Tae-Sik Yoon: Sure. You can imagine we are obviously, we have always closely monitored all of the covenants that we have on our own debt facilities as well as those of the food as well as you know, this where we hold as an asset on in terms of interest coverage, you know, we are we are clearly leading indicators, leverage test in all of our all of our debt facilities now. And I think one of the very proactive steps that we have taken now for the past several years is delevering our balance sheet. And so we have about $1 billion, $6 billion of financing that is materially down but a couple of years ago. And so we’ve been very mindful of making sure that we have the right balance sheet behaving in these more challenging market conditions.
We have increased our liquidity and we have done a number of measures. And all of that has obviously helped not only in terms of maintaining the flexibility and the balance sheet, and we need to work through some of the underperforming loans. And overall, it has put on neuroma stress on meeting our covenants. So for example, we were levered three to one. No, I think does coverage that would be on the tighter side. You guys that as we mentioned, we have worked very hard to delever our balance sheet significantly over the past several years, and that has helped significantly on our on our loan covenants themselves.
Stephen Laws: Great. Appreciate the comments this morning. And we look forward to hearing about some of these resolutions in the next couple of quarters.
Operator: We’ll take our next question from Rick Shane of JPMorgan.
Richard Shane: Thanks everybody for taking my questions this morning. Most have really been asked answered but I just want to make sure on the loan that was held for sale on sold at your carrying value; so no hit to book value by our calculations. That represents about a $2.6 million realized loss; is that correct?
Tae-Sik Yoon: Yes, good morning. So we sold the business at the moment as we mentioned at $39 million of that; and that is really the net proceeds received from the sale. And that was the stated fair value. So one thing just to maybe distinguish here is that because we were under contract to sell this loan at year end, we put this loan under available for sale. It was not held for investment. So it is not part of our held for investment portfolio. We didn’t hold us at fair value that fair value gain of $39 million carrying value and so there is no impact on book value. As you said, I forget the actual I’m not I wasn’t quite the movement of $2.6 million you mentioned.
Richard Shane: I thought I would do online and they say I apologize, you’re going to give you a better number. I just did that.
Tae-Sik Yoon: I’m going to. Yes, but I think the important point you’re making is that again, it was sold at its stated fair value that you’re at $39 million.
Richard Shane: Got it. And when we look at the call it, $150 million specific CECL reserve, should the assumption be, particularly because I think at this point you guys have incentive to resolve this quickly and be able to redeploy the capital in order to achieve the distributable earnings run rate that you’re targeting that you will. We like that those losses will largely come through in the first half that the cadence of realized losses is going to be very front-loaded and 2024?
Tae-Sik Yoon: Yes. So maybe I can try and Bryan, please weigh in. Again, we go through our hard process to determine the appropriate amount of the CECL reserve, it will be necessarily reflective of what will ultimately be realized because in almost all situations idea, these are these are very dynamic markets. And so the realized losses could be more or less in terms of timing. Again, as we mentioned, we’re working very hard on all of the funds. I mean some are more near term opportunities. So, more and more opportunities that will come out in later quarters later periods. I would not expect all of these to be realized in the first half. For example, on a new base; we are always balancing, as we say, maximizing proceeds as well as accelerating timeframe.
But there is a balance between those two. There are some situations where we feel holding on to oncology or maintaining our position for a little bit longer position resolved soon and of greater value that we think it’s worth doing. In some situations, we are pushing very hard to get suddenly realized immediately because we don’t think future value will be it will be materially greater. So it’s a positive situation but I would not say all of these will be realized in the first half. And again, I would not I would not equate what we what will be realized losses with the reserve. The reserve developed contemplates a different analysis. And unless they get it’s a very near term resolution where, for example, in assets already under contract for a specific price, then obviously those two numbers on come together but for longer-term resolutions assets, again, there can be tailored to the variance between what the actual realized value is for the losses versus their CECL reserve on the others to add to that.
Bryan Donohoe: I think that the leverage ratio that Pason touched on earlier gives us that flexibility. Sorry, and certainly I hear your point, and I think velocity is something it’s certainly part of the equation, but we’re balancing that with ultimate resolution. We certainly can we absolutely look forward to getting back on offense when available. And I think the resolution of some of these assets will be indicative of that. But I think the ultimate resolution is the balance of price plus.
