Donald Fandetti

Donald Fandetti requested clarification on the $1.60 per share net capital exposure in bridge loans, asking if it covers all bridge loans, and questioned how the risk is manifesting given rising delinquencies versus resolutions.

Answer

President Dashiell Robinson clarified that the $1.60/share figure is specific to the unsecuritized, pre-2023 vintage multifamily bridge loan portfolio. He explained that the Q1 delinquency increase was a strategic choice to pursue alternative resolutions like note sales, rather than extending terms, to exit risk more efficiently.

Donald Fandetti from Wells Fargo asked about risk management for large portfolio acquisitions against securitization market volatility and the expected margins for the new Aspire home equity business.

Answer

CEO Christopher Abate detailed a risk mitigation strategy that includes using joint ventures with capital partners for BPL loans and maintaining excess financing and diverse distribution channels for residential loans. President Dashiell Robinson stated that target gross margins for the Aspire platform are expected to be in the 75 to 100 basis point range, consistent with the traditional Sequoia business.

Donald Fandetti of Wells Fargo & Company asked about the impact of higher Q4 interest rates on book value and any considerations for Q4 EAD, particularly regarding the normalization of gain-on-sale margins.

Answer

CEO Christopher Abate reported that book value was estimated to be flat quarter-to-date, a positive result he attributed to effective hedging and distribution management. President Dashiell Robinson added that a strategic pivot in hedging has been accretive to NII and helped performance. Management reiterated guidance for normalized margins but noted a strong start to Q4 volumes.

Donald Fandetti asked about the credit outlook for Capital One's commercial portfolio, acknowledging market concerns around private credit and non-bank financial institutions (NBFIs), but noting Capital One's strong metrics and modest reserve release.

Answer

Richard Fairbank, CEO and Chairman, detailed Capital One's credit discipline in commercial banking, including tightening credit since 2022, shifting to credit-enhanced structures, and focusing on specific NBFI subcategories. He noted that Capital One's commercial loans decreased by 6% since year-end 2022, while the broader market grew 10%, reflecting a conscious decision to sacrifice market share for credit quality in a competitive environment.

Donald Fandetti from Wells Fargo inquired about the credit outlook for Capital One's commercial portfolio, addressing market concerns around private credit and non-bank financial institutions (NBFIs) despite Capital One's good metrics and modest reserve release.

Answer

Richard Fairbank, Capital One's Chairman and CEO, explained that Capital One has maintained credit discipline in commercial banking by tightening credit early in 2022, particularly in commercial real estate, and shifting business towards credit-enhanced structures. He noted that Capital One's commercial loans decreased by 6% since year-end 2022, contrasting with broader market growth, and emphasized a focus on specific NBFI subcategories with strong credit performance, while carefully monitoring the heightened competition.

Donald Fandetti from Wells Fargo & Company requested more details on the plans to build out Discover's international acceptance, asking about the potential cost, timing, and any guideposts for measuring success.

Answer

Richard Fairbank, Founder, Chairman & CEO, expressed that Discover already has a strong playbook for building acceptance through partnerships and direct merchant relationships. He stated the plan is to 'lean in harder' and invest more in this multi-year journey. While he did not provide specific cost or timing estimates, he framed it as a classic Capital One challenge with a clear and valuable opportunity on the other side.

Donald Fandetti inquired about the outlook for the auto lending business, specifically regarding loan growth strategy amid dynamics like potential tariffs and whether the company is still actively pursuing growth.

Answer

Richard Fairbank, Chairman and CEO, expressed confidence in the auto business, citing strong credit performance resulting from a strategic pullback in 2022. He confirmed they have since leaned back into growth, with originations up 22% YoY. While tariffs could create headwinds for new originations by raising vehicle prices, he stated they are still leaning in, albeit with a watchful eye on the economy.

Donald Fandetti asked if the recent pickup in credit card purchase volume growth was a temporary blip or a sign of sustained consumer confidence. He also inquired about the credit performance of the 2024 origination vintage.

