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spk00: Good morning, ladies and gentlemen, and welcome to the third quarter 2022 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 period, you will need to press star 1 on your telephone. If you want to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul Elenio, Chief Financial Officer. Please go ahead.
spk06: Okay, thank you, Shelby, and good morning, everyone, and welcome to the quarterly earnings call for Auburn Realty Trust. This morning we'll discuss the results for the quarter-ended September 30, 2022. 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 or circumstances after today or the occurrences of unanticipated events. I'll now turn the call to Arbor's President and CEO, Ivan Kaufman.
spk03: Thank you, Paul, and thanks to everyone for joining us on today's call. As you can see from this morning's press release, we're in another tremendous quarter as our diverse business model continues to offer many significant advantages over everyone else in our peer group. We have a premium operating platform with multiple products that generate many diverse income streams, allowing us to consistently produce earnings that are well in excess of our dividend. This has allowed us to once again increase our dividend to $0.40 a share, representing our 10th consecutive quarterly dividend increase with 33% growth over that time period, all while maintaining the lowest payout ratio in the industry. We've also strategically built our platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to thrive in this economic downturn. We invested in the right asset class with the right liability structures, highlighted by over $8 billion in non-recourse, non-mark-to-market CLO debt, representing nearly 70% of our secured indebtedness, with pricing that is well below the current market. We also have no significant short-term debt maturities and are well capitalized with currently around $600 million in cash and liquidity, providing us with the unique ability to remain offensive, and take advantage of the many opportunities that will exist to generate superior returns with our market capital. Additionally, our dividend is well protected with currently the lowest dividend payout ratio in the industry, and we cannot emphasize enough the depth and experience of our executive management team, including our best-in-class dedicated asset management function, that allowed us to successfully operate our business through multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing REIT in our space for several years now. Our view of the current environment is that we are in a recession with runaway inflation, and we expect the market to continue to be volatile and dislocated for the foreseeable future. With this location comes great opportunity for us to gain market share in our core business platforms and generate superior risk-adjusted returns on our capital. As a result, we are excited about how we strategically position the firm to take advantage of what we believe will be extraordinary opportunities in this downturn. Turning now to our third quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produce distributable earnings of $0.56 per share, which is well in excess of our current dividend, representing a payout ratio of around 71%. Our financial results all continue to benefit greatly from rising interest rates, which has significantly increased our net interest income and our floating rate loan book, as well as earnings on our escrow balances. And clearly, with our extremely low payout ratio, As for an earnings outlook, we are uniquely positioned as one of the only companies in our space with a very sustainable protected dividend, even in a recessionary environment. As regarded on our last call, in this market we are being very selective with our balance sheet lending, looking to replace our runoff with higher quality loans with superior spreads. In fact, in the third quarter, we originated $600 million of new multifamily bridge loans with an average loan to cost of around 72% and into spreads of $1,450 over the index, while a $600 million runoff we experienced during the quarter had an average loan to cost of around 79% with average spreads of around $390 over the index. As a result, we were able to widen our spreads on average by around 25 basis points, while substantially increasing the loan quality with a 7% reduction in loan-to-value. Additionally, we have a significant amount of replenishable capital in our low-cost CLO structures that have resulted in a meaningful increase in the levered returns on these loans. In fact, our third quarter originations averaged over a 14% levered return, and the loans we financed through our CLOs came to over 18%. We have also placed a heavy focus on converting our multifamily bridge loan runoff into agency loans, which is a critical part of our business strategy as our agency business is capital light and produces significant additional long-dated income streams. In the third quarter, we successfully refinanced around 25% of our balance sheet runoff into new agency loans that produce strong gain on sale margins and long-dated servicing income. And again, Our strategy is to preserve and build on our strong liquidity position to allow us to remain offensive and go on a premium yield on our capital. In our GSC agency business, we originated another $1.1 billion of loans in the third quarter. October's originations came in at $250 million, and we have seen some leveling off in the pipeline given the rise in the 10-year period. Despite the current rate environment, we believe we can close out the fourth quarter with a similar volume as the third quarter, as, again, we have a strategic advantage in that we focus on the workforce housing part of the market and have a large multifamily balance sheet loan book that naturally feeds our agency business. And, again, this agency business offers a premium value that requires limited capital and generates significant long-dated predictable income streams and produces significant annual cash flows. To this point, our $27 billion fee-based servicing portfolio, which is mostly prepayment-protected, generated approximately $115 million a year in reoccurring cash flow. This is in addition to the strong gain-on-sale margins we generate from our originations platform and a significant increase in earnings in our escrow balances that we are experiencing as rates continue to rise, which acts as a natural hedge and is unique in our business. In our single-family rental business, we are gaining significant traction with a steady increase in deal flow. In the third quarter, we funded $150 million of prior commitments and committed to another $450 million of new transactions. As we now source close to $1 billion in deals in 2022 to date, we have a very large pipeline of deals we are currently processing. And again, we love this business as it generates strong-level returns and offers us three turns on our capital through construction, bridge, and permanent lending opportunities. In summary, we had another tremendous quarter, and we're extremely well positioned to succeed in this environment. Our dividend is well protected with earnings that significantly exceed our dividend run rate. We invested in the right asset class and have very stable liability structures. We are well capitalized. and have no significant short-term debt maturities, putting us in a unique position to take advantage of the many accretive opportunities that will exist in this market, giving us great confidence in our ability to continue to significantly outperform our peers. I will now turn the call over to Paul to take you through the financial results.
