iStar Financial, Inc. (SFI) Q3 2008 Earnings Call Transcript October 30, 2008 10:00 AM ET
Good day and welcome to iStar Financial's Third Quarter 2008 Earnings Conference Call. (Operator Instructions). As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I’d like to turn the conference over to iStar Financial Senior Vice President of Investor Relations and Marketing, Mr. Andrew Backman. Please go ahead, sir.
Thank you Alex, and good morning everyone. Thank you for joining us this morning to review iStar's third quarter 2008 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Jay Nydick, our President; and Katie Rice, our Chief Financial Officer.
This morning's call is being webcast on our website at istarfinancial.com in the investor relations section. There will be a replay of the call beginning at 12:30 pm Eastern Time today. The dial-in for the replay is 1-800-475-6701 with the confirmation code of 964825.
Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call, which are not historical facts, may be deemed forward-looking statements. Factors that could cause actual results to differ materially from iStar Financial's expectations are detailed in our SEC reports.
Now, let me turn the call over to Jay Sugarman. Jay?
Thanks Andy. Thanks to all of you for joining us today. Let's get straight to it. The last several months have been terrible; terrible for the credit markets, terrible for the financial system, terrible for our company. It's been astonishing to watch the financial pillars of our economy crumble one-by-one, in an almost uncontrolled fashion. Yeah, we remain convinced we can find a way through this crisis and recover our position as a leader in the commercial real estate finance marketplace. How we plan to do that will be the focus of the call today.
Let's start with where we are. At the end of the third quarter, we reviewed every asset in the portfolio as we do every quarter. Of the $17 billion in assets we manage, $13 billion looked solid $1.3 billion were on our watch list and $2.5 billion are on our NPL list.
Our increased NPLs, reserves and charge offs reflect the worsening reality in the economy and recognition the problems have now become so systemic that the range of possible outcomes has begun to narrow for many of our challenged assets.
As a result, earnings in the third quarter were well below expectations. The EPS was negative $285 million or negative $2.15 per share. We continue to be hamstrung by the large number of non-performing loans that are still only part way through the resolution process. Until that logjam clears and we can start shrinking our NPL balances, earnings will remain under significant pressure.
Aside from earnings, I think it's pretty clear the market is most focused on the two pivotal issues for all finance companies, liquidity and credit. In our case, the key questions have centered on the ability of borrowers to repay loans in sufficient quantity to meet our funding obligations and the potential losses embedded in the weaker portions of the portfolio. Both are fair questions in light of the severe disruptions in the credit market.
So let me start with liquidity, we ended the third quarter with over $800 million in cash and available credit and still over $14 billion of unencumbered assets. In addition to funding both forward commitments and operating expenses, we've been judiciously reducing debt where possible.
With repays as expected to slow from their projected pace, we will be continuing and increasing our focus on executing other ways to monetize our substantial unencumbered asset base, through asset sales, note sales, participations, joint ventures, portfolio financing, secured debt and all other feasible means to increase the capital available to meet our funding commitments and debt maturities. We continue to believe our moderate debt maturities and large pool of unencumbered assets will enable us to meet all obligations as they become due through the end of 2009.
With respect to credit, there are a couple of key points to emphasize. Now last quarter we broke the portfolio down into four pieces, the sale leaseback portfolio, the Fremont portfolio, the iStar good loan portfolio and the iStar bad loan portfolio.
Now let's stick with that breakdown, the credit sale and lease portfolio is probably the least affected by near term economic conditions and continues to perform quite well. There's really nothing of major importance to report in that portfolio.
On the Fremont assets, an additional $400 million was repaid this quarter with 70% of those repayments used to repay the Fremont A-note, taking it down from approximately $1.9 billion at the end of last quarter to just over $1.6 billion at the end of the third quarter. iStar's B-note position increased to $2.7 billion, with $275 million of additional funding and $120 million of repayments from our 30% portion total repays.
Total remaining forward commitments that we believe will be funded by iStar stand at just under $700 million today. So let's just recap Fremont again, the original $10 billion portfolio is now down to right around $5 billion. With losses on assets sold and completely off our books totaling $27 million to date.
