So when we think about how we’ve positioned our balance sheet 2024, we continue to have flexibility if the market does get more challenging. Specific to the comment relating to Fed rate cuts. When we look at our balance sheet now, particularly now that we’ve resolved a substantial portion of our credit challenged assets, the one area that we look through 2024 when it comes to risk is, of course, that the Fed is slower. And when you think about SOFR at roughly 5, 5.3, that may put pressure on certain multifamily borrowers. So we just want to be respectful of that risk. But when it comes down to it, ultimately, again, we’ve positioned the balance sheet where can play a lot more offense this year relative to defense, but also just want to be really respectful in terms of where we are in terms of the market.
Sarah Barcomb: Okay, great. Thank you. And my second question relates to liquidity needs for the REO portfolio. You’ve already given some good details here, and thanks again for reminding us on those successful resolutions for the previous REO assets. Just digging into these four new REO properties, how much liquidity do you think is needed to manage these? And will you lever these up or run them unlevered? Just curious about CapEx plans here and overall liquidity needs. Thank you.
Bob Foley: Sure. Thanks for your question, Sarah. The answer is going to be different for each of the assets just to provide goalposts. The multifamily projects I alluded to earlier in the suburbs of Chicago really doesn’t require any capital. The properties, call it, 75%, 76% leased and occupied. So that’s a pure operations exercise, which we’re confident will go well under our control. At the other end of the spectrum, there are some assets that would require capital, perhaps reconditioning, perhaps for new leasing. Our liquidity projections for the company, obviously, incorporate our expectations there. But we’re not going to provide at this point, specific budgets, you’ll be able to see the spend over time as we undertake our business plans here. But generally speaking, as I mentioned earlier, one of the criteria is we’re looking for the best return for our investors. And all else being equal, we’d rather limit the capital spend where we can.
Sarah Barcomb: Okay, great. And then just really quickly, I wanted to clarify that $0.07 earnings income benefit that you mentioned, is that layering in your expectations for going on offense and making new loans? Or is that just the benefit of moving existing loans that are currently on warehouse lines over to the CLOs?
Bob Foley: Well, it’s actually a blend of the two. But as Doug and I think I mentioned a few minutes ago, the utilization of the $71 million of the $247 million, those were two new loan originations. We did originate almost $300 million of loans last year, and we’ve originated close to $90 million thus far this year. So we have not been idle.
Doug Bouquard: And also just to expand on that, Sarah, which I think is just a helpful context. If you think about where we are liquidity-wise, both from a cash perspective, from a Series CLO capacity perspective, and then also all of the new available secured financing that we just lined up, we really have a lot of different ways for us to deploy capital. So even though we will, of course, use every dollar of that Series CLO capacity, there are certain loans where we may opt to fund that even today outside of the Series CLO if we have a more attractive channel in terms of available back leverage. I think a lot of what we’ve seen from the bank community so far this year is although they are generally more cautious about direct lending, we’ve seen actually a pretty strong appetite from banks to be providing us back leverage as we’re out there making new investments.
So I think that that’s really what provides us some flexibility where, again, we, of course, will be fully populating that Series CLO reinvested capacity, but we do have many other liquidity alternatives. And as we deploy more and more capital, we will optimize between the two.
Sarah Barcomb: Thank you.
Doug Bouquard: Thank you very much.
Operator: Thank you. Next question comes from the line of Rick Shane with JPMorgan. Please go ahead.
Rick Shane: Thanks, everybody for taking my questions this morning. Look, cleaning up the book at the end of ‘23 gives you a tremendous amount of flexibility as you head into ‘24. Steve DeLaney had asked about repurchases, one of the other places that you have flexibility is related to dividend policy. And I understand there have been a lot of questions about, hey, what’s the run rate on distributable earnings. But the reality is, at this point, given the realized losses in ‘23, dividend is, I assume, going to be a return of capital. I understand that there is a signaling to the dividend level, but the reality is even with the stock running up, it’s trading at a 16%-plus yield. In the spirit of preserving flexibility and not really getting full credit for that dividend, does it make sense – and again, I realized this is not out of necessity, but perhaps out of efficiency to maintain the dividend at the current level even if you can.