spk06: Thank you, Ivan. As Ivan mentioned, we had another exceptional quarter producing distributable earnings of $105 million, or 56 cents per share, which is up from $94 million, or 52 cents per share, last quarter. The increase was largely due to substantially more net interest income on our floating rate loan book and from higher earnings on our escrow balances due to the increase in rates, along with a few one-time losses recorded in the second quarter on some one-off loan sales. And our third quarter results translated into ROEs of approximately 18%. And once again, our quarterly distributable earnings have substantially outpaced our dividend with a dividend-to-earnings ratio of around 71%, allowing us to increase our dividend for the 10th consecutive quarter to an annual run rate of $1.60 a share. As Ivan mentioned earlier, we are well prepared for this downturn, and our model offers many strategic advantages, giving us great confidence in the quality and sustainability of our earnings and dividends. In our GSE agency business, we originated and sold $1.1 billion in GSE loans in the third quarter. We generated margins on these GFC loan sales of 1.3% in the third quarter compared to 1.59% in the second quarter, mainly due to a greater percentage of FHA loan sales in the second quarter, which have a much higher margin, as well as some overall general margin compression given the current rate environment. We also recorded $17.6 million of mortgage servicing rights income related to $1.2 billion of committed loans in the third quarter, excluding $300 million of balance sheet loan sales, representing an average MSR rate of 1.51% compared to 1.48% last quarter. Our servicing portfolio was approximately $27.1 billion at September 30th, with a weighted average servicing fee of 42.4 basis points and has an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $115 million gross annually, which is down slightly from last quarter due to increased runoff in our Fannie Mae portfolio, mostly due to extensive sale activity again this quarter. As a result of the runoff, prepayment fees related to certain loans that have prepayment protection provisions continue to be elevated, with $11 million in prepayment fees received in the third quarter compared to $15 million in the second quarter. In our balance sheet lending operation, our $15 billion investment portfolio had an all-in yield of 7.19% at September 30th compared to 5.82% at June 30th, mainly due to the significant increase in LIBOR and SOFR rates. The average balance in our core investments was $15 billion this quarter as compared to $14.6 billion last quarter due to the full effect of our second quarter growth, and the average yield in these assets was up to 6.57%, from 5.26% last quarter, again, due to increases in SOFR and LIBOR rates. Total debt on our core assets was approximately $13.9 billion at September 30th, with an all-in debt cost of approximately 5.33%, which is up from a debt cost of around 4% at June 30th, due to the increase in benchmark index rates. The average balance in our debt facilities was up to approximately $13.9 billion for the third quarter from $13.4 billion last quarter, mostly due to the full effect of our second quarter growth and from the new three-year convertible note we issued in August. The average cost of funds in our debt facilities was 4.49% for the third quarter compared to 3.10% for the second quarter, primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets decreased slightly to 2.08% this quarter compared to 2.16% last quarter, mostly due to less accelerations from early runoff in the third quarter. And our overall spot net interest spreads were up to 1.86% at September 30th from 1.82% at June 30th, mostly due to positive effects of rising rates on our floating rate loan book. And as we've stated before, 97% of our balance sheet loan book is floating rate, while 88% of our debt contains variable rates, further enhancing the positive effect on our net interest income spreads as rates increase. In fact, all things remaining equal, a 1% increase in rates would produce approximately 10 cents a share in additional annual earnings. Additionally, as we mentioned earlier, we have $8 billion of CLO debt outstanding with average pricing of $163 over, which is well below the current market and has allowed us to meaningfully increase the levered returns in our balance sheet loan originations. And lastly, as rates are predicted to continue to rise, we will also earn significantly more income from the large amount of escrow balances we have from our agency business and balance sheet loan book. These earnings will grow substantially. as we have approximately $2 billion in escrow balances that are now earning almost 3% or around $60 million annually, effective November 1st, which is up significantly from a run rate of approximately $25 million annually at June 30th. As Ivan mentioned earlier, these features are unique to our business model, giving us confidence in our ability to continue to generate high-quality, long-dated recurring earnings in the future. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you may have at this time. Shelby?
