Q2 2024 ACRES Commercial Realty Corp Earnings Call
Kyle Brengel: Good day, ladies and gentlemen, and welcome to the second quarter 2024 Acres Commercial Realty Corp. Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions to follow at that time. If anyone requires assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brengel, Vice President of Operations. Please go ahead.
Unknown Executive: Good day, ladies and gentlemen, and welcome to the Sincant Quarter 2024 Acres Commercial Realty Corp.
Speaker Change: Good day ladies and gentlemen, and welcome to the second quarter 2024 Acres Commercial Realty Corp. Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions to follow at that time.
Unknown Executive: Erning's conference call.
Unknown Executive: Currently, all participants are in a listen-only mode.
Unknown Executive: Later, we will conduct a question-and-answer session with instructions to follow at that time. If anyone requires assistance during the conference, please press star, then zero on your touchtone telephone.
Speaker Change: If anyone requires assistance during the conference, please press star then zero on your touchtone telephone.
Unknown Executive: As a reminder, this call is being recorded.
Kyle Brengel: I would now like to introduce your host for today's conference, Kyle Brengel, Vice President of Operations.
As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Kyle Brengel, Vice President of Operations.
Kyle Brengel: Please go ahead. Good morning, and thank you for joining our call. I would like to highlight that we have posted the second quarter 2024 Earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company.
Kyle Brengel: Good morning, and thank you for joining our call. I would like to highlight that we have posted the second quarter 2024 earnings presentation on our website. This presentation contains summary and detailed information about the quarterly results of the company. Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. When using this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements.
Speaker Change: Please go ahead.
Kyle Brengel: Good morning and thank you for joining our call. I would like to highlight that we have posted the second quarter 2024 earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company.
Kyle Brengel: Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. When using this conference call, the words "Belize" anticipates, expects, and similar expressions are intended to identify forward-looking statements. Although the company believes that these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to several trends, risks, and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's report filed with the SEC, including its reports on forms 8-K, N-Q, and 10-K, in particular the risk factors section of its form 10-K.
Kyle Brengel: Although the company believes that these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to several trends, risks, and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statement. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Forms 8K, 10Q, and 10K, in particular the risk factor section of its Form 10K.
Speaker Change: Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements.
Speaker Change: When using this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements.
Speaker Change: Although the company believes that these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to several trends, risks, and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
Speaker Change: These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Forms 8K, 10Q, and 10K, and in particular, the risk factor section of its Form 10K.
Kyle Brengel: Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures may be discussed on this conference call. However, our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in the earnings presentation for the past quarter. With me on the call today are Mark Fogel, President and CEO, and Eldron Blackwell, ACRCFO. Also available for Q&A is Andrew Fentress, chairman of ACR. I will now turn the call over to Mark.
Kyle Brengel: Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements.
Kyle Brengel: The company undertakes no obligation to update any of these forward-looking statements.
Kyle Brengel: Furthermore, certain non-GAAP financial measures may be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation, whereas a substitute to the financial information presented in accordance with GAT. Reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with fairly accepted accounting principles are contained in the earnings presentation for the past quarter.
Speaker Change: Furthermore, certain non-GAAP financial measures may be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP.
Speaker Change: Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in the earnings presentation for the past quarter.
Kyle Brengel: With me on the call today are Mark Vogel, President and CEO, and Aldrin Blackwell, ACR-CFO. Also available for Q&A to the Andrew Ventress, Chairman of ACR.
Speaker Change: With me on the call today are Mark Fogel, President and CEO, and Eldron Blackwell, ACR CFO. Also available for Q&A is Andrew Fentress, Chairman of ACR. I will now turn the call over to Mark.
Kyle Brengel: I will now turn the call over to Mark.
Mark Vogel: Good morning, everyone, and thank you for joining our call. Today I will provide an overview of our loan operations, real estate investments, and the health of the investment portfolio, while Aldrin Blackwell will discuss the financial statements, liquidity condition, book value, and operating results for the second quarter of 2024. Of course, we look forward to your questions at the end of our prepared remarks.
Mark Fogel: Good morning, everyone, and thank you for joining our call. Today, I will provide an overview of our loan operations, real estate investments, and the health of the investment portfolio, while Eldron Blackwell will discuss the financial statements, liquidity condition, book value, and operating results for the second quarter of 2024. Of course, we look forward to your questions at the end of our prepared remarks. The Acres team continues to execute on our business plan by selectively originating high-quality investments, actively managing the portfolio, and continuing to focus on growing earnings and book value for our shareholders.
