Cohen & Company Inc (COHN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alesco Financial, Inc.'s First Quarter 2008 Earnings Conference Call. Before we begin, Alesco Financial would like to remind everyone that information provided in its earnings release and during this call contains forward-looking statements, which involve a number of risks and uncertainties.

Alesco Financial cautions readers that any forward-looking information is not a guarantee of future performance, and that actual results could differ materially from those contained or implied in the forward-looking information. Factors that may affect future results are contained in Alesco Financial's filings with the SEC, which are available at the SEC's website at www.sec.gov.

At this time, all participants have been placed in a listen-only mode. Following formal remarks, the call will be open to questions. I would now like to turn the call over to Jay McEntee, President and CEO. Sir, you may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us. Also representing the Company with me this morning is John Longino, our Chief Financial Officer, as well as several other members of the Company's management team.

Today I would like to update you on several important topics raised in our 2007 year-end call in March including the impact on our book value of adopting FAS 159, the status of unrealized CDS gains and related cash and our ongoing ability to maintain REIT status.

Next, I'll provide an overview of our first quarter performance. Finally, I'll provide some insights into the future direction of Alesco. Then, I will hand the call over to John, who will discuss additional details on our results for the first quarter.

We have spent a fair amount of time on our last two earnings calls trying to explain the reasons for our significant negative GAAP book value. I'm happy to report that, as we expected and reported last quarter, the adoption of FAS 159 has resulted in an increase of $2.6 billion, or $45 per share, bringing our GAAP book value to $4.34 per share as of March 31, 2008.

We've also spoken quite a bit about our strong cash and liquidity positions, both of which have only gotten stronger during the first quarter. Our unrestricted cash balance currently stands at $120 million after paying the $15 million cash dividend on April 10. We also have investable restricted cash of $44 million. The significant increase in unrestricted cash relates largely to margin cash received from our counter party against the $70 million of unrealized gains on open CDS positions as of March 31.

At the current time, we have not completed plans relative to the deployment of this cash. There are several options open to us, ranging from purchasing our own stock, purchasing or otherwise reducing debt, as well as making investments in our asset classes. However, until the future strategy of the Company is more definitive, continuing to hold unrestricted cash would appear, at this time, to be the best course of action.

Another item which has been discussed in some detail on our last two calls is the ongoing viability of the Kleros Real Estate deals and their ability to provide requalifying income and assets. All four of the deals have failed over collateralization tests. And now three of them have also experienced events of default.

In addition, on May 1st, the trustee of KRE III advised us that the controlling class debt holder has requested the liquidation of that deal. As of today, all four of these deals, including KRE III continue to generate REIT qualifying income. Moreover, we have now gone far enough into 2008 with all four deals intact that, even if all of these deals were to liquidate, we should be able to maintain REIT status through at least the end of 2008, although we may need to purchase additional REIT qualifying assets to do so.

With respect to the results from the first quarter, I'm happy to report that we have adjusted earnings of $0.34 per share. This amount includes $3.7 million or $0.06 per share attributable to net gains realized on our CDS positions during the quarter. It also includes earnings of about $4 million or $0.06 per share attributable to the KRE III deals with no corresponding cash. Excluding these items, our normalized quarterly earnings are approximately $0.22 per share, computed without taking into account the reinvestment of any of our restricted and unrestricted cash.

With the adoption of FAS 159, as of January 1, 2008, we anticipate a significant reduction as compared to recent quarters and the erratic adjustments to our GAAP book value and GAAP earnings going forward. For example, total stockholders' equity reflected in our consolidated balance sheet as of March 31 of $258 million or $4.34 per share is much more representative of our adjusted book value than the significant negative book values reflected for the past few quarters.

However, since asset and liability marks are not exactly correlated, we believe it continues to be important to understand the Company's adjusted book value. We measure our adjusted book value by looking at the capital we initially invested in each asset class and reducing those amounts for any permanent impairments in the value of those investments.

We have calculated AFN's adjusted book value in a table included in our Q1 earnings release. Total capital of $723 million has been reduced by net cumulative impairments and losses reported through the income statement of $215 million, resulting in adjusted invested capital of $508 million.

Deducting recourse financing, our own trust preferred debt, and our convertible debt yields a net adjusted invested capital of approximately $320 million, or $5.38 per share at March 31. Note that adjusted book value does not reflect unrealized temporary gains or losses that affect our GAAP equity or book value per share.

