TPG RE Finance Trust, Inc. (NYSE:TRTX) Q4 2023 Earnings Call Transcript

TPG RE Finance Trust, Inc. (NYSE:TRTX) Q4 2023 Earnings Call Transcript February 21, 2024

TPG RE Finance Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to TPG Real Estate Finance Trust Earnings Call for the Fourth Quarter and Full Year of 2023. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, today’s call is being recorded. It is now my pleasure to turn the call over to the company. Thank you. You may begin.

Unidentified Company Representative: Good morning and welcome to TPG RE Finance Trust earning call for the fourth quarter and full year of 2023. We are 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 will open the floor for questions. Last evening, the company filed its Form 10-K and issued a press release and earnings supplemental with a presentation of operating results, all of which are available on the company’s website in the Investor Relations section. As a reminder, 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 risks that could affect results, please see the Risk Factor section of the company’s Form 10-K. The company does not undertake any duty to update these statements, and today’s call participants will refer to certain non-GAAP measures, and for reconciliations you should refer the press release and the Form 10-K. At this time, I’ll turn the call over to Doug Bouquard, Chief Executive Officer.

Doug Bouquard: Good morning and thank you for joining the call. Over the past quarter, the market has rallied broadly, driven by a mix of robust economic growth, a tight labor market and the expectation that the worst is behind us in terms of both inflation and restrictive Fed policy. Not only is the S&P 500 up about 5% since the start of the year, it’s worth noting that since October 2022, the S&P has rallied a remarkable 40%. In credit markets, corporate credit spreads continue to tighten in sympathy with the equity markets. However, real estate credit spreads continue to underperform on a relative basis, driven by the same themes that have been affecting the real estate market for the last several quarters. Broad pressure on values, secular challenges to office, elevated borrowing costs and reduced liquidity.

Many traditional providers of real estate debt capital, particularly regional banks, remain defensively positioned. While there are multitude of dynamics at play within real estate capital markets, the pace of Fed rate cuts will be a key driver of credit performance, particularly among floating rate lenders. On the positive side, thus far in 2024, credit spreads in the CMBS and Series CLO markets have tightened with particularly strong demand from the bond buying community in favor property types such as multifamily and industrial. However, real estate as an asset class has lagged the broader market rally. I expect 2024 will be a year of increased transaction volumes and price discovery across the sector. In the fourth quarter, TRTX followed through decisively on the strategy that we have steadily articulated to the market.

Number one, maintain elevated levels of liquidity given the broader market pressure and uncertainty. Number two, resolve identified credit challenged loans with an eye towards maximizing shareholder value. And number three, position TRTX to take advantage of an attractive investment environment in 2024 and beyond. As I’ve mentioned in prior quarters, we continue to use every asset management tool at our disposal to maximize shareholder value, including those available to TRTX by virtue of being part of a broader real estate investment platform and a $222 billion multi-strategy asset management firm. Driven by the hard work and focus of our asset management team, we resolved during 2023, and especially in the fourth quarter, all of our identified credit challenge loans at levels in line with our CECL reserves.

Consequently, we ended the year with a loan portfolio that is 100% performing, contains no 5 rated loans nor non-performing loans, and achieved a 71% reduction in CECL reserves, all while maintaining liquidity of $480 million. Simply put, we were an early mover to identify and address challenges within the sector. Our fourth quarter results exemplify our commitment to getting ahead of and resolving underperforming credit exposures. Looking at our asset management progress through a more focused lens, we identified the challenges facing the office market and moved prudently to reduce our exposure by approximately 70% from $2.3 billion to $728 million since early 2022. A substantial portion of that risk reduction came in the form of full or partial repayments from our borrowers.

However, in certain cases where we deemed it to be the optimal path for shareholder value, we sold loans or took title to assets. These asset management decisions are rooted in the investment framework we apply to all of our investments. Given that TRTX is part of TPG’s fully integrated debt and equity investment platform, we are uniquely positioned to manage REO assets and maximize shareholder value. At quarter end, REO assets account for slightly less than 5% of TRTX’s total assets. Despite the banking industry’s emphasis to reduce direct lending on commercial real estate assets, we continue to benefit from strong demand from our financing counterparties to deepen their lending relationship with TRTX. To that end, we extended a $500 million secured credit facility with Goldman Sachs to 2028 and closed a new financing arrangement with HSBC.

