Pagaya Technologies Ltd.

Greetings. Welcome to the PAGAIO Second Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Craig Smith, Investor Relations at PAGAIO Technologies. Thank you, Craig.

You may begin.

Thank you and welcome to Pagaya's second quarter 2026 earnings conference call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya, Sanjiv Das, President, and John Dovers, Chief Financial Officer. You can find the materials that accompany our prepared remarks in a replay of today's webcast on the investor relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the third quarter and the full year of 2026. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in our press release today and our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC including our 10-Ks, 10-Qs, and other reports for more detailed discussion of these factors. Additionally, non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs or FRLPC, FRLPC as a percentage of network volume, core operating expenses and core operating expenses as a percentage of FRLPC will be discussed on the call and included in the accompanying materials. We also provide an outlook for the third quarter of full year 26 on a non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts. In our earnings release and other materials, which are posted on our investor relations website, we encourage you to review the shareholder letter which was furnished to the SEC on form 8K today for more detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release. With that, let me turn the call over to Gal.

Hi everyone, and thank you very much for joining. I'm really proud of our Q2 performance. The business had very strong growth. This growth was not by a chance. It was the outcome of a partner-focused strategy that we have. From an EPS perspective, Q2 reached 49 cents, which is a record for us. And as a result, we are raising our net income guidance by almost 25%. Today, I want to drive home a few key messages. First, our unique profit engine. Second, is that growth is accelerating, driven by repeatable products and partner expansion. Third, the Pagaya embedded B2B integration powers a unique consumer data mode at scale. Let me start with reminding ourselves of our business model. Our model is simple. Palmer Sanders Volume, which our proprietary technology turns a portion of that volume into loans. And our capital markets funds these loans with over 170 of the largest asset managers, insurance companies, and pension funds in the world. With each transaction, we earn high margin cash fees. And this quarter, every part of that engine set a record. Network Volume, FRLPC, Adjusted EBITDA, and EPS. Personal Loan reached an all-time high and OTO set a record by a wide margin. All of this while keeping costs flat, which means all of it went to the bottom line. OTO was the standout this quarter and showed a step function growth. The driver behind it is that our network calibrates now every aspect of the offer. The amount, the rate, the duration, and the document requested. Why this is so important? Because it pushes our lenders to win more deals with their crucial dealer networks. In turn, every offer strength our value proposition. This data drives the perpetual learning that improves our proprietary technology. This is the auto flywheel running, and we are still in the early days. The bigger picture, though, that keeps me excited is that the total addressable market in consumer credit is almost $1 trillion of origination per year. Today, we are only at a run rate of $14 billion of origination per year. To take advantage of this opportunity, Pagaya continued to develop two distinct capabilities. The first a B2P embedded platform where our products enable our partners to be a full spectrum lender and the second, a data mode engine for consumer lending where every application sharpens the next decision. This combination, the data mode plus the embedded distribution sets Pagaya on track for years of profitable growth.

To summarize, costs are largely flat, volume is growing.

Operational leverage is high. That combines to compound EPS, and it is just getting started. With that, I will turn it over to Sanjiv.

