Matt Salem: Thanks Jade.
Operator: And the next question is from Steve Delaney from JMP Securities. Please go ahead.
Steve Delaney: Thanks. Good morning, everyone. And thank you for taking my questions. So I think I’ll give you a break from talking about office. The West Hollywood multifamily, $2.8 million per unit, that’s obviously a nice property. Could you just give us some color as to what’s going on, on the ground there in terms of the appeal of the project or the units? And are there any conditions going on there with respect to homelessness or crime that could possibly impact that property?
Matt Salem: Yes. I can touch on that. And Steve, thank you for the question. Matt again. So that, you’re right. It’s a relatively high per pound loan amount. And that’s because it’s effectively best-in-class kind of trophy type of asset in the market. It was built for condo sales. So it is a very nice project. It’s well located, not concerned about crime or homelessness at all. But I think it’s extremely well located. And we had moved that to a four because we were in some modification discussions around an interest rate cap with that particular sponsor. So it’s not really necessarily an asset or value issue, and we hope to resolve that here shortly.
Steve Delaney: Got it. Sounds like more technical than fundamental. So thanks for that color. Just on your workout on the Philly office loan. Just to confirm, your junior mezz or I guess we’d like to call them hope notes. There’s no carrying value associated with that on your books at this time, is it? Are you carrying that?
Kendra Decious: Steve, it’s Kendra. That’s correct. That was fully written off the $25 million on the senior mezz.
Steve Delaney: Okay. Got it. So you would be obviously below the senior mezz that the sponsor has put up?
Matt Salem: That’s right. The new money that’s coming in is ahead of that.
Steve Delaney: Yes. Okay. Great. And then if you could, on the 4-rated loans, should we assume that all four of those loans, the fact that they are still four and not five that you are accruing interest or there is interest being paid by the borrower on those loans each month and quarter?
Kendra Decious: Yes. So Steve, Kendra again. On the 5-rated loans, we are still current. The sponsors are still current on paying us interest each quarter. As you’ll notice in the financial statements, we have put both of those loans on cost recovery. So as you know, that means the interest is not running through the interest income line. It’s actually being held against the carrying amount of the loan until there’s a resolution or until we think it that there are indicators that we can go ahead and start recording that interest income again. I can tell you that the run rate on the two 5-rated loans, interest income is about $7 million a quarter. And in terms of quarter-over-quarter because we kind of staggered when the two loans went on nonaccrual. The difference in interest income quarter-over-quarter from Q4 to Q1 was about $3 million. And you’ll see another $3 million go into cost recovery in Q2. And then it’s at that point, it’s stabilized on those loans.
Steve Delaney: Okay. Thank you. I apologize, Kendra, not – because I was actually asking about the 4-rated loans and the —
Kendra Decious: I’m sorry.
Steve Delaney: No, no, I probably didn’t make it clear, no problem at all, but I just wanted to Kendra, assume that 5-rated loans would – each would be a special situation. But on the 4-rated, I just wanted to confirm that those are all accruing interest or borrowers paying interest one way or another.
Kendra Decious: That is – full things are correct, accruing and receiving.
Steve Delaney: Okay, thank you all very much. Appreciate the conversation.
Kendra Decious: Thanks Steve.
Operator: Thank you. The next question is from Rick Shane from JPMorgan. Please go ahead.
Rick Shane: Thanks everybody, for taking my questions this morning. Look, I want to talk a little bit about capital allocation. Dividend yield is mid-teens now. In order to support the dividend on a book basis, you need to generate an ROE of north of 10%, which is a pretty high return even in this environment with high rates. At the same time, the stock is trading at a substantial discount to book value. Does it make sense to reallocate some of the distribution or return of capital to shareholders, reduce the dividend and be more aggressive in terms of repurchasing shares?
Patrick Mattson: Thanks, Rick. I appreciate the question. Matt, I can take that one. Just as it relates to the dividend and the coverage, I think you had asked about there. Obviously, this quarter, as we’ve seen over the last few quarters. And as we look ahead a little bit, we’re really benefiting from the current interest rate environment. And so we’re easily covered the dividend this quarter at $0.48 a share of distributable earnings versus the $0.43 payout. And so I think we feel good about the earnings power of the company just on for on an operating earnings basis. And so that’s probably the biggest consideration when we start to think about the dividend.
Rick Shane: But yes, I mean I understand that. But when we think about the reserves and the implication that the reserves will manifest into charge-offs. And so there’s this – there’s an accounting narrative of distributable earnings that distributable earnings is the basis for dividend and that it doesn’t and it is impacted by charge-offs, not provision. But over time, accounting also suggests that distributable earnings and GAAP earnings should converge. And presumably, that’s going to happen in the second half of this year. And so that you’re going to wind up in a situation potentially where distributable earnings is below dividend. Why not get ahead of that and also give yourself the opportunity to buy the stock at this discount?
Patrick Mattson: Yes. I mean let me touch on the share buybacks. I think we’ve been pretty consistent in terms of – certainly versus the peer set in terms of buying back stock when we thought it was attractive. I certainly think the stock is attractive now. We’ve been weighing liquidity a little bit more heavily, given what’s going on in the banking sector and the overall volatility in the market, and I think we’ll continue to prioritize liquidity here in the near term. And I understand the math that you’re thinking through as it relates to the – what’s the sustainable earnings power of the company. And certainly, if we thought that, that was going to decline significantly, and we couldn’t sustain the dividend, then we would evaluate that.
And obviously, the dividend is a Board-level decision. But right now, from what we’re looking at with the existing portfolio, with the current interest rate environment and even thinking through the forward curve, which obviously is a little bit downward sloping towards the end of the year. We don’t see what you’re describing in terms of just the earnings power of the company right now. So that – again, if it starts to happen or manifest itself, then it’d be something we’d have to evaluate, but not in our current projection is not what we’re seeing.
Rick Shane: Got it. Totally fair. And look, at the end of the day, having too much liquidity is a situation that you can remedy quickly as you choose to having not enough liquidity is a lot harder to fix fast.
Patrick Mattson: 100% agree with that.
Rick Shane: Thanks guys.
Patrick Mattson: Thanks Rick.
Operator: And the next question is a follow-up question from Jade Rahmani from KBW. Please go ahead.
Jade Rahmani: Thank you for taking the follow-up. As it relates to liquidity, how are you thinking about the dynamics there post the convert repayment. That will clearly reduce your cash on hand. Are there good news items in the portfolio in terms of deals that have really executed well on their business plan that you expect to be paid off or to be sold, things of that nature, refinanced that would create liquidity or perhaps they become – those deals become more leverageable?
