Jade Rahmani : Thank you very much. How is the higher rate outlook impacting borrowers? I attended CREFC in January, and everyone is ecstatic about the prospect for lower rates. Clearly, that’s changed. And if you could address multifamily in particular.
Katie Keenan : Sure. Yes, it’s a great question. I think that obviously the expectation for the pace of rate cuts has been tempered, but I think the important things to keep in mind, we still have the view that the overall path of rates from here is downward. We’re seeing that as we look across on inflation data that we see here internally, it’s all happening at a slower pace, but the direction of travel has not changed. And I think that importantly, when you think about the impact of rates, a lot of it has to do with market liquidity, spreads, overall cost of capital. And despite, a month of volatility or sort of going back and forth on expectations of rate cuts, we’ve continued to see liquidity continue in the market. We’ve seen cost of capital come down, spreads are normalizing across real estate lending markets, both public and private.
And so that all has kept sort of the direction of travel in the same direction. I think on more marginal situations, obviously higher rates and in particular the pace of rate cuts could have an impact in terms of carry costs, in terms of conversations on liquidity for sponsors. I think you’re going to see that, particularly in multifamily, more in the corner of the market with sponsors who were really less well capitalized. And it’s going to create a lot of headlines, but it’s not indicative of the overall market. So I think that the rate impact, obviously not helpful, but I think it’s really about long-term rates, the direction of travel for rates, and critically, liquidity in the market.
Jade Rahmani : Thank you. Just thinking about the dividend cash flow from operations, this quarter was below the dividend at $96.4 million. You mentioned the $16.8 million of interest that was accrued that’s now a non-accrual you received the cash, but that will be a decrement to earnings, and there are other factors including the smaller portfolio given repayments. Should we think about the dividend as being steady state because it’s based on a long-term premise about returns? Or does it make sense to think about a lower dividend, which would give the company some additional liquidity and also some flexibility in managing through the current turbulence? And it seems that with a 13% yield, the stock in fact is already pricing in dividend reduction. One of your peers, similar type of company, trades at around a 10% yield on its reduced dividend.
Anthony Marone : Thanks for the question, Jade. So to maybe hit the first point quickly, we would point you to the DE before charge-offs as the metric, more so than cash flow from operations. There’s different things that impact the gap cash flow, and we think the best metric for folks to look at is DE prior to charge-offs when you’re contextualizing the dividend, so the $0.65 this quarter relative to the $0.62. As it relates to the dividend, longer-term, we’ve had the same dividend level of $0.62 for almost nine years. Sometimes we’ve far out earned that level. Sometimes we’ve been slightly below that level. I think that shows that we’ve continued to set our dividend with a long-term view in mind. As I mentioned in the remarks, we’re looking at this quarterly.
We discussed with our Board of Directors. And what we think really drives the decision is where is the long-term earnings power of this company over time and what dividend makes sense relative to that. And we’re not going to overreact to one quarter or another along the way.
Jade Rahmani : Thank you.
Operator: We’ll go next. We’ll take our last question from Rick Shane with JPMorgan.
Rick Shane : Hey, thank you. It’s actually almost a perfect segue. So if we think about setting a dividend policy on distributable earnings, X realized losses, it essentially kind of takes credit out of the equation, which I’m not really convinced is the best way to look at the business. One of the outcomes of that is that, particularly given the start to 2024, it looks like book value will be down for the third year in a row. You talk about sort of the sustainable dividend and the economics. Given where book value is today, to earn that dividend would require about a 10.5% return on capital or economic return, which is a pretty high watermark for you guys. So I really do wonder or ask, I guess I would ask the question, do you think that a 10% plus return given the near-term headwind of non-accruals and potentially as we move into 2025 lower base rates, an achievable long-term target?
Katie Keenan : I think it’s a great question. You know, the way we look at it is very much in that way. So, I think putting aside sort of short-term and the encumbrance of non-accruals, it really is about the long-term earnings power of the business, which relates to the equity value, the book value, and our ROE. If you look back over the history of the business, we have very consistently generated a return that is about 900 basis points over base rates. And so base rates are a really important part of the equation. For most of the history of the business, base rates have been well below even what we see as sort of the terminal rate when we look at the SOFR curve today. So I think that when you’re thinking about where that normalized ROE could be over time, we need to think about sort of where ROE levels off.