Thanks, Gautam. Big picture, this was another strong quarter of disciplined execution, which stayed focused on profitable volume growth and on diverse design across asset classes, partners, and channels. What's driving this is our product-led growth playbook, which we keep rolling out partner by partner to unlock growth. So let's start with the headline. This quarter, we achieved the highest net worth volume in Pagaya's history at $3.5 billion, which is a 33% increase year over year. We did it with no change to our credit posture, with a steady conversion at roughly 1%, and almost no incremental OpEx. Auto alone was more than three-fourths of our year-on-year growth in network volume. In fact, this quarter, application volume grew 29% year-on-year. Our auto approach remained focused on the indirect auto industry and the relationship between the dealer and the lender, as we believe that the dealer will continue to be where most of the auto transactions will eventually take place. About 83% of auto loans close at the dealer's desk, so the dealer is the gateway to the loan, with Pagaya connected to more than 40% of the U.S. market. Let me break down what we are actually optimizing in order to solve critical dealer needs and thereby enabling our partners to become full spectrum lenders. First, we optimize our lenders' capabilities. So when a partner can't make an offer or their terms just aren't going to convert, we step in with an approval or a counter so they stay relevant right there at the dealer's desk. This means that our lenders stay in deals they'd otherwise lose. Second, we optimize for the borrower. We adjust the down payment, the APR, the loan to value, the term, all in real time. to find the structure that the borrower can actually close on. And that's the key. The goal isn't the offer that looks best on paper. It's the one that the borrower actually says yes to. And third, last, but certainly not the least, we optimize for the market. Because the dealer is seeing multiple offers at the same time, so we look at what the other lenders are putting in front of them, and we make sure ours is the most compelling one in that lineup. Not just approvable, but win-worthy. So you put those together and you get a self-reinforcing flywheel. We deliver a seamless dealer experience, we let our lenders make competitive offers, and that earns us more application referrals. As we expand full-spectrum approvals and capture more flow, approval rates and application volumes both rise, which makes our partners the preferred lending provider for the dealers, pulls even more flow into the top of the funnel for them, and feeds the next turn of the cycle. And here's a real structural advantage. Our embeddedness in our partners' business is driving our unique customer data mode. That combination, the B2B integration on one side and the data on the other side, is what makes this so hard to replicate. Now on to PL, or Personal Loans. This quarter alone, the affiliate optimizer engine, our flagship Personal Loans product, contributed more than $1 billion in network volume. Last quarter, we onboarded one of our leading Personal Loans partners into Experian Activate, and we are on track to add a few more Personal Loans partners to that platform this year, with a line of sight to two more next year. In the second half of this year, we expect to go live with a few more new partners, including regional banks. The important part, every new partner comes on to our pre-built product integration, which makes scaling additional products far more seamless and capital efficient. Finally, our point of sale business has the same story, a robust, diversified pipeline across verticals and ticket sizes. It runs from retail solutions like Cecil to upgrades travel-focused BNPL product FlexPay up to large ticket POS providers in onboarding right now. Part of the play here is enabling our existing personal loan partners to grow their POS business. FlexPay is a great example, and we have another large ticket partner in the pipeline. And beyond what's live today, we are building new solutions like PreQual to keep pushing the POS offering forward. On the funding side, the institutional demand for Pagaya's assets stays strong, and we keep optimizing our cost of capital and our access to liquidity. This was our largest funding quarter ever, with $3.7 billion, and we closed six ABS transactions, including our largest auto securitization ever at $600 million. Demand was strong enough that we grew our investor network by 11, to a total of 174 investors. And we upsized our last three securitizations this quarter. John will talk more about it. So to step back, this quarter reflects the repeatability and scalability of the model. By staying disciplined and underwriting, deepening our partner relationships, and executing methodically against the playbook, we are building a more diversified, multi-product platform. And with every turn, The Flywheel Gets Stronger. Each new partner and each new product compounds the value of the last, which is exactly what makes this mix. Prudent risk management plus relentless execution so powerful. It sets us up to deliver profitable, sustainable growth and to keep creating value for our partners, our funding network, and you, our shareholders. With that, I'll hand this over to John.

