Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the second quarter 2023 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 phone. 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. Okay, thank you, Todd, and good morning, everyone. Welcome to the quarterly earnings call for Arbor Realty Trust. This morning, we'll discuss the results for the quarter ended June 30th, 2023. With me on the call today is Ivan Kalkman, 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 with the occurrences of unanticipated events. I'll now turn the call over to Arbor's President and CEO, Ivan Kaplan. Thank you, Paul, and thanks, everyone, for joining us on today's call. As you can see from this morning's press release, we had another outstanding quarter as our diverse business model continues to generate earnings that are well in excess of our dividend. This has allowed us to once again increase our dividend to 43 cents, reflecting our 12th increase in the last 14 quarters, or 43% growth over that time period. all while maintaining the lowest dividend payout ratio in the industry, which was 75% for the second quarter. In fact, we're the only company in our space that has continued to grow our dividend, while many are either cutting their dividends or are electing to pay out over 100% of their earnings. Additionally, and very significantly, we're also one of the only companies in the space to have experienced significant book value appreciation over the last three years, with roughly 45% growth from approximately $9 a share to nearly $13 a share. Put simply, we have increased both our dividend and book value by over 40%, all while maintaining the lowest dividend payout ratio in the industry. And despite being a very challenging environment over the last several quarters, we've managed to maintain our book value while we're recording reserves for potential future losses which clearly differentiates us from every one of our peers. As we've discussed many times, we've been laser-focused over the last two years in preparing for what we felt would be a very challenging recessionary environment. In fact, unlike others in this space, we've been conducting ourselves as if we have been in a recession for over a year now, and as a result, one of our primary focus has been and continues to be preserving and building up a strong liquidity position. We are very pleased to report that we currently have approximately $1 billion in cash, which gives us a tremendous amount of flexibility to manage through this downturn and provide us with the unique ability to take advantage of the opportunities that will exist in this environment to generate superior returns on our capital. There continues to be a very significant amount of volatility in the market, and we are well aware of the challenges that lie ahead, we feel we are right in the thick of this dislocation and are operating our business with the expectation that the next two to three quarters will be the most challenging part of the cycle. As in the case with any real estate cycle, there will be issues and challenges to contend with, some of which will be a high touch and require a tremendous amount of discipline and expertise. We are extremely well-positioned compared to our peers, given our multifamily-centric portfolio, our asset management skills, and tenured senior management experience with a track record of managing through multiple cycles and the strength of our balance sheet and versatility of our franchise. Turning now to our second quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produce distributable earnings of 57 cents per share, which is well in excess of our current dividend, representing a payout ratio of around 75%. The dividend policies that we have implemented with our board of keeping such a wide disparity between our earnings and dividend provides us with a huge cushion and was very strategic, knowing full well that we're entering into a market of dislocation. This has enabled us to raise our dividend grow our book value, and create reserves. And we believe we're uniquely positioned as one of the only companies in our space with a very sustainable protected dividend, even in this challenging environment. In our balance sheet lending business, we remain very selective, focusing mainly on converting our multifamily bridge loans into agency product, allowing us to recapture a substantial amount of our invested capital and produce significant long-dated income streams. In the second quarter, we continue to have success in this area with another $685 million of balance sheet runoff, $435 million of 64%, which was recaptured into new agency loan originations. As a result, we're able to recoup $125 million of capital and continue to build our cash position, which again currently sits at approximately $1 billion. In our GFC agency business, we had an exceptionally strong second quarter originating $1.4 billion of loans, and our pipeline remains elevated. Clearly, with the continued inverted yield curve, the agencies are effectively the only game in town, which gives us confidence in our ability to continue to produce strong origination volumes for the balance of the year. We also have a strategic advantage in that we focus on the workforce housing part of the market, out of a large multifamily balance sheet book that naturally feeds our agency business. And again, this agency business offers a premium value as it requires limited capital and generates significant long-dated predictable income streams and produces significant annual cash flow. To this point, our $29.4 billion fee-based servicing portfolio, which grew another 2% in the second quarter, generates approximately $118 million a year in reoccurring cash flow. We also generate significant earnings on our escrows and cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning approximately 4.5% on around $2.8 billion of balances, or roughly $125 million annually, which combined with our service income annuity totals over $240 million of annual gross earnings. or $1.20 a share. This is in addition to the strong gain on sale margins we generate from our originations platform. And again, it's something that is completely unique to our platform, providing us a significant strategic advantage over our peers. We continue to expand our single-family rental business as though we are one of the only remaining lenders in the space, allowing us to aggressively grow this platform. We remain committed to this business as it offers us three turns on our capital through construction, bridge, and permanent lending opportunities and generates strong level of returns in the short term while providing significant long-term benefits by further diversifying our income streams and allowing us to continue to build our franchise. In summary, we had a very strong first half of the year. with exceptional results that once again clearly demonstrates our ability to generate strong earnings and dividends in all cycles. We understand very well the challenges that lie ahead and feel we are well positioned to manage through this cycle. Our earnings significantly exceed our dividend run rate. We are invested in the right asset