Mark Fogel: Loan payoffs during the period were $71.2 million, and net funded commitments during the quarter were $9.3 million, producing a net decrease in the loan portfolio of $61.9 million. The weighted average spread of the floating rate loans in our $1.7 billion commercial real estate loan portfolio is now 3.75% over one month's term SOFR rate. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.7 billion of commercial real estate loans across 64 individual investments.
Mark Fogel: Good morning, everyone, and thank you for joining our call.
Mark Fogel: At June 30th, there were 12 loans rated 4 or 5, which represented 21% of the par value of our portfolio, an increase of 4%, respectively, as compared to the end of the first quarter 2024, and our weighted average risk rating increased from 2.6 at March 31st to 2.7 at June 30th. In April 2024, we resolved an $8 million whole loan collateralized by a retail property located in Elizabeth, New Jersey, that was a risk-weighted five asset and had been in default since December 2021.
Mark Fogel: Today I will provide an overview of our loan operations, real estate investments, and the health of the investment portfolio, while Eldron Blackwell will discuss the financial statements, liquidity condition, book value, and operating results for the second quarter 2024. Of course, we look forward to your questions at the end of our prepared remarks.
Mark Vogel: The ACR-CFO continues to execute on our business land by selectively originating high-quality investments, actively managing the portfolio, and continuing to focus on growing earnings and book value for our shareholders. Loan payoffs during the period were $71.2 million and net funded commitment sharing the quarter were $9.3 million, producing a net decrease to the loan portfolio of $61.9 million. The weighted average spread of the floating rate loans in our $1.7 billion commercial real estate loan portfolio is now 3.75 percent of a one-month term SOFR rate. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management.
Mark Fogel: We went through a lengthy foreclosure and eventual bankruptcy process in the state of New Jersey that resulted in the sale of the asset at just above par value, plus we were able to recoup a majority of the legal expenses that we incurred.
Eldron Blackwell: The Acres team continues to execute on our business plan by selectively originating high-quality investments, actively managing the portfolio, and continuing to focus on growing earnings and book value for our shareholders.
Eldron Blackwell: The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. The company ended the quarter with $1.7 billion of commercial real estate loans across 64 individual investments.
Mark Vogel: The company ended the quarter with $1.7 billion of commercial real estate loans across 64 individual investments. At June 30, there were 12 loans rated 4 or 5, which represented 21% of the power value of our portfolio, an increase of 4% respectively as compared to the end of 1st quarter 2024. And our weighted average risk rate increased from 2.6 of March 31 at 2.7 at June 30.
Speaker Change: which represented 21% of the par value of our portfolio.
Mark Vogel: In April 2024, we resolved an $8 million whole loan collateralized by a retail property located in Elizabeth, New Jersey. There was a risk-rated 5-asset and had been in default since December 2021. We went through a lengthy 4-closure and eventual bankruptcy process in the state of New Jersey that resulted in the sale of the asset just above power value, plus we were able to recoup a majority of the legal expenses that we incurred. This successful completion is a credit to our patients to work through the legal process and achieve the value that we had placed on the asset.
Eldron Blackwell: In April 2024, we resolved an $8 million whole loan collateralized by a retail property located in Elizabeth, New Jersey, that was a risk-weighted five asset and had been in default since December 2021.
Speaker Change: We went through a lengthy foreclosure and eventual bankruptcy process in the state of New Jersey that resulted in the sale of the asset just above par value, plus we were able to recoup a majority of the legal expenses that we incurred.
Mark Fogel: This successful completion is a credit to our patients for working through the legal process and achieving the value that we had placed on the asset. We continue to manage several investments in real estate that we expect to monetize at Deans in the future. These anticipated gains will be offset by NOL carry forwards, and we expect to retain the equity and reinvest potential gains into our loan portfolio. One such investment, our student housing development at Florida State University, is on track to receive a certificate of occupancy in early August, in time for the school year.
Mark Vogel: We continue to manage several investments in real estate that we expect to monetize the gains in the future. These anticipated gains will be offset by NOL carry-forwards, and we expect to retain the equity and reinvest potential gains into our loan portfolio.
Speaker Change: These anticipated gains will be offset by NOL carry forwards and we expect to retain the equity and reinvest potential gains into our loan portfolio.