Thank you, Sanjiv. I met Pagaya initially as an investor in 2020 before joining in 2021. I was drawn to its unique value proposition for lenders and data-driven competitive mode, as well as a highly scalable operating model. Our results since then, including our current net income run rate of over 180 million, substantiates that initial confidence. Now let's get to the specifics on a highly successful quarter. Network volume grew 33% year-over-year to a record of $3.5 billion, driven by strength in auto and personal loans. Application to volume conversion remained at roughly 1%. Total revenue grew 19% year-over-year to a record $387 million. Interest and investment income doubled to $22 million as we continue to orient our investment portfolio toward cash interest bonds. This now comprises approximately 50% of our overall investments versus less than 30% in 2025. FRLPC grew 16% to 147 million, a record. FRLPC as a percent of network volume contracted about 60 basis points sequentially to 4.2%. Two drivers affected the FRLPC percentage this quarter. The first is product and partner mix. By design, new products and partners initially enter the portfolio at lower margins, consistent with our existing legacy products. As volume grows, margin follows. The second is the rate environment. Benchmark rates remain elevated, which compresses the margin we earn from the funding side of our network, even with interest in our funding vehicles at an all-time high. Importantly, over the course of 2026, we've priced ABS transactions with more conservative loss assumptions. That trades lower day one revenue for more stable vintage performance with a larger loss buffer. Turning to GAAP profitability, this is where our business model really shows its strength. Operating income reached $106 million, up 87% year over year. Adjusted EBITDA increased 43% to $124 million, with a margin of 32%, up five points over last year. Core operating expenses were actually lower sequentially and declined 6% year-over-year. As a percentage of FRLPC, Core OpEx hit a record low of 31%, an eight-point improvement versus last year. This deserves a second mention. We increased volume 33% and increased profits nearly 200%, but Core OpEx has not increased in a year and a half. That is unique and could only be accomplished by a software-like business model that requires virtually no marketing spend to generate volume. Quarterly GAAP EPS was a record 49 cents with overall GAAP net income increasing $29 million to $45 million. That was driven primarily by 19% growth in total revenue alongside lower operating expenses and interest expense from our more efficient balance sheet. Net income margin reached 12% compared to 5% last year. On credit performance, all asset classes are performing in line with underwriting expectations. 2025 and 2026 vintages continue to reflect consistent performance, with cost of capital down approximately 200 to 400 basis points versus 2024 and earlier, despite higher benchmark rates. Our funding diversification strategy, including more forms of longer-term committed capital, has received strong receptivity by our investor network. We combine pre-funded ABS, seasoned ABS, with committed long-term revolving structures and forward flow. Turning to the balance sheet. As of June 30, we held $249 million in unrestricted cash and cash equivalents, and 1.04 billion of investments in loans and securities. Our investments have consistently improved in quality and mix over the past 15 months, with now approximately 50% in bond tranches with highly attractive yields. As we have discussed in the past, there is widely available funding against these bonds and our ability to sell them as they season provides additional optionality. On fair value, the investment portfolio was adjusted downward by $42 million in the quarter, in line with expectations. We added $118 million of new investments net of paydowns from prior deals. Now turning to guidance. Based on a strong quarter and visibility on the remainder of 2026, we are raising our full-year net income guidance by about 25% at the midpoint. We expect network volume growth to be driven by deeper engagement with existing partners, primarily in auto, contributions from new partners, and new product initiatives. This will be partially offset by lower point of sale volume. FRL PC% is expected to be between 4% and 5% for the remainder of the year, and we assume that benchmark rates remain elevated for the rest of the year. For the third quarter 2026, We expect network volume between 3.425 and 3.625 billion, total revenue and other income in the range of 370 to 390 million, and adjusted EBITDA between 120 and 130 million. We expect gap net income for the quarter of 42 to 52 million. For the full year 2026, we're expecting network volume between $12.5 and $13.25 billion, total revenue in the range of $1.425 to $1.525 billion, adjusted EBITDA between $460 and $490 million, and gap net income between $155 to $180 million. With that, let me turn it over to the operator for Q&A.

Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Our first question is from John Hecht with Jefferies LLC.

Please proceed with your question.

Morning, guys, and thanks for taking my questions and congrats on a good quarter and good guide. It seems like there's a lot of strength in auto. You mentioned lower point of sale volumes. Maybe talk about your pipeline and the competitive, you know, What's causing the auto to grow so fast relative to the other segments?

