaney with citizens JMP. Please go ahead.
Yeah.
Good morning, Jamie. Please go ahead with your question you have a question.
Apologies I was on mute my apologies. Thank you for taking the question.
Following up on Steven's comment about the cleanup that you've done this was truly remarkable so we have to I have to applaud that now that sort of the credit is.
Robert R. Foley: So, for example, we now own a very nice Class A multifamily project in the western suburbs of Chicago. That property was completed several years ago and is in lease up. We've actually improved occupancy by about five or six points in the seven weeks since we acquired it.
Box demand, if you will and Youre at Youre looking at new loan opportunities were in the.
The ranking of priorities would you put share buybacks with the stock you know slightly under 50% of book value.
Robert R. Foley: You know, that's probably something that we lease up, stabilize, and then sell. There are some other assets that may have more complex business plans, and we'll report back to the market, www.tpg.com. Great. And one last quick one.
I realize that you know the scale and growth are important but what should shareholders expect if anything on buybacks at this point. Thanks.
Robert R. Foley: McKay mentioned the interest coverage ratio of Covenant reverts back to 1.4 at the end of this quarter. Can you give us an update on where you stand on that with that moving from 1.3 back to 1.4 and any moving pieces we need to know there? Sure, absolutely correct in your assessment. We're obviously monitoring that closely in constant discussions with our lenders about a number of things, including that. But we don't expect that that will be an issue come quarter end. Thank you for coming. I'm moving.
Thank you so Ah.
Share repurchases is certainly.
Certainly a potential tool in the capital allocation Arsenal for us that being said, we we really will be looking at both new investments and.
In other ways for us to be deploying our capital so just to be very very direct about it.
We along with our board are carefully considering the option.
And are seeking the best returns for our investors.
Sure I understand that you did not have I'm looking at the balance sheet I don't see a convert or any high yield debt is that correct I just see secured debt.
Robert R. Foley: Just want to add one more thing in response to your question. Retiring the substantial borrowings that we had in connection with the NPLs. We sort of earn our way into it and out of it.
Am I missing something that's correct that's correct.
Yeah, you're absolutely right.
Robert R. Foley: Thanks, Steve. Thanks, Bob. I appreciate the comments.
Okay, Yeah, because we've seen some some really nice buybacks on those well look I need capital allocation is.
Operator: Thank you. A reminder to all the participants that you may press star and 1 to ask a question. The next question comes from the line of Steve DeLaney with Citizens JMP. Please go ahead with the questions. Apologies, I was on mute.
It's part offense in part defense. So for now we'll just say congratulations on the AR on the great cleanup effort.
Doug Bouquard: My apologies. Thank you for taking the time to answer the question. Following up on Stephen's comment about the cleanup that you've done was truly remarkable, so we have to applaud that. Now that some of the credit is boxed in, if you will, and you're looking at new loan opportunities, where in the ranking of priorities would you put share buybacks with the stock slightly under 50% of book value? I realize that scale and growth are important, but what should shareholders expect, if anything, from buybacks at this point? Thanks. Thank you. A share repurchase is certainly a potential tool in the capital allocation arsenal for us. That being said, we really will be looking at both new investments and other ways for us to be deploying our capital. So just to be very direct about it, we, along with our board, are carefully considering this option and are seeking the best returns for our investors. I'm looking at the balance sheet. I don't see a convertible or any high-yield debt. Is that correct? I just see secured debt. Am I missing something?
I'm sure your board will make the right calls you know moving forward. So all the best in 2024.
Alright, Thank you very much we appreciate it.
Thank you next question comes from the line of sorrow.
But b T H Lee Scott.
Hey, good morning, everyone. Thanks for taking the question.
So my first question is about the run rate distributable earnings on the on the performing loan portfolio.
Could you walk me through your thoughts on go forward earnings power and now that you've gotten hero nonperforming mountains basically like what needs to happen in order for you to remain constructive on that credit.
You mentioned in the prepared remarks that the timing and pace of that.
