Arbor Realty Trust

Good morning. This is the operator's desk call. We begin momentarily. Until that time, your lines will again be placed on music hold. Please continue to hold.

Thank you. ¶¶ Thank you. Thank you. Thank you. Thank you.

Just acknowledge the delay and apologize.

Thank you, ladies and gentlemen, for standing by, and welcome to the Q1 2020 Arbor Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Paul Elenio, CFO. Thank you. Please go ahead, sir.

Okay. Thank you, Nita. And we apologize this morning for a little bit of delay in our call. It seems we have a tremendous amount of people trying to participate and dial in, and it's having trouble getting everybody in. So we're going to start, and hopefully all those people will be able to join us as we go. Good morning, everyone, and welcome to the quarterly earnings call for our realty trusts. This morning we will discuss the results for the quarter-ended March 31st, 2020. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements that are subject to risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these forward-looking statements are detailed in our SEC reports. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these forward-looking statements to reflect events and or circumstances after today or the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaufman.

Thank you, Paul, and thanks, everyone, for joining us on today's call. We hope that you and your families are safe and healthy, and we appreciate your participation during these very challenging times. In this environment, we are realizing more than ever that our homes are our castles, which is very relevant to Arbor and our multifamily asset class. Before we begin, I would like to acknowledge the staff and management teams here at Arbor for their outstanding effort during this crisis. We've all been significantly impacted personally and professionally, and the ability for our employees to perform remotely at such high levels under these current circumstances has been truly extraordinary. Today, I want to spend some of my time discussing our first quarter results, which were largely pre-COVID-19, and focus mostly on our outlook for the balance of the year with respect to our company, and more specifically, our core earnings, dividends, and assets. The significant decline in stock prices, which no one could control or predict, has forced companies, in our opinion, to prematurely communicate in order to defend the values of their businesses. We have been patient in our approach to communication as we were waiting for the dust to settle to properly evaluate not only the extent of the virus but which asset classes would be impacted and the stimulus packages that would be available as well as the political landscape. We feel the timing of this call is appropriate as we have a lot more clarity about the pandemic and how it will impact our business going forward. We have built a diversified operating platform that focuses on multifamily assets with very stable liability structures and an active agency business, which allows us to generate strong cash flow and consistent, reoccurring core earnings and dividends in every market cycle. Through this robust agency platform, We have been very active in providing liquidity at a multifamily market. We originated $1.1 billion in agency loans in the first quarter, which is up from $845 million in originations from the first quarter of 2019. We also originated $600 million of agency loans in the month of April. and we could produce $1.3 to $1.5 billion in agency originations in the second quarter. In this unprecedented environment, our agency platform offers a premium value as it requires limited capital and generates significant, long-dated, predictable income streams and produces significant annual cash flow. Our $20 billion agency servicing portfolio, which is mostly prepayment protected, generates $90 million a year and growing in reoccurring cash flow in addition to the strong margins and strong gain-on-sale margins we continue to generate from our agency originations platform. Having the ability to originate and sell loans in the liquid market with minimal required capital and produce gain-on-sale income as well as new servicing revenues, will not only allow us to retain our staff, but most importantly, contribute to stable core earnings and a consistent dividend. As Paul will discuss in more detail, our core earnings for the first quarter on 31 cents per share, which were affected by approximately two cents per share from the COVID-19 pandemic. The significant dislocation that has occurred has resulted in reduced interest income on our escrow balances and interest spreads on our agency inventory, net operating losses from our REO hotel asset, and curtailed growth in our balance sheet portfolio. Despite the significant impact of the pandemic, we believe, based on our projected originations, strong pipeline, net interest spreads, and significant prepayment protected servicing income that we can continue to produce a consistent baseline of predictable core earnings for the balance of the year without relying on future growth in our balance sheet portfolio. The strong core earnings outlook has allowed us to maintain our dividend of 30 cents per share for the first quarter, which reflects a 17% dividend yield based on yesterday's closing stock price. Additionally, with an adjusted book value per share of approximately $9.50, we are currently trading at roughly 70% of book value and below some of our peers. Prior to the pandemic, we were trading at a substantial premium to book value and well above our peers. We feel we are trading significantly below the value of our franchise, especially considering a multi-family focus, strong agency platform, and sustainable core earnings, which differentiates us from all other trading mortgage rates. From a liquidity perspective, we were very fortunate that we made a strategic decision prior to the spread of the coronavirus to this country to significantly increase our cash position which put us in a favorable position heading into this pandemic. We have also always operated our business with a heavy focus on the right side of our balance sheet, particularly in financing a large portion of our loans through