Hi John, this is Sanjiv. I'll take the call. I'll take the question rather. Thank you for the compliments on the performance. I will say that a large part of our auto growth came in as a result of a lot of the hard work that had been going on for the last six to nine months on the auto product. We had spent a lot of time essentially working on what we call the dynamic offer optimization, which was essentially Improving the conversion rate at dealer level in order to make our offers more win-worthy. So when a customer applies for a loan, we didn't give just one offer. We gave multiple offers and multiple choices. It was dynamically optimized at the point of sale for the dealer. This led to significantly higher flow that came into our lenders. because they were able to approve more loans. The other thing was a very strong effort that we had made in terms of product market alignment over the last few months. If you recall, in the last quarter, we had talked about updated terms and updated ticket sizes to meet market levels. So there was a much greater product market alignment. And last, and certainly not the least, in fact, it's something that I would like to double click on, was that we got access to substantially new flow from our partners which was essentially driven by this new construct of what we call counters where our underwriting models provide sometimes more optimized volumes of offers or loan approvals for the customer and so the lenders often prefer to provide Pagaya's approval as opposed to their own because it's sort of more fuller in terms of the loan amount and the approvals and this is really important because our partners are now giving us new flow that they used to keep for themselves so there are Three things. There's the product as a result of the optimization of the offer. There's greater alignment with the market in terms of the ticket size and the market levels, and of course, access to new flow. All of this effectively led to the growth in the auto business. Perhaps Carl can give some more color on that.

Yeah, John, hi. Good to hear from you. I think the one sentence I would add on top of all what Sanjiv said, which was exactly the point, is the unique power that we have because we have many lenders and what we perceive to be our partner product growth engine is really that when we are unlocking some product, in this case was understanding in one of our partners, that actually the decline flow is less where it's interesting but much more that what if we saw all the applications that are actually being sent back to the dealers with cutbacks and recognizing that the probability for them to convert is much lower and changing the full product of how Pagaya works to be able actually to receive it in an output and instead of that sending our offer instead. and that has driven a very major growth with that partner but more interesting than that we took that concept of kind of like meeting more what are the needs of the customer in the dealership moment through activating the best offer that could show to the customer in this case through reducing the amount of counter and we took it to another few lenders. So what you see is really the product partner growth in action specifically in OTO where one product solution is happening to one is actually pushing to be deployed and sold across the platform and therefore you see that meaningful change in rather short term, short period of time to be able to drive meaningful growth and it should remain the same in the future.

Okay, and then if you think about the momentum of the different products and then the pipeline, how should we think about product mix on a volume perspective in 2027?

Yeah, so basically we are experiencing a very, very strong pipeline. In fact, in the last quarter we had announced that there are about seven, in the last six months actually, that there are about seven new partners that we are in the process of onboarding. Some of them are in the personal loan side, some of them are in auto, and a couple in POS. We expect that the mix will roughly remain the same because PL continues to be our flagship product. Auto is showing significant growth. At POS, we continue to grow and diversify. In terms of our pipeline, we are now seeing a shift in the mix, which is very interesting. Investment loans, we are seeing much more traction with the regional banks. In fact, there are a couple of banks that we have signed term sheets with. in the final contract stages with them. It's interesting to see that in the U.S., banks are now starting to look into personal loans and are looking at fee income as a major source of growth. In auto, we are also seeing a lot of interest from the banks, although we have started moving interest in the direction of OEMs and some of the enterprise-grade dealers. We will announce some of these in the forthcoming quarters. and in POS we continue to have very important discussions with our existing partners who are now starting to branch into different forms of POS like purchase finance and so we expect the mix to remain pretty similar but I will remind you that we had exponential growth in our partner onboarding from the last couple of quarters and we expect the momentum The next few quarters without a very substantial mix in the three asset classes that we operate in today.

Great. Thank you so much.

Our next question is from Sanjay Sakrani with KBW. Please proceed with your question.

Is that negative 23 million this quarter run right now, or can that become more severe as you bring on incrementally more volume in the back half of the year? And are you guys seeing any changes in demand from asset managers, or is there still some repricing there? Thank you.

