TPG RE Finance Trust, Inc.

CPG 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Good morning and welcome to TPGRE Finance Trust's earning call for the fourth quarter and full year of 2023. We are joined today by Doug Bucard, 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 to the press release and the Form 10-K. At this time, I'll turn the call over to Doug Bucard, Chief Executive Officer.

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 a 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 C low markets have tightened, with particularly strong demand from the bond-buying community for 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 challenge 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 five-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 improving 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. 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 our identified 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 volumes 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 five-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 loan. 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 30, 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 five-rated loans and non-performing loans. We have no specific reserves for bond losses at year-end. Quote value per share is $11.86, a decline of 18 cents 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 31, 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 are 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 fourth 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 months. 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 shed 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 total $183.3 million, only 5% of our total loan commitments. We furthered the lever to 2.5 to 1, which is defensive, but gives us ample room for growth when warranted. We have $4.9 billion in 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 counterpart. 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 turnout 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 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 periods. CRTX has 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 UPV of roughly 95%. We financed return on 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 amounts. 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-weighting 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, finance 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 remains 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 secure 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? Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Aaron Siganovich with Citi. Please go ahead.

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?

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 CRE 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.

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 kind of had a lot of activity in the fourth quarter?

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 23 cents. And that 23 cents, 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 kind of starting from that 23 cents per share number is, I think, a relatively good base. And then really from there, I would describe it as our having kind of three levers upon which 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, you know, lever two would be deploying excess cash. And then third, you know, just from a leverage perspective, we are, you know, relatively low levered when you look at really across the landscape, we're levered at 2.5 to one. So we do have the opportunity to potentially have a bit more leverage at our company level.

Thank you. Thank you. Thank you.

A reminder to all the participants that you may press star and one to ask a question. Next question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Congratulations. Good morning. A busy, busy fourth quarter and a lot of progress. You know, I wanted to touch base, Bob, revisit, I think you said $0.07 per share. Is that a quarterly number? I guess we won't get a full quarter impact until later this year, but Is that a full quarter impact of $0.07 once the CLOs are topped off?

Yes, that's correct, Stephen. Great.

Just wanted to confirm that. Yeah. $247 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.

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 on other facilities? And what are you looking at in the current new investment pipeline that's likely to go into those CLO vehicles?

Yeah. So those two investments 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 able to we're basically able to lend that in today's market. We are, you know, I would say generally lending at a lower going in loan to value than I think a lot of where the market was lending in 2021 and 22.

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 or are they assets you need to lease up over time and stabilize? Are there some that may, you know, find other homes sooner than others? Can you give us a little color on that?

Sure. Bob, why don't you share that one?

Stephen, we, at year end, our REO portfolio was comprised of five properties, one of which is an office building in Houston that we've owned, you know, since earlier in 2023. And as you just mentioned, generates a a very attractive 9-plus percent ROE. For each of the others, we have evaluated alternative business plans for each. That was an important part of employing the investment framework to determine whether we were, in fact, going to foreclose or pursue another resolution strategy for each of what is now REO. I would say, generally speaking, properties that we own that, you know, generate less current cash, 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 five or six 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.

Great. And one last quick one. Nikkei 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?

Sure. Absolutely correct in your assessment. We're obviously monitoring that closely in constant discussions with our lenders about a rent. Great. Just want to add one more thing in response to your question. Retiring the substantial borrowings that we had in connection with the NPOs, 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 four-quarter test. So you sort of earn your way into it and out of it.

Thanks, Stephen. Thanks, Bob. Appreciate the comments. Thank you.

A reminder to all the participants that you may press star and 1 to ask a question. Next question comes from the line of Steve Delaney with Citizens JMP.

Please go ahead. Do you have a question?

Apologies. I was on mute. My apologies. Thank you 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 The ranking of priorities, would you put share buybacks with the stock slightly under 50% of book value? I realize that scale and growth are important, but what should shareholders expect, if anything, on buybacks at this point? Thanks.

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 direct about it, we, along with our board, are carefully considering the option and are seeking the best returns for our investors.

