Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the fourth quarter and full year 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 Alenio, Chief Financial Officer. Please go ahead. Hey, thank you, Todd, and good morning, everyone, and welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter and year-ended December 31, 2022. With me on the call today is Ivan Kauffman, 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 over to Arbor's President and CEO, Ivan Kaufman. 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 had another tremendous quarter and an exceptional 2022 as our diverse business model continues to offer many significant advantages over everyone else in our peer group. In fact, our 2022 results reflect one of our best years as a public company, and we believe we are well positioned for continued success. 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 increase our dividends three times in 2022 and in 10 of our last 11 quarters, all while maintaining the lowest dividend payout ratio in the industry, which was 70% for 2022. And our performance is head and shoulders above everyone else in our peer group, almost all of which have been unable to increase their dividends at all the last few years, and some are even paying dividends of over 100% of their earnings. We have strategically built our platform to succeed in all cycles, and as a result, we believe we are extremely well positioned to continue to outperform in this economic downturn. We have been very cognizant over the last 18 months preparing for what we believe would be a very challenging recessionary environment. As a result, we have taken a patient and selective approach to new investments and have been heavily focused on preserving and building up a strong liquidity position. This has allowed us to accumulate over $800 million of cash and liquidity on hand. providing us with the unique ability to remain offensive and take advantage of the many opportunities that will exist in this recession to go on a premium yield on our capital. We are also invested in the right asset class and have strategically positioned ourselves with appropriate liability structures highlighted by a significant amount of non-recourse, non-mark-to-market CLO debt with pricing that is well below the current market, allowing us to go on a premium yield on our assets. As you cannot emphasize enough, especially in the current environment, the importance is having a best-in-class, dedicated asset management function and an experienced and tenured executive management team that have a proven track record of successfully operating through multiple cycles, which is why we believe we are in a class by ourselves and have been the best performing in our space for several years in a row. Turning now to our fourth quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of $0.60 per share, which is well in excess of our current dividend, representing a payout ratio of around 67%. Our financial results also continue to benefit greatly from rising interest rates, which has significantly increased in net interest income and on floating rate loan book, as well as earnings on our escrow balances. And clearly, with our extremely low payout ratio and multiple predictable reoccurring income streams, we're uniquely positioned as one of the only companies in our space with a very sustainable, protected dividend, even in a challenging environment. In our balance sheet lending business, we continue to remain selective, looking to replace our runoff with higher quality loans with superior spreads. In the fourth quarter, we strategically reduced our balance sheet loan book by $600 million on approximately $500 million of new originations, offset by $1.1 billion of runoff. This allowed us to recapture $150 million of our invested capital and continue to build up our cash position to take advantage of the many opportunities we believe will exist in this downturn to generate outsized returns on our capital. Our level of returns on our fourth quarter originations came in at over 16%, as we have a significant amount of replenishable capital in our low-cost CLO structures that has meaningfully increased the returns on our capital. Additionally, we have participated in our first Freddie Q Series securitization in the fourth quarter, which demonstrates our strong social commitment to providing liquidity to the preservation of the affordable multifamily housing markets. This transaction also provides us with another low-cost financing option, allowing us to reduce our warehousing debt by more than $350 million of loans into a non-recourse, non-mark-to-market securitization vehicle. And we now have nearly $8 billion in securitized debt outstanding, representing around 70% of our secured indebtedness at pricing that is well below the current market. We continue to place a heavy focus on converting our multifamily bridge loans into agency loans, which is a critical part of our business strategy, and our agency business is capital light and produces significant long-dated income streams. We had tremendous success in the fourth quarter, recapturing over $500 million, around half of our balance sheet runoff, into new agency originations. A key component to our success in this area is a unique opportunity that exists in today's market, given the inverted yield curve, to go on a premium yields