I apologize. I think the first part of your question got cut off.

When it cut into the call, it was, yeah.

Yeah, so you guys were expecting some of that pressure on the capital markets line item. That negative 23 million that we saw this quarter, I guess, is that run rate now? Or can that potentially increase as you guys kind of lean into volume growth in the back half of the year?

Thanks for the question. This is John. So we don't view that as a run rate. However, we still see, you know, as we said, Benchmark rates remaining elevated. So, you know, you should think about our FRLPC margin as four to five percent. It reflects our self-funded business model and it's a range we remain very confident in. As benchmark rates remain elevated, as we expect, you know, you will continue to see some pressure on the funding, you know, from the funding side of the FRLPC contribution. But I wouldn't think of it as something that's going to necessarily increase much from where it is today.

Our next question is from Kyle Joseph with Stevens, Inc.

Please proceed with your question.

Hey, good morning, guys. And yeah, let me echo John's congratulations on a good quarter. I just want to get your posture on underwriting. I know you guys tightened coming into the year, and obviously it looks like the growth is re-accelerating there, and I just want to kind of You know, see if anything's changed on the underwriting front, or is that really just a function of new products and new partners?

Hi there. So, as you can tell, there are, and actually we spoke about it many times, but we'll share it again. There are two sides to it, but let me start with the bottom line. The bottom line is the posture in underwriting is not changed. The way we think about how do we bring together growth and in the same time the concept of being more prudent in risk managers as we have been, we are and we will be, is really looking on the growth engine that is coming from a new partners and from new products. So a lot of the growth that you have seen in this specific quarter has came from new products that has been deployed in our major partners and you should continue to expect that as we bring new auto partners to see much more growth from that front through the embedness of these products into them. So the concept of growing through embedding more product into more partners, which is the B2B concept of Pagaya, which we're taking the unique capabilities that we have on the consumer credit side and kind of like Allowing different lenders to become full spectrum through this is really what drives more applications to come to our way and what is driving the ability at the end of the day to present a very impressive growth numbers as we saw this quarter. On the other side of it, you have the discipline B2C side because we are talking about credit and we are taking credit risk. We are constantly looking for the areas and pockets that are actually Thank you very much. and therefore the posture for us is unchanged as the U.S. economy is in a very good spot. There is a lot of investment coming in. Unemployment is low and these are really the major driver for specifically our borer which is rather a healthy borer and Sanjiv will give us a few comments on that in a second but allowing us to say Very much on course without any major changes to the credit brochure. I don't know, Sanjiv, if you want to add anything to that?

Sure. Actually, I do want to double down on what Gal just said. In the last quarter when we said we were anticipating that there were shifts going on in the market because of inflationary pressures and all the kinds of stuff that people were talking about, the economy at the time, we, and I will repeat what we said last quarter, we took prudent measures A prudent credit broad posture by cutting out the highest risk because we were anticipating that some consumers will be under pressure. I must stress that when you show growth, you say, okay, I'm going to grow by basically shifting The mix that we have in the business flow that comes in through Tupagaya. Now there's one major misconception in the market, which is that we are a decline only lender, which is not true. We have used Declined as a mechanism to get into the loan origination system of about 36-odd partners, which is a very big deal. And once you do that, then you start moving upstream, up the funnel with our partners, which is what we have demonstrated we have done with pre-screen, with affiliate marketing, with counter flows. And that is now starting to become a very large part of our flow. In fact, about, you know, I'd say greater than 45% of our flow comes from non-decline types of flow, and I think that's a very important point for everybody to understand. So product-led growth, which is what we've been calling this, has been really important in shifting the positioning of Pagaya from a decline-only partner to using decline to leverage the embeddedness within a partner and grow up the funnel. That's really, really an important point. The second point is as a consequence of this, we have This is another misconception that we would like to straighten out. I don't think people understand that as a result of moving up the funnel, we've actually significantly shifted the profile of the borrower that comes into Pagaya. The average borrower income is now about $120,000. The average FICO is about $680. 37% of them are homeowners. and they have an average DTI of about 28%. To me, that looks like Middle America or Mass America. And as you know, Middle America is not the bottom of the spectrum. Middle America manages its finances quite responsibly and we've seen that across credit cards and other unsecured products through some of the other lenders. and so that's kind of how we are growing right now. We are growing through product, we are growing through top of the funnel and that is starting to be evidenced both in our auto business as well as in our personal loans business and soon in our POS business.