As we mentioned on our last call, we bought the portfolio at a discount, and expected to recover $300 million less than face in our base case. In addition, we indicated on the last call that if the current credit crisis continued or worsened in the second half, we could potentially take up to $200 million of additional losses on the Fremont portfolio. And unfortunately that is what is happening.
So right now on the remaining $5 billion, we have booked expected losses and specific reserves of $337 million. This is on top of the $27 million from above so the Fremont recognized losses or expected losses at the end of the third quarter now total right around $360 million.
We continue to believe overall recovery on the portfolio could be down from the $0.97 on the dollar we underwrote at the time of closing to somewhere in the $0.95 on the dollar range if current market conditions continue for a period of time.
Let's turn to the iStar portfolio and start with the core asset portfolio. We currently have $6 billion of assets risk rated in our good categories of one, two, or three on our principal risk rating scale. Losses in this portfolio have been minimal and are expected to be small even in this tough environment.
Average maturity of those $6 billion in loan assets is approximately three years. Most of the action this quarter was in the iStar NPL and watch list portfolio. The NPL list for the iStar assets is currently $1.7 billion, and the watch list is $725 million, both up significantly combined from last quarter.
Now many of the higher return transactions in the portfolio are struggling. The number of borrowers unable to pay the high coupons attached to these deals is growing.
This quarter we added several large deals to the NPL list and took significant reserves as a result. This will be a critical part of the resolution cycle, as we decide how best handle assets that cannot be repaid in full.
In many cases foreclosure, while painful to near term earnings, appears to be the best way to recover maximum proceeds from these assets, and really accounts for the growing list of NPL situations.
Now let me turn it over to Katie for more detail in the quarter and then come back and talk about the path to the future. Katie?
Thanks Jay, and good morning everyone. As Jay mentioned, our earnings for the third quarter were lower than we expected, based primarily on increased loan loss provisions and non-cash mark-to-market impairments. The increased provisions and impairments this quarter reflect the unprecedented changes and deterioration we've witnessed in the financial community over the past three months. As well as the increasingly challenging economic environment that all finance companies are facing.
I'll go through the details of our reserves and impairments in a couple of minutes. Our results this quarter included a $411 million addition to our loan loss reserve, $88 million of impairments and $20 million of gains from the sale of corporate tenant lease assets.
During the quarter, we recognized $68 million of gains associated with the discounted purchase of $241 million par value of both our short and long-term debt. We've also purchased 2.4 million common shares and have the remaining authority to purchase an additional $44 million of shares.
Okay, moving on, net investment income for the quarter was $215 million. The 2.4% decrease in this metric from the third quarter of last year was primarily due to an increase in non-performing loans, offset by gains from debt repurchases made in the quarter.
Additionally, the year-over-year comparison now includes the impact of the Fremont portfolio in the year ago period. During the quarter, we funded a total of $737 million under new and existing commitments, and received $679 million in gross principal repayments.
Of the $679 million, $283 million was used to pay down the A-participation interest in the Fremont portfolio and $396 million was retained by iStar. Principal balance of the A-participation interest at the end of the third quarter was $1.6 billion, down from $1.9 billion last quarter.
As you know, 70% of all principal repayments from Fremont go to reduce the A-participation until it is paid-off. After that iStar will retain 100% of all principal received. We currently expect the A-participation to be fully paid-off sometime in the second half of 2009.
The end of the quarter, our equity represented 23% of our total capitalization and our leverage, defined as book debt net of unrestricted cash divided by the sum of book equity, accumulated depreciation and loan loss reserve was 3.3 times versus 3.1 times at the end of the second quarter.
As we've said, we expect to see slight variations in quarter-over-quarter leverage, we don't anticipate leverage increasing materially from these levels. In fact, we continue to expect leverage to decrease in 2009 as we receive asset repayments and monetize our substantial unencumbered asset base through various channels.
Together, we believe these sources of capital we -- will be in excess of our funding requirements for 2009, and will allow us to reduce leverage accordingly next year.
Let's turn to the portfolio and credit quality. At the end of the third quarter, our total portfolio on a managed basis was $17.4 billion. This was comprised of $13.1 billion of loans, $3.7 billion of diverse corporate tenant lease assets, as well as $548 million of other investments. 92% of our portfolio is first mortgages and senior loans and corporate tenant lease assets.