Answer

CEO Richard Fairbank noted that overall purchase volume growth is driven by the branded card base, and that spend per customer began to pick up in mid-2024 and grew further in Q4, calling it a positive trajectory. Regarding new originations, Mr. Fairbank stated that recent vintages show continued stability and are performing in line with pre-pandemic levels (2017-2018), which he attributed to the company's proactive underwriting adjustments for inflated credit scores.

Donald Fandetti inquired about the Discover merger, asking if management still believes owning a payments network strengthens their case for regulatory approval, particularly in light of the DOJ's suit against Visa. He also sought to gauge their confidence in the deal closing.

Answer

Chairman and CEO Richard Fairbank affirmed their pro-competitive argument, highlighting the deal's unique nature. He explained that Capital One is entering the network business, not consolidating within it, and acquiring a smaller player (Discover) whose market share has been declining. He argued that strengthening a smaller competitor in a highly concentrated industry is beneficial for competition, a point they are emphasizing with regulators who have shown concern about the payments market.

Donald Fandetti asked for more detail on the trends within the Small and Medium Enterprise (SME) segment, specifically whether the recent uptick was due to organic growth or cyclical bouncing, and if normalization was expected by 2026, considering fintech competition.

Answer

Chairman and CEO Stephen Squeri indicated that American Express is seeing good acquisition in the SME segment, with organic growth starting to turn around, particularly at the small end and in the middle market. He expressed optimism that the previous organic downturn is behind them and highlighted the Center acquisition and upcoming integration as strategic moves to address the competitive marketplace.

Donald Fandetti of Wells Fargo asked for an update on the international business, specifically regarding merchant acceptance growth against targets and the competitive dynamics in markets outside the U.S.

Answer

Chairman and CEO Stephen Squeri reported that the international business continues to see double-digit growth and that the company's strategy to expand coverage is on track, particularly in five key markets. He stated that merchant acceptance is improving daily and that international represents a huge long-term growth opportunity, especially in the premium and small business sectors where Amex's share is still relatively low.

Donald Fandetti asked about the company's card refresh strategy and its ability to continue growing card fees in the current economic environment.

Answer

CEO Stephen Squeri affirmed the company's commitment to its product refresh strategy. He clarified that fee increases are not implemented indiscriminately but are always tied to significant enhancements in the value proposition for the customer. He stated this principle holds regardless of the economic environment, as the added value makes it a rational decision for card members.

Donald Fandetti asked for AXP's perspective on the competitive impact of the potential Capital One-Discover merger, given the increased scale and focus on premium and SME.

Answer

CEO Stephen Squeri described the deal as a smart move for Capital One that increases their scale. He acknowledged Capital One as a formidable competitor making inroads in the premium space but expressed confidence that AXP will "more than hold our own." He suggested the integration would occupy Capital One, while AXP continues to innovate its products.

Donald Fandetti of Wells Fargo asked if American Express is seeing any data that would raise concerns about the sustainability of the affluent U.S. consumer's financial health, especially with an election approaching.

Answer

CEO Stephen Squeri responded that the company sees no concerning indicators. He described the customer base as resilient and stable, with U.S. consumer spending growth holding steady around 6% and international consumer growth at 13%. He also noted that credit metrics remain strong, with write-offs declining sequentially, and that the business can deliver mid-teens EPS growth even without an uptick in organic spend.

Donald Fandetti from Wells Fargo inquired about the sustainability of the Q2 Net Interest Margin (NIM) into Q3 and the expected pace of loan growth for the second half of the year.

Answer

Christopher Farrar, Co-Founder, CEO & Director, explained that while Q2's NIM was strong due to lumpy resolutions of delinquent assets, the company targets a sustainable 3.5% NIM, which aligns with the average of the first two quarters. Regarding loan growth, he indicated that growth is expected to continue but often occurs in a 'step function' rather than a continuous monthly increase, without providing a specific forecast.

Donald Fandetti from Piper Sandler & Co. asked about the outlook for new origination yields, questioning if they would hold in the current range through 2025 after a recent slight dip.