spk00: Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best quality. We'll take our first question from Steve Delaney with JMP Securities.
spk02: Good morning, Ivan and Paul. I would congratulate you on another great quarter, but I think the fact that ABR shares are up 9% this morning says it much better than I could. But congratulations. Nice to see the response. So, obviously, a lot of talk about the CLO market. That had been a very important issue. tool and and building your your your bridge portfolio um we know what's you know dislocated right now we're starting to read just in the last four to six weeks about freddy and their q series shelf that seems to frankly i hadn't heard about it until the last couple months and you hear about k series obviously but q i don't know what q is um but i think a deal got done in october I'm just curious if for you, for Arbor and the business you do, is that program viable as an alternative to your normal CLO shelf?
spk03: Sure. So let me respond to that, Steve. And once again, thank you for your positive comments and the great relationship that we've enjoyed over the years. Thank you. You know, we're a Freddie, you know, seller-servicer. We've evaluated the Q-Series, and it is a viable program. It is really geared towards affordability to enhance their affordability numbers, and we think it's an important program because it offers the ability to access securitization through the government for those type of products. So that's right in the wheelhouse. So it's something that...
spk02: don't be surprised if we're a participant in that program. Great to hear. And we'll be talking about affordable, I think, in a couple weeks at our conference, hopefully. But I was glad. I figured if anybody was going to be involved with your relationship with Freddie, that you probably would. Paul, jumping over to you, when you were talking about your CLO, I think you were talking about reinvestment of CLOs. You mentioned a figure of 18%. Is that your estimated return on capital on reinvestment with fresh coupons going in?
spk06: Yeah, so it's exactly that, Steve. What we're saying is because we have these low-cost locked-in CLOs at 163 over, and we all know where spreads have gone, and all the CLOs that are left have reinvestable periods, what we're doing is loans are running off. We're originating new loans at higher spreads. and financing them through those vehicles with the replenishable capital. And when we're doing that, we're getting greater than an 18% levered return on those new investments. It's exactly what's happening. And it's really meaningfully moving up the levered returns on our model. And I'm sure Ivan can comment, but very unique to our situation and the way we've structured our deals and the way we had the foresight prior to the market dislocation to go out and do two securitizations this year and really lock in those low costs.
spk02: Fantastic. And the replenishment terms on the two that you just did this year, how many months or years do you have left on those two to reinvest?
spk06: Yeah, so let me give you some colors. So we have almost $10 billion of assets sitting in our CLOs with $8 billion of debt, roughly, about 82% leverage. One of the vehicles comes out of replenishment period this month. So if we exclude that vehicle, we have We'll call it $7.5 billion of CLO debt and about $9.5 billion of CLO assets that are sitting in one, two, three, four, five, six, seven vehicles that still have replenishment. And of those seven vehicles, I would say about $2 billion of that debt comes out of replenishment in the middle to end of 2023. It's all staged. And another $5.5 billion of that debt doesn't come out of replenishment until middle to late of 2024. So we have lots of time and room on a lot of these vehicles, which is really helping our returns.
spk02: That's fantastic. Okay, thanks. And one final quick question. I'll turn it over to the rest of the analysts. Ivan, I read that you did a deal in Brooklyn on 22 Chapel Street leading a recap. Commercial Observer had a feature on it. I was curious that because that property, I think, is in an opportunity zone. Can you just comment on the attractiveness of of that type of property for a developer and also the opportunity for the lender in terms of, I guess, tax benefits to the developer and how defensible, when you look at that property, is it more likely to perform better in an economic slowdown in a recession than maybe some high-end properties that may not be absorbed as quickly. I'm just curious your thoughts about that property both as an investment and as a loan. Thank you.