on our capital by refinancing certain of our balance sheet loans into agency product and provide mezzanine financing. This has allowed us to convert some of our balance sheet loan book into agency business with a long-dated servicing income and repatriate a portion of our capital into mezzanine positions behind agency loans at lower LTVs. In fact, in the fourth quarter, we successfully refinanced around $200 million of balance sheet runoff into new agency loans and funded $20 million of mezzanine loans on these transactions, which are generating 13% unlevered on our capital. This is a strategy we believe in and, again, is somewhat that is unique in our business, and we are both a top balance sheet lender and operate a very large agency platform. In our GSC agency business, we had a very strong fourth quarter, originating $1.5 billion of new loans. These numbers include a few large deals in December that were accelerated in order to close by year end, resulting in a light start to 2023 with approximately $150 million of originations in January. However, our pipeline remains strong, giving us confidence in our ability to produce similar volumes in 2023. Additionally, 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 nationally feeds our agency business. In fact, we are one of the leading agency lenders in the achievement of affordable housing goals, and as a result, we will continue to be viewed very favorably by the agencies. And again, this agency business offers a premium value and it requires limited capital and generates significant, long-dated, predictable income streams and produces significant annual cash flow. To this point, our $28 billion fee-based service and portfolio, which is mostly prepayment-protected, generates approximately $115 million a year in reoccurring cash flow. We've also seen a significant increase in earnings on our escrow balance, as rates continue to rise, which acts as a natural hedge against interest rates. In fact, we are now earning in excess of 4% on approximately $2 billion of balances, or roughly $80 million annually. And combined with our servicing annuity, we are generating $195 million of annual cash earnings, or approximately a dollar a share, before we even turn the lights on every day. This is in addition to the strong gain on sale margins we generate from our origination platform. And again, something that is completely unique in our platform, providing a significant strategic advantage over our peers. In our single family rental business, we had an outstanding year as we continue to grow out that platform and going to increase market share. In the fourth quarter, we funded $116 million of prior commitments and committed another 350 million of new transactions, putting our total deal flow at 1.2 billion in 2022. We also have a very large pipeline of deals we are currently processing. And again, we love this business as it generates strong levity returns and offers us returns on our capital through construction, bridge, and permanent financing opportunities. In reflecting on 2022, We had another exceptional year and once again, clearly outperformed our peer group. We are well positioned with earnings and significantly exceed our dividend run rate, are invested in the right asset class and have very stable liability structures. We've also focused heavily on building up a strong liquidity position, which has put us in a unique position to take advantage of the many accretive opportunities that will exist in the market. given 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. Okay, thanks, Ivan. As Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $114 million, or $0.60 per share. We also had a record year with distributable earnings of $2.23 per share in 2022, an 11% increase over our 2021 results. These results translated into industry-high ROEs of approximately 18% in 2022, allowing us to increase our dividend three times to an annual run rate of $1.60 a share, reflecting a dividend-to-earnings ratio of around 67% for the fourth quarter and 70% for the full year 2022. Our fourth quarter results beat our third quarter numbers and our internal projections, largely due to substantially more net interest income on our floating rate loan book and higher earnings on our escrow balances due to the increase in interest rates. We also experienced significantly more gain on sale income from stronger fourth quarter agency volumes and the early settlement of a few large agency loans to help meet agency affordable lending caps. Additionally, we benefited from no current tax provision this quarter in our PRS, mainly due to year-end timing differences and adjustments that resulted in a lower 2022 full-year current tax expense that was trued up through the fourth quarter provision. Our fourth quarter results also contained a few large items that are worth noting. We reported $7.4 million in a one-time expense related to the settlement of a litigation we had outstanding for several years. This was the only material litigation we were involved in, and we're pleased to have resolved this item as we were spending several hundred thousand dollars a month in legal fees on this case, which will now reduce our operating expense run rate by two and a half to three and a half million a year going forward, or a penny a share. We were also very pleased to have resolved our only significant