Mark Vogel: One such investment, our student housing development at Florida State University, is on track to receive a certificate of occupancy in early August in time for the school year. The successful completion of this over 125 million dollar project is a credit to our project development and asset management teams, as well as our unaffiliated partners. The two new buildings are 95% pre-leased for the school year, and the project includes amenities for a modern student living environment. We will provide updates and future quarters on the monetization of this asset.
Mark Fogel: The successful completion of this over $125 million project is a credit to our project development and asset management teams, as well as our unaffiliated partners. The two new buildings are 95% pre-leased for the school year, and the project includes amenities for a modern student living environment. We will provide updates in future quarters on the monetization of this asset. In summary, the Acres team continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality and recycling capital into performing categories. We will now have ACR's CFO, Eldron Blackwell, discuss the financial statements and the operating results during the second quarter. Thank you.
Speaker Change: The successful completion of this over $125 million project is a credit to our project development and asset management teams, as well as our unaffiliated partners.
Mark Vogel: In summary, the Augustine continues to be focused on the overall quality of the investment portfolio, including investments in real estate with the goal of improving credit quality and recycling capital into performing categories.
Eldron Blackwell: We will now have ACR's CFO, Eldon Blackwell, discuss the financial statements and the operating results during the second quarter. Thank you and good morning, everyone. The outlet income allocable to common shares on the second quarter was $1.7 million, or 21 cents per share. Included in that income is an increased to current expected credit losses or Cecil reserves of $1.3 million or 17 cents per share, as compared to Cecil reserves during the first quarter of $4.9 million. The increase to the general Cecil reserves is primarily driven by macroeconomic factors putting pressure on CRA evaluation, offset by a decrease in modeled credit risk.
Eldron Blackwell: Thank you and good morning, everyone. Gap's net income allocable to common shares in the second quarter was $1.7 million, or $0.21 per share. Included in that income is an increase to current expected credit losses or CECL reserves of $1.3 million or 17 cents per share as compared to CECL reserves during the first quarter of $4.9 million. The increase to the General Fiscal Reserves is primarily driven by macroeconomic factors putting pressure on CRE valuation, offset by a decrease in modeled credit risk.
Speaker Change: The increase to the general FECA reserves is primarily driven by macroeconomic factors putting pressure on CRE valuation, offset by a decrease in modeled credit risk.
Eldron Blackwell: The total allowance for credit losses at June 30 was $35 million, which represents 2.04 percent or 204 basis points on our $1.7 million loan portfolio at par and comprises $4.7 million in specific reserves and $30.3 million in general credit reserves. Turning available for distribution or EAD for the second quarter was $0.51 cents per share as compared to $0.16 cents per share for the first quarter. The difference primarily being a 33-cent increase in real estate operations and an 11-cent decline in GNA operating expenses, offset by an 8-cent run rate decline in that interest income resulting from net payoffs and, to a lesser extent, loan modifications that occurred during the quarter and late in the first quarter.
Eldron Blackwell: The total allowance for credit losses at June 30th was $35 million, which represents 2.04 percent, or 204 basis points, on our $1.7 billion loan portfolio at par, and comprised $4.7 million in specific reserves and $30.3 million in general credit reserves. Earnings available for distribution or EAD for the second quarter was $0.51 per share as compared to $0.16 per share for the first quarter. The difference primarily being a $0.33 increase in real estate operations and an $0.11 decline in G&A operating expenses offset by an $0.08 run rate decline in net interest income resulting from net payoffs and, to a lesser extent, loan modifications that occurred during the quarter and late in the first quarter.
Eldron Blackwell: Yeah, book value per share was $27.20 on June 30th, doses $27.25 on March 31st. During the second quarter, we used $1.6 million to repurchase 115,000 common shares at an approximate 50% discounted book value. It was approximately $4.1 million remaining on the board-approved program at quarter end. Available liquidity at June 30th was $98.4 million, which comprised $89.6 million of unrestricted cash and $8.8 million of projected financing available on unlearned assets. Our gap debt-to-equity leverage ratio slightly decreased to 3.6 times at June 30th from 3.7 times in March 31st, and our recourse debt leverage remains consistent at 1.1 times at both June 30th and March 31st.
Eldron Blackwell: Gap book value per share was $27.20 on June 30th versus $27.25 on March 31st. During the second quarter, we used $1.6 million to repurchase 115,000 common shares at an approximate 50% discount to book value. There was approximately $4.1 million remaining on the board-approved program at quarter end. Available liquidity at June 30th was $98.4 million, which comprised $89.6 million of unrestricted cash and $8.