The loan portfolio is comprised of $4.3 billion of Fremont loans and $8.8 billion of iStar loans. Total condo construction represented $3.5 billion at the end of the quarter. Condo conversion assets represented $400 million down approximately $100 million from last quarter.
Our land portfolio is approximately $2.6 billion, our corporate loan and debt portfolio was $1.4 billion and our European portfolio totaled approximately $800 million. The average loan to value on our loan portfolio was 75% at the end of the quarter.
As expected, and as we discussed in our last earnings call, we saw an increase in loans on NPL status in the third quarter. Specifically, 51 assets, representing $2.5 billion or 19% of managed loan value were non-performing at the end of the third quarter. This compares to 39 assets representing $1.3 billion or 10.5% of managed loan value last quarter.
As a reminder managed assets and loan values represent iStar's book value plus the A-participation interest in the associated assets. More assets than anticipated were added to the NPL list, including several performing loans, due to the significant market turmoil over the past eight weeks. The severe disruptions in the markets negatively impacted our quarterly risk rating process and caused us to reevaluate many of our asset valuations.
So let's review some of the statistics related to the NPL portfolio this quarter. Approximately $1.7 billion or two thirds of the company's NPLs are iStar legacy loans. The iStar loans representing most of the quarter-over-quarter NPL increase are in our higher risk, higher return asset group.
In aggregate, the iStar NPLs consisted of 22 loans ranging in size from $4 million to $260 million. 97% or $1.6 billion of iStar's NPLs are first mortgage or senior loans and only 3%, or $54 million are mezzanine or junior loans. We continue to believe that being in a senior position gives us more control and the ability to recover maximum principle during the workout process.
Five loans, representing $897 million, or 53% of the iStar NPLs are related to land. With respect to the aggregate iStar NPL list. Seven loans, representing $426 million, or 25% of the iStar NPLs were condo related. One loan was classified as entertainment leisure, which represented $211 million, or 12% of iStar NPLs. Five loans are $165 million represented the balance of our NPLs. These loans were secured by a variety of collateral types, including retail, corporate, and mixed use.
Geographically, 23% of iStar's NPLs are located in Florida, 17% in Arizona, 15% in California, 13% in Las Vegas, 12% are in New York and 12% are in Washington DC. The balance are in various other locations, the $1 billion increase in iStar NPLs this quarter was primarily driven by the addition of four land loans, three ground up residential construction loans and one condo conversion loan. Several of these loans still have remaining interest reserves, but we believe that current real estate market conditions warranted a reduction in the value of the collateral, in some cases well below our principal balance.
Now let me turn to the Fremont NPLs. $778 million, or approximately a third of our total NPLs were Fremont related. They're comprised of 29 loans ranging in size from under $1 million to $167 million. 100% of these loans are first mortgages as we discussed, the largest group, representing 38% of the Fremont NPLs, are condo conversion projects. 35% are condo construction, 15% are land related and 12% are secured by other collateral types.
Geographically, 43% of the Fremont NPLs are located in Florida, 32% in California, 11% in Hawaii, 3% in Las Vegas and the balance were in various other locations. We expected the company's total NPLs to increase as we continue through this very difficult cycle.
In addition, we believe that many of our borrowers will continue to have difficulty refinancing or selling their projects in order to repay us in a timely manner. As we discussed in the last call, real estate loans often take longer to resolve than other types of financial assets. But tend to have much higher recovery rates.
In order to maximize recovery it is sometimes necessary to foreclose on assets. At the end of the third quarter, 16 assets on our NPL list were in foreclosure. While the foreclosure process can take anywhere from 3 to 18 months, our asset management team is focused on resolving each NPL as expeditiously as possible.
During the third quarter, we took title to three properties that had an aggregate growth loan value of $81 million prior to foreclosure. This resulted in $25 million charge against our allowance for loan loss reserves. Of these three assets, one asset was sold during the quarter for total net proceeds of $12 million at a slight premium to our book. The end of the third quarter, we had 10 REO assets with a book value of $277 million.
