TPG RE Finance Trust - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the TPG RE Finance Trust second quarter 2023 earnings conference call. Please note this event is being recorded. I would now like to turn the conference over to Deborah Ginsberg, General Counsel, Vice President, and Secretary. Please go ahead.

Deborah Ginsberg (General Counsel, VP, and Secretary)

Good morning, and welcome to TPG Real Estate Finance Trust conference call for the 2nd quarter of 2023. I'm 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'll open up the call for questions. Yesterday evening, we filed our Form 10-Q and issued a press release and earnings supplemental with a presentation of our operating results, all of which are available on our website in the Investor Relations section. I'd like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 10-Q and 10-K.

We do not undertake any duty to update these statements, and we will also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and our 10-Q. With that, it's my pleasure to turn the call over to Doug Bouquard, Chief Executive Officer.

Doug Bouquard (CEO)

Thank you, Deborah. Good morning, and thank you for joining our call. Over the past quarter, the market has begun to reflect a greater likelihood of a soft landing as the Federal Reserve has been successful in dampening inflation without triggering a recession. Over the past 16 months, front-end interest rates have increased from nearly zero to their highest levels seen in 22 years. Despite the Fed's restrictive policy in place, we should acknowledge a few noteworthy takeaways. First, the labor market remains incredibly strong. Second, the residential housing market has remained resilient, with positive national price appreciation despite mortgage rates hovering around 7%. Third, credit spreads in the corporate credit market have tightened dramatically and have almost fully retraced to their pre-Fed hike levels.

Lastly, the U.S. public equity market has rallied nearly 18% year to date as the S&P 500 quickly approaches an all-time high. Despite the broader positive shift in risk sentiment in many asset classes, commercial real estate continues to underperform. This underperformance is driven by the commercial real estate landscape, reduced liquidity for debt and equity, and secular challenges facing the office market. Ultimately, there are a variety of micro and macroeconomic forces that drive commercial real estate pricing. In addition to the headwinds I just mentioned, continued uncertainty relating to both spot and forward interest rates continue to create volatility on valuations and hesitation on investment activity across the sector.

Our view remains that pressure within the commercial real estate space may persist for an extended period, and therefore we continue to maintain our strategic posture of, first, cautiously deploying capital, second, maintaining a strong liquidity position, and third, proactively risk managing our investment portfolio in a disciplined and tactical manner while focusing on long-term maximization of shareholder value. Over the past quarter, our decline in net income to shareholders was driven primarily by a $56 million net increase in our CECL reserve, which reflects our view of sustained value declines within the office market. Despite the net increase in our CECL expense, we continue to make progress reducing exposure to credit-challenged assets. In May, we sold a $71 million Brooklyn office loan, and post-quarter end in July, we sold a $129 million office and retail loan located in SoHo.

For each of these loans, we determined the optimal resolution path was via loan sale and executed accordingly. It's also worth noting that TRTX provided no seller financing as part of these transactions, and on a combined basis, the recovery amounts exceeded the carrying value at which we held them on our balance sheet. For broader context, over the past 15 months, we have reduced our cumulative office exposure by approximately $1 billion. From a balance sheet perspective, we funded no new investments this quarter. However, we did receive $279 million of repayments during the second quarter, primarily from multifamily refinancing activity.

While the multifamily sector has experienced cap rate widening over the past year, both debt and equity capital remain available, albeit at a lower entry point relative to the peak of the QE cycle in 2021. From a liquidity perspective, we continue to maintain a defensive posture. Total liquidity exceeded $542 million, broken out as $307 million of cash, $206 million of CLO reinvestment capacity, and $28 million of undrawn capacity on our secured credit facilities. Our performance this quarter continues to reflect an asset management strategy that relies on the depth and breadth of TPG's broad real estate platform with approximately $20 billion of AUM across a mix of debt and equity strategies.

From an asset resolution perspective, we continue to maximize value for our shareholders, regardless of whether we execute a loan modification, sell a loan, or foreclose on an asset. We continue to believe the kick-the-can approach for assets facing long-term secular headwinds is not a winning strategy. Our deep investing experience across multiple business cycles and diverse and our diverse real estate investment platform allows us to evaluate and execute on all potential resolution strategies. Inherent in this approach, the market should expect a certain amount of near-term volatility in our Distributable earnings, and this quarter was no different. We continue to have high conviction that this is the optimal long-term strategy for our shareholders, and will position TRTX for growth as the real estate credit market continues to evolve. With that, I'll turn the call over to Bob to discuss our financial results.

