Velocity Financial (NYSE:VEL) Q2 2020 Earnings Call

0:00 Good afternoon, everyone, and welcome to the Velocity Financial, Inc. Second Quarter 2020 Earnings Conference Call. All participants are currently in a listen-only mode. Should you need assistance, you may say no to a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Chris Oltmann, Chief Accounting Officer. Sir, please go ahead.

0:37 Thank you, Jamie. Hello, everyone, and thank you for participating in Velocity Financial's second quarter 2020 earnings call. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Szczepaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our second quarter 2020 press release, and the accompanying earnings presentation, which are available on our investor relations website. I'd like to remind everybody that today's call may include forward looking statements, which are uncertain and outside of the company's control, and actual results may differ material. For discussion of some of the risks and other factors that could affect results, please see the risk factors and other cautionary statements made in our communications with shareholders.

1:27 including the risk factors disclosed in our most recent annual and quarterly reports. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today and we do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. For reconciliations of these non-GAAP measures, you should refer to the press release and earnings presentation on our Investor Relations website. Finally, today's call is being recorded and will be available on the company's website later today. I will now turn the call over to Chris Farrar for opening remarks.

2:10 Thanks, Chris. Appreciate it. And thanks everyone for joining us on the call. Hope that everyone is safe and healthy and all of your families are as well. On our last earnings call, I outlined three overriding principles that will guide us through this pandemic. And just as a refresher, one, protect our employees and our shareholders. Two, help our small business owners manage through the crisis. And then three, carefully manage capital and liquidity to ensure long-term success. I'm proud to say that we've been very successful executing on all three of these goals. We are still working remotely and have done our part to protect our employees and our communities where we work and live.

2:57 In terms of our shareholders, we continue to manage the business and our balance sheet to create long-term value. Secondly, we helped many borrowers bridge the worst of the shutdown by offering forbearance plans to help them manage their cash flow. Lastly, we were able to issue long-term debt for all loans previously pledged to our warehouse lines at very attractive terms, which eliminated the mark-to-market risk that we faced. We're also very proud that we continue to enjoy strong support from our securitization investors through all market cycles. Looking forward, our team is eager to resume lending and our customers are indicating strong demand for our programs, making the final preparations to accept new loan applications and execute our growth plans in the third quarter. I want to thank all our investors, employees, and industry partners for your continued support Together, we will successfully navigate this environment and achieve our vision for the future.

3:59 With that, we'll turn over to the presentation materials. As Chris mentioned, we've got the earnings deck and I'll start on page three and just kind of kick us off with some of the highlights and then turn it over to Mark to walk through some results and then back to me to close. First topic on page one, we had net income of 2.1 million for the quarter and core EPS of 17 cents a share. We think this reflects the results of a resilient business model in obviously extremely challenging times. Later on, Mark will walk you through the mechanics, but as a result of the pipe transaction, declared a deemed dividend to the preferred common stock, which results in a non-cash adjustment from common equity to temporary equity.

5:04 Mark will walk you through all the details of that transaction in a bit. In terms of production in the portfolio, continued to see strong resolutions of delinquent loans. We're seeing good recoveries there, even in the The depths of the crisis, so we still see an active market and we're a little bit surprised by how much activity was going on and was obviously a very strange time for everyone. Also, in terms of our forbearance plan, about $331 million of loans were on some type of a forbearance plan at the end of the second quarter. Importantly to us, we've been monitoring how those folks are going to do post-forbearance, and for the month of July, a little over 80% of those folks either made payments or paid their loan in full. So we were very pleased with the performance coming out of the forbearance period, and we think it was really the right thing to do and helped a lot of borrowers get through a tricky time.

6:16 In terms of net interest margin, it's actually up quarter over quarter. We did see a reduction in the yields from our total portfolio because of non-accrual loans, but there was an offset there from the interest savings on our long-term debt that we paid down with IPO proceeds. So those two essentially washed. In terms of financing and capital, I mentioned that we paid off our warehouse lines, two really good securitizations that we put announcements on earlier. And then you folks all know about the 45 million of convertible preferred stock that was issued as well to strengthen the balance sheet. Turning to page four, this is essentially just a bridge.