Speaker Change: Gap book value per share was $27.20 on June 30th versus $27.25 on March 31st.
Speaker Change: Available liquidity at June 30th was $98.4 million, which comprised $89.6 million of unrestricted cash and $8.8 million of projected financing available on unlevered assets.
Eldron Blackwell: Our gap debt-to-equity leverage ratio slightly decreased to 3.6 times at June 30th from 3.7 times on March 31st, and our recourse debt leverage remained consistent at 1.1 times at both June 30th and March 31st. With that, I will turn the call over to Andrew Fentress for closing remarks.
Speaker Change: Our gap debt-to-equity leverage ratio slightly decreased to 3.6 times at June 30th from 3.7 times in March 31st and our recourse debt leverage remains consistent at 1.1 times at both June 30th and March 31st.
Andrew Ventress: With that, I will turn the call to Andrew Ventress for closing remarks. Thank you, Eldron. We're pleased with the direction of the portfolio. Our team has been working diligently with our borrowers to create positive outcomes during this rate cycle. We're working to deploy available capital into a creative loan opportunities.
Andrew Fentress: We're pleased with the direction of the portfolio. Our team has been working diligently with our borrowers to create positive outcomes during this rate cycle. We're working to deploy available capital into accretive loan opportunities. And lastly, as Mark mentioned, we're in the process of monetizing our equity investments, returning the capital to the loan portfolio. This concludes our opening remarks, and I'll turn the call back over to the operator for questions.
Andrew Ventress: And lastly, as Mark mentioned, we're in the process of monetizing our equity investments, returning the capital to a loan portfolio.
Unknown Executive: This concludes our opening remarks, and I'll turn the call back over to the operator for questions. Thank you. At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind you may remove yourself from the question queue at any time by pressing star and two. Again, it is star and one to ask a question today.
Operator: Thank you. At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing star and two. Again, it is star and one to ask a question today. We'll take our first question from Stephen Laws with Raymond James. Please go ahead, your line is open. Yeah, hi, good morning.
Stephen Laws: We'll take our first question from Stephen Laws with Raymond James. Please go ahead. Your line is open.
Stephen Laws: Yeah, hi. Good morning. Nice, nice quarter. Good to see the solid earnings and rebounding season from Q1.
Stephen Laws: Yeah, hi, good morning. Nice quarter. Good to see solid earnings and rebounding seasonally from Q1. I wanted to start with the real estate portfolio. You know, can you maybe provide a little more color on potential asset sales in the back half of the year? I know you mentioned the Florida state asset in your prepared remarks. You know, if you, you know, kind of force-rank these, which of the ones do you think are likely to be sold sooner rather than later?
Stephen Laws: I wanted to start with the real estate portfolio. Can you maybe provide a little more color on potential asset sales in the back half of the year? I know you mentioned the Florida State asset in your prepared remarks. If you kind of force rank these, which of the ones do you think are likely to be sold sooner rather than later? Is that the key to kind of turn on new origination opportunities? The portfolios have been running off for the last year or so, and I am curious to know when you think the portfolio size kind of troughs and starts to grow again.
Speaker Change: I wanted to start with the real estate portfolio. You know, can you maybe provide a little more color on potential asset sales in the back half of the year? I know you mentioned the Florida state asset in your
Speaker Change: prepared remarks. You know, if you, you know, kind of force-rank these, you know, which, which of the ones do you think are likely to be sold?
Stephen Laws: And is that the key to kind of turning on new origination opportunities? You know, the portfolio has been, you know, I've been running it for the last year or so and curious to know when you think the portfolio size kind of troughs and starts to grow again.
Speaker Change: sooner rather than later. And that's the key to kind of turn on new origination opportunities. You know, the portfolio has been, you know, been running off for the last year or so and curious to know when you think the portfolio size kind of troughs and starts to grow again.
Mark Fogel: Thanks Stephen, this is Mark. Look, we can't really determine at this juncture when we will sell the assets. It's really a matter of where the market is or, you know, executing on a good sale. We do know that our goal is to try to sell several of these assets prior to the end of 2025. You know, the FSU asset probably is the closest one.
Mark Vogel: Thanks, Stephen.