class with very stable 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. We're also well capitalized with significant liquidity, which has put us in a unique position to be able to manage through this downturn and take advantage of the accretive opportunities that will exist in this environment. And again, with our best-in-class asset management capability and seasoned executive team, we are confident that we will continue to be the top performer company in our space. I will now turn the call over to Paul to take you through the financial results. Okay, thank you, Ivan. As Ivan mentioned, we had another exceptional quarter, producing distributive earnings of $114 million, or 57 cents a share. These results translated into industry-high ROEs again of approximately 18% for the second quarter, allowing us to increase our dividend to an annual run rate of $1.72 a share, reflecting a dividend-to-earnings-payout ratio of around 75% for the second quarter. Our quarterly results significantly beat our internal projections once again. largely due to substantially more gain on sale income from increased agency sold loan volumes, mainly due to stronger origination volumes in the second quarter than we anticipated. We also continue to see increased earnings on our floating rate loan book and on our cash and escrow balances in the second quarter from higher interest rates. And we generated approximately $6 million of income from our equity investments in the second quarter, which included $3.5 million of income from our residential banking joint venture, from gains on servicing sales and a $2.5 million distribution from our Lexford investment. As a result of the servicing sales in our residential joint venture this quarter, our current income tax provision was higher than usual due to book-to-tax differences associated with these sales. As Ivan mentioned, we do expect some challenges ahead, and as a result, we recorded an additional $16 million in CECL reserves in our balance sheet loan book during the quarter. These reserves do not affect distributive learnings as we have not experienced any realized losses on these loans to date. Our loan book did see an increase in delinquencies in the second quarter as a result of where we are in the cycle. Again, this is to be expected, and we're confident in our ability to manage through this downturn as we believe we are well-positioned given our multifamily focus, strong liquidity position, and our best-in-class dedicated asset management team with extensive experience in loan workouts and debt restructurings. And it's very important to note that despite booking approximately $48 million in CECL reserves across our platform over the last two quarters, we still managed to grow our book value per share by 1% to $12.67 at 6-30-2023 from $12.53 a share at 12-31-2022. And we're one of the only companies in our space that has seen significant book value appreciation over the last three years. In our GFC agency business, we had a very strong second quarter with 1.4 billion originations and 1.3 billion in loan sales. The margins on the loan sales came in at 1.67% this quarter compared to 1.72% last quarter. We produced very strong margins over the first six months of the year ahead of our projections, mainly due to an increase in our FHA loan production in the first two quarters that generated much higher margins. We also recorded $16.2 million of mortgage servicing right income related to $1.1 billion of committed loans in the second quarter, representing an average MSR rate of around 1.43% compared to 1.23% last quarter. Our fee-based servicing portfolio grew another 2% in the first quarter to approximately $29.4 billion on June 30th, with a weighted average servicing fee of around 40 basis points and an estimated remaining life of eight and a half years. This portfolio will continue to generate a predictable annuity of income going forward of around $118 million gross annually. In the second quarter, we also received $3 million in prepayment fees as compared to $2 million last quarter. And given the current rate environment, we're estimating that prepayment fees will likely run around $2 million a quarter going forward. In our balance sheet lending operation, our $13.5 billion investment portfolio had an all-in yield of 9.07% at June 30th compared to 8.83% at March 31st, mainly due to increases in liveware and SOFA rates, partially offset by an increase in non-performing loans in the second quarter. The average balance in our core investments was $13.6 billion this quarter as compared to $14.1 billion last quarter due to runoff exceeding originations in the first and second quarters. The average yield on these assets increased to 9.19%, from 8.94% last quarter, mainly due to increases in SOFR and LIBOR rates, partially offset by an increase in non-performing loans in the second quarter, and from less acceleration of fees from early runoff. Total debt on our core assets was approximately $12.1 billion on June 30th, with an all-in debt cost of approximately 7.25%, which was up from a debt cost of around 6.97% on March 31st, mainly due to increases in the benchmark index rates. The average balance in our debt facilities was approximately $12.5 billion for the second quarter compared to $13 billion last quarter. The average cost of funds in our debt facilities was 7.11% for the second quarter compared to 6.69% for the first quarter, again, primarily due to increases in the benchmark index rate combined with the full effect of the unsecured notes we issued in March. Overall net interest spreads in our core assets decreased to 2.08% this quarter compared to 2.25% last quarter, and our overall spot net interest spreads were 1.82% at June 30th and 1.86% at March 31st. Lastly, we believe it's important to continue to emphasize some of the significant advantage of our business model, which gives us comfort in our ability to continue to generate high-quality, long-dated recurring earnings. We have several diverse and counter-cyclical income streams, allow us to produce strong earnings in all cycles, the most significant of which is our agency platform, which is capital light and generates very high ROEs through strong gain on sale margins, long-dated service and annuity income, and increased escrow balances that earn significantly more income in today's higher interest rate environment. Additionally, we are multifamily-centric and have a substantial amount of our non-market-to-market, non-recourse CLO debt outstanding with pricing that is well below the current market. We're also well capitalized with significant liquidity and have a best-in-class asset management and senior management team that have tremendous experience and expertise in operating through multiple cycles. And we believe these features are unique to our platform, giving us confidence in the ability to continue to outperform our peers. That completes our prepared remarks for this morning. 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, to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 2. So that others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Steve Delaney with JMP Securities. Please go ahead.