7:08 from core earnings to the GAAP loss per common share. Again, kind of the preferred dividend or deemed dividend, if you will. It was the most material transaction. And I don't think anyone will be surprised by that. That's essentially just a transfer as a result of the dilution. What we did do, just to be real clear, is mark the the convertible preferred stock to its full redemption value. So that's essentially what's driving this quote unquote deemed dividend. The other item on the slide that we mentioned is the COVID-19 reserve.

7:58 We run a pretty rigorous model. That model came back. We sat down as a team and looked through the results and The new updated forecast is for a more severe economic downturn and for a longer period. I think it goes out a little over two years. So we think we've got a very safe look at where we're going to be in terms of CECL, but that did result in some increased reserve for the quarter. Turning to page five, just again kind of summing up from the business perspective before I hand it over to Mark. I mentioned the two securitizations.

8:44 We are in negotiations right now with some other counterparties for new warehouse financing that will all be non-mark-to-market. So on a go-forward basis, we want to take that risk out of the business, and we have very good dialogue going right now. I expect to have significant facilities closed here in the third quarter. In terms of production, we spent some of the downtime reworking our IT and some of our processes. We think we've got a better process coming out of this crisis that will be more efficient and a little more streamlined for not only our customers but our internal operations folks as well.

9:32 are retraining on some of those changes right now and preparing to start accepting applications early September. So very excited to get back into the origination mode again. And then lastly, on forbearances and lost MIT, I did mention how those loans were performing. We stopped offering new forbearance plans at the end of June. We did issue some new forbearance plans early in the third quarter that kind of spilled over. But by and large, we're over that hump on a go-forward basis. Anything that we do should be pretty small and relatively minor in comparison to what we've already done.

10:26 Very happy to see folks getting back on their feet and resuming their payments. Obviously, we'll see that happen here again in August and September. The pig goes through the snake, if you will, and we should be over the hump with that process. We're looking forward to refocusing on not only managing those folks going forward, but making new loans. So with that, I'll hand it over to Mark to take you through the rest of the deck.

11:01 Thanks, Chris. And good afternoon. Good evening, everyone. I'd like to echo Chris's opening comments. I hope all of you and your families are staying safe during this COVID pandemic. And like I am, looking forward to being able to go outside without masks for a change. So before we go into the page six of the deck, I just want to kind of follow up to what Chris was mentioning on the $2.33 kind of adjustment or loss per common share and give a little more explanation or detail on that. GAAP account, U.S. GAAP calls it a loss per common share. We have to keep in mind when you see that word loss, it is not an operating loss. The company did not have an operating loss in Q2. Net income was 2.1 million for Q2. If you add that to Q1, it's 4.7 million net income year-to-date. So there was no P&L hit as a result of this.

11:48 It's also called a deemed dividend because no cash went out of the company. What happened is in putting together the preferred stock transaction, the preferred stock transaction has an embedded redemption feature. When it has an embedded redemption feature, US GAAP precludes us from classifying that as permanent equity because there's a chance it could get put back at a future date. So it goes in a category called mezzanine equity or temporary equity, which is on a balance sheet that's below liabilities and above common equity. So it goes into what's called mezzanine equity. And when it has a redemption value, you're really required to carry that preferred stock at its full redemption value. So the full redemption value of the stock as of June 30th is $90 million. So the stock was actually on the books to say like around $41 million because remember we received $45 million in proceeds but part of those proceeds is allocated to the warrants because we got stock, preferred stock and warrants.

12:42 The warrants are in permanent common equity because those are warrants that can only be exercised to buy common stock. They're not redeemable. So the carrying value of the preferred stock was about $41 million, $42 million less the warrants, but we had to increase it up to the $90 million, which is the redemption value. So that $48 million, $49 million actually is its net of deal cost. The $48 million, $49 million is a reclassification out of permanent equity, paid in capital, up into temporary equity. It's really just a balance sheet reclass because out of permanent equity into temporary equity. As I said, it didn't go through the P&L. It's not really a loss on the P&L. and that carries the preferred stock at 90. However, under GAAP, when you're calculating earnings per share based on common equity, common shares of stock, any classification out of permanent equity into temporary is what's called a deemed dividend, meaning cash didn't go out the door, but it's a deemed dividend. And when you calculate the earnings per share, you have to take the actual earnings for the quarter, which we said was 2.1 million off the income statement, it was our earnings for the quarter, and you have to reduce it by that reclassification amount that came out of common into temporary.