non-performing loan in the fourth quarter with a full payoff of a $20 million loan on a student housing asset. As part of the payoff, we received $8 million in back interest and fees that we did not have accrued, resulting in a substantial increase to our net interest income for the quarter. In our GFC agency business, we had a very strong fourth quarter with $1.5 billion in originations and $1.7 billion in loan sales. The loan sales numbers were significantly above our third quarter sales of $1 billion, mainly due to a large portfolio deal that closed in December but also settled in the same month in order to help the agencies meet their affordable lending caps. The margin on our fourth quarter sales were 1.33% compared to 1.30% in the third quarter, We also recorded $17 million of mortgage servicing rights income related to $1.5 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.12% compared to 1.51% last quarter, mainly due to a reduced servicing fee on the large portfolio deal we closed in December. Our fee-based servicing portfolio grew 4% in 2022 to approximately $28 billion, with a weighted average servicing fee of 41.1 basis points and 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 relatively unchanged from last quarter, despite very strong volumes and less early runoff in the fourth quarter. This, again, was due to the closing of a large portfolio deal in the fourth quarter with a 12 basis point servicing fee. We did see substantially less accelerated runoff in our agency loan book in the fourth quarter due to market conditions, which has resulted in prepayment fees leveling off as well. In the fourth quarter, we received $5.6 million in prepayment fees as compared to $11.2 million in the third quarter. In January, prepayment fees were around $1 million, and given the current rate environment, we're estimating that prepayment fees will run between $2 and $4 million a quarter going forward. In our balance sheet lending operation, our $14.5 billion investment portfolio had an all-in yield of 8.42 percent at December 31st compared to 7.15 percent at September 30th, mainly due to the significant increase in LIBRA and SOFA rates and from higher yields on new originations as compared to runoffs during the fourth quarter. The average balance in our quarter investments was $14.8 billion this quarter as compared to $15 billion last quarter due to the runoff exceeding originations in the fourth quarter. The average yield in these assets increased to 8.12% from 6.57% last quarter, mostly due to the $8 million in back interest we collected on the repayment of a non-performing loan and increases in the SOFR and LIBOR rates, partially offset by less acceleration of fees in the fourth quarter. Total debt on our core assets was approximately $13.3 billion at December 31st. when all in-debt costs were approximately 6.5%, which was up from a debt cost of around 5.33% on September 30th due to the increases in the benchmark index rates. The average balance in our debt facilities was approximately $13.7 billion for the fourth quarter compared to $13.9 billion last quarter. The average cost of funds in our debt facilities was $5.80 for the fourth quarter compared to 449 for the third quarter, primarily due to increases in the benchmark index rates and from the convertible and unsecured debt issuances we did in the third and fourth quarters. Our overall net interest spreads and our core assets, excluding the $8 million of default interest we collected in the fourth quarter, increased to 2.11% this quarter compared to 2.08% last quarter. And our overall spot net interest spreads were up to 1.92% at December 31st from 1.82% at September 30th, again, mostly due to the positive effect of rising rates on our floating rate loan book and higher spreads in our new originations. Lastly, we believe it's important to emphasize some of the significant advantages of our business model, which gives us comfort in our ability to continue to generate high-quality, long-dated, recurring earnings in the future. One of these features is the continued growth we'll see in our net interest income spreads as rates rise in our floating rate loan book. In fact, all things remaining equal, a 50 basis point increase in rates, 20 basis points of which has already occurred since year end, would produce approximately 5 cents a share annually in additional earnings. Additionally, we have approximately 7.6 billion of CLO debt outstanding with average pricing of 167 over, which is well below the current market and has allowed us to meaningfully increase the levered returns on our balance sheet loan originations. And very significantly, our substantial ESCO balances will continue to produce tremendous earnings as rates are predicted to continue to rise. These earnings have grown substantially as we have approximately $2 billion in balances that are now earning around 4% or $80 million annually effective February 1st, which is up significantly from a run rate of approximately $7 million annually at this same time last year. And as Ivan mentioned earlier, these features are unique to our business model, giving us confidence in the quality and sustainability of our earnings and dividends. 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. Todd? Thank you, sir. As a reminder, if you would like to ask a question, please press star 1 on your telephone now.

