Stephen Laws: CLO buy outs and liquidity…
Paul Elenio: Sure. So as you know, from time to time when loans have issues, we do exercise our right to buy loans out of the vehicles, restructure and we then put them back into another vehicle put them into our warehouse lines. And that’s a fluid process that happens each quarter. This quarter, I think we ended up buying $140 million of loans out of our vehicles. But one of those was a loan that I mentioned in my commentary that we restructured a $70 million defaulted loan late last quarter. That was restructured. So that was pulled out, restructured and then financed on one of our warehouse lines. So net, we probably had about, call it, $80 million of buyouts during the quarter. And it changes every quarter. It depends on performance. Last quarter, we had $50 million. So it’s just a fluid process from how loans perform and how you operate your vehicles.
Operator: And our next question comes from Jay McCanless with Wedbush.
Jay McCanless: The first question I had, if rates stay at these levels or even higher into ’24 and ’25, could you talk about what you think could potentially happen with the loan book?
Ivan Kaufman: Yes. I mean rates are clearly at a very elevated level, and it’s put a lot of stress on people being able to exit into the fixed rate market when rates were in the 3s. It was already stressful and borrowers, and we were encouraging borrowers to convert. The short-term rates have gone up a little bit, but they’re maintaining it at these levels. Clearly, it’s an elevated stress level. We’re thinking we’re going to stay at these levels for the next three quarters and are planning accordingly. But make no mistake about it. That’s distress in the system. People, when they have their business plan, they exit to a fixed rate, and it was anticipated in their minds the tenure would be around 3, . Now it’s getting close to 5 sort of opportunity to exit is much more difficult. So they’ve got to bring more capital to the table or bring more capital to able to carry their assets. That’s as simple as it is, and that’s just stressing the .
Jay McCanless: Are rate caps even available in this market? And if so, what type of cost are people having to incur to extend or create a new rate cap?
Ivan Kaufman: Rate caps are always available, at least they have been, they continue to be and costs vary. I think people have to bring roughly 3 points to the table to buy a rate cap in order to bring net debt service down to a level that this would make it a breakeven. So they have to make capital call to figure out ways to bring that capital to the table. So that’s the cost to balance their loans. It’s roughly 3 points.
Jay McCanless: Okay. And then if I may, one more. With the new construction lending opportunity you’re discussing, are these loans going to be on actual new construction? Or is this — are you going to be looking at maybe some transitional assets to bring on where banks are walking away from deals? So maybe just kind of what type of product are you envisioning for this new construction lending vehicle?
Ivan Kaufman: It’s pure ground-up multifamily, primary markets, primary sponsors, where we have the opportunity of construction lending trying to build bridge loan and get the end loan. That’s what it is, the banks are out of that market. There are some local and regional banks. The advance rates, which used to be in the 75%, 80% range are in the 50% to 65% range, and the guarantees on the deals are very good. So we think it’s a great opportunity, a great market, a great way to play our capital and where the short-term rates are or unlevered returns are very, very good, and our levered returns are outstanding.