Now, let's move to our current portfolio and ongoing investment strategy. With respect to the overall strength of our portfolio, as we have detailed in the past, we have been able to minimize interest rate risk and funding risk by having long-term, non-recourse match funding of our assets. As of March 31, Alesco Financial held approximately $4 billion in par value of trust-preferred securities in banks and approximately $1.2 billion in par value of trust preferreds in insurance companies.

In terms of the quality of the bank portfolio, we continue to expect to see an increase in the number of problem banks being placed on the FDIC's watch list and ultimately in bank deferrals and defaults from historical levels. In fact, there has been one new deferral in our portfolio beyond those reported in our last investor call.

A bank with a $15 million TruPS in Alesco XI will be deferring its second quarter payment. As of March 31, we have experienced four deferrals in our portfolio, aggregating $43.25 million. We have permanently impaired three of these TruPS by a total of $16.7 million. The combined impact from these deferrals will reduce our net investment income by about $500,000 or $0.01 per share per quarter.

These deferrals do not result in over-collateralization of failure in any of our TruPS CDOs. In the event that an over-collateralization of failure occurs, changes to the priority of payments would result in the equity holders, including us, not receiving any cash flows until such time as failure is cured. Additional deferrals could result in the triggering of an over-collateralization test.

Our portfolio of banks is being affected by the unsettled nature of the financial markets. We do expect further bumps in the road ahead. However, we remain bullish on this portfolio and while there are likely to be some additional bank deferrals and defaults, we expect this portfolio to perform fairly well over time.

In terms of the quality of the insurance portfolio, generally speaking, the property and casualty side of the insurance industry, which dominates our TruPS business, has experienced a sharp increase in capitalization over the last several years to historically high levels. This is true of our portfolio as well. At the present time, we see no material credit issues in our insurance TruPs portfolio.

Now, I would like to turn to our middle market loan business. As of March 31, we had $179 million of middle market loan assets on a warehouse facility, secured by $40 million of cash from AFN. As I explained on our last call, in March, we increased the cash deposit securing this warehouse by $20 million to a total of $40 million, and extended this $200 million warehouse facility into 2009.

The new warehouse line, like the old ones, is non-recourse to AFN beyond posted cash equity. It is not subject to margin calls and AFN has no liability with respect to this line beyond the posted cash collateral. We continue to believe that the middle market loans that have been acquired through our Emporia platform represent an attractive investment opportunity to us for the following reasons.

First, we believe that the inherent structural and credit protection built into our loans distinguishes them from the market as a whole. Second, the diversification of this portfolio is quite significant. The average borrower in our portfolio comprises just 0.77% of the entire portfolio. Further, we have intentionally avoided some of the borrower friendly structural provisions that we have viewed as too aggressive. In particular, we have very limited exposure to the covenant light loans, they represent less than 2% of our entire portfolio.

Finally, approximately 90% of our loans are senior secured first-lien loans. These loans were made to companies in over 30 different industry sectors. We have not experienced any significant credit losses or deterioration in this portfolio. Going forward, we remain positive about this business for both the mid and the long-term.

We are cautious over the short-term, given where our liability spreads are currently, and given the limited access to available financing. This outlook played a role in our decision to commit additional capital to secure our warehouse financing for these assets for the next year. We will continue to closely monitor market conditions and react accordingly.

Now, let's turn our attention to our MBS portfolio. Given our adoption of FAS 159, the losses reflected in our financial statements related to the Kleros Real Estate assets have now been limited to our investment of $120 million. I have already discussed the impact that the possible liquidation that the KRE deals could have on our qualification as a REIT, and the effect of non-cash income on adjusted earnings.

At March 31, 2008, Alesco Financial hold the residual of $1 billion worth of prime hold residential mortgage loans. Not surprisingly, these loans have been performing worse than originally expected, resulting in loan-loss provisions of 1.3% life-to-date.

Our cumulative loss estimate on the portfolio is now approximately 2.3% as compared to the 0.34% originally expected. Note that the mortgage loans are not a significant component of our adjusted earnings, contributing less than $0.01 per share quarterly, and actually resulting in losses in the last two quarters due to continued increases in loan-loss provision.

As you know from prior investor calls, we have spent much of the past six to eight months focusing on strengthening our liquidity position, and we believe that we have successfully done so. We are now focusing on the future strategic direction for the Company.

To that end, a special committee of our board is evaluating various strategic options which may include continuing to operate as an externally managed REIT, changing our form to that of a C-corp or partnership, internalizing some or all of our management or engaging in some other strategic alternative. We will report our detailed plan of action at the appropriate time.