Let's move on to reserves and impairments. As you know, as part of our quarterly risk rating process, we establish specific reserves for any loans in the portfolio that we believe are impaired. Impairments can arise if we do not believe we will be able to collect all of our principal and interest, or if the underlying collateral of the asset is significantly below our basis from the loan.
This quarter, based on the dramatic deterioration in the financial markets and the weakening economic outlook, we determined that it was prudent to establish larger reserves than we had previously anticipated. We'll take additional reserves in the future as warranted. However we certainly hope the provisions in future quarters will not be as high as this quarter's provision.
The end of the quarter, total loss coverage, which includes $833 million of on balance sheet reserves and $76 million of discount remaining from the Fremont acquisition, was $908 million. We increased our total loss coverage this quarter to 7.1% of total managed loans and 24% of total non-performing loans and watch list assets combined.
This compares to 4.3% of total managed assets and 20% of total NPLs and watch list assets combined last quarter. During the third quarter, asset specific provisions were $457 million. The increase in our provisions was based on the increase in non-performing loans, as well as our belief that larger reserves are needed on some assets based on the underlying value of the collateral.
To determine our general reserves, we use the results of our numerical risk ratings and apply those to a loss given default probability model of our performing loan portfolio. Because many of our lower rated assets moved to NPL status this quarter, the remaining performing loans did not necessitate our previous reserve level.
As a result, we reduced general reserve of this quarter by $46 million. In fact, the general reserves as a percentage performing loans remained essentially the same from last quarter at 1.7%. At quarter end, we also review our non-loan assets for impairment. As a reminder, we're not able to take specific or general reserves on these assets.
During the third quarter we took $88 million of impairments on assets within our corporate loan and debt, REO and other investment portfolios. While we previously marked some of the credits in our corporate loan and debt portfolio, based on the further downturn in the corporate debt markets it was necessary to take additional impairments during the third quarter as some of these securities continue to remain under pressure.
Now let's review our sources and uses of funds for the remainder of this year and 2009, as we see it today. As of today and as opposed to the 9/30 numbers that you have in the press release, we have approximately $700 million of cash and available capacity in our credit facilities, and today this is comprised primarily of cash. Given the heightened uncertainty surrounding the credit markets, we feel it is appropriate to maintain a large cash position.
In November and December, we expect to receive approximately $400 million in repayments net of the A-participation pay down. In addition, we expect approximately $100 million of NPL resolutions and other asset monetization, bringing our total sources to $1.2 billion for the balance of 2008.
Our uses of capital for the remainder of 2008 include approximately $600 million of forward commitments that we expect to fund, as well as approximately $100 million of secured debt pay downs, bringing total approximately $700 million. So as you'll see, our sources for the remainder of 2008 exceed our uses for the remainder of the year by approximately $500 million.
Now taking a look at 2009, there's no doubt that our borrowers will continue to be impacted by the disruption in credit markets and the overall economy, and we expect that the pace of loan repayments in 2009 will reflect these adverse conditions.
Conversely our funding obligations should diminish throughout the year, as many of our construction projects will be completed. We currently expect to receive $3.3 billion in repayments net of A-participation pay downs in 2009. In addition, we expect approximately $500 million of NPL resolutions and other asset monetizations for the year. These sources, in addition to the $500 million of liquidity we expect to have at the end of 2008, will bring our total 2009 sources of capital to be an estimated $4.3 billion.
Our uses for 2009 total $3.1 billion, which includes $1.5 billion of unfunded commitments and $1.6 billion of debt maturities. Assuming no new originations, we would now expect to end 2009 with approximately $1.2 billion of liquidity. While below our previous expectations, we continue to expect our sources for 2009 to be in excess of our uses for the year and as we see it today do not expect to need to raise public debt or equity in 2009, and we would do so only on an opportunistic basis.
As Jay mentioned, we have $14 billion of unencumbered assets and we continue to focus on ways to monetize these assets. Including asset sales, note sales, participations, joint ventures, secured debt and other means to increase our capital availability.
