Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Commercial real estate market sentiment is modestly improving, driven by reduced interest rate expectations and future supply dynamics.
- No negative migration in risk-rated one to three loans, which account for about three-quarters of the total $2 billion loan portfolio.
- The underlying borrowers have committed approximately $140 million of capital over the last 12 months in support of risk-rated three or better loans.
- The company declared a regular cash dividend of $0.25 per common share for the third quarter of 2024.
- The company is maintaining significant levels of liquidity and reducing leverage to strengthen its balance sheet.
Negative Points
- Reported a GAAP net loss of approximately $6.1 million or $0.11 per common share for the second quarter of 2024.
- Distributable earnings loss for the second quarter of 2024 was approximately $6.6 million or $0.12 per common share.
- Three loans migrated from a risk rating of four to a risk rating of five during the second quarter.
- The anticipated sale of a multifamily property securing one of their senior loans did not move forward as anticipated, leading to a nonaccrual status and revised risk rating.
- The company recorded a realized loss of $16 million on a California office property, which was classified as REO held for sale.
Q & A Highlights
Q: How quickly are you seeing behavior from borrowers change their outlook and willingness to work with you to resolve loans given the better expectations in terms of the forward curve?
A: Bryan Donohoe, CEO: The optimism is starting to crystallize with rates, and we began to see this change in sentiment around Q4 last year. The recent rate movements have been beneficial for real estate values, and while the last month's rate decline hasn't fully crystallized in the market, the sentiment is positive, and behaviors are changing in real time.
Q: Can you talk about the factors that will move the needle for distributable earnings, given the declining portfolio size?
A: Tae-Sik Yoon, CFO: We've been purposeful in maintaining financial flexibility, delevering the balance sheet, and maintaining higher levels of liquidity, which has impacted earnings. The number of loans on nonaccrual also affects earnings. Resolving risk-rated four and five loans and paying down debt associated with those assets will positively impact earnings. We expect uneven earnings as we work through our strategic plan, but we aim to stabilize and increase earnings as we resolve these loans.
Q: Do you still feel comfortable with the current dividend given the longer-term earnings potential of the portfolio?
A: Tae-Sik Yoon, CFO: Yes, our Board declared a $0.25 dividend for the third quarter based on our current financial position and outlook. We expect uneven earnings due to strategic activities and market conditions, and the Board will continue to evaluate dividends on a quarter-by-quarter basis.
Q: Regarding the new five-rated multifamily asset that went on nonaccrual, how much interest income did it contribute in Q2, and what realized loss should we expect in Q3?
A: Tae-Sik Yoon, CFO: We did not recognize any interest income from this multifamily loan in Q2 as it was on nonaccrual. We received interest income but recognized it as cost recovery. We have a $6.5 million CECL reserve against this loan, which gives an approximation of the potential realized loss.
Q: What dollar value of REO do you ultimately expect, and where do you think book value per share might trough?
A: Bryan Donohoe, CEO: It's tough to predict the exact dollar value of REO. We have active dialogue with borrowers and prefer to keep them in their natural seats if they add value. We step in as operators of real estate when we can add significant value, but typically for a short duration to stabilize assets before returning them to equity ownership.
Q: What would drive migration from risk four to five in some loans, and are there any loans in particular that we're monitoring more closely?
A: Tae-Sik Yoon, CFO: Migration from risk four to five is driven by factors like certainty and timing of potential events, such as loan maturity. Loans with shorter-term maturity or higher likelihood of loss are more likely to migrate to risk five. We monitor all assets closely, considering financial results, borrower sentiment, and market conditions.
Q: Can you walk us through your confidence level in the current pace of credit migration, balancing resolutions versus development of new problem assets?
A: Bryan Donohoe, CEO: The positive market sentiment and stability in asset fundamentals are supportive of continued stability in our portfolio. We have seen no migration from risk-rated one to three assets and are focused on resolving risk-rated four and five loans appropriately.
Q: What would it take for you to get back on offense, and do you think that could happen in the back half of the year or more likely in 2025?
A: Tae-Sik Yoon, CFO: We need to resolve some of the problem loans and bring additional clarity to our book. While there remains some uncertainty, we are seeing increased transaction activity and are ready to go on offense once we have sound footing.
Q: Of the $140 million of equity contributions from borrowers, what is that going towards?
A: Tae-Sik Yoon, CFO: The contributions are going towards a combination of renewing rate caps, loan paydowns, reserve replenishment, CapEx projects, and tenant improvement dollars. The positive movement in the interest rate curve will allow more funds to be allocated to accretive spends like CapEx and tenant improvements.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