I will now turn the call over to John Longino, our Chief Financial Officer, who will discuss the Company's financial results in more detail.

Thank you, Jay. For the first quarter ended March 31, 2008, we had $20.2 million or $0.34 per diluted share of adjusted earnings, a non-GAAP measure of performance, as compared to $17.2 million or $0.31 per diluted share for the first quarter of 2007. The first quarter of 2008 amount includes $3.7 million or $0.06 per share of net gains realized on our CDS positions.

We define adjusted earnings as net income available to common stockholders, determined in accordance with GAAP, adjusted primarily for the following non-cash items, fair value changes of financial instruments under FAS 159, stock based compensation and loan loss provisions.

For the first quarter, we reported GAAP net income of $84.9 million, or $1.43 per diluted share, based on 59.4 million weighted average shares outstanding, as compared to GAAP net income of $11.8 million, or $0.21 per diluted share, based on 55.1 million weighted average shares outstanding for the first quarter of 2007.

The adoption of FAS 159 as of January 1, 2008 should significantly reduce the erratic swings previously recorded in our earnings and stockholders equity. However, there may continue to be volatility in our GAAP earnings each quarter related to changes in the fair values of assets and liabilities, as these adjustments should be largely correlative, but may not completely offset.

In fact, GAAP net income for the three months ended March 31, 2008 includes $72.7 million of non-cash net gains, resulting from fair value adjustments on financial instruments, net of minority interest allocations. Consequently, we will continue to emphasize adjusted earnings as the most appropriate means of judging the operating performance of the Company over time and for a given quarter.

Adjusted earnings of $20.2 million reflects the following non-cash reconciling items arising during the quarter. $150.1 million of fair value changes on MBS and TruPS assets and liabilities, $68.7 million of changes in fair value of derivative contracts, $8.6 million of impairments on investments and intangible assets, $6.9 million of loan loss provisions, and certain other minor amounts reflected in this schedule attached to our earnings release.

The result is $0.34 of adjusted earnings per diluted share for the first quarter of 2008. This amount again, includes $3.7 million or $0.06 per share attributable to net gains realized on our CDS positions. It also includes earnings of $4.0 million or about $0.06 per share attributable to the KRE deals with no corresponding cash received. Excluding these items, our normalized adjusted earnings for first quarter are approximately $0.22 per share.

Net investment income, which also includes the amount earned by minority interest holders, was $26.5 million, or $0.45 per diluted share in the first quarter of 2008, and $16.8 million, or $0.31 per diluted share for the first quarter of 2007.

Net investment income for the first quarter was generated from TruPS of $21.4 million, or $0.36 per share, mid-market loans $4.2 million, or $0.07 per share, residential mortgages is actually a loss of $3.9 million, or negative $0.06 per share, and the KRE deals are $4 million, or $0.06 per share.

Also included in net investment income is interest expense of $4 million, or $0.06 per share related to our $190 million of recourse indebtedness. Net investment income for the residential mortgage loan asset class, and the leverage loan asset class, include approximately $4.9 million and $2.7 million respectively of provisions for loan losses recorded during the three months ended March 31, 2008 and 2007.

Related party management compensation, which is primarily asset management fees paid by the underlying CDOs, increased to $4.7 million in the first quarter of 2008, as compared to $3.4 million in 2007, due to an increase in the number of CDOs year-over-year. General and administrative cost for the first quarter increased to $3.6 million, as compared to $2.4 million for 2007 for the same reason.

As of March 31, 2008, our investment portfolio totaled approximately $7.6 billion, including $4.2 billion related to TruPS and subordinated debentures, $1.5 billion in mortgage-backed securities, $1 billion in residential mortgages and $0.9 billion of leverage loans.

Of the [$7.3 billion] of debt on our balance sheet at March 31, only $190 million is recoursed to AFN. This consists of the $140-million convertible bonds issued in the second quarter of 2007, and $50 million of TruPS debt. The $7 billion of non-recourse indebtedness consists of $5.7 billion of CDO notes payable, $0.9 billion of securitized mortgage debt, $0.3 billion of trust preferred obligations, and $0.1 billion of warehouse indebtedness.

Over the last few quarters, we have spent a fair amount of time trying to explain the reasons for our significant negative GAAP book value. As we expected and reported last quarter, the adoption of FAS159 has resulted in an increase of $2.6 billion or $45 per share bringing our book value to $258 million or $4.34 per share, based on 59.5 million shares outstanding.