spk03: Okay. I must say I'm not familiar with the details of that transaction, which is unusual, which must have been done in a normal course of business. You know, So in general, you know, anything that's affordable, you know, there's just huge demand for that product. Anything in the New York area that's affordable, we don't, you know, we don't project any real rent increases because it's all regulated. But you have very, very, very low, very, very low, you know, occupancy changes, more like utility. But I am not familiar with that particular one. Okay. Thank you both for your comments.
spk02: Thanks, Steve.
spk00: We'll take our next question from Stephen Laws with Raymond James.
spk08: Hi, good morning, Ivan and Paul. Very nice quarter, another dividend increase, so congratulations on that. Thanks, Steve. Yeah, I wanted to quickly touch base. Paul, maybe a quick number, but repayment income, can you talk about what you're seeing in repayments? I know you guys... everyone had been expecting to slow, but they've remained stubbornly high. Can you talk about early repayment income contributions for the quarter?
spk06: Yeah, so in my prepared remarks, I had mentioned that we did see a fair amount of runoff in our Fannie Mae book this quarter again that we've seen, as you know, Steve, over the last several quarters. That runoff was about $1 billion of transactions, and we had earned about $11 million in prepayment penalties. I think on the last quarter, I guided you that that should come down significantly. It was a little surprising to me that we had that much in repayment penalties, and I've done some work on it. And it really has to do with the fact that the market is lagging, right? There's a little bit of a lag on one, rates, and two, on sales volume. And we did see a little bit more sales volume in the second quarter than maybe we expected. The market has changed since then. So we are expecting that to start to really slow down, given where rates are. And maybe more importantly, it's very binary, right? So our Fannie Mae book has probably an average – interest rate or coupon rate of about 4%. That doesn't mean we don't have 5% and 6% mortgages. We do, and we have 3% and 3.5% mortgages that wait to about a 4%. And where rates are today, the 5, 7, and 10 years above that, even though there's a lag, If loans were to repay today, and I guess, you know, in my mind, loan repayments will slow naturally given the environment, there really isn't much yield maintenance, if any, because it just goes away, right, because the rates are exceeding the coupon rate. So it's a binary process. It hasn't happened yet because things are on a lag, but we do expect it to start. Having said that, we did have $200 million, $200-plus million of runoff payments. in our book in October, and we got about 3 million of prepayment fees already in October. I'm modeling maybe another million for November and December, so maybe we'll get to 4 or 5 million, but I do think that after that, it gets to a very small number. Maybe it's a million a month. Maybe it's half a million a month. I don't know, but it's not 11 million. But on the flip side of that, what's happening when runoff slows and rates rise is Our servicing portfolio is staying intact, and, of course, we love that because those servicing fees are long-dated and it's an annuity, so we'd rather have the servicing. And the other side, as we mentioned in our prepared remarks, is our escrow balances will stay elevated, and where rates are going, our escrow earnings are substantial. I mean, look at the numbers. So that's a great hedge against rising rates, and I think that's how this plays out over the next few quarters.
spk08: That's helpful. Thanks very much for that, Paul. You know, Ivan, as investors continue to do a lot of work on loans and portfolios and, frankly, looking into sponsor quality, can you talk about the typical sponsors of your bridge loans, how large they are, how well collateralized? Do you have any concentration among sponsor exposure with multiple loans from the same people? Maybe some metrics or general commentary around your typical borrower.
spk03: You know, we tend to have borrowers who do a significant number of transactions with us, and we generally, you know, traffic in the, you know, 25 to, say, $150 million loan range. And it's not unusual to have a number of transactions with a specific sponsor, and there's a lot of tenure with us. We're not the lender who would typically do a one-off loan to garner a piece of business. We generally like to do loans with somebody who we think we're going to have a long-term relationship. So that speaks to the kind of operator we have. We went through a period of time, and you could see it in the market, where a lot of sponsors, especially the big ones, are very syndicated. We have a mixture of all types of borrowers, but typically we have the borrowers who, you know, a lot of family and friends money. They do have some institutional money, but it varies. In reviewing our portfolio, in fact, I met with one of our top sponsors where we have close to a billion of bridge loans with that sponsor this week. And, you know, I will tell you that, you know, they're well capitalized. They have good access to capital. They're on top of the details of their specific loans. And they have a good grasp on them. And, You know, they, I believe, at least the people we have, are generally really good operators who can execute very well. Execution is really critical. And more significantly, we have a good enough relationship with them. If they run into an issue, we'd like to be able to sit down with them and figure out how to manage that issue with them. And so far to date, you know, looking at our portfolio, you know, we're always ahead of schedule in terms of evaluating our assets and our sponsors. Our portfolio on knock-on wood is in great shape. It doesn't mean that we're immune to the complexities that exist in a rising interest rate environment and decrease real estate values, but it's how you manage your sponsors and how you have relationships. More importantly, the kind of structures you have in your loans. I spoke about it repeatedly over the last number of years, that we have a lot of structure in our loans. It's not just the real estate. It's the provisions to keep our loans in order in terms of interest rate replenishments, rebalance requirements, and things of that nature. So we don't just look to the real estate. We look to the sponsor. We look to the financial capability of the sponsor and the commitment of the sponsor. And we put that all together in one potion, and that's how, with great asset management, we're able to keep our book in very good shape.