Okay now let's switch gears and spend a few minutes on our covenants. First, we continue to be in compliance with all of our bank and bond covenants. As we discussed last quarter, our bank and bond covenants each have a fixed charge coverage ratio of 1.5 times and in unencumbered assets unsecured debt or UAUD test of 1.2 time.
Fixed charge coverage test in our bank line is a maintenance test, while in our bond covenants it's an incurrence test. In the UAUD covenant in both the bank line and bonds, are maintenance tests.
Given the number of questions, we've received on the calculation of these covenants; let me again take a couple of minutes to walk through the calculation for each. In our bank covenants, our fixed charge coverage ratio, which is based on a trailing 12 month calculation, was 2.4 times this quarter. As a reminder, we add back non-cash items, including asset impairments and loan loss reserves as part of the calculation of EBITDA.
In the bond covenants, gains on asset sales are excluded from EBITDA. However, we do add back asset impairments and specific reserves. The end of the quarter, the fixed charge covenant in our bonds was 1.8 time. As we've said before, the fixed charge coverage ratio in the bonds is expected to be tight through 2009. This quarter, the UAUD covenant was 1.3 times, we expect this covenant to remain in the 1.3 times range in the coming quarters, as it is relatively easy to forecast and manage.
In addition to the fixed charge coverage ratio in the UAUD covenants, we also have a minimum tangible net worth covenant in our bank facilities that requires our tangible net worth to be in excess of $2.3 billion. The end of the third quarter, we were in compliance with this covenant with tangible net worth of approximately $2.5 billion.
Finally, let me conclude with our earnings guidance and dividend expectations. We revised our 2008 earnings guidance to better reflect the additional loan loss provisions we took this quarter and take into account the difficult market environment.
As we see it today, we expect fiscal year 2008 an AEPS loss of $3.50 to $3 to a loss of $3 per diluted common share, and a diluted GAAP loss of $2.50 to $2 per share. As you know, we do not include gains on asset sales in our AEPS. However we do add back impairments to good will and intangibles as these are non-cash charges.
With respect to 2009 guidance, given the significant uncertainty of the global economy, it is very difficult to provide guidance on earnings for next year. We will of course continue to update you as events unfold and we get better clarity on our expectation for future quarters.
As we announced earlier this month, we did not pay a third quarter dividend. Our board will meet at the end of the fourth quarter to determine what, if any dividend will be payable for the fourth quarter.
We intend to pay 100% of any remaining undistributed taxable income in the form of a dividend. However, based on our current outlook for taxable income, it is doubtful that we will need to pay a fourth quarter dividend. This will of course be reviewed when we have better clarity on our final 2008 taxable income.
And with that, let me turn it back to Jay.
Thanks Katie. So let's get back to the question at hand. How do we recover and steer through the current market chaos? I think the road back relies first and foremost on the core principles we founded this company on at the end of the last deep recession in the early '90s.
I'll just run through those quickly; one, build a strong balance sheet to withstand unexpected events. We've always run iStar with lower leverage than most financial companies to give us a wider margin of error. We've always diversified our asset base to reduce concentration risk and keep a core portfolio of safe and relatively liquid assets.
Two, don't [land] long and borrow short, we've laddered our debt obligations and made sure our asset maturities were shorter than our debt maturities. As markets overheated, we emphasized short lived assets to create a more favorable reinvestment window. Many of these assets are expected to pay-off in 2009.
Three, don't rely on mark-to-market warehouse lines, we've always been concerned that when you most need that liquidity, it probably wouldn't be available.
Four, don't rely on unsecured debt, we spent tremendous time and money moving our balance sheet to be almost entirely unencumbered, to create maximum flexibility. That flexibility continues to be very valuable as capital has become scarce.
Five, focus on risk reward not just absolute yield. As early as 2005, we began moving into senior debt and away from junior debt, focusing on areas with better risk reward than the monetized lending environment was offering.
And lastly six be contrarian, Warren Buffett says it more simply and more elegantly than we can, but we generally try to stay true to our contrarian roots. Be aggressive when everyone is scared, and scared when everyone is aggressive.
Now we've made our fair share of mistakes, but I trust these core principles will see us through to a better place, and that our strong foundation will help us overcome the challenges that current market conditions have created.