Great, really helpful. And then just one follow-up for me. In terms of point of sale, obviously some Some moving parts there in terms of your partners adding some, losing one. But just kind of talk about your expectations for volumes from point of sale specifically, given what's going on there. Thank you. Thanks.

Yeah, so when you think about point of sale through the rest of the year, you'll see some volume decrease there from the roll off of one of our POS partners. That being said, that partner represents very, very little in terms of FRLPC margin. So while it might have an effect on late Q3, Q4 volume, it has really no effect on FRLPC. And obviously, as we get into next year, toward the end of this year and next year, as we scale new POS partners, you'll begin to see that volume ramp again.

Very helpful. Thanks for taking my questions.

Can I just add one little thing to what John just said? John rightly pointed out the rolling off of one of our partners, and we continue to grow in partners like Sezzle, partners like FlexPay, with existing partners like Upgrade. And we are in pretty intense discussions with our existing partners who want to grow into areas like home improvement loans, purchase finance, and so on. Loans that have structures very similar to our personal loans business, which we understand quite well. And I know that in some of the earnings calls that you've had with some of our lending partners in the last few days, they're all talking about growth in other areas of PNPL. We are right alongside them in our growth across that particular asset class.

Our next question is from David Scharf with Citizens Capital Markets.

Please go ahead with your question.

Hi, good morning, and thanks for taking my questions. I wanted to ask about a couple drivers of further operating leverage. And, you know, one is on just the OpEx side. As you noted, remarkably, it's been flat for about 18 months. Despite the amount of growth you've seen, you know, just based on the portfolio of products that you've introduced now, should we pretty much for the next 18 months expect that core OPEX figure to be, you know, in a pretty tight range? I mean, is most of the heavy lifting of investment spending behind you, or is there another step function, you know, somewhere down the line that you foresee?

Thanks for the question.

You know, obviously, we don't guide into 2027, but as we said many times, our core OPEX, we believe, is right-sized today for, you know, significant growth in our three major asset classes. So, I don't think you should, you know, model much growth there at all.

Got it. Good clarification.

And I think maybe it's another point. I think there is another classification. As you think about the core business and the things we have right now, which is the POS, the OTO, the PL, the platform that we are operating and building that is repeatable, scalable, and actually at this point even predictable. About adding new partners and just to put things in perspective of how much we think about ourselves as an enterprise-grade type of organization, the average contribution margin of a customer to us is $8 million. So to that core business and the platform that we have built and just now rolling out more of the products to more of our partners and to be able to bring more partners from the 35, 40 that we have now hopefully to the 80 or the 100, there is very minimal investment that is needed. It might be that in the future because of the very heavy Operational leverage that we have and the earning power and the profits that we are starting to gain and to get, we will look for more avenues to accelerate even growth further, to invest in new initiatives of where the world goes, maybe in other areas, but the core business as it stands right now needs very limited, if any, investment to be able to handle twice the volume, three times the volume, and all of our amazing products to the partners that we enjoy so much supporting.

That's great feedback, Gal. Notwithstanding all the margin expansion at the bottom line you've experienced so far, it sounds like there's even more operating leverage to come.

and that's how we think about the earning power of the business that like the margins are going to continue to go up and the scale is going to continue to go up and that's how you should think again why we're not giving guidance for the next three years but you can just illustrate the next three years with that trajectory and ability to drive all of that value through a rather stable OPEX to get to a very interesting number that are the enterprise capability.