spk08: Appreciate the comment, Ivan and Paul. You guys have a great day. Thanks, Steve.
spk00: We'll take our next question from Rick Shane with J.P. Morgan.
spk07: Thanks, guys, for taking my question this morning. And I apologize if this has been covered. We're bouncing around a little bit in the calls this morning. One of the things that we're starting to realize as we move through earnings season is that sponsor behavior is increasingly influenced by revenue. what I would describe as exogenous factors, how they're financed on the debt side, time immaturities, type of financing. Within your portfolio, are you seeing that, and how do you manage that risk so that you don't sort of get – defaults or credit issues related to structure versus the underlying fundamentals of the properties?
spk03: Okay, let's first start by recognizing that we're multifamily oriented. Over 90% of our assets may have been higher on the multifamily side. Let's also realize that we're a senior lender primarily. and we're not doing, you know, preferred equity, mesnene, and things of that nature. So those are big qualifiers, and we're also a cash flow lender, right? Those are the basic premises. The second is, as I've mentioned earlier, many lenders in this environment were very lax on their documentation and very lax on their requirements in terms of you know, sponsor recourse and responsibilities. We have been in this business longer than anybody at this point. We've been through multiple cycles, and our documentation relative to our loans and the liability of the sponsors is very straightforward, unlike other lenders. On top of that, we have default rates in our loans typically at 24%, where other people have very mild default rates. So I would say it's our experience in terms of how we document our loans, how we asset manage our loans that puts us in a primary position. We also have the experience and the capability to take back and manage any asset. And we're not afraid to do that. We also have a deep pocket of sponsors who love to take on opportunities if there is a transition from an asset. So we have the depth, we have the distribution, we have the experience, and we have the capital to manage these particular circumstances and the right asset class. And that's what puts us in a great position. It doesn't mean we won't have our issues with our sponsors, and we always do. It's just a matter of how you're able to manage them and where you have the leverage. And typically when sponsors have no recourse and no liability, right, then they have the leverage. But when we structure our loans, typically we have the leverage. More significantly, we're not looking to take their assets from them. If they run into an issue, remember, they have other assets. We're looking to work out a solution that's in the long term. Our view and our history is in multifamily, every high is followed by another high, right? If you look at the charts, if you look at multifamily, if you look at rents, we're in a downturn with rising interest rates. We want to help our borrowers position themselves to succeed in the long run. There's one further factor which is very important to note. If you're a multifamily borrower, if you default, right, then you close down your borrowing abilities with the agencies. If you can't borrow from Fannie Freddie, then you're basically out of business. So if the borrower wants to step out of the industry by defaulting, that's a very, very, very, very, very tough choice. So they have to make decisions if they're going to have difficulty, either bring more capital or either come to us for different capital solutions. So that's it in a holistic sense, and that's how we manage our book. And also, first and foremost, asset management skills and capability. People are now scrambling to bring that to bear. We've been in this business. We've beefed up our asset management well ahead of our growth in our portfolio. We're well positioned to manage our assets. not only look forward to where they're going to be issues, work with our borrowers, sit down with them and come up with solutions with them. And that's a very important skill set to have. So that's kind of how we view the market and why we're well positioned in the market to manage through this dislocation. And we only think, you know, we're not at the bottom yet. You know, we're getting there. You know, we think first quarter, second quarter. And we've already dealt with a lot of borrowers understanding where they may run into issues. And we're ahead of the game. We're not playing catch-up. We're on top of our assets. We're managing through solutions, and we're being proactive. And that's the way we manage our business.