Richard Shane: Hi, and a question on it, and I think we see the logic here in terms of where the dividend has been struck. If we think about where book value is today on and looking at book, excluding reserves, because I think realistically that will be reasonably close to the amount of book value you have on a go forward basis, the dividend equates to a yield and a book of just over 8.5%. And I think that’s pretty consistent with mid-cycle returns for your company on a scale basis over long term over the long-term. Is that the right way to be thinking of these things?
Tae-Sik Yoon: Yes, it’s an excellent observation. And I certainly think that is one way to try and sort of triangulate to a sort of a yield that makes sense again, I would just caution you, however, that we are in, as I mentioned, very dynamic market times, for example, in one sense, we are enjoying very high interest rates. And I know, with sulfur being at five, three, five four level. On the other hand, it’s five 35 for silver is causing significant and adverse impact on real estate operating performance at values. And so there’s a lot of components that go into them in our overall returns. So certainly credit is certainly interest rates certainly leveraged. Certainly to pointed out, there’s a lot of factors that go into it.
But I do agree with your observation of that. You know, the $0.25 dividend for the fourth quarter, I’m sorry, for the first quarter of 2024. If you were to annualize that to $1 dollars divided by the 1152 book value equates to that data, I think about 8.7% yield. I do think that’s a great way to triangulate that sensibility of it. And but I will also caution that the story isn’t fully told you guys. We mentioned we have set our dividend level based upon what we believe we can earn by resolving some of the nonaccrual loans, not all of the non-accrual loans. So we do have potential for adding in more earnings at the same time without going through the fullness. I mean, there are lots of other factors that can and they’re likely to impact our earnings going forward as well.
So that is that is part of the part of the equation, but certainly not the only part of the equation.
Richard Shane: Got it. But I think it’s an interesting observation from you make. And in terms of sort of the long term, I would agree with you on average over time, but that’s probably six years at a 10 in that eight range, two years at a 10 above it and two years out of 10 below. And we’re probably in the midst of are in the thick of those two or three years that are below that 8.5% target?
Tae-Sik Yoon: Yes.
Richard Shane: Thank you, guys.
Tae-Sik Yoon: Thank you.
Operator: We’ll take our next question from Don Fandetti of Wells Fargo. Your line is open.
Donald Fandetti: I guess I’m trying to just get a sense of your confidence, like as you think about the shorter term, how are you feeling about the ability for just to a replay of this in Q. one where you have kind of nonaccrual migration, another big reserve build. I know there’s uncertainty kind of intermediate and longer term, like how are you thinking about it in the short term?
Tae-Sik Yoon: Yes. Sure, Don. Again, our short-term objectives is part of a longer term plan, of course. And our short-term objective, as we mentioned, is to remain very, very focused on the nonperforming loans. It’s to remain very, very focused on continuing to vigilantly monitor all of our loans overall, and we are in a state as of the fourth quarter as of year-end, where we have a significant portion of our capital on no came nonaccrual loans. And so that is clearly the impact of our current to our current income having said that on it, as we mentioned, a number of our loans, even though they’re on nonaccrual, continue to pay interest and that interest is not being recognized as income that interest is being used to reduce the carrying value of the loan itself.
And so we think all of that helps to further not further improve the balance sheet overall, Tom, but again, to answer your question short term can be made. We remain very focused on growing our on our income base and our overall the shareable earnings. And we want to continue that digitally worked out any of the problem assets so that we can either monetize the capital that we have and the asset we can pay down the debt associated with those with those assets with the liabilities associated with the nonperforming loans and then redeploy some capital. We have a significant amount of liquidity and we will hopefully generate more capital from another presentation and some of the phones gone. One things we have mentioned is that we are working very closely with many of our borrowers significant to continue to inject more equity into the loans themselves.