To withdraw your question, you may press star 2.

So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Again, to ask a question, please press star 1. Our first question from Steve Delaney with JMP Securities.

Thanks. Good morning, Ivan and Paul. Obviously, congratulations on great results in what was a much more challenging environment last year. So good job. Looking forward, which we have to do, Last year, despite the Fed taking rates up 400 basis points, you were able to grow the structured portfolio by 19% on $6 billion of originations. As you mentioned, Ivan, the world has changed for sure, and you're being more selective. I think that was your word. How should we feel about the outlook for the structured business in 2023, and is there potential for additional growth, or should we think we're just flatline there? Thank you.

So we have a variety of different business lines which we're focusing on, and I would say that, as mentioned in my comments, we're really in love with the single-family built-to-rent business, and we're expecting to really dominate that business. Many of our competitors have fallen away because of the nature of having three turns on our capital. and the growth in that space, we're putting a lot of our effort into growing that part of our business and being very successful at it. With respect to bridge loans and structured loans, with an inverted yield curve, it's very difficult to do bridge loans when you're borrowing at 9% and you're buying assets at 5.5 caps. So we don't see that as a growing area. However, with that said, The inverted yield curve gives us a lot of different opportunities if people want to borrow on a five- or ten-year basis. Lower lever deals and use some of our balance sheet providing MES and PREF, which we've been actively doing. So expect our MES and PREF to be more active. Expect the agency book to be used more effectively on those type of transactions. and also expect us to be working on other solutions, you know, to provide for transitional loans, you know, five-year product with a good use of MES and PREV. I think that's a sweet spot right now, but we're not overly concerned. One of the comments in Paul's commentary is, you know, for us, we have these low liability costs, so, you know, it has to really be effective in putting our capital out into opportunities. It's the level of returns on our capital, given our existing liability costs, are very, very favorable. So accumulating cash and being selective with our opportunities is something that we're uniquely positioned to, given the fact that we have $8 billion of below-market liability structures in place.

So clearly – yeah, Paul. Hey, good morning.

Hey, it's Paul. So obviously I've been taking control of the market data, and I'll just give you a few numbers. So I think – The way we look at it is, as Ivan said, we'll be very selective on the balance sheet side given the inverted yield curve. I think we did $175 million of fundings in January. We did see a little bit more runoff, which we love. We did see $480 million of runoff, so the books shrank a little bit again in the first quarter. We are obviously very competitive. very interested and very excited about the SFR business, and we'll continue to grow that. But as you know, that takes time to get to your balance sheet because it goes unfunded for a little bit. We're sitting with about a billion dollars on our balance sheet. So we did see a little bit of a decline in the first quarter, at least in January, on our loan book. But I think we're modeling, like you said, to somewhere around flat because we think the mezzanine opportunities will be greater and the SFR business will continue to build.

Great. And Ivan, on the MES and PREF, do you actually see opportunities to take equity interest in some of these financings and sort of be more of a merchant banker than just a banker, just a lender?

I think it's a combination of everything, depending on the leverage. At a low leverage basis, it's more of a coupon. The higher leverage you go, then you start to get a higher yield, which is a combination of pay and participation.

Well, thank you both for the comments. Thanks, Steve.

Thank you.

We'll take our next question from Steven Laws with Raymond James. Hi, good morning. Yeah, congratulations on a very solid quarter, pretty strong numbers across the board versus my estimates. I wanted to follow up on the meds. How big of an opportunity is that? I think you may have mentioned in the prepared remarks, like 20 million of investments on 200 million of agency volume. Can you talk about how big of an opportunity that is or how much, how large will we see that get on your balance sheet over the coming couple of years? I think it varies. You know, we're looking, you know, right now, I think we did, Paul, I think we did in the fourth quarter about $20 million as well, right, in December. We did. We did $20 million of Meds, Ivan, behind an agency product that we brought over from our balance sheet. Yeah. That's correct. I mean, we're looking at, depending on how much we want to juice it up, you know, between $15 and $40 million a month. That would be the level. And then... You know, it really depends on the market, the yield curve, whether purchases start to pick up. So those are the factors. But I would forecast, you know, conservatively $20 million per month. Great. Thanks for that, Keller.

Paul, as you think about margins, I know the mix impacted the MSR margin a little bit in Q4, but when you think about those margins looking out this year, is there a range you see those playing out between over the next two quarters?