And with that, let's open it up for questions. Operator?
Thank you. (Operator Instructions) And our first question comes from the line Ee Lin See with Credit Suisse. Please go ahead.
Ee Lin See - Credit Suisse
Hi, good morning. I have three questions. The first one is why do you think the total loss coverage of $908 million or 36% of NPLs is enough? We're hearing that condo and land values have dropped to around 20% of book value, so an average LTV of 75 would imply 55% loan loss?
And the second question is can you please explain what specific assumptions changed to change your '09 in flow compared to the previous projection of $5 billion? And the third question is what is the main reason for the NPL increase? Is it the inability of developers to achieve pre-sales of condos? Or maybe you can talk about what stage of development the projects are in when they become NPLs mostly? Thank you.
Okay. Let's start with the first question, which is what we base our recovery profiles on. As Katie said on the 75% loan to value metric, obviously that's an average. We look at each and every transaction individually very difficult to use rules of thumb on our portfolio. Many transactions have specific credit support it's not going to be apparent in some of the overall metrics.
Our NPL list and our reserves against NPLs is based on real-time information coming from the field, on transactions that we see as truly comparable and indications of real value. I would tell you, throughout the portfolio generally the higher quality better sponsored transactions are not receiving $0.20 on the dollar receiving much higher recovery rates. Not to say that's true in every single instance, but overall I think those would be far more conservative even in this tough environment than we would expect to recover. Certainly haven't had the experience yet of seeing that kind of minimal recovery on first mortgages in generally high quality real estate situations.
But I think given the toughness of the marketplace, we're certainly watching indications of value every day to make sure we are on top of that.
Yes, Ee Lin, I think your second question was related to sources and uses and why the big change that we're forecasting, particularly in 2009. And I think we monitor this number pretty carefully and we have our asset management teams scrub these numbers and there are two big inputs to the numbers. The first is what are we using the money for? And with that really revolves around our funding schedule for primarily our construction projects.
The funding schedule is generally relatively easy to predict. The numbers -- the overall numbers typically don't change, what happens is, as those of you who ever been involved in construction oftentimes construction projects are delayed a little bit. So sometimes the uses of the funds on a quarterly basis move a little bit and typically they simply move out a little bit, but the overall numbers don't change that much if you look sort of over an annual period. So the uses of funds are relatively easy to -- for us to get our hands around. The sources of funds primarily related to repayments of our loans, is the number that we've had great difficulty forecasting over the past several quarters.
And obviously our borrowers subjected to the same issues that everyone is in the --with respect to the disruptions in the capital markets, and many of them with very solid projects are having difficulty finding refinancing sources to refinance projects. So we have tried to be on top of this number, but I think as conditions continue to deteriorate from a financing perspective, our borrowers continue to indicate to us that they're going to have trouble repaying us.
So the big change that you see in this forecast really relates to that number. And we'll just have to continue to update you over the quarters to give you a sense of how that's changing. Now what has stepped up with respect to sources and we continue to hope will be a larger source of funds is the resolution of NPLs or REO and certain asset monetizations.
Several quarters ago, we stepped up that program, and as we've talked about a little bit, NPLs and REOs do take many months to resolve. The foreclosure process can be long. But we have been working on a number of these for several quarters and we're hopeful that in the next couple of quarters many of those will come to fruition and augment our sources of funds in 2009.
And just picking up on the last piece of that, why are the NPLs up? We conducted our three day risk rating meetings on every single asset in the portfolio amidst an S&P and Dow that was down nine days out of 10. We began to see absolute air pockets throughout the credit markets from the corporate finance world to the money market world to basically anything that wasn't government guaranteed. Those are pretty frightening, and definitely [joined] us about the ability of borrowers to repay and where cap rates are going to go and what ultimate values are likely to be. And despite having some performing loans and having borrower expectations remain somewhat high, the reality is of the situation as we take those indicators of value and those indicators of credit availability and build them into our thought process. And deals that in the second quarter may have looked like they would get by and had bids and had lenders lined up, we saw a number of those transactions fall away.