Sure. Hey, good morning, Ivan and Paul. Congrats on another strong quarter. Maybe I'll start off with something that, you know, was not the highlight of the quarter, but I think important to discuss. You had the three new MPLs, all multifamily. I'm curious whether those were, were they three loans to three distinct borrowers? And is there any common theme leading to the downgrades? Thank you.

Well, why don't you take those? Yeah, so hey Steve, it's Paul. Thanks for the question. Hey Paul, sure. Yeah, so we did three new non-performing loans during the quarter on our balance sheet, totaling about $116 million. They were all to different borrowers. Two of the properties were in the Houston, Texas area, and the other was in the Atlanta, Georgia area. You know, I've gone – the deals had gone 60 days the length of this quarter, but that's kind of the geographics, and, you know, the borrowers were all different borrowers.

Yeah, I mean, the geo sounds good. Is it an interest rate problem? I mean, is people just behind their – is it cash flow or just –

you know, let me let me give you a leasing leasing problem. Yeah, a little bit of a view on it.

Thank you.

I think generally in particular with the assets we're talking about is you often have underperforming sponsors. Okay, the underperforming sponsors, you know, it catches up to them a little bit. So when you see stress in the portfolio, like we're saying, It's a fact that the sponsors are not executing along their plan, and that's one part. The second part is that we are in this cycle a long period of time, and there's elevated interest rates to put stress on these assets. The rates are up anywhere between 10% to 100%, so they run into payment issues, and often they're late in their payment trying to raise additional capital and trying to get them in a proper position. But what we're seeing most of all with this stress on some of these loans, a lot of it is execution. I mean, there are other factors as well, elevated interest rates, increased insurance costs and increased taxes and increased labor costs. So it's a combination of all. But generally, if you have good operators, they're able to manage effectively. The poor operator catches up with them a little bit.

Okay, great. And, Paul, did I understand that when you put these in as non-performing that you added $5 million into your reserve for these three loans? Is that correct?