Mark Vogel: This is Mark. Look, we can't really determine at this juncture when we will sell the assets. It's really a matter of where the market is or executing on a good sale. We do know that our goal is to try to sell several of these assets prior to the end of 2025. You know, the FSU asset probably is the closest one. It's opening up. We'll work with our partners to determine whether or not now is the right time to sell and monetize that asset. And we're always looking to the market to try to determine when and if it's the right time to sell and if the properties are operating in the right place and cap rates are cooperating with us.
Speaker Change: We do know that our goal is to try to sell several of these assets prior to the end of 2025.
Mark Fogel: It's opening up. We'll work with our partners to determine whether or not now is the right time to sell and monetize that asset. And we're always looking to the market to try to determine when and if it's the right time to sell, and if the properties are operating in the right place, and cap rates are cooperating with us. We're actively looking at new originations. I think the market is getting stronger and stronger for good opportunities. The CLO market is starting to come back a little bit. We have liquidity, and I think all the elements are starting to come together to get a little bit more active on the origination.
Mark Vogel: Yeah, we're actively looking at new originations. I think the market is getting stronger and stronger for good opportunities. The CLO market is starting to come back a little bit. We have liquidity. And, you know, I think all the elements are starting to come together to see a little bit more active on the origination front.
Speaker Change: Yeah, we're actively looking at new originations. I think the market is getting stronger and stronger for good opportunities. The CLO market is starting to come back a little bit. We have liquidity.
Speaker Change: And, you know, I think all the elements are starting to come together to get a little bit more active on the origination front.
Stephen Laws: Great. Appreciate the color there.
Mark Fogel: Great, appreciate the color there. Can you touch maybe a little bit on the watch list loans? Obviously, there's some net shrinkage of the portfolio, which pushed that number up a little bit, but then you've resolved one five, and had a couple of new loans go on the watch list. So can you talk about expected resolutions there, particularly for the two five-rated loans?
Stephen Laws: Can you touch maybe a little bit on the watch list loans. Obviously, the, you know, there's some, you know, net shrinkage of the portfolio, which pushed that number up a little bit, but then you've resolved one five had a couple of new loans going to watch list. So can you talk about, you know, expected resolutions there, you know, particularly the two five rated loans.
Speaker Change: You know, there's some, you know, net shrinkage of the portfolio, which pushed that number up a little bit, but then you'd be resolved one five had a couple of new loans go on the watch list. So can you talk about, you know, expected resolutions there, you know, particularly of the two five rated loans?
Mark Vogel: I can't. In fact, the one of the five loans we foreclosed on at the beginning of Q3, an office building in Austin where we have a basis that we believe is below our value. That's an asset, just like the Broad Street deal that we just resolved, where we feel like we will get our money back and perhaps more upon a sale. So that one is charging towards resolution. It's been in our portfolio for quite some time. I think it's 2019.
Mark Fogel: I can. In fact, one of the five loans we foreclosed on at the beginning of Q3, an office building in Austin where we have a basis that's we believe below our value. That's an asset, just like the Broad Street deal that we just resolved, where we feel like we will get our money back, and perhaps more upon a sale. So that one is charging towards resolution. It's been in our portfolio for quite some time. I think so it's 2019 now.
Speaker Change: I can't. In fact, one of the five loans we foreclosed on at the beginning of Q3, an office building in Austin where we have a basis that's, we believe, below our...
Mark Fogel: And then the other five assets are just a Mez loan on an office building in Pittsburgh, where we have a full specific reserve. We're working actively with the first mortgage special servicer to try to determine an outcome, but that's still sort of an unknown. And look, the four assets are good assets. It's good real estate. They're just a little bit behind schedule, but we expect to have good resolution on all of those assets.
Mark Vogel: And then the other five asset is just a mes loan on an office building in the Pittsburgh where we have a full specific reserve. We're working actively with the first mortgage special services to try to determine an outcome with that's still sort of an unknown. And look, the four assets are our good assets. They're good real estate. They're just a little bit behind plan, but we expect to have good resolution on all of those assets.
Speaker Change: And then the other five asset is just a MES loan on an office building in Pittsburgh, where we have a full specific reserve. We're working actively with the first mortgage special servicer to try to determine an outcome, but that's still sort of an unknown.
Stephen Laws: Great.
Mark Fogel: Great. And then, you know, I noticed in your slide deck that the interest rate cap is 86%. But I believe, you know, almost half of those caps mature in the third quarter. Can you talk about discussions with borrowers, whether you expect them to buy new caps, they'll, you know, continue to perform on their loans without caps, you know? How do you expect the maturity of those interest rate caps to impact portfolio performance?