spk07: Look, it's a very helpful response, and I appreciate the context. You know, I think one of the things that we're starting to think about and hear more about is both the recalibration of cap rates and coincident with some deflation in terms of or more pressure in terms of rents and sponsors starting to run into issues where their pro forma rent increases are less likely to come through. So that's the other thing we're just trying to understand as we go through all this. And it sounds like you're approaching it exactly the same way.
spk03: Yeah, I think what's important to note on that, which is very relative, you've definitely had cap rates increase from, let's say, 4 to 5 as a general number. But during that period of time, going back 15 months ago and 18 months ago, you've also had rents increase by 15% to 18%. So to a large extent, you've had the rent increases kind of catch up a little bit and offset the change in cap rates significantly. But you're right. We do not expect under any circumstances to be that kind of rent growth going forward at all. And we've been that way for quite some time. We've been, you know, our outlook starting about nine to 12 months ago was exactly that as rates went up. We started to look at exit cap rates and we started to really take a look at that. If we are going into a recession, you're not going to see that kind of rent growth. So we're not expecting rent growth, right? If you're flat, To up a little bit, that's fine. We are expecting a recession, different than everybody else. We're going to expect some economic vacancy because people can't pay their bills and pay them on time. You also have a record number of units being delivered on the multifamily side, so you're going to see some concessions on the new product coming on board. So all those are the headwinds that we're facing. You can't ignore them, and you've got to manage to them. So we're prepared for that, and that's our outlook.
spk07: Appreciate the answer. Thanks, Ivan.
spk00: We'll take our next question from Jade Romani with KVW.
spk04: Thank you very much. Just wanted to confirm, are you expecting a flattish trend in transaction volumes for Arbor, both on the GSE side and the bridge funding side?
spk03: So I think on the GSE side, it all has to do with two factors, where the 10-year is and where cap rates go to. If cap rates adjust appropriately and people can buy opportunities and the 10-year is in a reasonable level on the yield curve, I think you'll see some decent purchase activity. We'll see that. So I would say going forward next year, I think we'll be in the range of what we did this year, maybe a little down. In terms of bridge activity, I think that's going to be dictated where we see the bottom when we want to get aggressive. I think that it may be the first quarter. It may be the second quarter. But when we are close to the bottom, we will get extremely aggressive at that point in time. And it's either going to be in the first quarter or the second quarter. We're not sure when. And then we'll resume a fairly active level. And it also depends on where SOFR is because, you know, depending on where SOFR is and where people have to borrow will dictate where the bridge is. We do think there's going to be an extraordinary amount of opportunity to provide recapitalization capital of very attractive returns. And we're working on that very effectively. We think we can recap borrowers. and get adjusted returns of between 15% to 20%, which would be a good use of our capital, and also could position people back into the agency business if that works well. So I think a little patience right now. We've been really patient the last six months. We'll continue to be patient through the first quarter and wait to where we feel the market has really adjusted. We think the market will overcorrect. We think a lot of the data that we're seeing is lagging. And there'll be a point in time where we can get real aggressive. It's not right now.
spk06: Hey, Jay, it's Paul. To Ivan's comments, which are on the longer-term side, which is great, just to help you with your model a little bit, as we had mentioned in our prepared remarks, We did $250 million in October in the agency business. We did $1 billion in the third quarter. We still think we can come in similarly. Maybe it's $950 million. Maybe it's $1 billion. I don't know where it comes in, but we're not thinking it's going to be materially different just on the short term. And in the balance sheet business, I think we did – October was a little bit lighter. I think we did $50 million of bridge, and we did another $50 million or $60 million in fundings on our SFR business. And we had about $180 a runoff in October, of which we recaptured into agency 50% of that runoff, which was great. That's our model. But I think we're projecting, and we talked about in our commentary, that we're looking right now, at least on the short term, to match our runoff with new originations. So we are expecting that to be flat in the portfolio for the fourth quarter, whether that's 400, 500 million, 600 million, a new volume. We're not sure yet, but we think the runoff is going to be equal to the originations, at least in the short term.
spk05: Thank you. I was wondering also if you're seeing any opportunities in M&A opportunities. in the commercial mortgage rate space?
