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01/11 12:00
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call reflects multiple challenges: declining net interest income, gain-on-sale income, and operating costs remain high despite some improvement. The Q&A reveals concerns about leverage and unclear management responses regarding dividends and buybacks. The company's financial health is strained by a GAAP loss and reduced book value. However, share repurchases and potential dividend evaluation provide some positive aspects. Given the modest market cap, these factors suggest a negative stock price movement of -2% to -8% over the next two weeks.
GAAP loss from continuing operations $0.13 per common share for the third quarter, impacted by a $1.4 billion reduction in the CRE portfolio and $40 million of negative credit migration.
Distributable earnings Loss of $0.94 per common share and $0.04 per common share excluding realized losses on asset sales, driven by lower net interest income and gain-on-sale income.
Net interest income Declined to $10.5 million in the quarter due to a $1.4 billion reduction in the CRE portfolio and $40 million of negative credit migration.
Gain-on-sale income Decreased $2.6 million to $20 million, driven by lower USDA and SBA 7(a) volume and offset by $189 million of realized losses from asset sales.
Operating costs from normal operations $52.5 million, representing an 8% improvement from the previous quarter due to reductions in compensation expense, servicing expense, and other fixed operating costs.
Provision for loan loss and valuation allowance Decreased to $140.2 million, with a $38 million net increase in provision for loan losses and a $178 million decrease in valuation allowance.
Bargain purchase gain Increased by $24.5 million due to additional future cash flows expected from the UDF IV merger.
Book value per share $10.28 at quarter end, down $0.16 from June 30, primarily due to the dividend coverage shortfall and partially offset by share repurchases.
Liquidity $830 million of unencumbered assets, including $150 million of unrestricted cash.
Small Business Lending operations: Originated $175 million of Small Business Administration 7(a) loans, 50% below quarterly target. USDA production was $67 million. Combined, the platform generated $11 million in net income, adding 280 basis points return on equity before realized losses.
Portfolio sales: Completed two portfolio sales: 21 loans with an unpaid principal balance of $665 million, netting $85 million; and 196 small balance loans with an unpaid principal balance of $93 million, netting $24 million.
CRE loan exposure reduction: Reduced CRE loan exposure through sales of low-yielding assets and traditional asset management strategies. Levered yields in the portfolio increased 10 basis points to 11%.
Operational cost improvements: Operating costs from normal operations were $52.5 million, representing an 8% improvement from the previous quarter due to reductions in compensation, servicing expenses, and other fixed costs.
Debt management: Focused on addressing $650 million of 2026 debt maturities through unencumbered assets, portfolio maturities, asset resolutions, and potential new debt issuance.
Portland mixed-use asset strategy: Engaged Lincoln Property for property management, revised pricing strategy for Ritz residences, and ongoing stabilization efforts to exit the position.
CRE Loan Exposure: The company is facing challenges in reducing its CRE loan exposure, with delinquencies increasing to 5.9% of the total portfolio and $40 million of new core net delinquencies in the quarter. Negative migration in core loans is also a concern.
Noncore Portfolio Performance: The noncore portfolio had an $8 million drag on earnings, with 31 loans marked to 79% of UPB. Liquidation of noncore assets is ongoing but continues to impact earnings negatively.
Portland Mixed-Use Asset: The Portland mixed-use asset represents 14% of quarter-end equity and is not yet stabilized. The hotel component is nearing stabilization but still operates at a net loss, while office and retail spaces are only 28% leased. The asset incurred a total net operating loss of $1.3 million and $3.7 million in interest carry.
Small Business Lending Operations: Small Business Lending operations are underperforming, with SBA 7(a) loan originations at 50% below the quarterly target due to capital market access issues and government-related delays. This has constrained growth opportunities.
2026 Debt Maturities: The company faces $650 million in debt maturing in 2026, which is a top priority. While multiple pathways to address these obligations exist, deleveraging actions may pressure book value depending on the size, timing, and pricing of asset sales.
Net Interest Income Decline: Net interest income declined to $10.5 million in the quarter, driven by a $1.4 billion reduction in the CRE portfolio and $40 million of negative credit migration.
Gain-on-Sale Income: Gain-on-sale income decreased by $2.6 million due to lower USDA and SBA 7(a) loan volumes, impacting overall revenue.
Operating Costs: Operating costs from normal operations were $52.5 million, including a $5 million loss from the Portland mixed-use asset. While there was an 8% improvement from the previous quarter, these costs remain a challenge.
Portfolio Management: The company plans to continue reducing CRE loan exposure through sales of low-yielding assets and traditional asset management strategies. Core portfolio payoffs are expected to accelerate with portfolio seasoning, and some loans may migrate to delinquency, net of modifications. For core loans experiencing negative migration, the go-forward strategy will favor liquidations.
Small Business Lending Growth: The company anticipates significant growth in Small Business Lending operations in 2026, supported by the approval of a $75 million warehouse facility and two planned securitizations. This is expected to address the primary hurdle of capital market access and enable volume growth.
Debt Maturities in 2026: The company has $650 million of debt maturing in 2026 and plans to address this through multiple pathways, including $830 million of unencumbered assets, $425 million in net liquidity from portfolio maturities and asset resolutions, accelerated sales of nonperforming loans and REO positions, and potential new debt issuance.
Dividend Policy: The company will evaluate the current dividend level in December, considering progress in the business plan, liquidity levels for managing 2026 maturities, and competing sources of liquidity.
Portland Mixed-Use Asset: The company plans to exit the Portland mixed-use asset after ongoing stabilization, lease-up, and sales. Efforts include a revised pricing strategy for Ritz residences and significant progress in leasing office and retail spaces over the next few quarters.
Dividend Policy Evaluation: The company will evaluate the current dividend level in December to determine the most appropriate level in the context of progress in the business plan, liquidity levels for managing the 2026 maturities, and competing sources of liquidity.
Share Repurchase: The company repurchased 2.5 million shares at an average price of $4.17, which offset the reduction in book value per share by $0.09 per share.
The earnings call reveals several challenges, including CRE portfolio issues, high debt refinancing costs, and dividend sustainability concerns. Despite some positive developments like asset sales and share repurchases, the overall sentiment is negative due to financial drags, high noncore asset delinquency, and reduced SBA volumes. The company's market cap suggests moderate stock price sensitivity, leading to a likely negative reaction in the range of -2% to -8% over the next two weeks.
The earnings call reflects multiple challenges: declining net interest income, gain-on-sale income, and operating costs remain high despite some improvement. The Q&A reveals concerns about leverage and unclear management responses regarding dividends and buybacks. The company's financial health is strained by a GAAP loss and reduced book value. However, share repurchases and potential dividend evaluation provide some positive aspects. Given the modest market cap, these factors suggest a negative stock price movement of -2% to -8% over the next two weeks.
The earnings call summary presents a mixed picture: strong liquidity and strategic repositioning efforts, but with challenges like increased operating costs and dividend coverage shortfall. The Q&A reveals uncertainties, such as unclear dividend strategy and reliance on future SBA volume recovery. However, the company shows potential in small business lending and has significant liquidity. The market cap suggests moderate volatility. Overall, the sentiment is neutral, with no strong catalysts for significant price movement in either direction over the next two weeks.
The earnings call presented mixed signals. The financial performance was stable, but distributable earnings showed a loss. Positive elements include share repurchases and strong liquidity, but concerns remain with declining net interest income and unclear guidance on key projects. The Q&A highlighted management's cautious outlook and uncertainty in asset repositioning. The market cap suggests moderate volatility, leading to a neutral prediction.
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