non-recourse, non-mark-to-market, long-dated CLO vehicles, as well as with longer-term unsecured debt. In the first quarter, we were very successful in closing an $800 million CLO with very favorable terms and issuing $275 million of seven-year fixed-rate unsecured debt to further strengthen the right side of our balance sheet. Additionally, in April, we issued another $40 million of three-year unsecured debt in an extremely challenging environment, which continues to demonstrate the value of our franchise and the strength of our investor relationships. This has resulted in current cash and liquidity position of approximately $350 million, which we believe provides us with sufficient liquidity to navigate the current market conditions. In any significant market dislocation, liquidity is critical. Therefore, our daily objective will be to continue to manage and maintain adequate liquidity. We also have a very strong balance sheet with a high quality portfolio and the appropriate liability structures. At March 31st, our balance sheet loan book was $4.8 billion and was financed with $3.4 billion of debt. Approximately $2.6 billion, or 76% of that debt, is non-recourse, non-mark-to-market CLOs, and approximately $800 million is financed for warehouse and repurchase facilities that is secured by $1.2 billion in assets with eight different banks that we have longstanding relationships with. Additionally, the majority of the loans being financed in these bank lines are also rated and CLO eligible. And given the current environment, we will be very selective in originating new balance sheet loans in the near term as we continue to focus on capital preservation and on replacing any runoff on our loan book. As we discussed in more detail in our shareholder letter dated April 13, 2020, we had reduced our exposure to debt that is financing our securities and is subject to margin calls related to changes and spreads from approximately $235 million to $75 million. Today, we are currently down to only $40 million of debt against $80 million of securities with margin call exposure. And this is a very nominal amount of remaining debt that will be easy for us to manage. With respect to our balance sheet portfolio, it is very important to highlight that over 90% of our book are senior bridge loans, and more importantly, approximately 82% of our portfolio is in multifamily assets, which has been the most resilient asset class in all cycles and we believe the multifamily, industrial, and self-storage will be the only asset classes to hold their values through the significant dislocation as well. In addition, we have not provided any loan modifications with rate concessions to date, and most of the loans in our portfolio contain interest reserves and or replenishment obligations by our borrowers, giving us the ability to effectively manage our portfolio through this dislocation. We also have very little exposure to some of the other asset classes that have been affected both in the short and long term by this crisis. We have only two hotel loans totaling $91 million, both of which are financed in our CLO vehicles with no mark-to-market provisions, one material retail loan for $33 million that is unlevered, and a $60 million legacy land development deal, which is also unlevered. Based on the current market environment, we feel it was prudent to book approximately $33 million of reserves against these assets in the first quarter to reflect the significant economic impact the pandemic has had on the value of these assets. And we believe our book value of $9.50 is an accurate reflection of the current impact of the pandemic. We also have seen positive trends relating to April payments in our agency business, with only 0.3% of our $15 billion Fannie Mae book and 4% of our $5 billion Freddie Mac book granted forbearance. With respect to our outlook for May and June payments, we do think there will be some more economic stress, although we also think it will be largely mitigated or offset by enhanced unemployment insurance and other economic stimulus programs the government is offering. In addition, the average debt service coverage ratio in our agency portfolio based on the most recent data available is approximately 1.65, which means that borrowers could withstand an average of 20% economic vacancy due to the effect of the virus before it impairs their ability to meet their debt service. With respect to servicing advance related to our potential forbearance claims, As a Fannie Mae servicer, we are required to advance principal and interest payments for a period up to four months. We are pleased to report that we have come to an agreement in terms with one of our banking relationships to provide an advance facility at 100 percent advance rate of any outstanding advance requirements with the agencies. And as a result, these potential advance requirements will not be an issue for us. We are very fortunate to have a tenured, proven senior management team that has a track record of managing in all cycles, including the 2008 financial crisis. This team has over 20% inside ownership, which represents the highest inside ownership of any commercial mortgage rate. Additionally, our management team has significant asset management expertise, which is invaluable in this current environment. We have always prided ourselves on investing heavily in our servicing and asset management functions, and these disciplines are embedded in our DNA and have always been reflected in our underwriting philosophy, which gives me great confidence in our ability to manage our portfolio through this unprecedented dislocation. In summary, we have built a diversified business platform that is multifamily-centric and is capable of generating consistent, sustainable core earnings and dividends in all cycles. We also have sufficient liquidity, the appropriate liability structures, and the asset management expertise and track record to successfully operate in this environment. We believe this puts us in a class by ourselves, and an investment in our company at these extremely low levels will provide a tremendous long-term return. And as the largest shareholder, My primary focus will be to continue to maximize shareholder value. I will now turn the call over to Paul to take you through the financial results.