Our adjusted book value of $5.38 per share does not reflect certain unrealized temporary gains or losses that do affect our GAAP equity and book value per share, which is primarily why adjusted book value is higher than GAAP book value.

At this point, I would like to turn the call back to Jay McEntee.

Thanks, John. I think it is appropriate to once again acknowledge the significant uncertainty that exists in the financial markets, and that we are not immune to the adverse developments in these markets. That being said, we have continued to weather the storm, and we believe we are well positioned to continue to do so.

We have a strong balance sheet, which, unlike many of our peer companies, has no repo or repo-like exposure, and we are committed to moving Alesco Financial forward. Most importantly, we remain focused on translating our progress into value for shareholders.

We paid a dividend for the first quarter of $0.25 per share. In early June, we expect to issue a dividend declaration related to the second quarter of 2008. We believe that the Company will have sufficient earnings and REIT taxable income to support a dividend for the remainder of 2008 in the range of $0.25 per quarter. However, further dividend guidance will depend upon any change in business strategy decided upon by the Board.

So now, I would like to ask the operator to open the floor for questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from Jason Arnold with RBC Capital Markets. Please proceed.

Hi. Good morning, guys. I was wondering if you can give us an update on the performance of your leverage loan portfolio.

Sure. I'll just speak very generally. As I said earlier, the portfolio is performing fine. I think as we have looked, it's basically performing to the original model. As I look across both the middle market companies that we've lent to, as well as the banks and insurance companies, it's clear that, across the board, there is an erosion of the earnings capabilities of these companies. There's no question that middle market companies are being affected by what's going on out there.

But with that being said, the credit performance has held up well. And in fact, where we've exited from positions, proactively because of the absence of the liquidity in the market today, we've had some of a unique opportunity to rebuild positions by buying at a discount to par so that those deals are performing well.

Okay. And I guess another one -- you had mentioned that you guys probably, for the remainder of 2008, will be able to remain a REIT but that you may need to acquire some assets. I was wondering if you could quantify really what you would expect, if you, indeed were to keep your REIT status and decided to go that route, how much you would need to acquire?

Sure. It really is dependent upon the timing of when these KRE deals might liquidate. As we've indicated, we did get one notice of liquidation. If the KRE deals that we had in place stay in place, the answer is we don't have to purchase any additional REIT assets. And if they stay in place for several more months, we will get to a point where the amount that we would need to invest would be very, very modest.

Even in a worse case scenario where they would all be liquidating in the near term, we would have to go out and purchase REIT assets. But at the prices that they are available in the market today is not a significant amount of cash that we would have to deploy to do that.

Okay. Very helpful there. Another question on the FAS 159 adoption. It seems like you guys were relatively conservative in the way in which category you're going into in the [interest] judging by the absolute value of book. What, I guess, would be breakout on your assets and liabilities with respect to being a level I, II or III asset as per FAS 159?

Yes. Given the fact that the assets that we are primarily fair valuing are TruPS and MBS. We're in a Level III situation for most of our assets.

Okay. And then on the liability side?

And the detail will be in the 10-Q filing and we'll have that all laid out. And the liability is the same as CDO liability. So, again, we're primarily on a level III.

We did not -- 159 has not been applied to our convert or our own trust preferred debt. So that may be why you view this as conservative. Those two don't fall into that basket.

Right, we could have written those liabilities down, but frankly, all that would happen then is they would accrete back over the next couple of years. And that didn't make a lot of sense to us.

Okay. Then, no, I was just judging by some of your periods of actually similar book value. It rose quite dramatic. And that doesn't seem particularly -- but that's exactly the clearest and most honest perspective to take. So I think that that number seems a little bit more normal. So thank you for that.

And, I guess another one is on the TruPS that are actually on the banks that are deferring on the TruPS. Can you give us the names of those institutions?

We really can't. We've had practice and we keep revisiting it about avoiding the laundry list of names. For the most part, we're looking at sort of smaller institutions that have deferred. But we're not able to release those names.

Okay. Is there any concentration on state? Are they California-based, with housing issues that's being a big problem in California? Or, are [there] any underlying trends?

It's it mixed bag. There absolutely is some California exposure in there and there's some non-California exposure, as well.

Okay. And then one final one. With the cash that you guys have got from the credit default swaps, if you were to see a sizable deferral that turns off cash flows, would you consider replacing that with cash or buying another TruPS to replace it in the deal with the cash? Or, how would that work?