Bob Foley (CFO)

Thanks, Doug. Good morning, everyone. GAAP net loss to common shareholders for the second quarter was $72.7 million, compared to GAAP net income to common shareholders of $3.8 million last quarter. The change was due primarily to an increase in CECL expense of $81.3 million, reflecting our assessment of further weakening in FL4 and valuations of office properties nationally. Net interest margin for our loan portfolio was $26.1 million versus $21.7 million in the prior quarter, an increase of $4.4 million, or $0.06 per common share. Distributable earnings declined quarter-over-quarter to a loss of $14 million, versus earnings of $13.4 million in the prior quarter.

This change was due primarily to realized losses of $33.2 million, related to two office loans resolved during the second quarter, one by sale and one by conversion to real estate owned. These realized losses approximated the CECL reserves held against them. Distributable earnings before realized credit losses was $19.1 million, or $0.25 per share, a 43% increase from $15.4 million, or $0.17 per share in the prior quarter. Book value per share at quarter end was $13.10, a decline of $1.21 compared to the first quarter of this year, due to CECL expense in the second quarter of $1.15 per share.

Our CECL reserve increased quarter-over-quarter by a net amount of $55.9 million to $278.3 million, from $22.4 million as of March 31st. Our CECL reserve rate increased to 572 basis points from 420 basis points, due almost entirely to further weakening in the office market. At quarter end, our five individually assessed loans represented 63% of our total CECL reserve. Regarding liquidity, we maintain high levels of intermediate, excuse me, of immediate and near-term liquidity, roughly 10.9% of total assets, to support our loan investment and asset resolution strategies.

Cash and near-term liquidity at quarter end was $542.9 million, comprised of $307.4 million of cash, $206.7 million of CLO reinvestment cash, and $28.7 million of undrawn capacity under our various secured credit agreements. Our third CLO remains open for reinvestment through February of 2024. This term, non-mark-to-market, non-recourse financing with a credit spread of 202 basis points, is valuable in supporting new loan investments, optimizing our current financing arrangements, and maintaining a high proportion of non-mark-to-market financing. During the quarter, we funded $33 million of deferred funding commitments. Unfunded commitments under existing loans declined by $53.4 million to $300.5 million, which is only 6.2% of our total loan commitments.

Regarding credit, risk ratings remained unchanged at 3.2. Nonaccrual loans at June 30th totaled $555.6 million, or 12.2% of aggregate UPB, versus $558.9 million, or 11.3% of aggregate UPB for the prior quarter. The de minimis net change quarter-over-quarter masks important asset management activity during the quarter. We reduced nonaccrual loans by $126.3 million through the resolution of two office loans during the quarter, one by sale and one by conversion to REO. Nonaccrual loans increased by $129.2 million, related to a five-rated first mortgage loan secured by an office and retail property in Manhattan that went nonaccrual during the second quarter due to a maturity default. That loan was promptly sold in July.

Consequently, nonaccrual loans today total $426.4 million. Nonaccrual status is the logical and often necessary consequence of our asset management steps to resolve loans, repatriate capital, and thoughtfully allocate it to create shareholder value. We work to resolve nonaccrual loans promptly to maximize recovery and boost shareholder value. We realized losses during the second quarter on two five-rated defaulted first mortgage loans, both on office properties. $24.1 million or 33.8% of the loan's $71.3 million UPB on a 444,000 sq ft former warehouse building converted to office in Brooklyn. We sold the note after a broad marketing process conducted by a national brokerage firm.

We sustained a $9 million or 16.2% of the loan's $55.7 million UPB on a 375,000 sq ft office building in downtown Houston. We converted that non-performing loan to real estate owned after conducting an extensive loan sale process, which led us to conclude shareholder value will be maximized through ownership, skilled property management and leasing using TPG Real Estate's broad resources and experience, and eventual sale. We borrowed $31.2 million under a 5-year, 7.67% fixed rate, interest-only mortgage loan that is assumable, which we believe may facilitate our eventual sale of the property at the appropriate time. The building is 77% leased and occupied. Based on current operating results and mortgage financing, our investment generates an 8% return on cost and a 10% levered ROE after depreciation and amortization expense.