Okay, thank you, Ivan. As our press release this morning indicated, we produced core earnings of $40.7 million, or $0.31 per share, for the first quarter, excluding reserves related to the new CECL accounting pronouncement. CECL went into effect for non-bank public companies on January 1, 2020. The adoption of this new standard resulted in an initial reserve of 32 million that was charged against retained earnings, 17 million related to our balance sheet book, and 15 million related to our Fannie Mae agency portfolio. We recorded an additional 76 million of CECL reserves through the income statement in the first quarter, 22 million on our Fannie Mae loan book, and 54 million on our balance sheet portfolio, which included the 33 million in reserves that we took against the assets Ivan mentioned earlier due to the significant adverse change in the projected economic outlook from the COVID-19 pandemic. As Ivan mentioned, our first quarter core earnings were affected by approximately two cents a share related to COVID-19. This was due to approximately two and a half million in reduced earnings on our escrow balances and net interest spread income in our agency business from reduced interest rates and the inverted yield curve that existed during the quarter. More importantly, we believe we will be able to generate consistent quarterly earnings for the balance of the year despite the significant dislocation from the pandemic, in large part due to our capital-light agency business that generates significant core earnings and cash flow. We also have reduced our overhead and general and administrative expenses by approximately $5 to $7 million annually, which will increase our core earnings run rate by around $0.04 to $0.05 a share going forward. Our adjusted book value at March 31st was approximately $9.50, adding back our CECL reserves on a tax-affected basis. We believe that this adjusted book value more accurately reflects our economic value as the CECL reserves are non-cash and are unrealized. Looking at our results from our agency business in the first quarter, we generated $15 million of core earnings and approximately $1.1 billion in originations and $950 million in loan sales. The margin on those first quarter sales was 1.49%, including miscellaneous fees, compared to 1.55% all-in margin on our fourth quarter sales. As Ivan mentioned, we also had a great start to our second quarter with $600 million of agency production in April, and we believe that we, in this current environment, will be able to continue to grow this platform. We also recorded $22 million of mortgage servicing rights income related to $1.3 billion of committed loans during the first quarter, representing an average MSR rate of around 1.73% compared to a 2.32% rate for the fourth quarter, mostly due to a change in the mix of our first quarter loan production. Our servicing portfolio was $20.2 billion at March 31st, with a weighted average servicing fee of 43.6 basis points and an estimated remaining life of 8.9 years. This portfolio will continue to generate a predictable annuity of income going forward of around $88 million gross annually and growing, which is up approximately $4 million on an annual basis from the same time last year. Additionally, early runoff in our servicing book continues to produce prepayment fees related to certain loans that have yield maintenance provisions. Prepayment fees were approximately $5 million for both the first and fourth quarters. In our balance sheet lending operation, we grew our portfolio 12% to $4.8 billion in the first quarter on $850 million in originations. Our $4.8 billion investment portfolio had an all-in yield of 6.35% at March 31st compared to 6.68% at December 31st, mainly due to higher rates on runoff as compared to new originations during the quarter and from a reduction in LIBOR, which was partially offset by LIBOR flaws in a portion of our portfolio. The average balance in our core investments was up to $4.6 billion from $4 billion at year-end due to our first quarter growth. The average yield on these investments was 6.77% for the first quarter compared to 7.18% for the fourth quarter, mainly due to higher interest rates on runoff as compared to originations and from a reduction in LIBOR. Total debt on our core assets was approximately $4.7 billion at March 31st. with an all-in debt cost of approximately 3.68%, compared to a debt cost of around 4.35% at December 31st, mainly due to a reduction in LIBOR. The average balance on our debt facilities was up to approximately $4.25 billion for the first quarter, from $3.76 billion for the fourth quarter, mostly due to financing our first quarter growth. And the average cost of funds on our debt facility decreased to approximately 4.11%, for the first quarter compared to 4.46% for the fourth quarter due to a reduction in LIBOR and from lower borrowing costs associated with our new CLO. Overall, net interest spreads on our core assets decreased slightly to 2.66% this quarter compared to 2.72% last quarter, mainly due to higher interest rates on runoff as compared to originations in the first quarter, which was partially offset by the positive effect of LIBOR floors on a portion of our balance sheet portfolio. And our overall spot net interest spread went up to 2.67% at March 31st from 2.33% at December 31st, mainly due to the positive effect of LIBOR floors on a portion of our balance sheet portfolio and from reduced borrowing costs from CLO 13. Additionally, approximately 80% of our balance sheet portfolio currently have LIBOR floors above 1, which is well above where LIBOR sits today. And if LIBOR continues to stay at its current level, these LIBOR flaws could have a meaningful positive impact on our net interest spreads in the future. The average leverage ratio on our core lending assets, including the trust-preferred and perpetual preferred stock as equity, was up to 85% in the first quarter from 83% in the fourth quarter. And our overall debt-to-equity ratio on a spot basis was also up to 2.9 to 1 at March 31st compared to 2.5 to 1 at December 31st. excluding the CECL reserves and unrealized swap losses that reduced equity in the first quarter. The majority of this increase was due to several timing issues during the first quarter, including a portion of the proceeds from our new $275 million unsecured debt issuance that was used to pay down secured debt in April, the ramp feature on our new CLO being fully deployed subsequent to March 31st, and from cash margin calls made in March related to the financing of our securities that were applied against this outstanding debt in April. Our REO hotel asset did produce a net operating loss for the first quarter due to the effects of the pandemic, and at this point has been temporarily shut down. And as a result, we're expecting this trend to continue for the near future. Lastly, income from equity affiliates increased during the quarter, predominantly due to significantly more income from our residential banking joint venture as a result of the current interest rate environment. We do believe this positive trend could continue for the next few quarters, and this income from this investment further emphasizes the diversity of our platform and income streams. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you have at this time. Nita?