It is important here.
Would we need to see that within the next few months or can you speak to any sensitivity there and any other variables that we should consider as we think about the go forward nonaccrual risk. Thank you.
Sure I'm.
Happy to address that and thanks for the question.
I'll first start just once again just around again anchoring on our average distributable earnings in 2023 before credit losses again, just to use that as a guidepost of approximately 23 cents per quarter and then from there you know again there there is a.
Robert R. Foley: That's correct. Okay, you're absolutely right. Okay, yeah, because we've seen some really nice buybacks on those. Well, look, capital allocation is part offense and part defense. So, for now, we'll just say congratulations on the great cleanup effort. I'm sure your board will make the right calls, you know, moving forward. So, all the best in 2024. Thank you very much.
Ways to grow the balance sheet in terms of starting to grow earnings power by deploying a series CLO reinvest in capacity.
Deploying excess cash and then also potentially.
Potentially adding adding more leverage given that we are relatively modest elaborate within our within our cohort at <unk>.
You'd have to one.
As we look forward and I think that why you know both both Bob and I had kind of spoken to the fact that we are respectful of where we are in the cycle. Even though we are really pleased as to where our balance sheet is and our ability to frankly deploy capital in 2024, we remain respectful of the fact that the real.
Doug Bouquard: We appreciate it. Thank you. The next question comes from the line of Sarah Barcomb. TPG.
Doug Bouquard: Hey, good morning, everyone. Thanks for taking the question. So, my first question is about, you know, the run rate distributable earnings on the performing loan portfolio. Could you walk me through your thoughts on go-forward earnings power now that you've got zero non-performing loans? Basically, like, what needs to happen in order for you to remain constructive on that credit?
State market is in no way out of the woods.
So when we think about how we positioned our balance sheet and 2024, we continue to have flexibility if the market does get more challenging.
Doug Bouquard: You mentioned in your prepared remarks that the timing and pace of a Fed pivot are important here. Would we need to see that within the next few months, or can you speak to any sensitivity there? And, you know, any other variables that we should consider as we think about the go-forward non-accrual risk? Thank you. I'm happy to address that, and thanks for the question. I'll first start just once again, just to round up, anchoring on our average distributable earnings in 2023 before credit losses, again, just to use that as a guide. And then from there, you know, again, there are ways to grow the balance sheet in terms of – sorry, growing earnings power by deploying the Series CLO reinvestment capacity,deploying excess cash, and then also potentially adding more leverage, given that we are relatively modestly levered within our cohort at two and a half percent. As we look forward, and I think that is why both Bob and I have spoken to the fact that we are respectful of where we are in the cycle.
Pacific to the comment relating to.
Fed rate cuts you know when we look across our balance sheet now, particularly now that we've we've resolved the substantial portion of our credit challenged assets. The the one area that we look through 2024 when it comes to risk is of course that the fed is slower and when you think about you know sofa at roughly five.
Five and a third that may put pressure on certain multifamily borrowers. So we just want to be respectful of that risk.
But when it comes down to it ultimately again, we've positioned the balance sheet, where we can play a lot more office. This year relative to defense, but also just when did you really respectful in terms of where we are in terms of the market.
Okay, great. Thank you and.
My second question relates to liquidity needs for the Oreo portfolio, you've already given some good detail here and thanks again for reminding us on the successful resolutions for the previous Oreo assets.
Doug Bouquard: Even though we are really pleased as to where our balance sheet is and our ability to frankly deploy capital in 2024, we remain respectful of the fact that the real estate market is in no way out of the woods. So when we think about how we've positioned our balance sheet for 2024, we continue to have flexibility if the market does get more challenging. Specific to the comment relating to Fed rate cuts, you know, when we look across our balance sheet now, particularly now that we've, you know, resolved a substantial portion of our credit-challenged assets, the, you know, one area that we look through 2024 when it comes to risk is, of course, that the Fed is slower. And when you think about, you know, SOFR at roughly 5, you know, 5 and a third, that may put pressure on certain multifamily borrowers.