In late July, we sold a $129.2 million first mortgage loan secured by an office and retail property in Manhattan. That loan sale is disclosed as a subsequent transaction and will be reflected in our results of operations for the third quarter. Regarding CECL, our CECL reserve increased this quarter by $55.9 million net, reflecting a lack of debt capital for office transactions, which has pressured valuations. Our general reserve declined by $56.3 million, largely due to the transfer of three loans from the general pool to the specifically identified pool. Our specifically identified reserve increased by $112.2 million due to increased loan loss estimates and the aforementioned transfers. Regarding our capital base, our focus remains on maintaining a sturdy, diverse financing base.

Our deep relationships in the financing community and the market power of TPG's firm-wide capital markets business enables us to access and maintain long-dated, cost-efficient debt capital to support our existing portfolio and selective loan purchases and originations. During the second quarter, we used $265 million of reinvestment capacity in FL4 to finance an equal amount of existing loans and retire $189.8 million of borrowings under five different secured financing arrangements. Quarterly interest expense savings are approximately $0.05 per share. At quarter end, we had $206.7 million of reinvestment capacity available in FL5 for similar use or to support new loan acquisitions or originations. We also extended for one year an existing borrowing arrangement with Morgan Stanley, with $500 million of committed capacity and $54 million of borrowings at quarter end.

We closed a new 3-year, $200 million credit mark-only secured financing arrangement with Bank of America, with $35.9 million of borrowings at June 30th. Simultaneously, we allowed to expire a $200 million mortgage warehouse with B of A that had been in place since 2018. Test of our financial covenant package, which is uniform across all 12 of our secured borrowing arrangements, and reduced the threshold to 1.4x from 1.5x. We sought this change to accommodate higher benchmark interest rates and elevated levels of non-performing loans as we continue to execute our asset resolution strategy. This quarter, we've already delivered notice to exercise our by-right extension of an existing $500 million credit facility with Goldman Sachs, with current borrowings of $324.3 million.

At quarter end, 71.7% of our secured financing was non-recourse, non-mark-to-market, versus 74.1% at prior quarter end. These levels are consistent with our long-standing strategy of relying primarily on non-mark-to-market, non-recourse term funding. Our debt-to-equity ratio declined quarter-over-quarter to 2.79 to 1 from 2.95 to 1. We were in compliance with all of our financial covenants at June 30th. With that, we'll open the floor to questions. Operator?

Operator (participant)

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 is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please hold while we poll for questions. Our first question comes from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws (Managing Director)

Hi, good morning.

Bob Foley (CFO)

Good morning, Stephen.

Stephen Laws (Managing Director)

You know, Bob, I guess you touched on, I believe, the, the sale post-quarter end of the 5-rated mixed-use loan. How much of an impact will that have in Q3, you know, how much of that is an impact to GAAP versus what's gonna run through distributable earnings?

Bob Foley (CFO)

Sure, good question. That transaction is part of third quarter results. It will be, you know, reported in October. There will be a loss. It will flow through distributable earnings. The loss, we're comfortable, is covered by the existing CECL reserve.

Stephen Laws (Managing Director)

Okay. expect it to be covered, but no, no material impact to GAAP then?

Bob Foley (CFO)

That's right.

Stephen Laws (Managing Director)

Great. Touching base on FL5, looks like about a little less than $200 million of reinvestment capacity that's available through December is when that window ends. Can you talk about how you look at replenishing the collateral there and thoughts about when that might happen and how much net interest income that might add when it's done?

Doug Bouquard (CEO)

Sure. This is Doug, and I'll, I'll answer that. You know, in, in terms of our liquidity, you know, we've, we've maintained, you know, this CLO reinvestment capacity really continuously over the past year. Really what it allows us to do is have a certain amount of optionality in terms of, you know, potential uses of capital. In terms of how we think about deploying it, you know, Bob can kind of walk through in more granular detail exactly its effects, you know, on a, on a, from a per share basis. We, we expect to be deploying that over the next three to six months, generally speaking, in advance of that open window closing.

We will keep you updated in terms of our process and, and our, and our- excuse me, our progress in terms of deploying the capital.

Bob Foley (CFO)

To be specific about the timing, FL5 has a reinvestment period of 2 years that concludes in February of 2024. There's actually effectively a 59-day tail on that. You'll recall with respect to FL4, whose reinvestment period closed this year, in March, that we undertook a similar reinvestment strategy, which I described earlier on the call, that concluded in May. The rough math there is, if we were to do the same thing with FL5 as we did with FL4 and use that capacity to finance existing loans, which is only one of multiple paths, as Doug just described. You assume that existing loans are borrowed at around 75% under other forms of financing.