Doug Bouquard: Look, it’s a great question, and we, of course, spend a lot of time being very thoughtful about our dividend policy. I’ll first start with, we continue to think about our dividend policy along with our Board really to be anchored around a level that is reflective of the long-term earnings power of the company. I think as you can see from what we were able to achieve, particularly in the fourth quarter and really in all 2023, that really allows us, to your point, to have, frankly, a much clear window into the sort of long-term earnings power of the company. And frankly, that’s exactly what we’ll be using as we think through the dividend policy going forward.
Rick Shane: Got it. And look, I see that the flipside of it is that the realized losses last year probably equate to, call it, almost three years of dividend distributions. And so, again, I just think of it preserving capital, being able to – you guys have as a unique problem, which is that you can’t really retain and reinvest capital you’re in a situation right now where you’re probably looking at above historical norm returns on marginal investments. Doesn’t it make sense to, in this window, where you actually can retain capital, to retain and reinvest?
Doug Bouquard: Yeah. Look, I think you’re asking a really thoughtful questions. And again, we are evaluating dividend policy, but again, we really used the guiding light as the long-term earnings power of the company. And I think that as we evolve in our balance sheet and we see opportunities out in the market, that’s exactly what’s going to help us shape our policy and navigate some of the complexities that frankly, you laid out quite eloquently.
Rick Shane: Okay, thank you so much. And again, look, understanding the policy is really helpful. And I realized there’s an enormous amount of uncertainty, ambiguity and what is optimal for shareholders. I’m not saying that this is the right choice. I’m just trying to weigh what the different – what you guys will consider as you think about this.
Doug Bouquard: Absolutely –
Bob Foley: I’d like to just add one more thing to Rick’s thoughtful line of questioning, which is that, dividend policy is an important and big linear programming problem or application. And none of us should forget that one of the other overlays or constraints that all REITs operate under is that, in order to preserve your REIT qualification, you need to distribute at least 90% of your taxable income. So the discussion today seems to have been focused on situations where the REIT in question, which I think this morning is TRTX doesn’t have taxable income, but there have been – there are instances where there is taxable income. And so that’s something that every REIT management team and Board needs to consider as well. Thanks, Rick.
Rick Shane: Thanks guys.
Bob Foley: Thank you.
Operator: Thank you. The final question comes from the line of Don Fandetti with Wells Fargo. Please go ahead.
Don Fandetti: Hi. As you look out over the next quarter or two, how are you thinking about the risk of migration from 3 to 4s and also reserve build over the next quarter or two?
Bob Foley: Hey Don, it’s Bob. Thanks for your question. I’ll sort of take those in order. In terms of risk ratings, I would say two things. At the end of every quarter, we carefully scrub all the loans and our risk ratings reflect our assessment of current and expected future macro conditions, real estate conditions and our assessment of our individual loan collateral, loan sponsor and so on. So, our risk ratings at the end of any quarter, including December 31st, are based on both current reality and our expectations of the future. With respect to our expectations for the future, Doug had mentioned earlier that, we are in a period of uncertainty and correction, uncertainty in the broader real estate or in the broader economy and certainly correction of real estate.
And that Fed policy, in particular, weighs heavily on real estate. So, if the actual path of the economy and rates proves to be different than what we currently expect it will be, that could weigh on borrower behavior and consequently on risk ratings to the negative or the positive. With respect to CECL, you mentioned build and build is not the way CECL is structured. So at any period end, the CECL reserve, again, is supposed to reflect management’s assessment of the – it’s a current assessment of expected losses over the life of the loan. So, our reserves at any quarter end are intended to reflect that and do to the best of our ability. I think to-date, our empirical evidence of realized losses in comparison to CECL reserves has been pretty tight.
And so the short answer to your question is, we’re comfortable today with our CECL reserve based on what we see in the future. If the market environment in the future is materially different than our current assessment, then we’ll adjust at the appropriate time. But again, thus far, our reserves have been pretty on target.
Don Fandetti: Thanks, Bob.
Bob Foley: I hope that answers your question.
Don Fandetti: Yep.
Operator: Thank you. Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to the management for closing comments.
Doug Bouquard: Yes. I’d just like to thank you all for joining today, and we look forward to speaking with you again on our next earnings call.
Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