Answer

President and CEO Christopher Farrar confirmed that the current yield range is expected to be stable. He explained that Velocity lowered coupons to mirror reductions in its borrowing costs, effectively maintaining its spreads. Farrar noted that future yields are priced off 3- to 4-year interpolated treasury rates and could decline later in the year if the Federal Reserve proceeds with rate cuts.

Donald Fandetti asked about the competitive landscape, including potential new entrants and barriers to entry, and inquired about the outlook for non-performing loans (NPLs) and underlying collateral values.

Answer

President and CEO Chris Farrar stated that while there are rumblings of new players, Velocity has not seen material competitors targeting its specific niche. He highlighted that cautiousness from banks and credit unions provides a tailwind. Regarding NPLs, Farrar expects them to remain in the current range, noting that the company is not seeing any concerning trends in the portfolio or the broader real estate markets.

Donald Fandetti of Wells Fargo & Company inquired about Starwood's expectations for commercial real estate (CRE) loan growth and whether a Fed rate cut would accelerate its velocity. He also asked about the ramp-up strategy for the newly acquired net lease portfolio.

Answer

President Jeffrey DiModica stated that STWD is on pace for a near-record origination year, close to $10 billion, even without a more favorable rate environment. He noted that lower rates would boost both new transactions and refinancing activity, creating further upside. Chairman & CEO Barry Sternlicht added that the company will remain agnostic about where it deploys capital, focusing on returns and credit quality across all its business lines, including the new Fundamental Income platform.

Donald Fandetti inquired about the opportunity set in residential credit and the potential for corporate M&A, asking if management sees consolidation opportunities becoming more likely.

Answer

President Jeff DiModica and Chairman & CEO Barry Sternlicht provided answers. DiModica stated that while they are actively evaluating a re-entry into the residential credit market, current capital is best deployed in their CRE and infrastructure businesses due to higher returns. On M&A, both executives agreed that consolidation is challenging in the REIT sector without a willing seller. However, Sternlicht expressed optimism that financially stressed competitors will eventually need to consolidate, creating opportunities for Starwood, though valuation and due diligence remain significant hurdles.

Donald Fandetti of Wells Fargo asked for the company's outlook on the Washington, D.C. office and multifamily markets, considering the competing factors of return-to-work mandates and potential federal government workforce reductions.

Answer

Chairman and CEO Barry Sternlicht acknowledged the uncertainty in the D.C. office market, noting that while return-to-work is a positive force, potential government downsizing creates a headwind. He mentioned the company's D.C. assets have decent tenancy and duration. President Jeffrey DiModica added that the company has paid down repo debt on these assets, mitigating liquidity risk even if the market worsens.

Donald Fandetti of Wells Fargo & Company inquired about the outlook for credit risk migration, which has been stable. He specifically asked if a scenario where the Federal Reserve does not cut interest rates would necessitate an increase in the company's CECL reserves.

Answer

Robert Foley, CFO, addressed the question by explaining that under CECL accounting, the company's current reserves already incorporate future expectations for interest rates, inflation, and GDP growth. Therefore, a change in the Fed's path would not automatically trigger a need for additional reserves. He added that the company's risk ratings have been very stable with virtually no credit migration, and they do not currently anticipate any changes to that trend.

Donald Fandetti of Wells Fargo inquired about the components of the change in the CECL reserve during the quarter, the adequacy of those reserves for recent REO conversions, and the forward-looking outlook for provision expense and loan risk rating migration.

Answer

Executive Robert Foley detailed the CECL reserve movement, explaining it decreased from $69M to $64M. This was driven by a $10M release for the two loans converted to REO (which was adequately reserved for) and a $5M increase due to macro factors. He stated that future migration risk is low, with only two 4-rated loans remaining, and expects the CECL reserve rate (in basis points) to remain stable or decline, though the dollar amount will grow with the loan book.

Donald Fandetti from Wells Fargo asked about the risk of 3-rated loans migrating to a 4-rating. As a follow-up, he questioned the potential stress on book value, specifically from the 4-rated loans and the company's REO properties, and whether the basis in those REO assets is secure.