We have no material financing maturities until 2026, which provides us an attractive runway to deploy fresh capital into the real estate credit market. Looking ahead, uncertainty continues to permeate the broader real estate market. For TRTX, due to the substantial progress made over the past year in reshaping our loan portfolio, our strong liquidity and low leverage, we are confident in our ability to navigate the current environment. From an exposure perspective, our loan portfolio is 49% multifamily, which we believe is a sector with positive long-term tailwinds, despite the near term pressures of new supply and elevated short-term borrowing costs. Our multifamily book is 100% performing. Furthermore, 100% of our multifamily borrowers who are required to replace their interest rate caps in 2023 did so by either renewing, replacing a cap or funding an interest reserve, which is a positive signal towards borrower commitment, the strength of our collateral and the overall credit quality of our balance sheet.

While slower than expected interest rate cuts may put pressure on the sector and our borrowers, we continue to favor the housing sector and believe this will be an area for attractive new investment in the coming quarters. Against this improvement backdrop, our current share price represents approximately 50% of book value, so there remains a clear disconnect from the company’s fundamentals, including the significant progress made in 2023 and our 100% performing loan portfolio. In simple terms, with $480 million of available liquidity, a conservative leverage ratio of 2.5 to 1, a balance sheet with 100% performing loans and the deep investing experience of TPG’s global real estate platform, we believe that our shares offer compelling value at today’s price.

We acknowledge the real estate sector remains under pressure and that credit performance may be heavily dependent on the pace of future interest rate cuts. However, we are pleased with how we are positioned to navigate 2024 and beyond. With that, I will turn it over to Bob for a more detailed summary of this quarter’s performance.

Bob Foley: Thank you, Doug. Good morning, everyone and thanks for joining us. Our results for the fourth quarter and full year illustrate our success in executing our 2023 operating, which was to efficiently resolve or identify credit challenge loans, primarily office, at the best values available in the market, sustain high levels of liquidity, maintain or reduce our already low leverage levels and position TRTX at year end to play offense, defense or both in 2024. Regarding our operating results, GAAP net income attributable to common shareholders was $2.6 million for the fourth quarter as compared to a loss of $64.6 million for the third quarter. Net interest margin for our loan portfolio was $21.3 million versus $19.5 million in the prior quarter, an increase of $1.8 million or $0.02 per common share, due largely to repayment of borrowings associated with non-performing loans resolved during the fourth quarter.

Distributable earnings before realized credit losses was $24.4 million or $0.31 per common share as compared to $13.7 million or $0.18 per common share in the prior quarter. Distributable earnings before realized credit losses averaged $0.23 per quarter for the full year 2023, which we view as a solid foundation from which to build in 2024. Distributable earnings declined quarter-over-quarter to a loss of $159.7 million versus a loss of $103.7 million in the prior quarter due entirely to realized losses incurred from the resolution of all of our non-performing and 5 rated loans during the fourth quarter. The realized losses recognized in the fourth quarter were nearly identical to the CECL reserves associated with the resolved loans. Our CECL reserve decreased quarter-over-quarter by $166.8 million or 70.5% to $69.8 million from $236.6 million as of September 30th, 2023.

Our CECL reserve rate declined to 190 basis points from 560 basis points. This decline reflects $466 million of loan resolutions during the fourth quarter involving identified credit challenge loans, including the elimination of all 5 rated loans and non-performing loans. We have no specific reserves for loan losses at year end. Book value per share is $11.86, a decline of $0.18 per share from $12.04 in the third quarter. Some important data points. We reduced non-performing loans to zero from the peak of $558.9 million at March 31st, 2023. Our $3.7 billion loan portfolio was at year end 100% performing, 100% floating rate and 100% first mortgage. Resolved $466 million of identified credit challenge loans in the fourth quarter and $951 million during the entire year.

For the quarter, the loan resolutions included, one office loan sold, three office loans converted to REO, one multifamily loan sold and one multifamily loan converted to REO. Excluded from these amounts, our $70 million of regular way loan repayments in full on one hotel loan and partial repayments of $30.2 million across three loans. To accomplish our goal, we incurred realized losses during the full quarter of $184.1 million and for the year of $334.7 million. These losses were within 3% for the quarter and 9.5% for the full year of the aggregate CECL reserves related to those resolved loans. The small quarterly decline in book value in the face of $184.1 million of realized losses reflects that our CECL reserve had already largely captured the eventual losses realized upon resolution.