13:49 So you take the 2 million, let's say 48, 49 million that got reclassified. Then you're saying, well, I've got a negative 47 million divided by 20 million shares outstanding. There's your $2.33 a share loss. So we have to keep the loss in perspective. There is no operating loss. The company does not have a loss as a result of its operations, its resulting operations. It's more of kind of an accounting loss. saying the way U.S. GAAP and FASB requires you to classify. So that's the pipe transaction in the 233. So let me make sure that everybody's clear on that. So now going back to the deck on page six and taking a look at our loan portfolio. It's the combination of the HFS and HFI. Obviously, HFI has a $2 billion portfolio. HFI as of June 30th was about $1.8 billion.

14:35 The HFS was a much smaller portion, a couple hundred million. But take a look at the total portfolio. On the left-hand side, the portfolio composition, you can see we ended at just under 2.1 billion compared to end of Q1, which is a little over 2.1. So as you can imagine, the portfolio is fairly flat. Remember, we had no loan originations in Q2. Operations were suspended in Q2. And again, because of the COVID crisis, there's very little paydowns or payments happening as well. So you can see that the portfolio stayed pretty flat, decreased about 3%. And then the right-hand side just kind of shows the waterfall. On page 7, we look at our portfolio-related net interest income and our net interest margin. Our net interest income for Q2 was $18.6 million. That's compared to $21.8 million for the first quarter.

15:23 And our NIEM, our portfolio-related margin, was 3.54% compared to Q1, 4.18%. And again, as Chris mentioned earlier, the margin is down primarily because of the non-performing loans going up. and the right-hand side shows we did get a pickup though, that decrease in the amount of the yield, if you look at the top side, the right-hand side, the low yield, the decrease in the yield is due to the non-performings going up, but we also had a decrease in our average debt cost. As we kind of mentioned, debt cost has been coming down. A lot of it's due to the pro rata structures. So if we could do more of those and the sequential pay down, we're going to be picking up on the debt cost and see that is happening. Debt cost has trended down over the last three quarters. But the yield is down as well due to the increase in nonperformings, so the margin is down compared to Q1.

16:15 On page 8, if we take a look at the biggest portfolio, we have the HFI loan portfolio. In terms of the nonaccrual loans, we ended the quarter with just under 15% nonperforming and nonaccrual loans compared to about 8% for the end of Q1. So as we said, the nonperforming is up. The one thing to keep in mind, we've always said our charge-off rate is very, very low compared to non-performings. A lot of that has to do with the low LTV, the 65% LTV, which we've held consistently, the high borrower FICO score on average, personal guarantees. There's a lot of good reasons that the charge-offs have been low historically. And you see those charge-offs continue to stay low. You look at the right-hand side, for the last three quarters on a quarterly basis, under 50 basis points in charge-offs in any one of those quarters.

17:02 So although the non-performing has ratcheted up, charge-offs remain low, and we're kind of expecting our charge-off rate to be hopefully consistent going forward and kind of what we've had in the past based on the way our loans are structured. Going on to page 9, in terms of the CECL Reserve, Chris had mentioned that we did take an increase to our loan loss reserve for Q2. The biggest part of the reserve was due to the economic forecasts. I think we mentioned at the end of Q1 we use a model and we used a ceaseless stress scenario at the end of Q1 to kind of model the economic forecast and we increased just that ceaseless piece of that I'm sorry the COVID piece of it by about $900,000 in Q1 and we used a COVID stress scenario again for Q2 and as you can imagine the COVID stress scenario was a little bit more adverse for Q2 because of the longer recovery period that was experienced during Q2 on COVID the resurgence of kind of The second wave of the COVID virus, businesses that were reopening now had to reclose again.