Answer

Executive Robert Foley addressed the questions, stating that no risk migration occurred in the quarter and that historically, about two-thirds of loans that migrate from a 3 to a 4 rating ultimately resolve at par. Regarding book value, he explained that REO assets are marked to market value upon acquisition, and the company's CECL reserve is designed to cover expected lifetime losses, expressing confidence in the current reserve levels and the stability of the portfolio.

Donald Fandetti asked for more color on the reported July purchase volume improvement and requested an update on the company's technology and AI investments.

Answer

President and CEO Brian Doubles clarified that the July purchase volume strength was concentrated in the Health and Wellness, Diversified Value, and Digital platforms. On technology, Doubles highlighted significant investment in GenAI for efficiency, customer service, and driving top-line sales through their partner marketplace. He stressed that technology and credit underwriting are key competitive differentiators. EVP and CFO Brian Wenzel added that IT and strategic headcount has increased 5% to support these investments.

Donald Fandetti of Wells Fargo & Company asked about the growth runway for the CareCredit platform, inquiring if the market remains fragmented, and questioned how its credit performance has tracked against expectations.

Answer

CEO Brian Doubles affirmed that the Health and Wellness platform, led by CareCredit, is a primary investment focus due to its leadership position in a large, growing, and fragmented market. He noted that while there has been some recent softness due to its bigger-ticket nature, they are extremely optimistic about its long-term growth. He added that its credit performance is generally in line with the rest of the business, with the ability to underwrite slightly deeper at attractive risk-adjusted returns.

Donald Fandetti inquired about the recent improvement in late-stage collections and whether pressure on lower-income consumers is accelerating.

Answer

EVP and CFO Brian Wenzel confirmed that while collections are generally tougher today, requiring more digital tools, late-stage collections have shown recent improvement, though they remain worse than pre-pandemic levels. He stated that Synchrony is not seeing signs of accelerating stress in the low-end consumer segment; instead, they are observing rational behavior like pulling back on spending and managing budgets, with payment rates for non-prime customers remaining relatively stable.

Donald Fandetti of Wells Fargo & Company asked if recent industry acquisitions, such as Rocket's acquisition of Redfin and Mr. Cooper, were causing Guild to rethink its strategic approach.

Answer

Executive Terry Schmidt responded that Guild's strategy is already aligned with engaging customers early in the process. He emphasized that Guild's focus on local presence, purchase business, and serving first-time homebuyers remains a key differentiator. Schmidt expressed confidence in Guild's strong brand trust and local expertise, stating they feel well-positioned in their target market.

Donald Fandetti inquired about the dynamics behind the lower Q2 gain on sale margin, its expected trend for the remainder of the year, and the current state of the M&A pipeline versus organic growth opportunities.

Answer

Desiree Elwell, Executive, clarified that timing differences between quarters impacted the gain on sale margin, but the year-to-date figure of 340 basis points is a stable operational metric with no indication of a step-down. Terry Schmidt, Executive, added that while the M&A pipeline is slowing, organic recruiting of individual loan officers and teams is extremely strong and gaining momentum.

Donald Fandetti of Wells Fargo asked for an assessment of the current competitive landscape in the non-QM market and the long-term implications for Angel Oak if the GSEs' role diminishes.

Answer

CEO Sreeniwas Prabhu described the non-QM market as growing and increasingly competitive, with more originators entering as agency volume shrinks. He stated that Angel Oak is not chasing market share but is leveraging its long-standing broker relationships to maintain its high-quality origination standards. He anticipates that when rates fall, competitors will refocus on the larger agency refi market, making the non-QM space less crowded and creating more opportunities for Angel Oak's specialized model.

Donald Fandetti of Wells Fargo asked for the outlook on Net Interest Income (NII) for the upcoming quarter and whether continued growth through 2025 is a fair assumption. He also inquired about the long-term view of the non-QM market under a new administration.

Answer

Chief Financial Officer Brandon Filson affirmed that NII is expected to grow throughout 2025, driven by a strong loan pipeline and upcoming securitizations that will free up capital for accretive purchases. Regarding the regulatory outlook, Filson suggested that potential changes could be positive for the non-QM market by moving more loans out of the GSEs, though he acknowledged the situation remains fluid.