But short term, I would tell you also that we continue to see some volatility in the markets and in our portfolio. I think Canada is one of the subsequent events that we had mentioned on our in our public filings this morning is that we had two loans go into default at year end after year end at one boom is at $57 million loan backed by office property that matured. Obviously, that loan had been rated a five. That’s the loan that Bryan had mentioned. We are pushing to sell before year-end we continue to push to sell that loan. So the resolution of that loan will be there will be a utility, a material part of this by going forward, the element that we mentioned is that $18.5 million mezzanine immature as a loan. And that loan also went into default as a result of the borrower not meeting its January interest payments.
And unfortunately, that loan remains in default and the January and now February payment has not been made, but that low retention has been on nonaccrual for the past couple of quarters. So your backlog going into the fall, while rates are very disappointing, obviously ITO has already been on. Nonaccrual has been rated a four. And so there continues to be movement in the portfolio.
Donald Fandetti: Okay. Got it. Thank you.
Operator: We’ll take our next question from Steve Delaney of Citizens JMP. Your line is open.
Steven Delaney: Thank you. Good morning, Bryan and Tae-Sik. We’re starting to see something interesting this quarter and hearing anecdotes that there are a number of debt funds or even hedge funds that are starting. We look around for opportunities to kind of opportunistically buy loans from I’m sure they’re talking to the banks, but we’ve seen evidence that they’ve been talking to the commercial mortgage rates as well. I’m curious if you’re receiving any if you could just say generally, are you receiving these types of inquiries on back third parties looking to kind of step in so that you can avoid foreclosure and all that mess and actually just lay off the loan to somebody who works more not in a public company environment and can operate a little differently. Just curious if you’re seeing this secondary market in distressed loans picking up at all?
Tae-Sik Yoon: It’s a great question, Steve. And I think the loan held for sale at year end was a good example of executing on Ireland, just that strategy, I think there’s two major narratives in commercial real estate book, probably more of that, one of which is this wall of maturities and the others this wall of capital and I think certainly been touched on a little bit if the macro environment is shifting. And part of that is that the capital on the offense side being dislodged and becoming more pro-business, I would say. So, I think that you’re seeing a good reflection throughout this space of deal activity. And in general, the first market opportunity in commercial real estate will come in the form of credit, whether that’s in new loans that are attractive on a relative value basis for purchasing loans, either for control or for yields.
So I think you’re spot on the activity is here, and I think it will continue to progress. But the amount of capital that’s out there that needs to be spent in this space is significant. So the trend that we’ve seen or you’re hearing about, I would expect that to continue.
Steven Delaney: Okay, I appreciate that. And I would have to think — you know, the Fed has kind of — given us a head fake here. But I’d have to think as we start getting into the middle of this year and there is more of an expectation for cuts in the second half of the year that may make those potential buyers more aggressive because you’re creating a more positive sentiment, you know, for the market generally and people are going to be less willing to sell at large discounts. I could see that this interested this opportunistic money really picking up as the year goes along. And then the second thought I have is I’ve been hearing this about the banks on We all know what the capital issues are with the banks, but that we’re hearing that in know, construction loans at the banks that the banks are going to manage through those, but probably will be less likely to move into a bridge lending phase on that, that would be you know, maybe when we get to late 24, early 25, we could find a new wave of lending opportunities for the commercial mortgage rates with paper coming off the banks’ balance sheet, do you see that type of opportunity as well or am I getting ahead of myself there?
Tae-Sik Yoon: I think as you think about the concentration of commercial real estate debt within the banks. And certainly when you think through the real estate capital treatment for the bank’s balance sheet of CRE and essentially the overlay that regulators have focused on the banking sector. It doesn’t take a large shift of the allocation of real estate debt from banks still against the private markets to create a pretty substantial opportunity set to invest into. So that’s certainly what I think areas in our peer set is playing for us that continue to show that it’s going to be a great opportunity to partner with the banks and this next evolution of the real estate debt market. So I would certainly look towards that.
Steven Delaney: I think I’d echo your sentiments. Well, congratulations on the progress you’re making. It’s I know it’s a slog, but and I think we have better days ahead for ACRE and for the Group as a whole. So, thank you for your time this morning.
Tae-Sik Yoon: Appreciate as always do. Thank you.
Operator: We’ll take our next question from Doug Harter of UBS.