18:03 So the model that we use reflected that. And so it was a little bit more sort of kind of an inverted V where it hit the peak and then came down quickly. It was more of the curve was more of an inverted U where that peak kind of extended a little longer. And so we felt the need to take an additional provision for Q2 based on that model. So at the end of Q2, we're now at a loan loss reserve of $5.2 million. on our total portfolio, or 28 basis points, where at the end of, say, last year, we were at 13 basis points. So we feel that we've sufficiently increased that reserve, that it's in a good position kind of based on where COVID's at now and based on the adverse scenario that we've run. And with that, Chris, I'll turn it over to you to go through second quarter asset resolution activity.

18:51 Great. Thanks, Mark. Appreciate that. Back on 10... Just a little more detail around resolutions. On the roadshow, we emphasized how resolutions were really critical to us, the main thing that we focus on. As Mark mentioned, with the higher non-accrual loans, we get lower current yields, but our anticipation is that those recoveries will just be pushed out into future quarters, and we will get all of that contractual interest in the back as well as some of the penalties. So recoveries are really important for us and pleased to report again in Q2 strong recoveries and kind of laid it out in detail here.

19:42 So it was good to see that the markets continued to perform for us even in some very strange times. and those are the gains, 102 recovery for the quarter. On 11, just kind of wrapping it all up, the real estate values have held up much better than I think a lot of people feared and that's really helped us in speaking with our special servicing team. They're seeing properties being shown, borrowers paying off, borrowers refinancing, healthy markets, just anecdotally had a foreclosure last week in California that we went to the courthouse steps and was paid off in full by a bidder there.

20:32 And so starting to see things unthaw and markets continue to perform. So we think that's good for resolutions. We've enhanced our staff and the special servicing department. We're well prepared to handle this increase. We're on top of all of those borrowers and speaking with them and working through those assets and expect to continue to resolve assets favorably. And then lastly, in terms of profitability and growth, we think there's some good opportunities here to drive higher income as we start to originate again. Opportunistically, we think we can lend in this environment at lower LTVs and higher coupons. So I think from an ROE perspective, it's probably very attractive.

21:28 And so we'll see how that goes as we start to roll things out here. But we're very optimistic that we can put a lot of capital to work at very good return profiles. And we're hearing good demand from our customers. And then lastly, just, you know, key operational standpoint. Again, I already mentioned, but we want that mark-to-market risk removed going forward so there's less volatility and less risk in the business, and we're very excited about getting that completed as well. So that wraps up our presentation of the deck, and I think we can open it up for questions now.

22:15 Ladies and gentlemen, at this time, we'll begin the question and answer session. Once again, to ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up the hand step before pressing the numbers to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to ask a question. Our first question today comes from Don Sandetti from Wells Fargo. Please go ahead with your question.

22:43 Yes. Chris, on the non-recruals, you know, certainly being up this quarter, it sounds like you expect those not really to materialize into larger charge-offs. Can you talk a little bit about how you think those will get worked out versus your historical? I mean, clearly the residential housing market is holding up really well, and so I didn't know if there would be, you know, more sales, more refinancing. How do you see that being worked out?

23:12 Yeah, sure. Hi, Don. Good to hear from you. Yeah, I think, you know, looking at it, we think it will resolve pretty similarly to how it has in the past. For sure, in the investor one to four portfolio, you're right, very robust markets. And I would expect we'll historically see that sort of 50-50 divide between refinances and folks selling their properties. And I think our view is that we've tried to help as many folks as we can get through that, and it will take some time to work off. It doesn't come off overnight, so it's going to take three, four quarters to work through that, but as each month goes by, you tend to...

24:08 worked that backlog off, I guess. So we think it'll be stable but declining.

24:14 Yeah. So, Mark, do you have any thoughts on NEM outlook in the near term? I'm not sure if nautical rules have peaked at this point.

24:23 Yeah, I mean, our focus and the way we take a look at our forecast as well, Don, by the way, hi, nice to hear you again, is, you know, we're thinking that where we're at now, the 16%, 15%, 16% level is probably you know kind of where we're going to peek out and we're going to start to see it actually decline and taking a look like you know you get one metric on one slide it's like the 14.6 or whatever overall or the entire portfolio is like around 15.9 in the queue if you've taken the HFS NHFI loans like 15.9 percent of Q2 when we look at the end of July it's more like around 15.1 so if you know you're already starting to see a some decline and we think that's going to gradually start to decline so that would be our forecast.