In reading our balance sheet of these identified credit challenge loans, we also shared $280.6 million of borrowings used to fund those non-earning assets and $6.1 million of related quarterly interest expense or approximately $0.08 per share per quarter. Multifamily loans now represent 49.2% of our loan portfolio. Office has declined 68% over the past eight quarters to 19.9%, life sciences is 11%, hotel is 10.6% and no other property type comprises more than 3.1% of our portfolio. Unfunded commitments totaled $183.3 million, only 5% of our total loan commitments. We further de-levered to 2.5 to 1, which is defensive, but gives us ample room for growth when warranted. We have $4.9 billion of total financing capacity across 13 different arrangements.

During the fourth quarter, we added a non-mark-to-market note-on-note financing arrangement with a new counterparty, and shortly after year end, we extended our existing $500 million secured credit facility with Goldman Sachs for two additional years through 2026 and tacked on a two-year term out provision through 2028. Our only scheduled debt maturity in 2024 is $1.8 million under a credit facility we expect to extend. Regarding REO. One of our strategies to resolve credit challenge loans and recycle capital is to convert certain loan investments to REO, which gives TRTX sole control over the properties and their destinies. During the fourth quarter, we converted to REO four loans, three office properties and one multifamily property. Our holdings at year end comprised five properties, four office and one multifamily, with a total carrying value of $199.8 million, a blended current annualized yield of 6%, an average basis per square foot per office of $121 and per apartment unit of $274,000.

Refer to footnote four of our financial statements for a snapshot of our REO portfolio at year end. We’re using the broad resources of TPG Real Estate’s $18 billion real estate platform and TPG, including platform companies owned by our equity funds, senior advisors and partners, and counterparties to optimize REO returns, giving due consideration to investment alternatives, cash on cash returns, capital requirements and holding period. TRTX is experienced owning effectively managing and harvesting REO. Prior to the fourth quarter of 2023, we’d taken title to four properties, one land, two office and one multifamily. We sold the land within 14 months of acquisition for a gain of $29.1 million. We sold one of the office properties in the fourth quarter of 2022 for a net loss of roughly $200,000, which translated into a recovery against our pre-foreclosure EPV of roughly 95%.

We financed return in the second office building, which we own today and operate, and which generates a 9% yield on equity, and we sold in November, just three months after acquisition, the multifamily property for all cash, no seller financing and generating a $7 million gain compared to our REO carrying value, with total proceeds roughly equal to our pre-foreclosure loan balance. The gain is reflected in our results of operations for the fourth quarter. Regarding credit, risk ratings improved to 3.0 from 3.2, due almost entirely to loan resolutions during the fourth quarter. Refer to Pages 73 and 74 of our Form 10-K for a detailed recap of risk rating changes during the quarter. Regarding our liabilities and our capital base. Non-mark-to-market liabilities remain an essential ingredient in our financing strategy.

At quarter end, non-mark-to-market liabilities represented 73.5% of our liability base as compared to 68.9% at September 30th. Leverage declined further to 2.5 from 2.6 to 1 at September 30th and 2.8 to 1 at June 30th. We were in compliance with all financial covenants at December 31st, 2023. At quarter end, we had $247.2 million of reinvestment capacity available in FL5 to refinance existing loans financed elsewhere on our balance sheet or to support new loan acquisitions or originations. We have since utilized $71.2 million of this capacity and intend to fully utilize the remaining $176 million before the outside reinvestment date of mid-April. We estimate total incremental quarterly interest income of approximately $0.07 per share. Regarding liquidity.

We maintain high levels of immediate and near term liquidity, roughly 11.4% of total assets to support our asset resolution and loan investment strategies. Cash and near term liquidity remained substantial at quarter end at $480 million, comprised of $206.4 million of cash, $247.2 million of CLO reinvestment cash and $26.4 million of undrawn capacity under our secured credit agreements. Our third CLO remains open for reinvestment through mid-April of this year. And during the quarter, we funded $34.6 million of commitments under existing loans. And with that, we’ll open the floor to questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich: Thanks. I guess maybe now that you’ve worked through some of your most challenged loans, is your time now just focusing on realizing the value of the REO? Or can you start to get on a more offensive footing and start to look at investing in some new loans as well?