spk03: Thanks. I think there will be. I think there's going to be a liquidity squeeze. I think people got really, really aggressive on their originations even late in the cycle. When we were backing off nine months ago, people were thinking that was an opportunity to gain market share, and I think that was a real mistake. I think a lot of people have never managed CLOs before, don't have asset management skills. And I think there could be some real opportunities. We're in a period now of capitulation on cap rate changes and values and rent growth. It's interesting that we spoke about it on this call. We've been speaking about it for nine months. Everybody's been looking at us like we're nuts. And I definitely think we've had a different view than everybody else. There's a bit of a catch-up. So I think that will occur. I think there's going to be plenty of trouble. with the people who have been extraordinarily aggressive the last nine months.
spk06: Thank you. Thanks, Jayden.
spk00: And again, if you would like to ask a question, please press star 1. That is star 1 if you would like to ask a question. We'll take our next question from Crispin Love with Piper Sandler.
spk01: Thanks. Good morning, everyone. I think you telegraphed last quarter. You pulled back meaningfully in bridge multi-family originations this quarter. Was that primarily just your conscious decision there, or was there a drop-off in demand as well from borrowers just given board cap rates and debt costs currently for borrowers?
spk03: It was a conscious decision for a multitude of reasons. Number one, we had a significant pipeline earlier in the year that we actually didn't close because we were required an adjustment to valuations based on the changing marketplace. So that was an unusual thing that occurred. We had garnered a significant pipeline, and the change in interest rates did not reflect the change in values. So that was immediate. That was a conscious underwriting decision. The borrowers didn't like it, but numbers don't lie. Facts are facts. So we had a lot of fallout in our existing pipeline. We were very aggressive in changing our underwriting grids and our pricing to reflect the market. So we stepped out of the market based on where we saw the market and where our competitors saw the market. Those were two factors. And the third was an eye towards liquidity. We were very conscious of maintaining our liquidity and managing our liquidity and not putting out more money, not knowing where the market was going. So that really led our direction. In addition, you have to look at the way our company is structured. At this point in time with these low liability structures that are in place, when we have runoff and we can replace it with existing inventory, it's better leverage on our capital. So we don't have the necessity to go out right now, especially when cost of capital is higher. So if you take all those factors, it was a strategic direction of the company to be exactly where we are today.
spk01: Great. Thanks, Ivan. That makes sense. And then just one on credit quality. Credit quality looks to be really stable in the quarter, effectively no change in non-performing loans or the allowance. But can you just speak a little bit to the credit outlook from your point of view? And if you're starting to see any issues, whether it be in bridge multifamily space or elsewhere away from your portfolio, just especially considering your comments earlier, Ivan, that you believe that we're just in the middle of a recession right now.
spk03: Yeah, I think there's going to be stress in the system. And I think people are going to have access to capital to pay for higher debt costs and potentially to put new caps in place when old caps expire. I think there's a lot of benefit right now for existing caps in place. I had mentioned I met with a borrower who we have close to a billion dollars of loans. He has strike prices on his caps between 50 and 150 basis points. So he's well protected, right? So there's a lot of that protection out there. When that protection wears off, Either people are going to have to put lower caps in place, attract capital to buy lower caps, or somehow convert to fixed rates, which are lower carrying costs and bring more equity to the table. That's going to be the point in time when borrowers have to reposition and access other equity. And the equity checks could be between 5% to 20% of the capital structure and be put in a priority position. that's going to be the point in time. And it's going to happen. It could happen a year from now. And all will depend on where the yield curve is at that point in time or where we are in the cycle. But there's a little time for that. It will leak in gradually. But, you know, I think that's where the stress will be. We put a very aggressive campaign in place. when the Treasury started going over, too, to convert a lot of our floating rate book into some agency loans and fixed rate business. And we were fairly effective with that, and the borrowers are very thankful for that. So I think we will look at where Treasuries go, if there's a dip in Treasuries, how to convert some of our portfolio and manage it day by day based on where the yield curve comes and the access to liquidity that our borrowers have.
spk01: Thanks, I appreciate you taking my questions and congrats on a great quarter here. Thanks, Kristen.
spk00: It appears that we have no further questions at this time. I will now turn the program back over to for any additional or closing remarks.
spk03: Well, let me conclude by thanking everybody for their participation. And once again, it was a remarkable quarter. And, you know, we do expect stress in the system, but the company has multiple different revenue streams that act differently in different environments, and we're very pleased to have delivered the kind of results we have. So everybody have a great weekend and have a great day. Take care. Take care, everyone.
spk00: That concludes today's teleconference. Thank you for your participation.
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