25:06 And then just lastly, as you start to originate again, how are you going to pay for those? I mean, obviously you'll get good advance rates on the bank lines, but do you have enough cash? I mean, do you expect paydowns? How material could the new originations be?

25:24 Yeah, good question. We're going to start slow coming out of the gate. We're not going to and race back to where we were. So yes, we have enough capital and cash to do that. We kind of want to test the waters and see where demand levels are. And as we resume, we'll figure that out. But we expect to have positive cash flow from our retained interests coming in as well. So as we go forward, we should have capital to grow the originations and then we're also in talks, as I mentioned, with some of our investment banks and warehouse providers to provide financing there as well. So the combination of those should give us plenty of room for growth capital.

26:15 Thank you. Our next question comes from Steven Loss from Raymond James. Please go ahead with your question.

26:25 Good afternoon. Chris, Mark, you're both well. Good to hear from you. You know, I guess first, you know, I noticed in the deck on page five, it talks about reevaluating product guidelines and offerings. You know, Chris, can you maybe talk about that a little bit? Is that, you know, due to performance you're seeing in certain geographies or product types in your portfolio? Is it something specific with an outlook of COVID impact? Can you give us a little color around the changes being made there? Maybe what you like more post-COVID and and what products you may be no longer gonna offer.

27:01 Sure, yeah. We've been evaluating with the team, looking at just our performance and then where we see opportunities. We definitely see more delinquency at lower FICO scores. So initially going out, we're probably gonna raise our minimum FICO score. That'll be a key area. and then we've looked across the portfolio at property types, don't see much there. But on a go forward basis, we're certainly gonna be careful lending to a property to make sure that the tenants are paying or what's going on with those businesses there. So that will have a little bit of, I would say COVID feel to it, where we're just wanna make sure we understand what's really happening at the asset and not walking into a mess.

27:57 and then I think that sort of overlays with the geography question as well. Same type of thing, just if there's any specific thing going on in a municipality or something like that that we need to be aware of and adjust for. So I think, broadly speaking, we're gonna go initially out of the gate with our traditional 30-year product that's kind of our core bread and butter We won't offer that short-term bridge loan right out of the gate, but probably add that in as time progresses. Fortunately, we have the earnings coming off the portfolio, which sustains us, so we're going to just kind of dip our toe back into the water, if you will, and just see how things go.

28:51 Great. Chris, higher level when Think about the business here. Move to non-market-to-market financing for the new originations, and certainly I expect that to be a higher cost to get that characteristic of those facilities. Securitization markets and what it costs to finance there, and then just heightened risk today. So how do you take all those things in and think about pricing on new loans in order to meet your ROE requirements? targets, and maybe how does that compare to maybe where you were with rates six or 12 months ago?

29:33 Yeah, good question. So the way that we look at it is the lower non-mark-to-market aggregation facilities really don't have that big of an impact on ROE. Yes, we have more of a haircut, but We also have lower interest expense during the aggregation period. So it's not a huge factor and we think that just the peace of mind and the structural benefits of those facilities far outweigh any marginal cost. The more important driver for true ROE or IRR on any loan that we make is really where we execute in the securitization market.

30:19 We think we can aggregate fairly quickly and securitize. And those economics are much more favorable. So we think we can price product and securitize it with ROEs north of 20% at the margin on new stuff. And so we work backwards from there from the securitization exit, I guess, to determine pricing and ROE. And the execution that we saw just in Q2 was very strong, and the markets bounced back very quickly. So I think we're being conservative about what those returns will look like, but I think if securitization markets are where they are today, we'll have very healthy ROEs.

31:11 Great. That's helpful. Thanks very much for that. Have a good afternoon.

31:15 Thanks. You too. Good talking to you. Our next question comes from Steve Delaney from JMP Securities. Please go ahead with your question.