Stephen Laws: And then, you know, I noticed in your slide deck, you know, the interest rate caps 86% but I believe of, you know, all this half of those caps mature in the third quarter. You know, can you talk about the specials with borrowers, whether they expect them to buy new caps. They'll, you know, continue to perform on their loan without caps. How do you expect the maturity of those interest rate caps to impact portfolio performance?
Speaker Change: Great. And then, you know, I noticed in your slide deck, you know, you know, the interest rate caps 86%, but I believe, you know, almost half of those caps mature in the third quarter. You know, can you talk about discussions with borrowers, whether you expect them to buy new caps, they'll, you know, continue to perform on their loan without caps, you know, how do you expect them?
Speaker Change: the maturity of those interest rate caps to impact portfolio performance.
Mark Vogel: Look, I think today we've been very successful in working with the borrowers to put new interest rate caps in place. And I expect that to continue. As I've said in prior quarters, in every one of those loans where interest rate caps are expiring, there's a significant amount of real equity invested by the borrowers and a lot to protect. So we believe that we will be successful in working with them to put new caps in place. And at the same time, we've been flexible. We work with them on, you know, either buying a cap or maybe depositing dollars into an interest reserve in lieu of a cap, but today we've been very successful in working closely with our borrowers to ensure that these assets are in the right place with respect to caps.
Mark Fogel: Look, I think today we've been very successful in working with the borrowers to put new interest rate caps in place, and I expect that to continue. As I've said in previous quarters, in every one of those loans where interest rate caps are expiring, there is a significant amount of real equity invested by the borrowers and a lot to protect. So we believe that we will be successful in working with them to put new caps in place.
Speaker Change: Look, I think today we've been very successful in working with the borrowers to put new interest rate caps in place.
Speaker Change: and I expect that to continue.
Speaker Change: As I've said in prior quarters, in every one of those loans where interest rate caps are expiring, there's a significant amount of real equity invested by the borrowers and a lot to protect.
Mark Fogel: And at the same time, we've been flexible; we work with them on either buying a cap or maybe depositing dollars into an interest reserve in lieu of a cap. But to date, we've been very successful in working closely with our borrowers to ensure that these assets are in the right place with respect to caps.
Speaker Change: So we believe that we will be successful in working with them to put new caps in place. And at the same time, we've been flexible. We work with them on either buying a cap or maybe depositing dollars into an interest reserve.
Speaker Change: In lieu of a cap, but to date we've been very successful in working closely with our borrowers to Ensure that these assets are in the right place with respect to caps
Mark Fogel: Great, I'm guessing that the forward curve shifting a little probably made those caps a little more affordable. Lastly, can you talk about considerations around capital and returning it to shareholders? You've got the NOLs, which you've been able to use.
Stephen Laws: Great, I'm guessing that the forward curve shifting a little has probably made those caps a little more affordable.
Stephen Laws: And lastly, can you talk about considerations around capital and returning it to shareholders? You've got the NOLs, which you've been able to use. You're buying back stock, still very accretive to book, although not as accretive as with the stock up 40% year to date, roughly.
Andrew Fentress: You're buying back stock, still very accretive to book, although not as accretive as with the stock up 40% year to date, roughly. How do you think about a dividend with that potentially helping close the gap towards valuation of peers that have similar asset mix and performance, yet they trade it at higher stock multiples? How do you think about a dividend versus repurchase versus continuing to use the NOLs?
Speaker Change: Lastly, can you talk about considerations around capital and returning it to shareholders? You know, you've got the NOLs, which you've been able to use.
Andrew Ventress: How do you think about a dividend, and with that potentially helping close the gap towards valuation of peers that have similar asset mix and performance, yet they trade at higher stock multiple. So how do you think about dividend versus repurchase versus continuing to use the NOLs?
Speaker Change: You know, year-to-date, roughly.
Speaker Change: How do you think about a dividend? And with that, potentially helping close the gap towards valuation of peers that have similar asset mix and performance, yet they trade it at higher stock multiples. So how do you think about dividend versus repurchase versus continuing to use the NOLs? Unknown Speaker
Andrew Ventress: Yes, this is Andrew. I'll take that one. See, the basic objective for capital deployment is a 15% return on equity target. So that's what we're striving for as a minimum in the loan book. And to the extent we can do better than that through share repurchases, we're doing that additionally. We're limited in what we can repurchase, just in terms of volume. And as you've seen, we've been able to build up a reasonable amount of liquidity. And so I think you'll see both happening: both repurchases and deployment into the loan book for the balance of this year.