That's correct, Steve. We did record a specific CECL reserve of $5 million related to one of the loans.

Okay.

But not performing. The other two, we believe the values are fine. The borrowers are just seeing a little stress, as Ivan mentioned, and we're working hard with those borrowers to get those deals to perform. But we don't see right now any need for reserves on the other two, so we did take a $5 million reserve related to one of the assets. Yeah, and I will take a note. As of yesterday, the borrower made, you know, has made one of his payments, so He is behind. He's making efforts to make it. He still remains a little bit behind, but he's made progress, and, you know, he's getting there. It's just a very slow process.

Great. Well, I appreciate the color on that, and I'll leave it there. I'm sure the other guys have questions for you, too. Have a good weekend. Thanks.

Thanks, Steve. Thank you. We'll take our next question from Stephen Moss with Raymond James. Hi. Good morning.

First off, congrats, another strong quarter, another dividend increase.

A lot of those the past couple of years. You know, and a lot of positives in the quarter. But, Ivan, I wanted to follow up on your comment you started with, talking about the next two to three quarters being the most challenging. And I think it's likely due to the issues you just mentioned in your answer to Steve Delaney.

You know, is it interest rate caps rolling off? I mean, can you talk about it? Is it behind business plans? You know, the good operators, bad operators? You know, do we think about this being really a wave of stress from originations, say, two years ago, or is it a bigger sample size given differing maturity dates?

So, let me give you a little bit of our macro view, and it's one that we've had for quite some time and one that has obviously put us in a very favorable position in terms of liquidity and strategy and personnel and resources. It's been our view that generally these downturns last 18 to 24 months on the outside of it, and if it's a downturn that's short-term, it's 15 months. We've been at this already for at least five quarters, and that's why we think that there could be another two to three quarters left. Having been through multiple cycles, we feel now we're pretty much on the bottom of the cycle. and that we're going to work our way out of it shortly. But the bottom is the most difficult period of time. Our borrowers are working really, really hard to manage their loans and their portfolios, and this is the peak of their stress right now. We feel it. They're working hard to raise capital, get their assets in a good position. So we're just thinking and planning for a little bit more elevated than it's been in the last quarter, and we think the next two quarters will. given where we are in the cycle and what our outlook is, is going to be a little bit tougher. So the bars are, you know, put a lot of resources in, are stretched on their resources. Interest rates have remained elevated. The cost of labor, even though it's coming down, put a lot of stress on people's portfolios. And the other aspect, which is beginning to fade a little bit, which people don't talk about but I've talked about on our prior calls, is the economic vacancy, specifically in areas like New York and New Jersey and other areas like that, where the economic vacancy, the ability to get rid of nonpaying tenants, has been extremely elevated, and it is going to begin to come down. You know, in certain walks where you have physical occupancy of 97% to 98%, you have economic vacancy of 10% to 12%, and that's been putting a lot of stress on So we think the economic vacancy is going to begin to come down. Our outlook in terms of interest rates is at this point a little bit more favorable than it was six months ago and nine months ago. And the ability for people now to really put their time and attention to managing their assets has become much more focused. But we do think that the next two quarters will be the worst of the quarters, and that's what we're seeing. But economic vacancy has played a pretty significant part in terms of making, you know, having these bars struggle.

Thanks, Ivan.