31:24 Thanks. Good afternoon, everyone, and thank you for the detailed deck and your clarifications on a couple of complicated things this quarter. As far as the increase in non-accruals, certainly in 98 basis points, so we were high, certainly over the high, well above the consensus because of not factoring in, not applying enough windage to that, I guess I would say. But would you say that, I mean, it is the increase in the non-accrual loans to 15. Should we assume like there's really no material impact for floating rate loans in your held for investment portfolio? Is that a good assumption, Chris?

32:09 Yeah, that is, that is. Just to remember, I would say a very, very large majority of the loans are fixed and so is the underlying debt. So there should be no interest rate factor at all. It's all related to non-accrual.

32:28 Great. Okay. And that was a meaningful jump, of course, in the quarter. You know, accounting has its rules and then economics at the end of the day, economics rules. The non-accrual interest, okay, that we – that you were not able to recognize in the second quarter. As you go through your resolution workout process, and we look at you had 102% recovery in the second quarter, I believe I'm right in assuming that you're not just talking about principal, but you're talking about all interests that you would be due, including possibly some penalty interest. Is that correct?

33:10 That's correct. I'm sorry, the 102% is actually saying we got all of our back contractual principal and interest, and on top of that principal and interest made a 2% gain. 2% gain. Because of either prepayment or default interest or whatever, yes.

33:26 Great, yeah. So not just 102% of principal, but you're entitled, everything you're entitled to under the deed of trust. Okay, that's very helpful because, you know, when you look at the quarter and and you look at the trend in NIM and in spread, it's meaningful but it's also important to know that this isn't due to just a levered carry trade or something. This is something that's temporarily credit related but you have a track record of eventually recognizing that income down the road or at least we'll look at it as you certainly have the potential. to recognize that, assuming COVID doesn't get worse than we think. But thanks for that clarification.

34:13 And that's why that one slide, to your point, the left-hand side is the non-accrual and the right-hand side is the charge-offs. And to your point, that's the left-hand side gap accounting and the right-hand side economics. And the non-performing is high because 90 days past due, we put it on non-accrual. That's the gap kind of industry standard. But if you look at the actual losses that were taken economically, that's the right-hand side charge-off. And you can see it's been historically very low, and it was low for Q2 as well.

34:40 Yeah. Okay, great. Thanks. And then on the 214 million loans held for sale at June 30, I know you did a securitization in July, and that had kind of mixed collateral in there, I think. Are the HFS loans still around, or did any of those get pushed into the securitization? Where do you stand on those at this point?

35:02 Yeah, so everything got securitized, Steve, and so all of the HFS loans will move into HFI for Q3, so it'll all just be held as HFI.

35:15 Great, okay, very good. So we won't have that category going forward. Okay, great.

35:22 And just to give you a little color there, I'd say I don't have the exact number, but a very large portion, probably 75% or so, were kind of the short-term loans. So they're in that securitization, but I think our expectation is they'll pay off much faster than our other core long-term product.

35:45 Got it. Yeah, the securitization was about, what, $276 million, and about $215 of that was the short-term.

35:51 Yeah, I noticed the ticker had MC, and I assume that stands for mixed collateral or something.

35:56 That's exactly right.

35:58 That was my guess. All righty. And then lastly, and Mark, this may be best handled offline, but with respect to the accounting, the book value impact of the preferred and your book value being at 1026, we had actually – had taken into account the dilution on the preferred if converted and had taken 1247 at March 31 down to 930. So the 1026 is not a shock, but is there a, I don't know if there's a simple answer to this, but if let's say the holders of that Series A pref decided next week that they were just gonna convert to common, that my question is how much, my analysis had assumed 45 million, was going to go in, and then the 11.7 million shares would be issued.

36:53 Of your 90 million that you're now showing in TempMes equity, and I know that's got that implied dividend building, is there a number you have in mind that, like, if we forgot about the dividend because they elect to convert, is there a number within that that would go into common equity on an if-converted basis that you can share?

37:15 Yeah, well, I mean, well, right now, the way the financials show You'll see in the queue tomorrow, you've got $90 million in temporary equity and roughly $48.9 million. $49 million was a Dean dividend that came out of common equity up into temporary. But to your point, if tomorrow all those preferred shareholders converted to common, that entire $90 million would go back down into the common stock.