Thank you. As a reminder, to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one on your telephone keypad. To withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Steve Delaney with JMP Securities.

Hey, good morning, guys, and congratulations on a strong quarter, despite a very fluid environment here, especially in March. First, on the strong agency originations that continued over into April, that $600 million figure compared to a little over a a billion in the first quarter. Can you comment if there are any particular large loans, mega loans, that kind of would have kicked that figure up in April?

There were no mega loans, although we are working on a few big transactions. That's a very typical type of business we've been doing, but there were no significant mega loans.

Okay. All right. That's helpful. Thank you. And, Paul, on the CECL Reserve, refresh me – I was trying to take notes, but there was a lot coming out. In the structured business, I think the first quarter provision was, what, 53.9, call it 54 million. And Ivan mentioned some loans, a couple of hotels, the retail loan. I just want to get the numbers right. Is it 33 million of the 54 million that was related to the loans that Ivan mentioned?

That's correct, Steve. That's exactly the numbers. 33 of the 54 we booked through the P&L. in the first quarter related to our balance sheet loans was the position we took on a few hotel and retail assets that Ivan mentioned in his commentary.

Yeah, we took a very conservative approach on that, Steve. We looked at all our non-multifamily loans. We took a look at the impact of the pandemic, specifically on hospitality and retail. And we tried to come up with a realistic assessment of the value impairment on those loans in our portfolio so we'd have an appropriate reflection on our true book value. And it's probably a little different than the rest of the market, but we felt it was prudent. And since it was such a small amount of our balance sheet, it was easy for us to assess and put a lot of time and effort in and come up with an appropriate response.

Well, wise to do that. Look, there's a lot of CECL noise this quarter. Might as well throw it all, throw everything but the kitchen sink in it so you won't have that noise going forward. So I commend you for that. And, Paul, on the general part of CECL at March 31 for the structured business, can you give me that figure? So the initial plus the incremental, what was the actual balance sheet allowance?

Sure. So as I mentioned, at 1-1 we had to do an adjustment process. because of CESA being adopted on 1-1, and that was around $17 million of a general reserve on our balance sheet business. And then in the first quarter, we took an additional $21 million in general reserve on our balance sheet business because of the change in the economic outlook as you run these models. They make you stress them based on the economic outlook, as I'm sure you've seen in all of the other companies in our space. So those are the numbers of how we came up with the $71 million change. related to structured for the quarter with 17 opening, the 33 that Ivan mentioned related to those assets, and another 21 general. So it was about 38 million of general CECL related to the rest of our book.