Just digging into these four new Oreo properties, how much liquidity do you think is needed to manage these and will you elaborate ease up or run them Unlevered I'm, just curious about capex plans here.
We're all liquidity needs. Thank you.
Sure. Thanks for your question Sarah the answer yes.
The answer is going to be different for each of the assets.
Just two.
Provide goalposts the multifamily projects I alluded to earlier in the suburbs of Chicago.
It doesn't require any capital.
You know the properties call it 70, 576% leased and occupied so.
That's a pure pure operations exercise, which we're confident will go well.
Our control.
At the other end of the spectrum there are some.
Assets would require capital perhaps reconditioning.
Perhaps for new leasing.
Our liquidity projections for the company, obviously incorporate our expectations there.
Doug Bouquard: But when it comes down to it, ultimately, again, we've positioned the balance sheet where we can play a lot more offense this year relative to defense, but also just want to be really respectful in terms of where we are. Okay, great. Thank you. And my second question relates to liquidity needs for the REO portfolio. You've already given some good details here, and thanks again for reminding us of those successful resolutions for the previous REO assets.
But we're not going to provide at this point specific budgets, you'll be able to see the spend over time as we are.
As we undertake.
You know our business plans here, but generally speaking as I mentioned earlier one of the criteria. We're looking for the best return for our investors and all else being equal we'd rather you know limit capital spend where we can.
Okay, Great and then just really quickly I wanted to clarify that.
That's 7% earnings income benefit that you mentioned is that layering on your expectations for.
Robert R. Foley: Just digging into these four new REO properties, how much liquidity do you think is needed to manage these, and will you lever these up or run them unlevered? Just curious about CapEx plans here and overall liquidity needs. Thank you. Sure. Thanks for your question, Sarah. The answer is... The answer is going to be different for each of the assets.
For going on offense, and making new loans or is that just the benefit of moving existing loans that are currently on warehouse lines over to the clo's.
Well, it's actually a blend of the two but.
And I think I mentioned, a few minutes ago.
Sure.
Robert R. Foley: Oh, provide goalposts, the multifamily project I alluded to earlier in the suburbs of Chicago, really doesn't require any capital. You know, the properties call it 75-76% leased and occupied. So, That's a pure, a pure operations exercise, which we're confident will go well under our control. You know, at the other end of the spectrum, there are some assets that would require capital, perhaps reconditioning. Perhaps for new leasing. Our liquidity projections for the company obviously incorporate our expectations there. But we're not going to provide, at this point, you know, specific budgets.
The utilization of the $71 million of the $2 47, those were two new loan originations.
Right right and we did everything Shlomo.
Originate almost $300 million of loans last year end.
We've originated close to $90 million, thus far this year. So we have not been idle.
And also just to expand on that.
Sure wish I think it's just helpful context.
If you think about where we are liquidity wise, both from a cash perspective from a CRE CLO capacity perspective, and then also all of the new available secured financing that we just lined up we really had a lot of different ways for us to deploy.
Robert R. Foley: You'll be able to see the spend over time as we undertake our business plan. But generally speaking, as I mentioned earlier, one of the criteria is, you know, we're looking for the best return for our investors, and all else being equal, we'd rather limit that capital spend. Okay, great.
Deploy capital so even though we will of course use every dollar of that CRE CLO capacity. There are certain loans, where we may opt to fund that even today outside of the CRE CLO. If we have a more attractive channel in terms of available available back leverage.
Robert R. Foley: And then just really quickly, I wanted to clarify that $0.07 earnings income benefit that you mentioned. Is that layering in your expectations for going on offense and making new loans? Or is that just the benefit of moving existing loans that are currently on warehouse lines over to the CLOs? Well, it's actually a blend of the two, but as Doug and I think I mentioned a few minutes ago, the utilization of the 71 million of the 247; those were two new loan originations. We did originate almost $300 million in loans last year.