If we had, you know, $207 million of cash in FL5, that would equate to about $156 million of repo borrowings, which we would repay. That costs a little more than 200 over term SOFR. That all works out to be, you know, a little bit it's basically between $0.04 and $0.05 a quarter of interest savings that would result from FL5 reinvestment.

Stephen Laws (Managing Director)

Great. That, that's helpful. Appreciate the clarification on the, on the tail. I wasn't aware of that, so, thanks for that.

Operator (participant)

Thank you. Our next question comes from Rick Shane with JPMorgan.

Richard Shane (Managing Director)

Hey, Bob. Thanks for taking my questions this morning. Hey, Doug. I've been bouncing around, so if this is covered in the prepared remarks, I apologize. Can you talk about were there any buyouts from the CLOs during the second quarter related to defaults? As you look through the third quarter, and what's going on in the CLOs, anything, that you anticipate, buying out?

Bob Foley (CFO)

Sure. With respect to the first question, Rick, no, we, we didn't buy any loans out of any of our CLOs in the second quarter. With respect to what may happen in the future, that's really a function of, of loan performance, which we attempt to predict, but no one can predict with perfect precision. It's also a function of the cushion that's structured into the over-collateralization inter- and interest coverage tests of each of our CLOs. For those who have studied our CLOs carefully, you'll see that, for example, in FL3, which is the most mature of our three outstanding CLOs, we actually have a very substantial over-collateralization buffer there.

That transaction could actually withstand loan defaults for loans that are in that structure and would remain in that structure without triggering a diversion of cash flow.

Richard Shane (Managing Director)

Got it. Just to be clear, I believe I know the answer to this, but I just wanna make sure. When you talked about amending the coverage tests, that was across your secured credit agreements, correct?

Bob Foley (CFO)

That's correct. It, it has no impact on the CLOs. It's only with respect to our credit facilities and note-on-note and other non-CLO financing arrangements.

Richard Shane (Managing Director)

That's it for me. Thank you, guys.

Doug Bouquard (CEO)

Thank you.

Thank you.

Operator (participant)

Thank you. Our next question comes from Sarah Barcomb with BTIG.

Sarah Barcomb-Holt (Senior Research Analyst)

Hey, everyone. We're expecting to see some Distributable earnings volatility, as you spoke to, on that loan sale in Q3, like we saw in Q2. Can you talk about where we sit now with respect to the watch list? Should we expect to see additional watch list migration and higher specific loss reserves going forward?

Doug Bouquard (CEO)

Good morning, Sarah. I, I appreciate the question. You know, first I'll just address our, you know, migration in terms of the five risk-rated asset buckets and just sort of take those, those specific assets and generally put them in two categories. The first category, as you know, Bob and I previously mentioned, relates to the subsequent event disclosure in connection with the sale of the office and retail loan located in SoHo. Call that category one, that which has been resolved. To Bob's comment, we'll be sharing more information on that loan sale at the conclusion of our third quarter.

The second bucket, which, which leaves, you know, four, five risk-rated loans, really, we, we are currently pursuing various resolution paths, including potential loan sales, within that bucket. Those assets, specifically are all office assets across four different office markets: Philadelphia, New York, Virginia, and Orange County. Given that we're actively in the market pursuing various paths, I'm mindful of providing transaction-specific information at this time. I think what I would highlight as it relates to our five-rated assets and our resolution of credit challenge loans, I think it is worth highlighting that in the three loans that, that were most recently resolved, including our subsequent event, which, which we've disclosed, in the aggregate across those three resolutions, they were resolved in excess of our carrying value.

I continue to kind of point, point to that in terms of both a comment on our CECL reserve, but also a comment on, on our ability to effectively resolve credit-challenged assets on our balance sheet.

Sarah Barcomb-Holt (Senior Research Analyst)

Okay, thank you. Yeah, I mean, you've been managing some in-place issues on your book, but you also originated a hotel loan after quarter end. I was hoping you could speak to how you're thinking about maintaining more defensive liquidity versus going out and originating loans at higher coupons. Should we see new originations pick up in the second half of the year, or how do you think about that?