And to follow up, Paul, can you, you know, given the outlook for kind of a couple of challenging quarters to continue through this, you know, what gives you confidence that the current reserves are appropriate? You know, how are you looking at the losses? And what's the risk that those reserve levels need to increase, you know, possibly materially in the next couple of quarters? sure steve thanks so um we do look at this in a very detailed level a lot of the reserve building you're seeing is from stress in the portfolio as ivan said and what we think you know could happen over the next couple of quarters a lot of it's the macro economic view out there on commercial real estate we obviously think we have adequate reserves today we built 48 million reserves across our platform both on the agency and the balance sheet side the last two quarters. But I think it's a great question, and I think – I don't know what others are saying out there in our space, but I do expect over the next couple of quarters to continue to see reserve building, maybe similar to where we were this quarter, maybe a little higher, maybe a little lower. But That's my expectation. Obviously, we'll see where rates go and what happens in the market. But my expectation is that there will be some reserve building over the next two to three quarters, probably consistent or slightly consistent to where we were the last couple of quarters. Ivan, would you agree with that? Yeah, and I think it's extraordinarily important to focus on the fact that as we've put reserves on the books, we've maintained our book value and we haven't hit our book value. And our cushion between our dividend and our earnings is so large. And as I mentioned in my comments, that's always been very critical to us and the board to make sure that we have that, knowing we're going into a recession and knowing we're going into a difficult environment. It's normal to have reserves. I think the fact that we're able to create these reserves, which are against future losses, and not decrease our book value and maintain it is remarkable and a real testament to how we've managed through this cycle. But I do agree with Paul. I do think that what we've seen this quarter could continue for another quarter or two, and a balance sheet is well positioned to handle it. Great. Thanks for the comments this morning. Thanks, Steve. Thank you. We'll take our next question from Crispin Love with Piper Sandler.

Thanks, Brad. Good morning. Appreciate you taking my questions. Can you speak to your ability to roll your repo facilities that are coming up? And then just what percent of your loans have interest rate caps right now?

Yeah, I mean, the repo facilities are not of major concern with us. It's very diversified and they've come down dramatically. And, you know, we've continued to renew them. And, in fact, the banks are more aggressive to want to do business with them as the outstanding keep coming down. And as you're watching the securitization market, the securitization market is returning. The CLM market is returning. We're not far from, you know, readdressing some of that and even bringing our outstanding in our bank down. I continue to meet with management and treasury with the different institutions and they're aggressive to continue to have more outstanding. So that's the least of our issues. And if we look at our outstandings on repo and our ratios, they're extremely healthy. So we feel really good about it, and we feel really good about accessing the CLO market and actually creating greater efficiencies than we have today, and we're pretty efficient. So that's our view on that. With respect to caps and everything, Paul, you can address that, and I can give you some commentary as well. Yeah, I think, Crispin, just to add on to Ivan's comments on the repos, I mean, I think we've done a great job of continuing to de-lever the balance sheet from natural runoff in the portfolio. Obviously, there's no balance sheet lending going on right now that makes any sense. So as loans run off, we're naturally de-levering the balance sheet. And I think we've done a great job of managing the efficiency in our CLO vehicles to help do that. I think currently today, We stand with 70% of our secured indebtedness in non-recourse, non-mark-to-market vehicles. And as you look, those leverage numbers continue to come down quarter over quarter. So while we're very confident that our repo lines are healthy and we'll have no issue rolling them as we've never had. And as Ivan said, the banks are getting more aggressive. Just prudently, we're levering the balance sheet and putting us in a much better spot. So I think we've been focusing on that for a while, knowing how you go through these cycles. As far as the rate caps in our book, it's always been a big part of our strategy to have certain structural efficiencies in our loans and a good portion of our loan book have rate caps. I think it's somewhere in the high 60s, below 70s, but also a good portion of our loans have interest reserves and interest serve replenishment guarantees, probably in the same range, probably about 60%. And then there's a crossover. There's certain loans that have rate caps and interest rate reserves. I don't have that percentage handy, but a good portion of our book has rate caps and interest reserves.

I appreciate that. And then just during the quarter, did you buy any loans out of your CLOs? And if so, are you able to size that?

I don't recall doing that during the quarter. I have to look. We do have a similar amount of credit risk assets designated in our CLOs as we did last quarter, $114 million. But, Ivan, do you know if we purchased anything back? I'm not aware. If we did, it was one loan, but I have to look. Yeah, I don't recall offhand.

All right, thanks. I appreciate you taking my questions.