Right, and if I took the 38, I took your structured book and took away those assets that have the 33, I can look up the principal balance. That would give us a percentage that would reflect sort of in basis points which your reserve is relative to the principal balance of the loan.

Sure, that is correct. So I think if you looked at it that way, Steve, and I think that's the right way to look at it, if you took the 21 and the 17 that we booked, which is 38, And you pulled out about, and I have the numbers somewhere, you pulled out those assets we mentioned that Ivan was talking about in his commentary, which probably reflected about, I would say, $200 million of assets. So now you've got $38 million on a $4.6 billion portfolio, right?

Got it. So something under 1%. Okay, that's very helpful. Thank you.

On the general side, that's correct.

The general, right, right. And just one follow-up thing. Private label CMBS, obviously nothing was going to happen mid-spring or early spring. Goldman Morgan Stanley looks like they got a deal done this week and kind of inside the original whisper talk. Any thoughts as to whether – Your private label transaction might be viable, you know, over the next few months, or should we just think longer term on that?

Well, our market is returning much quicker than everybody thought, and the execution of the deals done this week are really significantly inside where they thought. Us having a multifamily-only pool, we may consider going to market. We'll see how the next deal gets done, but we can come in considerably tight to that. And the performance on those assets is 100%, not one single forbearance or defeasance in those loans. And they were all recently rated. I think they were rated last week, so we got confirmed ratings. So we're ready to go. in the near term if the market continues to tighten. So we'll see. It's all a matter of where the market is.

Great. Thanks for the comments. Y'all stay safe and be well.

Thank you, Steve.

Your next question comes from the line of Jade Romani with KBW.

Good morning, everyone. This is Ryan on for Jade. Congrats on navigating through the quarter and good to speak with all of you. Nice to hear the favorable stats on the forbearance and rent collections in April. But just based on your viewpoint now, how are you expecting the portfolio to perform into May and June? And are there any stats you can provide on made-to-date collections in both the multifamily balance sheets as well as the servicing portfolio?

So as we enter May, we were expecting there to be a significantly greater number. And when you mean a significantly greater number, when you're 0.3 on your Fannie Mae, we were expecting to maybe come in below 2%. We're seeing outstanding collections, and we're seeing very few forbearance requests. So we're looking at that very, very favorably. As I mentioned earlier, our private label, we didn't have a single forbearance request. They're all current on our balance sheet, very little in our agency book. We're below the expectation of forbearance requests. So we're seeing very, very, very favorable trends.

And, you know, you mentioned the obvious benefit that, tenants are receiving today from extended unemployment benefits, um, which I believe are set to expire in July. So, you know, how worried are you about, you know, the floor that these economic stimulus programs are, are, are providing and the risk if those go away later in the summer, um, that, you know, the collections could drop materially and forbearances spike. And separately, you know, if there are any, um, stats you can provide with respect to the employment profile of those tenants, and also maybe a geographic exposure on the secondary and tertiary side.

Yeah, that's a lot of detail which we don't have at the present time, but I'm sure Paul can provide that offline with you. But right now we're seeing a very, very small drop off, less than we anticipated on rent collections across the portfolio. We're seeing very, very positive trends. And my comment in my introduction stating that our homes are our castles or our apartments are our castles, there's a certain psychology that we're seeing, which is people are really spending all this time in their homes. And that's their place, and that's the place they're protecting. So there's a bit of a psychology that we didn't expect due to the pandemic that they're valuing their homes. And therefore, they're going to make sure that their homes are safe. And all the initial discussions about rent forgiveness, that's pretty much off the table. Rent forbearance and evictions is something that's out there, but people are really looking to pay their rent. We instituted a specific program uh you know all the rental relief program in conjunction with our landlords so we're working firsthand with a lot of our tenants directly to our bars and the attitude is we do want to pay our rent we're going to pay our rent we may need some assistance we may need some rental assistance but we're not looking not to pay our rents so the attitude is very very positive throughout our tenant base and our borrower base. So we're fairly optimistic, and certainly we were prepared for the worst and expecting the best, and we're really getting the best. So we hope that continues.

Okay. And then, Paul, you know, just considering all the puts and takes you mentioned, can you give us a sense of what you believe is a reasonable range of run rate quarterly earnings for the balance of the year? And then, Ivan, as a follow-up to that, can you say how the board plans to approach the dividends for the rest of the year?