Well, there is some optionality. I think what you're focused on is, when you have a CDO and assets fail inside that CDO, there may be some optionality to contribute assets or cash to cure that deferral. And in fact, I'd remind you that we have, actually, about $29 million of trust preferred assets that we hold directly on our balance sheet. And one of the things that we think about is perhaps engaging in that type of transaction, in the event the OC trigger is hit.

It's not a no-brainer, though. It requires some analysis. And you want to make sure that you're not throwing good money after bad. But there is some optionality there. And we would absolutely consider doing that and would do the analysis and go through the work of reaching a conclusion. But there is some possibility of doing that.

Okay. And I think you guys mentioned before that there some concentration limits that may prevent you from putting some of those TruPS that you guys hold on the balance sheet into a deal. Is that correct?

It's possible that the more recent -- like the Alesco XVII deal -- we might hold on our balance sheet in asset that's already hit its concentration limit. But by and large, the assets that we hold would be available to go into various deals. But this is not something that we're committed to doing or have even completed the analysis or there's even a need to. We haven't hit a OC trigger. So, by no means is it imminent that we would start contributing assets to CDOs, that we are not in that position.

Okay. All right. Thank you very much.

Your next question comes from the line of Lee Cooperman with Omega Advisors. Please proceed.

Thank you, and good morning. In the range of alternatives that you mentioned for possible future activities, you did not include on that -- I don't think unless I missed it -- the possibility of just going home and liquidating the Company, given the change in the financial environment. A) Is that a practical consideration? And B) If it was, does one look at the adjusted book value as some value that might be returned to the shareholders? Thank you.

Good morning, Lee. Yes, and I apologize for not including that. I wasn't intending to be exhaustive. Certainly, doing nothing, which is de facto, going into liquidation mode is a possibility. And that is absolutely one of the considerations on the table for that. I would not want to conjecture what the liquidation value would be.

Given current market conditions, it would be a runoff, not a one-time liquidation. You would not want to be selling assets into this marketplace if you didn't have to. And we don't have to, so you wouldn't want to do that. But doing nothing is certainly a possibility.

Thank you very much.

You're welcome.

And your next question comes from the line of [Al Mitchell]. Please proceed.

Hi, gentlemen.

Good morning.

In terms of your convertible debt, what could you purchase that for? What percentage on the dollar could you purchase that for if you decided to go that route?

I'm not sure -- the marketplace for the convertible is what it is. So if you had a willing seller, that would dictate the price. And one of the handicaps for us in purchasing convert, apart from the fact that we're in a blackout period, is that we would suffer automatic realization of income equal to whatever the spread to par was.

So it's not as attractive an opportunity as one might think as you watch the convert trade at steep discounts. But there's no magic number to what a buyback would be other than what management would believe was the right value and what a seller would believe is the right value.

Also, in terms of your dividend, last quarter you had -- I believe it was $0.53 of earnings. In this quarter, $0.34 of earnings. And should you decide to remain a REIT, when do you have to distribute the 90% of that? At what point do you have (inaudible) to qualify it?

Yes. The requirement is to distribute at least 90% of the REIT taxable income recognized that -- by the end of the year. So by 12/31/2008, we'd have to distribute at least 90% of 2008 earnings. A significant portion of the $0.53 in the fourth quarter recall was related to realized gains on our CDS positions.

Depending upon the characterization of that income may be something that's capital in nature, and therefore would actually offset some of our capital losses and actually may not be distributed. It may just be increasing the capital that we've lost in some of these KRE deals. That will factor into the decision.

And in regards to your permanent TruPS write-offs, write-downs that you did, what recourse do you have to try to get money back [out of that]?

Well the way that a trust preferred security works is that you have the borrower has a five-year period during which they can defer payment, typically, for a regulatory event. And subsequent to that five-year period, it's a full-recourse liability. And having said that, it's rare -- I'm not aware of any.

I'm sure there has been one, but I'm not aware of one where it actually goes to five years. But typically, there's some resolution prior to that time. But we would have full recourse at the end of that period if that's how it went.

Okay. A couple of quarters ago, you were mentioning some concerns about E*trade and IndyMac. Can you give any update on that?

Well, I'm not -- I wouldn't want to comment on our assessment of the liability of those two companies or where they're headed. I think the marketplace, obviously, has an opinion. But we continue to hold significant amounts of trust preferred paper from both of those institutions. And we continue to be quite engaged in monitoring and watching those securities.

So they're not the ones in deferral?

That's correct.

One last question. What rate of return are you making on -- I believe you have $120 million in cash right now?