Just a quick follow-up, more on the consumer and credit side. Notwithstanding all of the kind of quarter-to-quarter commentary, the conversion rate has been holding around 1% for really several years now. Is there anything... whether it's kind of inflation, unemployment, I mean, just trying to get a sense for if there's anything out there that you keep an eye on or are looking for that would notably change that. Or maybe what might also be helpful is to understand not so much the conversion rate, but your loan, your approval rate. Has that actually been holding steady as well?

I mean, David, let me take this.

Look, I think you're absolutely right. You know, the environment keeps shifting. As I said before, we feel pretty good about the shift that we have made in the consumer to essentially end the shift in our business model to the more top of the funnel environment. and we think that we understand this consumer quite well. Having said that, for those of us that have gone through several cycles in the market, we are extremely humble about what it is that we don't know. Which is why in the last quarter, in anticipation of a potentially shifting market, We took out our highest risk tiers and we have the ability to do that. When you get a trillion dollars worth of flow coming in and you're only issuing 1% of that, you in some ways have a lot of the ability to be fairly discerning, which is what we constantly watch. Now, one other thing is that across 36 odd partners, you constantly watch credit performance of the flow that's coming in. and you can fine tune your performance to optimize for best performance that comes in into the system. So that's kind of how we think about it. Obviously we are very tuned into things like inflation and unemployment and what it does to the discretionary spending power of our consumers and we work very closely with our primary lenders to make sure that we are seeing what they are seeing We work very closely with them. But the good news in all of this is that the credit box of our primary lenders has stayed stable. We expect it to continue to remain stable. As you know, in situations like this, the flow increases because they spend more in marketing and they keep their credit box stable. So our outlook for ourselves in terms of the stability of the flow and the discretionary ability to manage underwriting carefully continues to remain stable. Pretty good. So we feel pretty good about where we are at right now.

Just keep in mind one interesting stat from this quarter. For the first time, we had over $300 billion of applications coming in. So we have the ability to be selective and to keep that conversion rate that Sanjiv described while still growing the business quite nicely.

Thank you very much.

Our next question is from Joseph Vafi with Canaccord 6. Please proceed with your question.

Joseph Vafi Hey guys. Good morning. Great results. Great operating leverage. Really nice to see. So maybe we start – can we get an update on the forward flow market. I know that, you know, there were some moving parts there a couple of quarters ago. Wondering how you're viewing that market and a quick follow up.

Thanks. Thanks, Joe. Let me.

This is John. I'll take that one. And the way I'll answer it is how we think about funding generally. And, you know, I think how you should think about it when it comes to the Gaia. So, our funding channels are more committed and diversified than ever. Today, about 40% of our flow comes from the non-prefunded AVS product. Funding diversification remains a core strategy and focus. This doesn't just mean AVS and forward flow, right? We think of it as different forms of long-term committed capital. So the market demand for our securitizations, as you can see, just from the last couple weeks and the last quarter is extremely high, even with elevated benchmark rates. So, you know, just throwing out some numbers, last quarter, Q2 rather, we have $3.7 billion raised with 12 new investors. So our full investor base right now is around 175. The last three deals were upsized and both, you know, paid in RPM. Our pre-funded ABS, which is sort of our core and historical product, provides committed clarity for kind of going forward looking a quarter. Forward flow, where we remain active, we've announced new forward flows this year, you'll continue to hear from us, provides additional clarity for a six to 12 month period. but importantly beyond that we've executed longer term one to two year committed revolving structures and are in process with several other agreements with large asset managers as well as bank partners. So all in all we see PAGAYA as an evolving committed funded sort of suite of funding solutions where forward flow remains an important one but it's just one of several.

Great, that's helpful. Thanks, John. And then, you know, with all the operating leverage emerging and I appreciate the kind of fixed transaction processing side of OpEx, just wondering if there are areas of, you know, say marketing spend that you see at this point that could have attractive ROIs and, you know, put put some of this emerging operating leverage back to work in the business. Thanks.