Doug Bouquard (CEO)

Look, that's a, that's a fantastic question. I think as we continue to make progress through our credit challenge loans, you will see us, you know, begin to more actively deploy capital in terms of new originations. I, I think that, you know, again, as you look at our, you know, current bucket of, of five risk-rated loans, you know, as we make progress, we, we look forward to the ability to, you know, resolve and then recycle that capital. That's been a pretty consistent strategy of ours, that, that I've, I've, you know, Bob and I have mentioned in, in prior quarters, which is our core view relates to the fact that, you know, we don't think that a kick-the-can strategy for assets that we see having long-term secular pressures is gonna be a winning strategy for, you know, for our company.

We've been really disciplined around addressing issues, being, you know, overly transparent with the market. Then as we address those issues, we'll be, we'll be very actively engaging in the, in the new origination market. Just for one moment, in terms of capital deployment, you know, I think that what we are seeing is, you know, actually a, a, a very, you know, ripe opportunity, you know, to be lending. I think despite the fact that, you know, broader risk sentiment is actually, you know, very positive across a variety of asset classes, as I mentioned in my prepared remarks, you know, we, we are still seeing a fair amount of dislocation and opportunity within real estate credit.

That really continues to be an underlying, you know, kind of key tenet of our investment focus, is being able to redeploy capital with some duration in today's wider spread environment at a lower basis, I think is gonna serve the, serve the company well over the long term.

Sarah Barcomb-Holt (Senior Research Analyst)

Thank you.

Doug Bouquard (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Steve DeLaney with JMP Securities.

Steve DeLaney (Managing Director)

Good morning, Doug and Bob. I enjoy-- I appreciated your opening remarks, and Doug, especially your macro view. I'll come back to that in a minute. Bob, can you tell us, I haven't had a chance to look at the queue yet, but on the $129 million dollar loan, I assume that specific reserve is disclosed in the queue. Can you share with us what that, what that might be, the amount?

Bob Foley (CFO)

I cannot.

Steve DeLaney (Managing Director)

Okay.

Bob Foley (CFO)

disclose loan by loan, specific reserves.

Steve DeLaney (Managing Director)

Okay.

Bob Foley (CFO)

What we do disclose next quarter, you know.

Steve DeLaney (Managing Director)

Obviously.

Bob Foley (CFO)

you'll, you'll see it flow through the income statement. Doug touched-

Steve DeLaney (Managing Director)

Okay.

Bob Foley (CFO)

Earlier on why we don't disclose the specific reserve.

Steve DeLaney (Managing Director)

All right. Well, obviously, negotiating with, with loan buyers is, probably a big thing because you're tipping your hand as far as what you'll take, right? If, if they know you've got a reserve.

Bob Foley (CFO)

It's quite a big tell.

Steve DeLaney (Managing Director)

All right, dumb question. I'll, I'll move on to the next thing.

Bob Foley (CFO)

No, no.

Steve DeLaney (Managing Director)

The one thing that I saw was positive, you know, to get to be a five, you have to probably be a four first. The four-rated loans dropped almost $400 million, seven loans now at $515 million. It's 11% of the portfolio versus 18% of the portfolio at March 31. Overly simplistic, I know, but we kind of know what happens with fives. They end up sold or foreclosed or whatever. If you were to tell an investor, you know, would there be value for our clients and ourselves as analysts to pay close attention to migration into the four bucket as we go through? You know, we've obviously, as Doug said, probably got another year or longer in this CRE disruption. It seems like that's the place.

If there's one place we can look to get a picture of the future, that might be it. Just curious how you all think about that.

Bob Foley (CFO)

Steve, great observation. A couple of comments, and I think Doug has some commentary here as well. I think you're right. You know, risk ratings are something that we take very seriously. They're not the only tool, but they're an important tool to help us manage our risk well, and also convey to the market what our current and future expectations are about loans.

Steve DeLaney (Managing Director)

Sure.

Bob Foley (CFO)

Four is, 4 is probably the key category. We did have three loans, as we disclosed, that migrated from 4 to 5 in the second quarter. We didn't have any inbounds. If you look historically, and history isn't necessarily a guide to future behavior, but if you look at historically, loans that move into the 4 category, a fairly large proportion of them actually don't move to 5, and many of them get resolved, while being 4s. Some actually move back to 3. It's a really important thing. You're right. Folks should pay careful attention to it. We do. Doug?