Right.

What are you making on that?

Sure. It's very low. It's basically a money market account. Same thing you're making on it probably. It's in the 2.5% range. It's just not a long-term strategy for us to hold that amount of cash in a money market account, but that is where it is.

Okay. I know on the last conference call, I remember you mentioning that the time to act is now. So I was hoping to hear something about a new securitization or something going on. But I guess I can't fault your strategy so far.

Well, the securitization market continues to be best characterized as almost closed. There are signs of life. There's no question about there are signs of life including in some of the asset classes that we play in. I'm somewhat -- we've been very reluctant to lead the market in terms of -- the first thing one has to do is gather up assets.

And so, for us to deploy this cash to fund a warehouse, to gather up assets, given the current state of the securitization market, I don't think would be prudent. We just need a little bit more visibility on where things are headed.

But there does seem to be -- particularly on the loan side -- more on the broadly syndicated loan side than on middle market, but there does seem to be some movement there. It's not imminent, but things are happening and we are very focused on, as I mentioned, thinking about ways to move the business forward by leveraging the skill sets that we have. And I hope that in the near future we'll be talking to you about those, about what we think.

Great. Thanks again, gentlemen.

Your next question comes from the line of Jim Ballan of Bear Stearns. Please proceed.

Thanks a lot. Hi, guys. I just really have one quick question. The $40 million deposit that you have on the warehouse line -- where does that show up on your balance sheet? Or, does it show up on the balance sheet? Is that in unrestricted cash?

Jim, that's actually -- the way that warehouse works is that we effectively purchased the first $40 million of loans on the warehouse. So you have a reduction of -- you have a higher asset balance than you do a loan balance by the $40 million. So it's not in the restricted cash number nor is it in the unrestricted cash number.

I didn't really reference that number because of the structure for that. I mean that too is additional dollars that we hope to be investing at some point, but it's not included in the $44 million of restricted cash or the unrestricted cash number I gave you.

That $40 million has effectively already been used to purchase loans.

Okay. So is it in leveraged loan investments on the -- ?

Yes.

Correct, yes.

Okay. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Robert Knapp with Ironside. Please proceed.

Good morning, guys. One thing I'm just trying to understand is that when you have on the balance sheet the adjusted book value, you show that $232 million and the TruPS investments. And those are just the equity tranches of the CLOs that you originated, correct?

Yes. When we do adjusted value, that's our starting point.

Right. And so, are you holding that at book? I mean, is that at par, basically?

It's at par less what we've determined to be permanently impaired. So what it does not reflect is a mark-to-market for spread widening. That's what's not in there.

But if you've had material losses or whatever, you are taking those.

Yes.

Okay. And have you shared with people what your loss rate has been so far?

Well, I've reviewed --. The losses are based upon the TruPS -- in the case of the TruPS business -- the TruPS that are deferring. We've identified the ones that we think are permanently impaired. We haven't actually had any of them liquidated. You know, [it's euro] or -- these banks are all still functioning and trying to snap back. And actually we're hopeful that most of them will. So we have given the number, which I did on this call, as well. I've given [like] the number out.

Okay. Thanks for that. Then on -- when you talk about the REIT status, one thing that I'm kind of confused about is if the Kleros and MBS liquidate, aren't you going to book such huge losses that the loss of REIT status wouldn't matter?

Those are capital losses. And the losses have already been reflected through our financial statements.

But you haven't booked them, yet, right?

Well, we haven't booked the tax loss.

Right.

But the tax loss, again, is a capital loss. So it doesn't affect our REIT taxable income.

Yes, but, I guess -- sorry, maybe I'm confusing you rather than asking the question. The question that I have in my mind was, if I understand it right, the REIT status is relevant to keep your pass-through tax structure.

Right.

But the kind of losses that you'd be able to book on a tax basis, if those MBSs go under, it wouldn't seem to me that, if you lost the tax status, it has no material impact on you. You wouldn't have any taxes to pay.

No, again, the losses that we're going to recognize for tax purposes, those are capital losses which don't offset the investment income, the ordinary income. So it seems incongruous to us, but that's the way the tax laws work. We will have taxable income. We will be paying taxes in the event that the income doesn't pass through under the REIT rules.

Okay. And I do hope you're in the various options. I mean, I'd like to -- just an echo of the question, one of the other questions. I think it was Cooperman. There should be scenarios where you can put yourself under a liquidation trust and then not worry about your tax status and be able to run-off in a very tax efficient manner, regardless of your REIT status. So, I do hope that special committee is considering that.