Thanks, Chris. Thank you. We'll take our next question from Jay McCandless with Wetbush. Hey, good morning, everyone. It looks like special mention loans in the multifamily portfolio went up about $500 million from the first quarter to the second quarter. um could you maybe talk about what what drove that decision is there any type of geographic or vintage risk we need to be mindful of with that book and the loans that move to special mention yeah sure yeah so it it's a natural um progression as loans get closer to maturity and move on to have your ratings move all around i will i will preface this that we originate loans that are special mentions special mention is not a category that gives us a concern that there's a pending loss or a delinquency or not a performance coming. It's just one of the tools we use as a management tool to focus more on a loan if we think certain things are changing or certain things in the market are changing. I have the numbers going up from 32% last quarter to 37% this quarter in special mention, but there's nothing specific I can say related to a group of loans, a geographic location. It's just the natural progression of our loans. We did have, as you saw, a little bit of a move, but not much in the substandard and doubtful, which is related to the non-performing loans we put on the books this quarter and a little more stress. But the special mention doesn't give us a level of concern that there's going to be a loss or a default. It's just things we look at when we look at the loans to highlight more of a focus on the loan.

Okay. Sounds great. Thank you. The second question, could you please repeat the comments you made about moving bridge loans into agency volume?

I guess how much of that are you doing and what type of mezzanine financing would Arbor be putting in to make those deals happen? Sure. We had a fairly effective, you know, reduction in our balance sheet and a conversion into fixed rate loans with the agencies. A lot of that is the loan properties get conditioned. They got out of the breeze. They get stabilized. And with the 10-year being so volatile, the lower the 10-year, the greater the opportunity there is. And with an inverted yield curve, it's a natural shift from voting rate loans into fixed rate loans. And that's something we've been doing consistently, um, from time to time. And I don't have the numbers, Paul may have it. Uh, we will be put, we do put some mezzanine, uh, lending on, on some of those loans, not that much. A lot of those loans are, you know, uh, 65% loan to value and have a certain coverage. And sometimes when the borrower is paying down those loans, putting more equity, we'll also put some mezzanine lending into that to facilitate those transactions. We like that kind of lending. We think the returns are extraordinarily healthy, and it's a good part of our business. But it's not a very big part of our business. And, Paul, maybe you can comment on how much money we put out in the quarter for that kind of business. Yeah, I think it's exactly what Ivan said. It's not a big part of our business, but it is some of our business. And it was pretty benign this quarter. We had $685 million of balance sheet runoff. We recaptured $435 million of that into the agencies, which was 64% recapture rate, very high. And we only gave $1.5 million of MES behind one of those agency loans. And in the first quarter, we had like $1.2 billion of runoff. We were captured just under 50% of that, and we put $5 million in MES. behind the agency. So it's not been a very big part of our business. It's helpful, but we've seen a really, really nice recapture rate, almost about 50% for the first two quarters here in runoff that we brought over to our agency book, which is the way we model our business. We happen to like that mezzanine lending. We know the collateral. We know the cash flow, the yields. We generally run 13%, and it's long-dated, so it's a good part of our book. But at the end of the day, even though it's something that borrowers look into, sometimes they just change their mind and say it's better to raise the equity and pay down the loan themselves. So we're not putting out as much as we thought we would.

Okay. That sounds great. Thanks for taking my questions.

Thank you. We'll take our next question from Jade Romani with KBW.

Thank you very much. A follow-up to the last question to Jake. You said the better for the borrowers to raise equity.

So I assume that means they're raising preferred equity because in a refi, the GSEs or another lender would consider the preferred equity as equity.

Is Arbor providing any preferred equity, and is that an attractive opportunity?

You all have had these loans on your balance sheet, so we know the credit pretty well. Yeah. So when you mentioned, Mez, I also – looked at the same as preferred. For us, it's structural. We always like Mez better. It has better remedies. But I think it's one and the same for us, whether we talk about preferred or Mez. So we're open to doing both, depending on whether it's Fannie or Freddie or what the structural enhancements are. And we think, since we know the assets, we know the borrowers, it's often very good opportunities. And what we're uniquely positioned for It's often small pieces. They can run anywhere from $500,000 to $5 million, and for them to bring in an outside provider, the costs and inefficiencies are really, really, really high. So with us having full knowledge of the borrower and the collateral and being able to implement those in a very cost-effective way, it puts us in a strategic position to be the provider.

Thank you very much. Are you surprised that there hasn't been more of that, or is it that the borrowers are raising prep equity from someone else?