Sure. I 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?

That's correct. That's correct. Steve, you're absolutely right.

Okay, yeah, because we've seen some really nice buybacks on those. Well, look, I know capital allocation is part offense and part defense. So for now, we'll just say congratulations on the great cleanup effort. I'm sure your board will make the right calls moving forward. So all the best in 2024. All right.

Thank you very much. We appreciate it. Thank you. Next question comes from the line of Sarah Balcom with PDIG.

Please go ahead.

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 got zero non-performing loans? Basically, 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.

Sure. Happy to address that, and thanks for the question. You know, I'll sort of start just once again, just a round again, anchoring on our, you know, average distributable earnings in 2023 before credit losses. Again, just to use that as a guidepost of approximately 23 cents per quarter. And then from there, you know, 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 two and a half to one. As we look forward, and I think that why both Bob and I have kind of spoken to 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 in 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 across 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 five and a third, 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 we 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.

Okay, great. Thank you. And my second question relates to liquidity needs for the REO portfolio. You've already given some good detail 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? you know, just curious about CapEx plans here and overall liquidity needs. Thank you.

Sure. Thanks for your question, Sarah. The answer is going to be different for each of the assets. Just to provide goalposts, the multifamily project I alluded to earlier in the suburbs of Chicago really doesn't require any capital. You know, 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. You know, 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.

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?

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, those were two new loan originations. Right, right. 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.

And also just to expand on that, Sarah, which I think is just 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 reinvestment capacity, but we do have many other liquidity alternatives.

And as we deploy more and more capital, we will optimize between the two. Thank you. Thank you very much. Thank you. Next question comes from the line of Rick Shane with J.B.

Morgan. Please go ahead.

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 effect to the dividend level. But the reality is even with the stock running up, it's trading at a 16 plus percent yield. In the spirit of preserving flexibility and not really getting full credit for that dividend, does it make sense? And again, I realize this is not out of necessity, but perhaps out of efficiency to maintain the dividend at the current level, even if you can't.

Look, it's a great question, and we, of course, spend a lot of time, you know, being very thoughtful about our dividend policy. I'll first start with, you know, 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. And I think as you can see from what we 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 clearer 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.

Got it. And look, I see that the flip side 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?

Yeah, look, I think you're asking, you know, really, really thoughtful questions. And, you know, again, we are evaluating dividend policy, but again, we really use the guiding light as the long-term earnings power of the company. And I think that as we, you know, evolve in our balance sheet and we see opportunities out in the market, that's exactly what's going to help us, you know, shape our policy and, and, and navigate some of the complexities that frankly you laid out quite eloquently.

Okay. Thank you. And again, look, understanding the policy is really helpful. And I, and I realized there's an enormous amount of uncertainty, ambiguity, and what is optimal for shareholders. I'm not saying that this is, is the right choice. I'm just, I'm just, trying to weigh what the different – what you guys will consider as you think about this.

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, you know, 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, Ray. Thanks, guys. Thank you. Thank you.

The final question comes from the line of Don Fendetti with Wells Fargo. Please go ahead.

Hi. As you look out over the next quarter or two, how are you thinking about the risk of migration from three to fours and also reserve build over the next quarter or two?

Hey, Don. It's Bob. Thanks for your question.

I'll sort of take those in order. In terms of, you know, 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, you know, we're in a period of uncertainty and correction. uncertainty in the broader real estate or in the broader economy and certainly correction in real estate. And that Fed policy in particular weighs heavily on real estate. So, you know, if the actual path of the economy and rates proves to be different than what we currently expect it will be, you know, that could weigh on borrower behavior and consequently on risk ratings to the negative or the positive. With respect to CECL, you know, you mentioned build. And, you know, 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 due 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 it the at the appropriate time.

But again, thus far, our reserves have been pretty on target. Thanks, Bob. Hope that answers your question. Yep. 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.

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.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Okay, can you hear us? Can you guys hear me?

Let me just dial, let me just re-mic you back.

Yeah, we can drop the 877 number, right?