Yes, liquidation absolutely is one of the things on the list to look at.

And I mean it. Especially, just because of the potential there for tax efficient needs. I mean, obviously, it's probably not something you're interested in.

Well, we're interested in maximizing the value for shareholders. I'm a pretty significant shareholder, myself. But I'm not as versant on the technical tax issues associated with a liquidating trust, but before we're done here, we will be.

All right. And that -- a final comment about you being a shareholder. It is -- given where the shares have been trading and all that's been going on, it ahs been a little bit surprising to me that there hasn't been more insider purchases during this year.

Yes, we've been in a blackout from December 9th. And we're still in blackout. So, I mean, prior to December 9th, you can quibble with us. But since then there's been no optionality.

Is that right? Okay. Because that's very interesting because if you're a market participant and you're staring at this thing and you're thinking, God, if they believe in what they're doing, they should be buying a lot of shares here. Okay.

I understand the thought, but again, we've been in blackout. We all are significant shareholders. So we all have a stake in the game here.

Okay. All right. Thanks, guys.

Your next question comes from the line of Arthur Burns with Deltec Asset Management. Please proceed.

This question is a more general question about your feeling of how things are out there. Because it sounded to me like the tone of the call was that this last quarter saw, perhaps, a larger decrease in the credit quality of your portfolio across the board than, perhaps, you were expecting, in December, when you confidently said that should E*trade and the other large [creditor] of yours that we talked about a few minutes ago continue to perform, the $0.25 was fairly secure throughout the year.

It sounded slightly less so this time. Has there been a deterioration in the last three of four months. And if so, do you feel a bottom? Or, do you feel like we're on a slippery slope?

I was not intending to communicate that I think things are worse today than they were at the last call. In fact, the last call saw the year-end adjustment tend to be more rigorous in my experience. And we saw that in the experience that we suffered through those results that I talked about during the last call. So the deterioration between that last report and this one, I've not perceived there to be any greater deterioration.

In fact, I'm somewhat encouraged by the fact that only one bank -- notwithstanding all the noise in the press and all the things that the regulators are doing. And they're very, very active. But to have just one bank defer in that period, to me, is encouraging. We're not done yet. But it's encouraging.

I don't really know where we are in the cycle. I think it's not the ninth inning. I'm quite sure of that. I'm also quite sure it's not the first inning. But, beyond that, your guess is as good as mine. The economy -- things are getting -- are quite rough out there. And whether or not the other institutions, borrowers generally are at this juncture in the cycle, able to weather the remainder of the storm or not, none of us know. and only time will tell.

But I've not seen anything in the last three months and for the last call to make me more pessimistic. In fact, I won't articulate great optimism, but if any, I'm a little bit relieved about the way things are going.

Right. And just as a final follow-up, is the state of the market, whether slightly worse or slightly better -- and you're obviously an optimist and feel slightly better. There was not a lot talk last time about alternatives. I mean, you were going to weather the storm and stay a REIT. Somewhere in the last four months you've appointed this committee and began to think about other things. What brought on that change?

Well, there's an assessment by us that the world is not going to revert back to the way it was 12 months ago or 18 months ago anytime soon. And so, the question in front of us is whether or not there's an opportunity for Alesco to significantly enhance its value by reacting to the conditions that exist today.

And the more restricted conditions that I believe will exist over the short-term and maybe even into the mid-term. And so we are thinking through in a more restrictive environment, what are the options? What is the optionality for us? And in particular, what opportunity is created by virtue of the skill sets that we have?

We happen to think that the skill sets are great. The opportunity makes us a bit clouded, but there are certain ways to move this business forward that we believe would be very value creating. And so, we're very focused on answering the question of whether or not we can do it, whether we have the people that we need, access to capital, et cetera to move forward.

And so we're putting on the table for consideration now, not only, moving forward and growing the business, but we can't make that determination or give consideration to that option in a vacuum. You have to consider all other alternatives, and some of them have been mentioned on this call. Liquidating is one of them. Doing nothing and waiting for another day is one of them as well. There are other things. Selling the Company is one of them.

So, I think all of those things have to be thought about when one looks at an opportunity to kind of move the business forward. So, I do think the reason we're talking about this more today than six months ago, was six months ago, the world was changing so radically, so quickly that we were much more focused on resetting the balance sheet, as I mentioned, and I think we successfully did that.