Doug Bouquard (CEO)

Yeah, look, I, I think you, you are hitting on, you know, I, I think a little bit of the positive in terms of this quarter, which is, again, I know we've been saying it now for a few quarters in a row, but we're, we're really focused on being able to be, you know, you know, one of the first kind of through a lot of the, you know, challenges. Again, we've I'll say it again, we've avoided the kick to can. You know, we've, we've reduced our office exposure by, by over $1 billion in the last 15 months, and we, and we continue to have a, a, a very clear focus on, on, you know, getting any credit challenges behind us because that just allows us to play offense sooner, you know, relative to our, you know, to, the, broader market.

I would say secondly, you know, there was one thing that is worth highlighting in terms of probably the second positive, and that does relate to, if you, you know, absent, you know, absent our, our credit losses, what our distributable earnings, you know, per share were this past quarter. I think, you know, I think, I think Bob should perhaps just re-highlight some of those numbers just so we're really clear, because I think that's probably the, you know, one of the most important, I would say, indicators in terms of potential earnings power of the company and sort of where, where we believe to be headed. I think just worth, worth, worth Bob kind of hitting those numbers one more time so that we're, we're sort of all clear collectively on what that looks like.

Bob Foley (CFO)

Yeah. I think the, the point Doug is directing me to is that, distributable earnings before the realized losses for the second quarter were $0.25 a share, which is actually $0.01 higher than our dividend.

Steve DeLaney (Managing Director)

Right.

Bob Foley (CFO)

We were talking. You know, Doug commented in his general remarks about, you know, the general risk environment and the rate environment. Rates are clearly important to us and companies like us. In terms of our ability to rebuild earnings power, rates are actually a secondary issue. The biggest issue is clearly for us to move quickly through the credit challenge loans, resolve them at the best values possible. We had, you know, at quarter end, $555 million of nonaccrual loans. All of those are financed, so we're paying interest on the funding costs, and we're not collecting interest. The foregone interest there on an annualized basis, by our estimates, is, you know, $0.15-$0.16 a quarter. That could be a potential upside note.

Stephen had asked earlier about the, the math surrounding CLO cash reinvestment. I say the third component is we are intentionally carrying high cash levels in order to support our portfolio and be able to work toward the, you know, the optimal resolutions for each credit challenge loan. In a more normalized environment, if we succeed in our objectives, you know, we would not be carrying $340 million or $310 million of cash. If that were deployed, you can make up your own ROE, but if you assume, say, a 9.5, that's another $0.05-$0.06 a quarter. There are clearly some drivers.

They're all contingent upon executing what Doug articulated and has articulated again and again, and that's working thoughtfully but quickly through our credit challenge loans to achieve the highest recoveries possible for our shareholders.

Steve DeLaney (Managing Director)

Well, that's all great color, and I appreciate each of your comments. Thank you very much.

Bob Foley (CFO)

Thank you.

Doug Bouquard (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Derek Hewett with Bank of America.

Derek Hewett (Senior Equity Research Analyst)

Good morning, Doug and Bob. I think, Bob, you addressed my or at least partially addressed my question in terms of the sustainability of the dividend, given you're currently carrying excess liquidity, and you have additional self-help opportunities from refinancing certain loans within FL5. Could you just, in general, just talk about your thoughts in terms of how you determine what the dividend should be set at?

Bob Foley (CFO)

Sure. Good question, Derek, and thanks for dialing in this morning. You know, our view is that dividend, a dividend level for a company and our company in particular, ought to be set at a level that matches its sustainable earnings power. There's also a consideration about distributable earnings, which is a pretty close but not perfect proxy for taxable income, and distributing at least 90% of taxable income is a REIT rules-based driver of dividend levels as well. Let's focus on the first point. You know, we just articulated that, you know, NIM currently exceeds our dividend level. Doug described that, you know, volatility of distributable earnings is likely to continue as we work to resolve these loans.

The team spends extreme effort on that and also in terms of getting our CECL reserve, you know, right, so that we feel that the net carrying value of our loans are fairly stated. To Stephen's earlier question, in instances where we do resolve a loan, that the realized losses closely approximate the CECL reserve. All of those are variables in the equation, and we use that to formulate recommendations to our board, because at the end of the day, the dividend decision is theirs to confirm. That's how we think about it.

Derek Hewett (Senior Equity Research Analyst)

Okay, great. Thank you.

Bob Foley (CFO)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I would like to turn the floor back over to Doug Bouquard for closing comments.

Doug Bouquard (CEO)

Thank you. Just wanted to thank everyone for dialing in this morning, and we look forward to updating you next quarter. Have a great day.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.