Yeah, I think that's a good question, Steve. Certainly the larger transactions, as I mentioned in my commentary that we did, the portfolio deals really weighed down on the MSR because you're getting a lower servicing fee, but, you know, a bigger transaction done. I would say that, you know, we've been running anywhere from 130 to 135 on a gain-on-sale margin. I still think that holds. I think we've done a nice job there, even given where interest rates have gone. And I would say on the MSR side, you know, it was certainly lower this quarter than it normally would be without big portfolio deals like that. I'd say we're running probably anywhere from 125 to 145 is what I think I'm estimating going forward, depending on deal size. and on the tiers of credit. We have seen a little bit of a backing off on the servicing fee in Fannie Mae, a little bit lower than where it's been, but it's still really strong. We're still seeing servicing fees on new Fannie loans anywhere from a low of mid-30s to a high of mid-40s. So I still think we'll get some nice servicing strips and put on some nice MSRs, but I think 125 to 145 is probably an appropriate range. Absolutely large deals. Appreciate the color on that, Paul. Thanks very much for your time this morning. No problem. Thanks, Steve. Thank you. We'll take our next question from Rick Shane with J.P. Morgan. Hey, guys. Thanks for taking my question, and I apologize if this is redundant. like many of my peers bouncing around between calls this morning. I just want to talk a little bit about the migration between the structured business and the agency business to the extent historically you put loans on balance sheet, worked with borrowers to complete the projects, and then, you know, securitized those or sold them to the agencies. I'm curious if you think in this environment there is how that compares to other commercial mortgage rate models where the ultimate takeout is in the private term markets as opposed to the government term markets. So, as you know, our business model on every bridge along we do is for an agency takeout. That's how we're built. That's how we're structured. That's how the economics of the firm really flows, and that's the value of our franchise. So each and every loan that's in our portfolio is underwritten accordingly. So in this kind of yield environment, when you have an inverted yield curve, many of the borrowers have a decision to make. Do they pay higher interest courts when their caps burn off? Can they cash in their caps and use that as equity and recapitalize some of their assets, go with a fixed rate? If you're a floating rate individual, you're paying anywhere between a low of eight and a high of nine and a half, and you factor in the capital costs of cap costs, you may have a great opportunity to go into a 10-year fixed rate. And we were putting people into 10-year fixed rates, in the low fives on an IL basis, and the savings are so considerable, and the stability is so significant that people are willing to come out of pocket with cash, lower their principal balance, and go into agency debt. In certain of those circumstances, we laid on some preference on MES, which has been very creative for us as well. So that's our business model. It works very, very well. Some borrowers like to ride it out. Other borrowers are more conservative. So it's a whole mixture. But unlike our competitors, our model is built in that manner. It's multifamily debt. It's agency eligible. And that's one of the primary exits every time we do a loan.

Got it. Very helpful. Thank you, guys. Thanks, Rudy.

Thank you. Our next question comes from Jade Romani with KBW. Hi. This is actually Jason Satch on for Jade. So, for the question, we're starting to see a few cases of what looks like strategic defaults from borrowers in order to extract concessions from lenders. since they know that lenders don't want a foreclosure on their hands. For example, Blackstone, this large multifamily deal in New York just hit special servicing, and we know that arborist-borrower relationships are unique and tend to be repeat borrowers, but can you comment on whether you're seeing this trend at all?

It's definitely a trend in the market, and in a competitive lending environment, many lenders strip away certain structures on their loan, and without those structures on the loan, if the asset value is close to the debt and the lenders don't want to take back those assets, it gives a lot of strategic advantage to the borrowers if they don't care about their profile. For us, we have a long history of originating loans, and we have tremendous structure on our loans within the industry. We're treated a lot differently than other people because we're very prudent when we make these loans, and the borrowers need to come work with us for a variety of reasons. One of them is the structure on the loans. The second is the number of loans we do with particular borrowers, and the asset class itself. So it is very common. you know, in today's environment, that if the borrowers, you know, don't want to support the loans, they're going to hand back their keys because they have no economic incentive. And if you're a blackstone, it doesn't affect your reputation. In our case, it's just very, very different. We're involved. I'm involved every day with our borrowers. And, you know, they come to the table because they have to come to the table. And if they're willing to be reasonable, we've been able to work out good solutions. Keep in mind that, you know, we have a deep and seasoned asset management group, and we're well positioned. And if we have to, we will take back an asset. We haven't had to do it, but we always have that skill set and capability and take back that asset, manage it, capitalize it, and continue with our remedies against those borrowers. We haven't been in that position. We've been well positioned. And so far, we've done extraordinarily well in working with our borrower base.

Great. Thank you. That's very helpful. For my second question, on the single-family rental side, are you guys at all concerned about the recent uptick in build-to-rent supply?