Andrew Fentress: Yes, this is Andrew. I'll take that one, Steve.
Andrew Fentress: The basic objective for capital deployment is a 15% return on equity target. So that's what we're striving for as a minimum in the loan book, and to the extent we can do better than that through share repurchases, we're doing that additionally. We're limited in what we can repurchase, just in terms of volume, but as you've seen, we've been able to build up a reasonable amount of liquidity, and so I think you'll see both happening, both repurchases and deployment into the loan book for the balance of this year.
Speaker Change: This is Andrew. I'll take that one, Steve. The basic objective for capital deployment is a 15% return on equity target, so that's what we're looking at.
Speaker Change: up a reasonable amount of liquidity.
Andrew Ventress: It has been and continues to be an objective of ours to re-inflate the dividend. What we're hoping to do is to have the assets that were purchased sold; that equity capital then redeploy back into the loan book, driving higher EAD, and then taking that EAD and distributing it to shareholders in the form of a dividend. And so that's the thought process that's ongoing. There are some timing considerations around the last two items. Mark mentioned our objective is to sell these assets and redeploy. The timing is a little bit uncertain, but it's definitely our mission to do that.
Andrew Fentress: It has been and continues to be an objective of ours to reinstate the dividend. What we're hoping to do is to have the assets that were purchased sold, that equity capital then redeployed back into the loan book, driving higher EAD, and then taking that EAD and distributing it to shareholders in the form of a dividend. So that's the thought process that's ongoing. You know, our objective is to sell these assets and redeploy them. The timing is a little bit uncertain, but it's definitely our mission to do so.
Speaker Change: driving higher EAD and then taking that EAD and distributing it to shareholders in the form of a dividend. So that's the thought process. It's ongoing. There's some timing considerations around the last two items Mark mentioned.
Speaker Change: You know, our objective is to sell these assets and redeploy. The timing is a little bit uncertain, but it's definitely our mission to do that.
Stephen Laws: Great.
Stephen Laws: Great. Well, I look forward to watching you execute that playbook and appreciate your time this morning.
Stephen Laws: Well, I look forward to watching you execute that playbook, and I appreciate your time this morning. Thanks.
Unknown Executive: And, as a reminder to ask a question, please press the star and one keys.
Operator: And as a reminder, to ask a question, please press the star and one keys. We'll take our next question from Chris Mueller with Citizens JMP. Please go ahead. Your line is open.
Speaker Change: Thanks.
Speaker Change: And as a reminder, to ask a question, please press the star and one keys. We'll take our next question from Chris Mueller with Citizens JMP. Please go ahead, your line is open.
Christopher Muller: We'll take our next question from Chris Mueller with Citizens, JMP. Please go ahead. You're light is open.
Chris Mueller: Hey guys, thanks for taking the questions and congrats on a nice quarter. So it looks like leverage is moving lower as the CLO is delevering. Should we expect that to continue in the near term until lending ramps back up? And just any thoughts on timing for a new CLO? Is that more of a 2025 type thing?
Christopher Muller: Hey guys, thanks for taking the questions, and congrats on a nice quarter. So it looks like leverage is moving lower as the CLO is delivering. Should we expect that to continue in the near term until lending ramps back up and just any thoughts on timing for a new CLO? Is that more a 2025 type thing?
Mark Vogel: Thanks. Thanks, Chris.
Mark Fogel: Thanks, Chris. This is Mark.
Mark Vogel: This is Mark. Yeah, we expect that the CLOs will continue to deliver such natural runoff of the portfolio. And that may actually increase even more as the 10-year treasury drops. If it continues to drop as people in our portfolio look to the permanent low markets, Fannie Freddie to refinance the loans that they have with us on the bridge side. Yes, we are actively looking at the CLO market to try to determine whether or not it's in a place where we will execute on a new CLO. And obviously, once the old CLOs get to the point where they're delivering, they've leveraged to the point where the return on equity is not where we need it to be or want it to be.