Donald Fandetti of Wells Fargo asked about the company's international exposure of approximately 41%, questioning if this level is a cap and how the company perceives international credit risk versus the U.S. following recent tariff movements.

Answer

CEO Katharine Keenan described the global platform as a key strength for finding relative value. She expressed confidence in the European portfolio, which is primarily in industrial and hospitality, noting the market there is stable and less competitive, allowing for better risk-adjusted returns. She expects international exposure to remain around the historical 35-40% level, viewing it as a source of balance.

Donald Fandetti asked for an update on the international markets, focusing on both the origination and credit perspectives.

Answer

CEO Katharine Keenan highlighted that international markets like Europe, the UK, and Australia offer positive relative value. She noted that while the US has a stronger growth profile, these markets have lower supply and different competitive dynamics, allowing BXMT's platform to source attractive, low-leverage deals in high-conviction sectors like industrial and multifamily.

Donald Fandetti of Wells Fargo Securities asked for clarity on future book value impacts, questioning if further downgrades to risk-rated 4 or 5 loans could occur. He also inquired about the specific market drivers behind the increased pace of loan resolutions.

Answer

CEO Katie Keenan responded that while the universe of potential challenges is shrinking, the focus remains on the ~$700 million of non-modified 4-rated office loans. She stated that existing reserves on impaired loans are appropriate. Keenan attributed the accelerated resolutions to a general return of liquidity to the real estate market, evidenced by increased CMBS issuance and transaction activity, which provides greater value transparency and capital for deals.

Donald Fandetti asked how the commercial real estate finance and equity markets would respond to a Federal Reserve rate cut and whether such an event is already priced into the market.

Answer

CEO Katie Keenan opined that while markets are already reacting to expectations, an actual rate cut is not fully priced in and would be a material positive tailwind for capital markets liquidity and investor conviction, including for the office sector. She noted the cost of capital is most impacted by base rates.

Donald Fandetti of Wells Fargo & Company asked about the outlook for net portfolio growth, the returns on recent multifamily originations, and the risk of further downgrades in the Life Science portfolio.

Answer

President & COO Patrick Mattson stated that while some incremental growth is possible, the portfolio is nearing its target size, with a focus on recycling capital from repayments into new originations. CEO Matt Salem confirmed recent multifamily loans had a weighted average spread of 277 bps, yielding gross IRRs of 12-13%. On Life Science, he reiterated that it is not their expectation for loans to migrate from a '3' to a '4' rating due to asset quality, strong sponsorship, and prior modifications.

Donald Fandetti inquired about the outlook for book value stability over the next 12 months, given the cross-currents of improving office fundamentals versus the 'higher for longer' rate environment impacting multifamily. He also asked about sentiment and liquidity within KREF's multifamily portfolio.

Answer

CEO Matt Salem responded that while the company has dealt with the majority of portfolio issues and expects more book value stability, it's hard to project multiple quarters out in a volatile macro environment. Regarding multifamily, Salem noted there is tremendous liquidity in the market, and factors like spread compression and proximity to an undersupplied market are offsetting some rate pressure. He expressed confidence that KREF's portfolio has limited rate sensitivity and that high-quality sponsors will likely de-lever to buy more time.

Donald Fandetti asked about the outlook for book value stability, considering the cross-currents of an improving office market and potential pressure on multifamily from higher interest rates. He also inquired about the health of KREF's multifamily portfolio and the liquidity available for those assets.

Answer

CEO Matthew Salem responded that while it's difficult to project perfectly, he believes KREF is largely through its major credit issues and is entering a phase of 'much more book value stability.' For the multifamily portfolio, Mr. Salem noted that there is 'tremendous amount of liquidity' in the market for such assets. He believes factors like compressed spreads and future rent growth potential are offsetting rate pressures, and he does not see significant rate sensitivity within KREF's specific portfolio, expecting sponsors to de-lever and extend rather than default.