So I think those questions are combined. I'll handle the front end of that, and Ivan and I will handle the second one. I think what we've laid out pretty clearly in our commentary is that we are extremely fortunate to be, one, multifamily focused, and, two, to have this large agency platform. And we've always said on all of our calls, that the diversity of that platform and having that capital-wide agency business really drives a significant amount of our core earnings. So as the pandemic has hit, and certainly there have been effects to that pandemic to our business, i.e. the REO asset having a little less income going forward, balance sheet growth being curtailed as we're going to preserve capital and be very selective, we're very, very happy to be able to say that the agency business is is functioning very well. We had a $600 million quarter, as we mentioned. We expect that business to grow. And in our view, although it's early and a lot can change, we think, as we said, we can put up pretty consistent numbers for the balance of the year. Now, whether that's every quarter is a 31 or 30 or a 32, it's hard to say. But in our mind, relatively consistent numbers for the balance of the year. which would be a tremendous accomplishment considering what has gone on in this market. Ivan, I don't know if you want to add some color to that and then talk about the dividends.

Well, I think you really have to focus on our asset class, which is a multifamily asset class, and the fact that that is going to be probably the most desired asset class in the market. I think people are going to continue to invest, and as our prediction is, that you can actually see cap rate compression in the multifamily asset cliffs, which you can't invest in retail. You can't invest in hospitality. You're very suspect in office. and therefore people are going to continue in this asset class and it's going to be very viable on the one hand. On the other hand, when looking at our portfolio and it speaks to our dividend and it speaks to our core earnings, what we're seeing is very, very few requests for forbearance. And keep in mind, Forbearance is just a deferral of your payment. That's all it is. And since most of the multifamily borrowers treasure their access to the agency platform, they cannot not pay their forbearance back. And that's why they're actually paying. Because if you don't pay your forbearance back, or if you default, then you're no longer a viable borrower in the multifamily market. So they have resources, and if they have to, I believe they will support that. So it speaks to where our earnings are. We don't have a lot of non-multifamily assets, and I would be concerned, and it doesn't really impact us, when you have a potential deterioration of asset value and when you have a substantial amount of loans put in on pay and accrue. We haven't had a single pay and accrue loans. So getting back to our core earnings and our dividend, We have multifamily assets. They're performing in an outstanding manner. Based on the core foundation, I think they'll continue to perform. And therefore, as they perform, they'll continue to contribute towards our earnings. In addition, the agency access is the viable liquidity in the market. We've indicated we've had a great first quarter. We've told you where we think the second quarter is going to go. Our pipeline is strong. It's vibrant. It's growing. So we're very, very comfortable with what we've spoken about today, which as I mentioned in my comments, it puts us in a class by ourselves. And that's what really distinguishes us from the traditional mortgage REIT because we have an operating platform that produces stable core earnings. And as Paul's mentioned in his comments and I have, we have over $90 million of servicing revenue that comes in each and every year, and it's a growing part, and it represents a very substantial amount of our core earnings. So that's kind of a summary of how we feel and how the board feels.

Great. Thank you for all that color, Ivan and Paul. You're welcome.

Your next question comes from the line of Stephen Laws with Raymond James.

Hi. Good morning. Hey, Steve.

How are you? Good. Good to hear from you. Hope all are well on your end, both Paul and Ivan and everyone else. I wanted to touch base, maybe a little more detail on the agency business, Paul, and I'll let the touch lead on the call. But the margins, you know, what should we think about the factors, plus or minus, kind of going forward as where we see the MSR margin and the fee-based services income margin headed as we move forward from here?