We've always been concerned in that market because there's a very, very big difference in core locations versus remote locations. So a lot of the supply will come in areas that don't warrant the investment. So we're selective with the projects that we're doing. So if you're in the right core area, in the right school districts, in the right traffic patterns, you're good. But a lot of people are just buying land, building them, and having the attitude of build them and they will come. We have tremendous discrimination in terms of who we're doing business with.

Got it. Thank you. Thank you. We'll take our next question from Crispin Love with Piper Sandler.

Thanks. Good morning, everyone. First on securitization markets, how do you see securitization markets to be functioning right now? You've been very active there in your history, but have you seen signs of stress in securitization markets continue in recent weeks to start 2023, or are you seeing any improvements?

They're improving significantly. The CRL market is improving. There's no product. And the fear and dislocation which occurred immediately is starting to subside. So the market's improved a lot over the last three months. And we think it will continue to improve a little bit. The investors need product. There's no new product. So it's a demand and supply imbalance. And the existing structures have proven from a credit perspective to work well for investors. So we believe the CLO market is not far from where we would do an execution. It's close. The issue with a CLO market and doing an execution is creating new product. It would be good for existing inventory and to create maybe some economies in how we finance our existing product, but creating a new vehicle for a new product is a little bit difficult. So we would look at using the securitization market to improve our current funding, which is an upside for us. So that's how we look at it, but it has improved, and it looks like it's going to continue to tighten up a bit.

Thanks, Ivan. That's all helpful color there. And then just one last question for me on maintaining the dividend and dividend in the quarter. Can you speak to the key reasons why the board chose to do that after, I believe, 10 consecutive increases? Just on the surface, looking at your results, which are really strong with GAAP and core earnings handling covering the dividend, would have seemed like a dividend increase would make sense. But I'm just curious how the board thinks about that. And does that say anything about the cautious outlook?

Listen, we always have tremendous discussions of, you know, maintaining, raising, and how much we've raised. And, you know, we've had such a huge cushion, and, you know, our performance has been outstanding. I think the board in discussions, and Paul can comment on it as well, is we just don't get, you know, we just don't get the credit in the market. And at this period of time, there's really no upside there. in the market to raising the dividend. Everybody else is lowering their dividend, and the board felt the credit is really everybody's dropping their dividend. They're paying it out of capital. And, you know, clearly the cushion we have, and if all it was, there's no real benefit to it. Paul, do you want to give a little color on that? Yeah, I think that's right, Crispin. I think our view is, as you know, we have a lot of cushion and easily could have just done it again. But we look at when you come into these markets, and we've been, as Ivan said in his prepared remarks, we've been strategically looking over the last 18 months at what we think would be a challenging recession. We think our assets and our portfolio are in great shape. We're in the right asset class. We have a lot of structure. We do a lot of deals with repeat borrowers. Having said that, when you come into challenging environments, cash and liquidity is crucial. And we've done a great job of accumulating, really stockpiling a war chest of cash. And at this point, we just don't see a lot of value in increasing that dividend today. Now, that may change. We may see where our earnings go, and we'll continue to evaluate it with the board on a quarterly basis. But again, raising it three times this year 10 of the last 11 quarters, and when I look at the peer group, there's, I think, only one peer group that actually, one person in our peer group that actually raised their dividend and was nominal over the last three years. So, you know, we just feel like the credit isn't there at this point, and, you know, we'll continue to evaluate it. And we're trading at a similar dividend to some of the others in our peer group, and they haven't raised their dividend and their payout ratio is close to 100%. And, you know, the board just said, well, what's the benefit of increasing the dividend? And let's see how that goes. We're such an outperformer in paying out 67% or 70% increasing your dividend. What is the market even going to care? And that was kind of a consensus.

Thanks, Ivan, Paul. That all makes sense to me, and I appreciate you taking my questions.

Thanks, Kristen. Thank you. We'll take our next question from Lee Cooperman with Omega Family Office.