37:41 So we just took a $2 plus hit to book value to account for the future dividends, theoretically account for the dividend stream going forward for some period of time.

37:55 We took a hit to common. Be careful. Yes. No, it's a common book deal. That's right.

38:02 Hit to common, exactly.

38:03 Yes. So we took a hit to common equity because you're basically reserving up in temporary equity on the chance that it is at some time put back to the company at the full redemption value. It's like a reserve. Once they all convert to common stock, there is no put right. They can't put the common stock back. That's right. That Dean dividend and all goes back into common stock.

38:29 Okay. Very good. So that $2 loss in book value, if you will, at some point it's theoretically recoverable into common equity. Okay. That's great. So the same question I had about the Narno Cool Interest, you know, we get that back on resolution and this, you know, Dean Dividend, we potentially get that back as well into, you know, into book value. So I'm good with both of those things.

38:58 Yeah, and that's why I have to be very clear on this call. That's why I have to be clear on the call as well, Steve, is saying, you know, the gap term is loss per common share of stock. And I have to put it that way because of the gap, but, you know, I'm just saying loss. There was no operating loss in the company. Nothing went through P&L. No cash went out the door. It's a reserve. It's a reserve in case something should happen, redemption in the future. But to your point, if the conversion happens, that all goes away and everything comes back into permanent equity.

39:26 Great. Thank you both for your comments. Sure. Very helpful. Thank you. Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2. Our next question comes from Aaron Saganovich from Citi. Please go ahead with your question. Thanks. In terms of the non-equals that you're seeing, and maybe you already mentioned this, but are you seeing any kind of difference in terms of your investor one to four versus the other kind of small ticket theory?

40:03 Hi, Aaron. It's Chris. Yeah. We saw a slight outperformance on the 1 to 4 versus the small commercial, but not massive and not something that I would call materially different. It's pretty consistent to the weightings in the portfolio. Okay. And I don't know if you have much feel for this, but in terms of the customer base on the small ticket TRE, Do you have a feel for how many of those customers were able to access PPP loans, whether or not folks are planning to shut doors? There's been a lot of discussion about the impact of small businesses from the pandemic.

40:54 Unfortunately, we don't have any data that we can share with you. We do everything at the loan asset level. Don't aggregate that up all the way to see trends in speaking with our asset managers and the head of our special servicing team. You know, we're seeing everything across the board. We're seeing folks that say, you know, my tenants are literally shut and we're seeing people say, well, everybody's paying and I'm fine. So it's kind of too widespread to... report any common theme that I could give you there or any real data. Are you seeing any change in credit trends through July and into August?

41:45 Yes, so through July, as Mark mentioned, we saw delinquency basically stabilize where it was, got a tick down slightly. The probably, well, Interesting thing to note, obviously, will be how the rest of these forbearance plans perform, so that the 19% who didn't pay are going to roll through those delinquency buckets now, and we'll see how they do. If they miss that first payment and make it up in the second month, or if they just go straight into foreclosure, we'll have to see how that shakes out. But so far, we've seen it stabilize, and we're planning for it to be that way for the next few quarters and with a slight downtrend as we work through these assets just based on past experience. It takes time to work them off.

42:41 Okay. And then just lastly, you had mentioned dipping your toe in the water in terms of originations. Should we expect the portfolio to continue to decline as you're originating assets? New loans, or do you think you'll actually be able to grow the portfolio modestly?

43:01 Yeah, we think we'll be able to grow. Time will tell, obviously, as we get back out there and see where we are. But I think our expectation is by Q4, we'll be back to a point where we'll see the portfolio start to expand. And then going forward into 21, definitely see real acceleration there. Great. Thanks so much. Thank you. And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

43:41 Nothing else from me. Thank you all for joining the call, and we appreciate you taking the time. Anything, Mark, you wanted to cover?

43:49 No. Again, just thank you. Very good questions, and I hope the pipe transaction There's a little bit out there. It's a little bit out there for us too, but hopefully we explained it properly for everybody. So thank you for your time. Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining. You may now disconnect your lines.