Sure. I think that's a great question. And given the landscape, I think what we've been impressed with, and Ivan will touch a little bit more on the market and spread, is what we've been impressed with is that we've been able to hold our margins really, really well. And so we put up a 150, a 149 margin this quarter. I think they'll be fairly consistent throughout the rest of the year on our gain on sale. We do some larger loans, maybe it comes down a little bit in a given quarter, but for the most part, I think those margins are gonna hold. The second thing we've seen is our servicing fees are holding. So we are seeing the agencies hold the servicing fee high, And so we don't expect the servicing fee to really drop much, if at all, going forward as well. It will depend on where the runoff is and what rate of servicing fee the runoff is paid at. We did have a little bit higher runoff this quarter on a higher servicing fee, but the servicing fees we're generating in the new origination have been very strong. So the originations have been strong, the margins have held, the servicing fees have held. As far as a capitalized MSR number, let's talk about that a little bit. This quarter, the number came in a little lighter than it did last quarter, mostly due to mix. We had a little bit more on our committed loans, Steve, in Freddie and Freddie Conventional as a percentage of our total book and FHA and a little bit of private label. Therefore, those servicing fees are a little lighter on an MSR perspective than Fannie. So that mix really drives where this OMSR rate is going to go. If we're doing more Fannie, that OMSR rate is going to rise. If we're not, then the OMSR rate... comes down, but it doesn't affect our servicing fee, in my mind. Our servicing fee will hold. The second thing that affects MSR values today is the value of the escrows. And that's something we talked about in our commentary, that even despite the net interest income going down pretty substantially for where interest rates went on our escrows, we're still able to, in our opinion, generate consistent core earnings, which is a tribute to the platform. But those reduced earnings on escrows going forward do hit the MSR capitalization rate a little bit because it's a part of the value of the servicing you're putting on day one.

That's great. That's helpful. Thank you for the detail there. Could you touch base again on the servicing? I was writing things down as quickly as possible. I think you said a servicing advanced facility, 100% advance rate is not going to be an issue for us. But can you provide a – was there a size of that facility or did you quantify anything in your comments around that?

So our servicing advance for April was $300,000. No, it was $200,000. $200,000. It's really nominal. Initially, when there was a tremendous amount of fear there'd be a lot of forbearance, everybody scrambled around and thought that number would be a big number. We immediately contacted one of our banks. We've had a number of banks wanting to offer us a servicing advance facility. So we're in the process of putting it in place for no fee. The terms have been agreed upon, and that'll provide 100 percent of the advances that we have to make, so we'll have no capital outlay on that.

Great. Sorry to have you repeat it, but I appreciate making Charlotte clear. That's great to hear. Thanks for the time. Thanks, Steve.

And your next question comes from the line of Rick Shane with JP Morgan.

Hey, guys. Thanks for taking my questions. Hey, Rick. Ivan, I really appreciate the clarity and sort of outlook on the agency volumes going forward. I am curious. I'd love to hear sort of structurally how underwriting works in this environment in terms of due diligence and appraisals, et cetera.

Sure. So the real paradox here is that the loans that we're generating on the agency loans are probably the best loans we've ever generated for two reasons. Number one, more conservative underwriting. Number two, there's less competition. And number three, every single loan is being underwritten and funded with interest reserves. Interest reserves are generally six to 12 months. If there is any shortfall and they have a problem, then you actually have insurance that you're going to have those payments made current. Keep in mind, a 12-month interest reserve, even in very draconian circumstances, if a property doesn't perform, will last over two years. Those are all the enhancements that are put in place. And I must say that Auburn was a front runner in working with Fannie Mae. And we wouldn't close a loan when the pandemic started unless we had an interest reserve. And we were actually the architect with Fannie Mae and put that in place. So I think the quality of our loans are outstanding. In terms of the appraisals and the inspections and that whole technical process, I'm personally not that granular in it. Our technical staff worked with the agencies to make sure that we had the right inspection processes. Initially, there were some issues, but I believe that the ability to appraise and inspect has all been put in place and all the right fundamentals are there.

Great. Okay. Thank you. I appreciate both the physical explanation and the structural loan explanation as well. One question on the balance sheet business, you guys walk through the Cecil Reserve, and I'm sure it's in the K or excuse me in the queue, and I've just got to get there at this point. But were there any realized losses netted against the reserve in provision that we should be aware of in the quarter?

Yeah, so no, Rick, there were not. We have had zero realized losses in the quarter, and none of the reserves, as you know, no realized losses were netted against that. And that's one of the reasons we are adding it back to our book value as we spoke, is these are all just CECL reserves, general in nature, and none of them have been realized. And hopefully, we've been conservative in our approach. We feel like we have been. and we'll see where the market goes and how we end up with those reserves.

Yeah, it's interesting. You just provoked the thought because a lot of people, in order to get liquidity, sold some of their loans on securities and have a lot of realized losses to create that liquidity. Fortunately, we had sufficient liquidity, and we didn't sell any loans, nor do we have any realized losses.

That's an excellent point. I should have mentioned that. We have not sold a single loan at any stress value.