And we started thinking about these things, and it wasn't like in exactly in the last 90 days, but there's enough bubbling to the surface that I thought it was appropriate and, more importantly, the Board thought it was appropriate to give serious consideration to do something.

Very good. Thank you very much.

Sure.

Your next question comes from the line of [Bud Hieke] with [Hieke] and Company. Please proceed.

Yes. My question is that in looking at financial statements on financial companies these days is pretty tough because there's so many moving parts. It's anybody's guess what their assets are worth. In looking at your assets, would you say your very conservative, conservative, or just about right in valuing your assets?

We make a good faith effort and spend a tremendous amount of time at getting it right. And so I can't -- it would be inappropriate for me to apply a scale of where we fell on that. We try hard to get it right.

Well, do you tend to be a little bit more to the conservative side, maybe?

We tend to try and get it right. I think the approach that we take is to try to present fairly the position of the Company. I think you heard one of the analysts quizzing us on the FAS 159 utilization. We didn't go out and do every -- throw everything into the 159 bucket that presented a positive picture.

Some of these things that we talked about would have presented a very positive picture. But we didn't think it was meaningful. It just was a number that didn't really relate to anything positive. Because over time, that positive adjustment would simply evaporate merely by the passage of time with nothing else happening.

I guess part of the calculation goes for the duration of the underlying security. So we try to be fair. We spend a lot of time and people focused on doing so, and most importantly, being very consistent.

We're looking at giving a picture of our company to our shareholders and having them see us approach things in the same way, not the way that presents the best number for that particular period. So we apply the same test that look at things the same way with quarter after quarter and spend a ton of time doing it.

Well, do you feel like you could sell your assets for what you have them on the books for?

We do not present a liquidation analysis. This is a going concern assessment. That's what we're charged with doing. I won't proffer to you a liquidation assessment. But I would say to you, liquidation is a very negative place to be in a financial services company. Any financial services company that's told, you've got a month to liquidate your company, is going to be a very negative event for every financial services company.

Okay. And a last question -- on your balance sheet, what's the most difficult to value? What item? Or, is there one --?

No, no. Look. They're all hard. We focus in the middle market credit space. And what that means is we're lending to smaller, smallish -- by and large -- banks and insurance companies. And our middle market borrowers are on the small side. So these underlying securities don't trade regularly. That's the part of our special sauce is being able to access this market and do it efficiently. And we think it was a good risk reward profile. But by definition, you can't go onto a Bloomberg and see what these assets are trading for.

So what we do do though, is imply, based upon what the market for similar securities is -- or loans -- at any given time. And we apply that market metric to mathematically calculate the value of what we own, subject to an overlay of credit assessment. So, if we think something is not creditworthy, we'll permanently impair it on top of what I would call marking it to market.

That's all I've got. I want to thank you very much. I've been a very happy investor over the last three or four months. Thank you.

Thanks for your call.

Your next question comes from the line of Kevin Mullen with RBC Capital Markets. Please proceed.

Hey, guys. Just a quick question. Someone had talked about possibly buying back the convert. And you had mentioned, obviously, it's carried at par. And then the marketplace is trading below par, obviously. You had talked about that might not be as attractive as you might think. Could you just expand on that a little bit?

Sure. I mean it's very simple. If we purchase our debt at -- let's call it -- $0.60, that $0.40 economic gain that we realized by effectively retiring a debt at less than par, that's income to us on that day. And so, it requires -- we would have to make a distribution with respect to that discount and/or pay some taxes. So when the dust settles, it's not quite as efficient an opportunity as one might have hoped.

Okay. But obviously, it's still positive.

Yes, absolutely.

Okay. Thanks.

And your final question comes from the line of Mike Bristol with CBRE. Please proceed.

Good morning. Can you tell us what percentage of the TruPS that you trade IndyMac constitute, and are there any other significant holdings?

In the aggregate, it's 2.1

Each is about two point -- one's 2.4, one's 2.1. That's been disclosed in the past. And it --

2.4 for IndyMac and 2.3 for E*trade.

And we have the next highest concentration is 2.2%. And then things fall off pretty rapidly from there. The 2.2% holder is not a headline name. IndyMac and E*trade are obviously headline names right now. So we thought it was important to get those two names out there. The other one is not.

Thank you.

At this time, I will now turn the call over to management for the closing remarks.

Thank you very much, everyone, for listening. I was able to accomplish a little bit shorter call this time. We'll work harder to make it even shorter next time. And thank you for your interest.

Ladies and gentlemen, that concludes the presentation. You may now disconnect, and have a great day.