Thank you. I have three questions. Before I ask my question, I just want to give you guys a well-deserved shout-out. I've been an investor, I think, from the day of the IPO for well over 10 years. You guys have done an absolute sensational job in managing the affairs of the company. And I want to congratulate you on that, and I want to thank you for that. My three questions are, number one, you know, as you said in your press release, we have a best-in-class return on equity of 18%. In your view, is that sustainable at the current time, or do you think that we're over-earning? Number two, I need a little bit of an education. There are certain tax laws that require you to pay out a percentage of your taxable income as a REIT. Based upon your budgets this year, do you think you'll be forced to pay an additional dividend before the end of the year or not? And third, I think the answer is self-evident. We don't have any need for any additional equity here because you have plenty of equity on the balance sheet. So that's three questions.

Yeah, so let's take them, let's try to take them in order. The first, let's head to the second question first. As far as the tax code goes, you're rightly, you are required to distribute 90% of your taxable income as a REIT, and if you don't distribute 100, you're paying corporate tax on the difference between 90 and 100, so that's leakage. I mean, the advantage we have over everybody else in the space is that we have what we call a REIT over a TRS. So we have a taxable REIT subsidiary that pays taxes on the agency business. And because of that, we're able to retain that capital after you pay tax and not have to dividend it up. So that's one piece of it. To your question, will we have to pay a special dividend to the entity, the answer is no. But we will continue to evaluate where our taxable income goes, both in the REIT and TRS going forward, and that will certainly be one of the contributing factors to where our dividend goes in the future. But right now, we have the ability to retain capital and are not running afoul of those REIT rules. As far as the third question on capital, we've done, I think, a masterful job, as you said, Lee, and we really appreciate your comments. of really looking at this world correctly and knowing that you have to be properly capitalized when you enter into these challenging environments. And so we've done a really good job of accessing capital. We're probably one of the companies, one of the only companies in the space that has access to different levels of capital, both in debt and equity, because of our reputation, because of our brand, and mostly because of our performance. We are viewed best in class by a lot of the investors, so that's really helped us. We'll just evaluate it right now. As you said, we're sitting with a bunch of cash. I think we're in a really strong liquidity position, and we'll just continue to evaluate whether there's a need for capital going forward. But at this point, you know, we like our position. Right, Ivan? We do. You know, we'll evaluate our runoff versus our originations because runoff exceeding our originations creates a lot of capital for us. Given the benefit of our low liability structures, it puts us in a position to continue to have, you know, outstanding earnings. I mean, you know, if we leverage our existing liability structures, you know, With assets, we have a real cushion and a real benefit. There are a lot of firms in the industry that mark up their liabilities, which we think is not the right way to run a business. We don't do that. We get the benefit of having higher earnings on those assets, especially in replenishable vehicles. So I think we've got to wait and see how each month goes and where the yield curve is and where the opportunities are. But we're sitting in a pretty good position, Lee. And to your first question, Lee, about the return on equity, certainly our return on equity has been unprecedented, as you said. A lot of that has to do with, obviously, the run-up in interest rates and earning more on our capital. I think everybody in the space is seeing that. We're seeing a significant increase in the escrow earnings because of where rates have gone. and obviously our agency business is capital light, and therefore the ROE on the agency business is much higher than on the balance sheet business. To answer your question of whether we think that's sustainable, that will depend on a lot of factors. It'll depend on the mix between the balance sheet business and the agency business, and if we can keep pace We'll keep close pace to where the agency business was last year. I think that will be a meaningful contributor. But it also will depend where rates go because obviously if rates at some point down the road, and I don't think it's happening in 24, others have a different view, if rates start to come down, then you start to get a lower return on your cash and your escrow balances and on your floating rate loan book. But I think for 2023, I see that as a relatively attainable goal or close. After that, we'll just have to see where the market goes.

Thank you. Again, congratulations and a very well-deserved shout-out. You guys have done a fabulous job. Thank you.

Thanks for all your support, Lee. Thank you.

At this time, we have no further questions in queue. I'll turn it back to Ivan Coffin for any additional or closing remarks.

Well, thank you, everybody, for your support in 2022. It is clearly the best year that the firm has had in what is a very challenging environment. Our management team has done a great job. Our board is good. It's great support. And thanks to all our investors for their contribution to support our franchise. Everybody have a great day and a great weekend. Take care.

This concludes today's call. Thank you for your participation you may disconnect at any time.