We thought there'd be more, but there isn't. I think we had forecast, I think, in our numbers that we would probably put out between prep and MES about $10 million a month. That's what was in our cash projections, and We're not hitting those numbers by any means, so we're well behind what our own views were, how they're getting the capital, where they're getting the capital. I don't get that involved in. I'm just happy with the conversion from the balance sheet into an agency loan that provides us a long-dated income stream and fits our business model. So I'm not always familiar with how they achieve their goals.

Thanks very much. On modifications, is it reasonable to assume that you're doing about 15, that you will be modifying about 15% of the portfolio?

I think it's very fluid. So it's just consistently different, and I don't have a particular number. It all is just a point in time. So I don't have a stat on that.

Max, this last question would be when you think the right time would be to ramp up origination considering the strong liquidity.

Are you hoarding liquidity just to get through these next two to three quarters in which you think the stress will play out and originate afterwards?

Because clearly, you know, post this, the yields will probably be lower.

lower than where they are today?

So that's a great question, and in my comments, we talk about our single-family business in terms of the built-to-rent business, and that business, we are extremely aggressive. We've ramped that up, and we want to continue to grow that, and we We like that business, and we are ramped up, and we want to dominate that business, and we will be one of the bigger landers. I think on the multifamily side, I do believe that business will return. We've talked about it. We've put together programs.

And I do believe the second half of 2024,

will be a very, very good year for the multifamily bridge loan business. And we will get aggressive, and we'll start to get aggressive at the end of the fourth quarter, maybe first quarter. We have liquidity for it, and we also have the outlook that SOFA will come down and that multifamily transactions will start to occur, and people will want to borrow, float, and rate business. and it will be a great opportunity, and we want to be a leader on that side too. It's early right now. I think you're a quarter early for that business. I think fourth quarter it will start to pick up, and definitely in the first quarter we aim to be extraordinarily aggressive in that business.

Thanks for taking the questions.

Thank you. We'll take our next question from Rick Shane with J.P. Morgan.

Thanks for taking my questions this morning, guys.

Most have been asked and answered, but I did want to ask, the restricted cash on balance sheet came down sharply.

What drives that, just so we understand it? Sure. Hey, Rick, it's Paul. So a couple of things. One, we had one vehicle we were de-levering, and as you may have seen, We called one of the vehicles during the quarter and took out one of our CLOs. But as runoff is occurring in certain vehicles that may be past their replenishment period, that restricted cash goes down to paid debt. That happened during the quarter in the vehicle that we retired and one of the vehicles would be levering. And then just generally... When there's loan runoff, if you can put loans in from your balance sheet book that are on your repo lines into the CLOs, then you're chewing up restricted cash. So we've seen a little bit of more efficiency this quarter in moving loans across our balance sheet, e-levering, and putting them into vehicles. And then you've got the natural wind down of a couple of vehicles that

starts to reduce restricted cash, that restricted cash ends up coming into corporate cash, but that's the natural progression of why that number has changed at this point.

Got it. Okay, that's very helpful. Thank you. And then I'd love to circle back on Jade's question about

the mods and extensions. And he cited a 15% number.

And Ivan, understandably, you kind of said that number moves around.

Can we just get some context of sort of during the second quarter? the value, the notional value of loans that were modified and extended both on the balance sheet and within the CLOs? I don't have that offhand.

And, you know, it is a fluid process between extensions and modifications and That's something that we could take a look at the data. It's just something that's constantly changing. Yeah, I don't have it in front of me, Rick, but my recollection is it wasn't very significant at all this quarter. But, you know, that could change. It all depends on the cycle and where we are, but we haven't seen significant modifications. that I'm aware of in either of those vehicles to date.

Got it. And then last question for me. Ivan, you've talked about the next two to three quarters being the most challenging.

You've also spoken of sort of the fluidity of what's going on. Just curious what you're seeing in terms of loan performance in July. I think, you know, when we're talking about it, you know, we're not even talking about June. We're talking about where we are today, and I don't really reflect on that as a June conversation. I reflect on it as of timing, as of the moment, and what we're in the middle of. So it's pretty much along my comments, and Our outlook is that we should have somewhat of, as Paul mentioned, a continuation in terms of reserves and outlook for the third and fourth quarter similar to what we had in the second quarter.