Okay, great. And just so we can think about it from a housekeeping perspective, The plan on core going forward would be to add back provision but to deduct any defaults or charge-offs, correct? So that way, that's where the credit will run through the core number.

That's correct. So we're trying to be like everybody else here because we feel like our AFFO was a little bit of an outlier. Core earnings is how people look at the business. That's how you support your dividend, and I agree with you. Okay. as you book general reserves, they get backed out. If you do have a realized loss, well, then that's a real loss, right? That's a cash loss, and then, therefore, it would charge against your core earnings. That's exactly how we're approaching it.

Terrific. Great, guys. Thank you very much. Thank you, Rick.

Your next question comes from the line of George Bahamas with Delta Bank.

Hi, good morning, everyone. Thank you for taking my question. I hope you're all well. Just a follow-up on Rick's question. I appreciate the color on the six to 12 months in reserves. The new loans you mentioned look more attractive today than they had historically, given competition declining and some of the other factors you mentioned. In terms of yields on these loans, maybe LTVs, have those changed meaningfully in the current environment relative to what they look like prior to all this occurring?

They have. I think in terms of cash out, refinances, those are being cut back significantly. And also loans are being underwritten to their current collections. So if collections are off 3% to 5%, than they're being underwritten off of today. So let's assume you typically have a loan that's at a 95% occupancy and it's backed up to 92. You're not underwriting off 95, you're writing it off the current level, which is just a temporarily impaired level, it's not permanent. So I think you're getting a reduced loan. In addition, the lower the LTV, the less of a reserve. So you're going to see people who don't want to post 12 months and six months perhaps go for a lower LTV. So I think we'll have a lower LTV in actual that's lower. And then if you take into consideration that this impairment on your rent collections is temporary, then it's even further than that. So I would say at least 5% across the board, I expect, and perhaps a little bit more.

Great. Thank you. That's helpful, Culler. Appreciate the time today. Thanks, George.

And your final question comes from the line of Lee Cooperman with Omega Family Office.

Not so much of a question, though I do have one, but I think you deserve a shout-out. So I'm going to give it to you, which is unusual for me. Nobody thinks like an owner except the owner, and the fact that you guys own over 20% of the company, demonstrates the view that nobody thinks like an owner. Because for the last year now, you've been focusing your remarks on a restrained and conservative outlook, saying you were concerned that some of the competitors were resorting to doing foolish things. I think you've kept the company conservatively focused on workforce housing, and given your profitability, you have validated our book value. My only regret, this is the question, is you probably didn't get enough stock in a sub-four, but Your press release didn't refer to anything in stock repurchase. I have not gotten to your 10Q yet, but did you do anything in stock repurchase in the quarter?

Yes. So, Paul, why don't you indicate what we did buy back, and I'll get some color in terms of what our thought process was.

Sure. So the math is simply we bought about a million shares back at just around $4. We spent about $4 million of our capital on the plan. And Ivan or myself can give you the dialogue around that, but Ivan, if you want to take a crack at it then. Sure.

Certainly in retrospect, we would have liked to have bought more, but we had two issues. Number one, given the pandemic and not knowing how deep it would go and what further strains that were put on liquidity, we couldn't have a free-for-all buying. And second of all, we entered into a blackout period, so we had to enter into a program buying what ranges. So Fortunately or unfortunately, and I would say unfortunately we didn't get to buy more, fortunately there was a lot more liquidity, and the pandemic only lasted a certain amount of time in terms of how it affected our business. And being in a position where we couldn't go in daily and buy, but we're subject to a preconceived formula, that's all we were able to get. And we're out of the blackout period now. Stock is higher, so it's a different environment. But it was definitely our intention to buy, but given the circumstances, that's what we were able to come up with, but we did buy.

Nothing to apologize for. You've done a very good job in a very difficult environment. Congratulations.

Thank you, Langsley, and thanks for your support. Thank you.

There are no further questions at this time. I will turn the call back over to the host.

We definitely appreciate all our shareholder support. This has been a very trying period of time. Our team here, as I've mentioned in my remarks, have worked remotely and tirelessly and have performed at a level beyond my expectations. We feel we are well through it, in good standing, and very optimistic about our franchise and our ability to produce core earnings and a consistent dividend. So stay healthy, be well, look forward to our next call, and everybody have a good weekend.

And this does conclude today's conference call. Thank you for your participation.