Lot of what we've seen from you know from the bank community. So far this year is although they are generally more cautious about direct lending we've seen actually a pretty strong appetite from banks to be providing us back leverage as we're out there, making new investments. So I think that's really what provides us some flexibility where again we.
Of course, we'll be.
Fully fully populating that CRE CLO invested capacity, but we do have many other liquidity alternatives and as we deploy more and more capital we will optimize between the two.
Robert R. Foley: You know, we've originated close to 90 million this year, so we have not been idle. And also just to expand on that, Sarah, which I think is just helpful context. If you think about where we are liquidity-wise, both from a cash perspective, from a series CLO capacity perspective, and then also all of the new available secured financing that we just lined up, we really have a lot of different ways for us to. So even though we will, of course, use every dollar of that Series CLO capacity, there are certain loans where we may opt to fund them even today outside of the Series CLO if we have a I think a lot of what we've seen from the bank community so far this year is, although they are generally more cautious about direct lending, we've seen a pretty strong appetite from banks to be providing us back leverage as we're out there making new investments. So I think that that's really what provides us some flexibility where, again, we will be fully populating that CRE-CLO reinvestment capacity, but we do have many other liquidity alternatives, and as we deploy more and more capital, we will optimize. Thank you. Thank you very much.
Thank you.
Thank you very much.
Thank you next question comes from the line of Rick Shane with Jpmorgan. Please go ahead.
Thanks, everybody for taking my questions. This morning.
Look at cleaning up the book at the end of 'twenty. Three gives you a tremendous amount of flexibility as you head into 2004.
Steve Delaney asked about repurchases one of the other places that you have flexibility is related to dividend policy and I understand there's been a lot of questions about hey, what's the run rate.
On distributable earnings, but the reality is at this point.
Given the the realized losses in 'twenty three.
Dividend as I assume going to be a return of capital.
I understand that there is a signaling to the dividend level, but the reality is even with the stock running up it's trading at a 16 plus percent yield.
In the spirit of preserving flexibility and not really getting full credit for that dividend does it make sense and again I realize this is not out of necessity, but perhaps out of out of Av.
Efficiency to maintain the dividend at the current level, even if he can.
Doug Bouquard: Thank you. The next question comes from Rick Shane with J.P. Morgan. Please go ahead. Thanks, everybody, for taking my questions this morning. Look, cleaning up the books at the end of 23 gives you a tremendous amount of flexibility as you head into 24.
Yeah look it's a it's a great question and we of course spend a lot of time.
Being very thoughtful about our dividend policy I'll first start with yes.
We continue to think about our dividend policy along with our board.
Doug Bouquard: Steve DeLaney asked about repurchases. One of the other places that you have flexibility is related to dividend policy, and I understand there have been a lot of questions about, hey, what's the run rate on distributable earnings? But the reality is, at this point, given the realized losses in 23, the dividend is, I assume, going to be a return of capital. I understand that there is a signaling about the dividend level, but the reality is, even with the stock running up, it's trading at a 16-plus percent yield. In the spirit of preserving flexibility and not really getting full credit for that dividend, does it make sense – and again, I realize this is not out of necessity but perhaps out of efficiency – to maintain the dividend at the current level, even if you can?
Really to be anchored around.
A level that is reflective of the long term earnings power of the company I think as you can see from what we what we were able to achieve particularly in the fourth quarter and really in all 2023 that really allows us to your point to have frankly, a much clearer window into the sort of long term earnings power of the company and frankly, that's exactly what we'll be using as we.
As we think through the dividend policy going forward.
Got it and look at I see that the flip side of it is that.
The realized losses last year, probably equate to call it almost three years of dividend distributions and so.
Again, I just I, just think of it preserving capital being able to see you guys have.
Doug Bouquard: Look, it's a great question, and we, of course, spend a lot of time being very thoughtful about our dividend policy. I'll first start by saying that we continue to think about our dividend policy, along with our board, really to be anchored around a level that is reflective of the long-term earnings power of the company. I think, as you can see from what we were able to achieve, particularly in the fourth quarter and really throughout 2023, that really allows us, to your point, to have a much clearer window into the sort of long-term earnings power of the company. And frankly, that's exactly what we'll be using as we think through the dividend policy. Got it. And look, I see that.