Mark Fogel: Yeah, we expect that the CLOs will continue to de-lever. It's just a natural runoff of the portfolio, and that may actually increase even more as the 10-year Treasury drops, if it continues to drop, as people in our portfolio look to the permanent loan markets, Fannie, and Freddie, to refinance the loans that they have with us on the bridge side. Yes, we are actively looking at the CLO market to try to determine whether or not it's in a place where we will execute on a new CLO.
Mark Fogel: And obviously, once the old CLOs get to the point where they're de-levering, they've de-leveraged to the point where the return on equity is not where we need it to be or want it to be, certainly a CLO execution is in the cards as long as the market's cooperating.
Mark Vogel: Certainly, a CLO execution is in the cards as long as the market's cooperates.
Unknown Executive: Kelly.
Eldron Blackwell: Got it. That's helpful. And then maybe one for Eldron.
Christopher Muller: That's helpful, and maybe one for Eldron.
Eldron Blackwell: How much, I guess, potential upside to book value is there remaining from the tax law scary forward? Or have you guys already been able to capture the bulk of that? I know you used to put a slide in the deck, but I think you took that out a couple quarters ago. So, I'm curious about what that potential upside remaining is. Thanks. I think we've kept, well, it's to be said, but I think we've captured the majority of that. As Mark and Andrew laid out, the majority of that's going to be coming from the sale of our FSU property.
Eldron Blackwell: How much, I guess, potential upside to book value is there remaining from the tax loss carry forwards? Or have you guys already been able to capture the bulk of that? I know you used to put a slide in the deck, but I think you took that out a couple quarters ago. So I was curious about what that potential upside remaining is. Thanks.
Eldron Blackwell: I think we've capped, well, it's to be said, but I think... I think we've captured the majority of that, as Mark and Andrew laid out, the majority that's going to be coming from the sale of our FSU property. We don't know what that value is currently. But that's, for the most part, where the value in our animals is going to be lying along. Got it, so it'll be
Speaker Change: I think we've captured the majority of that as Mark and and Andrew laid out majority that's going to be coming from the sale of our FSU property we don't know what that value is currently but that's that's for the most part where the value in our NOLs are going to be like going forward.
Eldron Blackwell: We don't know what that value is currently, but that's for the most part where the value of our antelope is going to be lying going forward. God, it'll be chunky going forward. That makes sense. That's right.
Chris Mueller: Got it. So it'll be chunky going forward. That makes sense. Thanks for taking the questions. Thanks, Chris.
Speaker Change: Got it. So it'll be chunky going forward. That makes sense. It'll be chunky.
Unknown Executive: Thanks for taking the questions. Thanks, Russ. And once again, if you'd like to ask a question today, please press the star and one key on your telephone keypad. We'll pause for a moment to allow any further questions to queue.
Speaker Change: That's right.
Operator: And once again, if you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll pause for a moment to allow any further questions to queue. And there are no further questions on the line at this time. I will return the call to our speakers for any additional or closing remarks.
Chris Mueller: Thanks, Chris.
Speaker Change: And once again, if you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll pause for a moment to allow any further questions to queue.
Andrew Ventress: And there are no further questions on the line at this time, or turn the call to our speakers for any additional or closing remarks. This is Andrew. Thanks again for everyone participating in this morning's call. We greatly appreciate the questions, as always, and we're always available for additional follow-ups as they arise.
Speaker Change: And there are no further questions on the line at this time. I will return the call to our speakers for any additional or closing remarks.
Andrew Fentress: This is Andrew. Thanks again for everyone participating in this morning's call. We greatly appreciate the questions, as always, and we're always available for additional follow-ups as they arise. Enjoy the rest of the summer, everybody, and we'll look forward to speaking to you in the fall.
Chris Mueller: This is Andrew. Thanks again for everyone participating in this morning's call. We greatly appreciate the questions as always and we're always available for additional follow-ups as they arise. Enjoy the rest of the summer everybody and we'll be look forward to speaking to you in the fall. Thanks.
Andrew Ventress: Enjoy the rest of the summer, everybody, and we'll look forward to speaking to you in the fall. Thanks.
Unknown Executive: This does conclude today's program. Thank you for your participation, and you may now disconnect.
Operator: This does conclude today's program. Thank you for your participation, and you may now disconnect.
unknown: ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??
Chris Mueller: [inaudible]
Unknown Executive: Yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah. Yeah, yeah, yeah. yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah yeah, yeah, yeah, yeah, yeah yeah, yeah, yeah yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah
Speaker Change: ♪♪ ♪♪ ♪♪