So, I think our thought process about the future definitely ratcheted it down. That seems to be a continuing theme unfortunately throughout the marketplace. But we saw again some things that were almost unimaginable take place in the last weeks of September and first weeks of October. And I think being somewhat sobered by those events led us to just take the NPLs now because we can no longer believe that the range of outcomes includes full repayment, full interest on a timely basis.
We have a next question please.
Our next question from the line of Matt Burnell with Wachovia. Please go ahead.
Matt Burnell - Wachovia
Good morning. Let me ask you, I guess, a couple of bigger picture questions. In terms of what's going on with the recapitalization of the banking system, what's your expectation, if any of getting even a modest amount of relief for banks potentially funding some of your borrowers? Is there any reason to think that there would be some benefit from that program for iStar, if not directly then indirectly?
This is a critical four week period, really, the question that's on our minds is, does the liquidity that's being infused into the system in massive amounts, not just domestically but now pretty much globally, and the indirect cash is trash focus that's going to make short term rates go very, very low, does that offset the fundamental deterioration we are still likely to see regardless of all the liquidity moving into the market.
I think our view is -- it's unknowable right now. We're going to watch the next four weeks the battle between liquidity being infused. Can it pull people off the sidelines? Can it pull cash off the sidelines? Do people perceive enough stability entering the marketplace to say, I can earn 0% to 1% in pure safe short term instruments, but if I just step out the risk curve slightly, I can make extraordinary returns, 5,6,7,800 over or ostensibly almost risk free investments and 12% or 13%,14%, 15% for taking risks that as little as six or nine months ago we’ve been priced at a fraction of that?
We've seen this dynamic before, obviously never in the confluence of events that have happened over the last 12 months. But that dynamic is one that we will watch very carefully to see does some of this liquidity start showing up and trying to take at least a modest advantage of some of the extraordinary investment opportunities we see or are people just so stunned that and so afraid of what the real fundamental aftershock of the credit crisis are. The people are just going to sit on their hands for awhile just to see if the world is going to make it through on a reasonable basis.
We are certainly hopeful that the money being infused makes its way more than likely indirectly in a way that benefits us. We don't really see any direct link to some of the programs being available to us. But I would tell you we feel like the both the federal action, the government actions and now the global actions are meant to restore at least a modicum of liquidity in the marketplace and we're hoping that begins to offset some of the just complete shutdown we've seen in the credit markets for the last three weeks.
Matt Burnell - Wachovia
Katie, you mentioned project delays related I guess to your sources and uses calculations. But are you seeing greater numbers of projects simply being canceled? If not -- at the beginning stages before ground is broken but even after ground has been broken, where just funding has either dried up or the sponsors have just decided that it's not worth throwing additional money at projects that may not work out?
No, I think most of the projects that we or Fremont were involved in that we're not going to fund the developer came and said this project doesn't make sense. That most of that activity has occurred quite a while ago. What I meant delay is typically construction can be delayed just for almost weather there are just a variety of reasons subcontractors can be delayed.
So it's not an issue around things that are being withdrawn. It's more typical construction delays, and I don't think either we or our borrowers ever believe that not completing a project is in the best, in their best interests or in our best interests. So, we will continue to fund projects according to our documents and see projects through to the end even despite obviously weakening economic conditions.
Matt Burnell - Wachovia
And my last question focuses on the weakening of markets. I think most of us on the call appreciate what's going on in Florida and California and Las Vegas. But are there other markets that three months ago, perhaps even six months ago were far stronger than they are now that are not on that fairly short list?
Yes, I guess the one we look at out our window everyday is the New York market benefited from obviously strong foreign currency relative to the dollar. There was some underpinnings from that foreign buyer. I think again the full aftershocks of what's happened on Wall Street have not yet rippled through this market entirely. We continue to see a reasonable number of projects closing in the Tri-State area. So there's definitely been a slowdown.
And so I guess New York probably had the highest perch from which to fall, so there's still plenty of cushion there. But I think we are, as other people are trying to really determine what is the near term and intermediate term future for the New York market. The devastation in some of these other markets has been played out and everybody is well aware of it. I think New York has been one of the islands of security that we think it still has a little bit way to go down before you can actually read the tea leaves and say how bad is this going to be.