Thank you guys very much. I appreciate it. Thanks, Rick.

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

Let me just first say I congratulate you on your performance. I've been an investor in the company for about a decade. In the last couple of years, you know, you've spoken to me very conservatively, assessing the outlook, and I think the company's performance is not an accident. It's a result of your positioning them, and I congratulate you on your correct reading of the environment. Thank you. Now, let me, if I can get on to something. some other questions. You distribute earnings of 57 cents. Do you think there's a lot of push and pulls? Do you think that's close to recurring earnings, or do you think you over-earned in this quarter?

Yeah, I think we don't give a financial outlook, but I would say that

you know, we're expecting that those numbers will be, you know, not that strong in the third and fourth quarter, but I don't know how much different. We've had a couple of things during the quarter. I'll give you an example. We had 1.3 billion of loan sales in our GSE agency business. We have excessively high second quarter volume Given that rates rose to about 4% for a short period of time and have come back down, you know, we see a little backlog in that business. We expect that business to be strong for the balance of the year, but I'm projecting a billion, billion one versus a billion four in agency business in the third quarter and probably something stronger than that. in the fourth quarter, so I expect our agency business to come in for the year higher than we did last year, but I do expect a dip down in the third quarter and then a big rise in the fourth quarter, so that gain on sale associated with those sales will change and likely end up with a reduction in gain on sale and a slightly less distributable earnings. Also, we are we are expecting the portfolio to continue to run down as there is no balance sheet lending and runoff has been naturally brought over to our agency business. So I don't know if it's easy for us to say that that's a recurring number. I can't tell you what the number is going to be, but those are a couple of items that I think could make it slightly less going forward. Having said that, we still think the number is substantially higher going forward than where our dividend is today, right?

That's where I'm going to get to. I think that the 57 is probably higher now than it will be in another couple of quarters, but I suspect that the earnings will be above the dividend.

But I'm sure you're very confident about that, Lee. Exactly. If you don't like to comment on the distributable learning, because if we did, we'd be wrong every time. We've exceeded everybody's expectations, including us.

The three loans that were highlighted as being issues, what is the loan-to-value ratio on average for those three loans?

I don't have them offhand, but one we took a reserve against, and we didn't expect payment, but we got payment. We got our June payment. The other one is a great asset, just poorly managed. So we'd have to take a look at what the stabilized value of that asset is. And you have to also keep in mind on a lot of these loans, we have a lot of recourse on these loans with substantial sponsors. So we look at a combination of not just the asset, but the sponsor and the recourse liability that we have. So it's a combination of multiple factors on each of these different assets.

Last question, just an observation. What do you think the Schwartz are thinking about? The fully diluted share cans, 187 million shares. If I take what you own, what the employees own, what BlackRock owns and Blackstone owns and what I own, these guys are short a meaningful percentage of the float. And what do you think they're thinking?

All I can say is they didn't properly understand the company when they shorted the stock. The information, as we've talked about on the calls before, was inaccurate. and on the face of it is all of the analysts and everybody made no sense so I think whatever they did they've made a tremendous error in their analysis I mean our performance has certainly been contrary to all of their comments and More significantly, you know, they just didn't understand the fundamentals of our company relative to our peers. Paul, do you have any comment on that?

Yeah, I think that's it.

I mean, you know, I don't know who's shorting the stock, Lee.

I'm not involved in who's shorting it, but, you know, I don't know what their thinking is, but a lot of times these are just

financial art plays, and they either work or they don't. But we just continue to do what we do, continue to perform really well, and the results of our performance will be what they are for those people.

Well, congratulations on your performance. I'm a pleased shareholder. Thank you very much. Good luck.

Excellent. Thank you. At this time, I would like to turn the call back to Ivan Kaufman for any closing remarks. Sure. Well, thank you, everybody, for participating on the call and being shareholders of the company. We once again had an extraordinary ordinary quarter, raising our dividend, having great earnings, and I'm very prepared to manage through the rest of the year.

And everybody have a great weekend. Take care. Thanks, everyone.

Thank you. This does conclude. the second quarter 2023 Arbor Realty Trust earnings conference call. You may disconnect at this time.