So actually, I will take it. It's Gal here. So again, I want to just emphasize what I said before. The platform and the way it's being operating doesn't require any more investment from that perspective in the business models that we are. So directly to your question, no. There is no marketing dollar or other pieces that will need to be ramped up and therefore could erode the operational leverage in the future. We are looking in areas of ROI and places where you can bring specific knowledge that could help our ability to even sharpen further our product and value proposition and offering, but it's nothing in the magnitude that you will see as a major expense item. and the last piece I would say and we don't talk about it a lot because this is a little bit embedded in the way we operate but the agentic world kind of like revolution and company like ours that all of us are either computer science and data science engineers or on the other hand side financial leaders We are very much enjoying from that leap of growth of the ability to get access and do many of the tasks that once in the past have needed to be relied upon many analysts now to be much more driven by the agentic world, by our ability to have the data that we have in a such organized manner. So as we think about the future productivity for our business, We actually think about doing more with the same rather than the other way around.

Great. Thanks for that, Carl. Much appreciated. Thanks, Carl.

Our next question is from Hal Goetsch with B Riley Securities. Please go ahead with your question.

Hey, thanks, guys, and congratulations on a great quarter and start to the first half of the year. Back to the auto, you mentioned that 83% of loans close at the dealer desk, and you're making more competitive offers at that point of sale, essentially, at the dealer channel. I think you mentioned, Sanjiv, you might have mentioned that you're using Hi, Hal. How are you? And thank you again. Good to hear your voice.

A couple of things. One is, you know, I'll take it back a little bit. In the past, what used to happen was, you know, there was an offer that came, there's an app that comes, an application that comes in through the lender to us, and we made, you know, essentially what I would call a static point-in-time, one-dimensional offer to the consumer. Now what happens is we have access through our lenders to to essentially the interaction that they have with the dealer in terms of essentially what the dealer comments are, what the dealer is saying in terms of what will make the application work or not work. And we leverage that information essentially to build in as inputs into our underwriting decisioning process instead of giving one static approval, we are now able to give multiple choices. What if you reduced your down payments? Thank you for joining us.

Thank you very much.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Raya Kumar with Oppenheimer and Company Inc. Please go ahead with your question.

Hi, this is Guru on for Raina and thanks a lot for taking our question. We were just wondering if you can comment on your current capital allocation priorities here and if there are any updated thoughts on your appetite for acquisitions going forward. Thanks.

Thanks for the question.

So, we're always calculating sort of the best use of the net incremental dollar that we spend. Thank you for joining us today. Always considering things there. But in terms of our guidance and looking over the near term, we have no anticipated M&A.

So, since we don't have any more questions, we really want to thank everyone for joining us today. We delivered a record quarter that I'm very and extremely proud of the team and the execution behind these results. But importantly, I want to leave investors with a few clear messages. Pagaya is a materially different company today than it has been in the last few years. And there are four fundamental small misperceptions about our business that I want to address directly before we close the call. First is that our product portfolio is broadened than ever and it is the effective growth engine that we are pushing towards and should expect in the future. Secondly, the Pagaya Borewell that has $120,000 on the PEL product is materially stronger than market assumed and is rather resilient to any inflation pressure. The third one is that the earning power that you are seeing and that our network is actually building is very strong mainly because of the operational power because our platform is already ready to use and it's only the starting days of that earning power growth. And lastly, thanks to all of that, the acceleration of the strengthening of our balance sheet and funding engine is something that we are focusing on and did major changes in the last year. So with all these factors, it makes me much more confident in the business as we think about our growth trajectory and as we think about how Pagaya 10 next year looking for after having celebration the Pagaya 10th year this year. Thank you very much everyone for joining and we are looking forward to discuss with you more in the future.

This concludes today's teleconference. You may disconnect your lines at this time.

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