Doug Bouquard: Thank you for the question. On that point, I think based on where we are as a company, we’re in a really unique spot where we actually are able to start and play, frankly, a lot more offensively. Our record in terms of managing and owning REO, I know that Bob spent some time in his prepared remarks speaking to our experience there, but from a capital allocation perspective, we will be deploying capital into new loans in 2024. Part of that, of course, will be by deploying our Series CLO reinvestment capacity. And then beyond that, we will have the ability to deploy excess cash, which, of course, can help drive earnings power of the company.

Arren Cyganovich: I guess on the last point, I guess, where we stand at the end of the year or today, where is the earnings power that you see right now? Now that you’ve had a lot of activity in the fourth quarter.

Doug Bouquard: Sure. So I think to maybe anchor everyone for a moment. One thing that we mentioned earlier in the call is that, when you look at our average distributable earnings before credit losses in 2023, on a quarterly basis, we averaged about $0.23. And that $0.23, of course, was during a period of time where we were generally playing, I’d say, more defense had elevated cash levels. So I think starting from that $0.23 per share number is, I think, a relatively good base. And then really from there, I really describe it as our having three levers of how much we can build the earnings power of the company up. The first of which, as I mentioned is deploying the Series CLO reinvestment capacity, which we’re well in the process of, as Bob mentioned, we have $274 million of capacity within those CLOs. We have already deployed thus far about $71 million of that, and we fully intend to fund that remaining amount.

Secondly, we may look to deploy excess cash into investments as well. We are fortunate to have a series of financing counterparties that would like to continue to grow our relationship. So from a back leverage perspective, there’s ample liquidity. So again, sort of lever two would be deploying excess cash. And then third, just from a leverage perspective, we are relatively low levered. When you look at, really, across the landscape, we’re levered at 2.5 to 1. So we do have the opportunity to potentially have a bit more leverage at our company level.

Arren Cyganovich: Thank you.

Doug Bouquard: Thank you.

Operator: Thank you. [Operator Instructions] Next question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Stephen Laws: Hi. Good morning. Congratulations –

Doug Bouquard: Good morning, Stephen.

Stephen Laws: Good morning – a busy fourth quarter and a lot of progress. I wanted to touch base, Bob, revisit, I think you said $0.07 per share. Is that a quarterly number? Once I guess we won’t get a full quarter impact till later this year. But is that a full quarter impact of $0.07 once the CLOs are topped off?

Bob Foley: Yes, that’s correct, Stephen.

Stephen Laws: Right. Just wanted to confirm that.

Bob Foley: Yeah, $247 million was uninvested at year end. We’ve deployed about $71 million since, and so that leaves about $176 million. So we’re all that deployed based on where we’re originating loans today in the first quarter. That’s how you get to the $0.07.

Stephen Laws: Great. And that is a great lead into my next question. So the $71 million done so far, were those new originations closed this year? Were those existing that were in other facilities? And what are you looking at in the current new investment pipeline that’s likely to go into those CLO vehicles?

Doug Bouquard: Yeah. So those two investments were both – those were both new investments and both within the multifamily sector. And I think as we think about deploying capital in 2024, we still do prefer housing as a broad theme, while we do acknowledge that there are parts of the multifamily market which are under pressure due to either an increased amount of supply in certain markets, and then sort of on the borrower level, in some cases, seeing pressure with elevated short-term rates. But beyond those two factors, we really do like the multifamily space, specifically longer-term. So my expectation is that, we will be deploying capital within the housing sector. But when we look at the current leverage points that we’re basically able to lend at in today’s market, we are, I would say, generally lending at a lower going and loan to value than I think a lot of where the market was lending in 2021 and ‘22.

Stephen Laws: Appreciate the color there. And then on the REO, I know one of your assets that’s currently there generating a fairly attractive return, but can you talk about the timeline of maybe moving the others off the balance sheet? Are they assets you need to lease up over time and stabilize? Are there some that may find other homes sooner than others? Can you give us a little color on that?

Doug Bouquard: Sure, Bob, why don’t you start that one?

Bob Foley: Stephen, at year end, our REO portfolio was comprised of five properties, one of which is an office building in Houston that we’ve owned since earlier in 2023. And as you just mentioned, generates a very attractive 9%-plus ROE. For each of the others, we have evaluated alternative business plans for each. That was an important part of the employing the investment framework to determine whether we were in fact in a foreclose or pursue another resolution strategy for each of what is now REO. I would say, generally speaking, properties that we own that generate less current cash, we require more capital for investment and have a longer hold period in order to fully realize on the investment, probably have a higher return bar and therefore are likely to be owned for shorter periods of time and the opposite would hold true.