As a REIT any problem, which is that you can't really retain and reinvest capital you're in a situation right now where you're probably looking at above historical norm returns on marginal investments.
Doesn't it make sense to in this window, where you actually can retain capital to retain and reinvest.
Okay.
Youre asking you know really really thoughtful questions and you know again, we are evaluating.
<unk> dividend policy, but again, you really use the guiding light as the long term earnings power of the company.
And I think that as we you know.
Evolve in our balance sheet, and we see opportunities out in the market that's exactly what's going to help us shape, our policy in and navigate some of the complexities that frankly, you laid out quite eloquently.
Doug Bouquard: The flip side of it is that the realized losses last year probably equate to, call it, almost three years of dividend distributions. Again, I just think of it as preserving capital. You guys have a unique problem, which is that you can't really retain and reinvest capital. You're in a situation right now where you're probably looking at above-historical norm returns on marginal investment. Doesn't it make sense to, in this window where you can actually retain capital, to retain and reinvest?
Okay. Thank Rick one language.
And again look at understanding the policy is really helpful and I and I realized there is an enormous amount of.
Uncertainty ambiguity in what is optimal for shareholders I'm.
I'm not saying that this is.
Is the right choice I'm, just I'm just trying to weigh what the different what you guys will consider as you think about this.
Absolutely I'd like to.
Yes, just to add one more thing to Rick's thoughtful.
Doug Bouquard: Yeah, look, I think you're asking really, really thoughtful questions. And, you know, again, we are evaluating dividend policy. But again, we really use the guiding light as the long-term earnings power of the company. And I think that as we, you know, evolve in our balance sheet and we see opportunities out in the market, that's exactly what's going to help us, you know, shape our policy and navigate some of the complexities that, frankly, you laid out quite well. Okay. Thank you so much. And again, look, understanding the policy is really helpful, and I realize there's an enormous amount of... uncertainty, ambiguity, and what is optimal for shareholders is the right choice. I'm just trying to weigh what you guys will consider as you think about. I'd like to just add one more thing to Rick's thoughtful line of questioning, which is that dividend policy is an important and big linear programming problem or application, and none of us should forget that So the discussion today seems to have been focused on situations where the REIT in question, which I think this morning is TRTX, doesn't have taxable income. But there have been, you know... There are instances where there is taxable income, and so that's something that every REIT management team and board needs to consider as well.
Your line of questioning which is that you know our dividend policy is important and big linear programming problem or application and.
None of us should forget that one of the other.
Overlays or constraints that all REIT to operate under is that in order to preserve your REIT what qualification you need to distribute at least 90% of your taxable income so.
The discussion today seems to have been focused on situations.
Where the REIT question, which I think this morning is Trs <unk> doesn't have taxable income.
But there have been yeah.
There are instances, where there is taxable income and so that's something that.
Every REIT management team and board needs to consider as well.
Thanks, Greg.
Thanks, guys.
Thank you.
Thank you.
The final question comes from the line of Don <unk> with Wells Fargo. Please go ahead.
Hi, as you look out over the next quarter or two how are you thinking about the risk of migration from three to four.
And also reserve build over the next quarter or two.
Hey, Dan its Bob Thanks for your question.
Sort of take those in order in terms of of you know.
Risk ratings.
I would say two things at the end of every quarter, we we carefully scrub all the loans in our risk ratings were flat.
Our assessment of current and expected future macro conditions real estate conditions and.
Our assessment of our individual loan collateral loan sponsor and so on.