Matt Burnell - Wachovia
Great, thank you.
Thanks Matt. Next question, Alex?
(Operator Instructions) And we go now to the line of Michael Dimler with UBS. Please go ahead.
Michael Dimler - UBS
Good morning. I was wondering with respect to your NPLs and watch list assets specifically, what the average LTVs in those two categories would be? And as you consider projects for the watch list, what primary drivers influence that decision?
Yes, I mean, I think it's safe to assume with respect to NPLs, the LTVs are plus or minus roughly 100%. So and obviously we're reserving for those NPLs to ensure that we're properly covered. Watch lists and the criteria for the watch lists is really a little different. Watch list loans are those that we are concerned that over the next six to nine months will potentially go NPL, have difficulty refinancing us, project fundamentals are slowing, our market fundamentals are slowing.
So we saw a slight decrease in that list this quarter vis-a-vis last quarter. I do not think that is a trend yet, I think eventually you will see watch lists come down as we move through our credit cycle and that will be an indicator because that's the early warning system, that our total NPL watch list and REOs should be declining overtime.
I don't think the decline this quarter was anything more than mix or, I just don't think it was a trend yet. But I don't have the specific statistics on the LTVs on the watch list. But they're probably a little higher than average they're probably in the high 90 range.
Michael Dimler - UBS
Thanks Mike. Next question, Alex?
And our next question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.
Joshua Barber - Stifel Nicolaus
Hi. Good morning. I was just wondering, how many loans that you guys have funded in the last 12 months are currently on the NPL or the watch list?
Partially funding? Because --
Joshua Barber - Stifel Nicolaus
Yes, partially funding.
I'd say a good number of them.
Josh, I don't know the exact number. It's Andy. I'll talk to you offline about it.
Joshua Barber - Stifel Nicolaus
I think if you walk through the statistics that I gave you on the NPLs, some of those are condo construction projects. Some of them might be complete, but some of them, as I mentioned earlier, we continue to fund because a finished project is a far better project than an unfinished project.
Joshua Barber - Stifel Nicolaus
Alex, next question?
And our final question comes from the line of Omotayo Okusanya with UBS. Please go ahead.
Omotayo Okusanya - UBS
Hi. Yes, good morning. Katie, quick question, is there any way, just kind of given all the moving parts, that you can help us in regards to trying to figure out differences between adjusted EPS and your taxable EPS? So we can get some sense of if it's possible that the dividend could return in 2009?
Yeah. I think it would be hard for a third party to try to figure this out. I think it's primarily related to the timing. Just like your own personal taxable income versus GAAP income if you will. A lot of it relates to the timing of when losses are actually incurred, and when specific reserves actually represent from a taxable perspective an impairment. So it's not easy to give you -- w e can't give you a good estimate. I think it would be tough for you to actually look into the portfolio and figure that out as well.
But right now we do think that particularly given the specific reserves that we took this quarter, that we probably will be in a position where if there is a fourth quarter dividend, it would be very minimal and most likely not at all, based on the reserve levels that we have.
Omotayo Okusanya - UBS
Got it. And then you may have given us this number before and I missed it, but of the $411 million of provision expenses this quarter. How much of it was specific reserves versus general reserves?
Yes, it was actually, walked through that in my script. It's about $456 million of specifics, and actually general reserves went down this quarter. As loans move from performing to non-performing, they actually move out of our general reserve calculation. General reserves are based on our performing loan portfolio.
Omotayo Okusanya - UBS
And that actually went down a little bit.
Omotayo Okusanya - UBS
Alright. Great, thanks very much.
Thanks Tayo. With that being our last question, I want to thank Jay and Katie for joining us today and I'd like to thank everybody on the phones joining us as well this morning. If you should have any additional questions on today's earnings release please feel free to contact me directly here in New York. Alex, would you please give the conference call replay instructions once again. And thanks again everybody.
Ladies and gentlemen this conference will be available for replay after 12:30 pm today until November 13, at midnight. You may access the AT&T executive playback service at anytime by dialing 1-800-475-6701 and entering the access code of 964825. International participants may dial 1-320-365-3844 and with the access code of 964825. That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconference service. You may now disconnect.
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