So, for example, we now own a very nice Class A multifamily project in the western suburbs of Chicago. That property is completed several years ago in lease up. We’ve actually improved occupancy by about 5 or 6 points in the seven weeks since we acquired it. That’s probably something that we lease up, stabilize, and then sell. There are some other assets that may have more complex business plans and we’ll report back to the market as we work through those.

Stephen Laws: Great. And one last quick one. The K mentioned the interest coverage ratio covenant reverts back to 1.4 at the end of this quarter. Can you give us an update on where you stand on that with that moving from 1.3 back to 1.4 and any moving pieces we need to know there?

Bob Foley: Sure. Absolutely correct in your assessment. We’re obviously monitoring that closely – in constant discussions with our lenders about a number of things, including that, but we don’t expect that, that will be an issue come quarter end. We’re moving – just want to add one more thing in response to your question. Retiring the substantial borrowings that we had in connection with the NPLs, which we no longer have, was an important point in addressing the interest coverage ratio. And the other thing I would just remind investors and analysts, is that, that test is a trailing 4-quarter test. So you sort of earn your way into it and out of it. Thanks, Stephen.

Stephen Laws: Thanks, Bob. Appreciate the comments.

Operator: Thank you. [Operator Instructions] Next question comes from the line of Steve DeLaney with Citizens JMP. Please go ahead.

Doug Bouquard: Good morning, Steve.

Operator: Mr. DeLaney, please go ahead with your question.

Doug Bouquard: Do you have a question?

Steve DeLaney: Apologies. I was on mute, my apologies. Thanks for taking the question. Following-up on Stephen’s comment about the cleanup that you’ve done was truly remarkable. So we have to applaud that. Now that sort of the credit is boxed in, if you will, and you’re looking at new loan opportunities, where in the ranking of priorities would you put share buybacks with the stock slightly under 50% of book value? I realized that scale and growth are important, but what should shareholders expect, if anything, on buybacks at this point? Thanks.

Doug Bouquard: Thank you. So a share repurchase is certainly a potential tool in the capital allocation arsenal for us. That being said, we really will be looking at both new investments and other ways for us to be deploying our capital. So just to be very, very direct about it, we, along with our Board, are carefully considering the option and are seeking the best returns for our investors.

Steve DeLaney: Sure. Understand. Now you did not have – I’m looking at the balance sheet, I don’t see a convert or any high-yield debt. Is that correct? I just see secured debt. Am I missing something?

Doug Bouquard: That’s correct.

Bob Foley: That’s correct.

Doug Bouquard: Steve, you’re absolutely right.

Steve DeLaney: Okay. Yeah, because we’ve seen some really nice buybacks on those. But look, I know capital allocation is – it’s part offense and part defense. So for now, we’ll just say congratulations on the great cleanup effort. And I’m sure your Board will make the right calls moving forward. So all the best in 2024.

Doug Bouquard: All right. Thank you very much. We appreciate it.

Operator: Thank you. Next question comes from the line of Sarah Barcomb with BTIG. Please proceed.

Sarah Barcomb: Hey, good morning, everyone. Thanks for taking the question. So my first question is about the run rate distributable earnings on the performing loan portfolio. Could you walk me through your thoughts on go-forward earnings power now that you’ve gotten zero non-performing loans? Basically like, what needs to happen in order for you to remain constructive on that credit? You mentioned in the prepared remarks that the timing and pace of a Fed pivot is important here. Would we need to see that within the next few months? Or can you speak to any sensitivity there? And any other variables that we should consider as we think about the go-forward non-accrual risk? Thank you.

Doug Bouquard: Sure. Happy to address that, and thanks for the question. I’ll sort of start just once again, just around, again, anchoring on our average distributable earnings in 2023 before credit losses, again, just to use it as a guidepost of approximately $0.23 per quarter. And then from there, again, there is ways to grow the balance sheet in terms of – sorry, to grow earnings power by deploying the Series CLO reinvestment capacity, deploying excess cash and then also potentially adding more leverage given that we are relatively modestly levered within our cohort at 2.5 to 1. As we look forward, and I think that why both Bob and I kind of spoke into the fact that we are respectful of where we are in the cycle. Even though we are really pleased as to where our balance sheet is and our ability to frankly deploy capital in 2024, we remain respectful of the fact that the real estate market is in no way out of the woods.

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 –