Robert R. Foley: Thanks, Rick. Thanks, guys. Thank you. The final question comes from the line of Don Fandetti with Wells Fargo. Hi, as you look out over the next quarter or two, how are you thinking about the risk of migration from three to fours and also reserve build-up over the next quarter or two? Hey, Don, it's Bob. Thanks for your question; sort of take those in order. In terms of risk ratings, I would say two things. At the end of every quarter, we carefully scrub all the loans, and our risk ratings reflect our assessment of current and expected future macro conditions, real estate conditions, and our assessment of our individual loans, collateral, loan sponsor, and so on.
And so.
Our risk ratings at the end of any quarter, including December 31st are based on both.
Current reality and our expectations of the future with respect to our expectations for the future.
Doug had mentioned earlier that you know we're in a.
We are in a period of.
Uncertainty and correction.
Certainty in the broader real estate or in the broader economy, and certainly correction real estate.
And that policy in particular weighs heavily on real estate so.
Yes, yes.
If the actual path of the economy and rates proves to be different than different than what we currently expect it will be.
Now that could weigh on borrower behavior, and consequently on risk ratings to <unk>.
Robert R. Foley: So... Our risk ratings at the end of any quarter, including December 31st, are based on both. With respect to our expectations for the future, Doug had mentioned earlier that we are in a period of uncertainty and correction. I'm David Meehan.
A negative or the positive.
With respect to see so you know you mentioned built and.
Bill that's not the way Cecil is structured so any period N C stores, there and again, it's a cluster reflect management's assessment.
Operator: Thanks for joining us. This is a great show. I hope you enjoyed it.
Operator: Thank you for tuning in. We hope you'll join us again next week for another edition of The Real Estate Report. My name is David Meehan.
The current assessment of expected losses over the life of the well so.
Robert R. Foley: Thanks for tuning in. And if you haven't already, please do subscribe to our channel and give us a thumbs up. And if you're new to our channel, please do subscribe to our channel and give us a thumbs up on real estate. So, you know, if the actual path of the economy and rates proves to be different than what we currently expect them to be, that could weigh on borrower behavior and, consequently, on risk ratings to the negative or the positive.
Our.
Reserves at any quarter end.
Our intended to reflect that and due to the best of our ability I think to date are empirical evidence of.
Realized losses in comparison to she's still reserves has been pretty tight.
And so.
The short answer to your question is.
Robert R. Foley: With respect to CECL, you mentioned BUILD, and BUILD is not the way CECL is structured. So at any period end, the CECL reserve, again, is supposed to reflect management's assessment. It's a current assessment of expected losses over the life of the loan, so our reserves at any quarter end are intended to reflect that and do so to the best of our ability. I think to date our empirical evidence of realized losses in comparison to CECL reserves has been pretty tight.
We're comfortable today with our CSO reserve based on what we see in the future yes.
If the market environment in the future is materially different than our current assessment then we'll you know we'll.
We will adjust it at the appropriate time, but again, thus far are our reserves have been you know.
Where are you on target.
Thanks, Paul Hope that answers your question.
Yes.
Okay.
Thank you.
Ladies and gentlemen, we have reached the end of question and answer session I would now like to turn the floor over to the management for closing comments.
Robert R. Foley: And so, you know, the short answer to your question is, you know, we're comfortable today with our CECL reserve based on what we see in the future. If the market environment in the future is materially different than our current assessment, then we'll, we'll adjust it at the appropriate time, but again, thus far, our reserves have been pretty on target. Thanks, Bob. I hope that answers your question.
Yes, I'd just like to thank you all for joining today.
We look forward and we look forward to speaking you again speaking with you again at our next earnings call.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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Operator: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to the management for closing remarks. Yes, I'd just like to thank you all for joining us today, and we look forward to speaking with you again in our next hearing. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Right.
Can you guys hear me okay.
Let's just let me just I'll, let me just remind you that.
Yeah, we can drop to 877 number right.
Goodbye.
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Operator: Do you hear us? You guys hear me? Yeah, I think we can hear you. Let's just, let me just dial, let me just re-invite you back. Yeah, we can drop the 877 number, right? Goodbye. The Fourth Edition, LLC, www.tpg.com.au.
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