Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the third 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 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 0. I would now like to turn the call over to your speaker today, Paul Alenio, Chief Financial Officer. Please go ahead.

Okay, thank you, Mike. And good morning, everyone, and welcome to the quarterly earnings call for all the realty trusts. This morning we'll discuss the results for the quarter ended September 30th, 2023. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before I begin, I need to inform you 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 follow-looking statements, which speak only as of today. Arbor undertakes no obligation to publicly update or revise these follow-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 outstanding quarter as our diverse business model continues to generate earnings that are well in excess of our dividend. This has allowed us to maintain one of the lowest dividend payout ratios in the industry, which was 78 percent in the third quarter. Additionally, and very significantly, despite Being in a very challenging environment over the last several quarters, we've managed to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from every one of our peers. In fact, we're one of the only companies in our space to have experienced significant book value appreciation over the last three years, with roughly 40% growth from around $9 a share to nearly $13 a share. As we discussed on our last call, we feel we're right in the thick of this dislocation and operating our business with the expectation that the next two or three quarters will be the most challenging part of this cycle. We've been laser-focused over the last two years preparing for this environment. One of our primary focuses has been and continues to be preserving and building up a strong liquidity position. We're very pleased to report that we currently have approximately $1 billion in cash It gives us a tremendous amount of flexibility to manage through this downturn and provides us with the unique ability to take advantage of the opportunities that will exist to generate superior returns on our capital. Clearly, given the current interest rate environment, we expect to experience additional stress. We need a tremendous amount of discipline and expertise to successfully navigate this market, and we're very pleased to have a tenured senior management team with a track record of managing through multiple cycles as well as what I consider to be the best asset management team in the industry. This is an extremely challenging environment, and I'm very pleased with the level of success we've had to date in managing through this downturn, which is a real testament to the quality of our franchise and the extraordinary efforts being put forth by our entire organization. As we have said before, We feel we are very well positioned compared to our peers, given our strong liquidity position, multifamily-centric portfolio, the depth and skill of our management team, and the strength of our balance sheet and the versatility of our franchise. We also believe we are uniquely positioned to step back into the lending market and garner some very accretive opportunities to continue to grow our platform. While others in this space will be dealing with significant internal issues, we feel we are well positioned which allows us to reenter the lending market at a time when there is a great opportunity to put some of the high-quality loans with attractive returns while the competition is less active. In addition, we recently launched our first construction lending business, which is something we are very excited about, and we believe we can generate 10% to 12% unlevered returns on our capital and eventually leverage this business and produce mid-to-high-change returns. We also believe this product is very appropriate for our platform as it offers us returns on our capital through construction, bridge, and permanent agency lending opportunities. We are very committed to this business, and as a result, we went out and hired some of the best and top people in the construction lending field. We are extremely pleased with how quickly we're able to roll out this product and get ahead of the market and build an incredibly talented team to execute this strategy. Turning now to our third quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We've produced distributable earnings of $0.55 per share, which is well in excess of our current dividend, representing a payout ratio of around 78%. The dividend policy that we have implemented with our board of keeping such a wide disparity between our earnings and dividend has provided us with a large cushion It was very strategic going full well that we were entering into a market dislocation. And we certainly could have raised our dividend again this quarter based on a substantial cushion and continued short earnings. The board decided to keep it flat since we believe we are not getting credit for raising it in this environment and would be more prudent to preserve a large cushion as we head into the most challenging part of the cycle. We're also the only company in the space that has been able to consistently grow our dividend with approximately 40% growth over the last three years, all while maintaining the lowest dividend payout ratio in the industry. Just as importantly, in a time of tremendous stress, we've managed to maintain a book value of our recording reserves for future losses, which clearly differentiates us from our peers. And we believe that Our diverse business model uniquely positions us as one of the only companies in this space with the ability to preserve our book value and continue to provide a very stable, protected dividend, even in this extremely challenging environment. In our balance sheet lending business, we remain focused 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 third quarter, we continue to have success in this area with another $665 million of balance sheet runoff, $350 million, or 53%, which was captured into new agency loan originations. As a result, we're able to recoup approximately $100 million of capital and continue to build up our cash position, which, again, currently sits at around $1 billion. And again, we're excited about the opportunities. We think we'll be able to available to us over the next three to six months to reenter the market, draw a balance sheet, loan book, and generate very attractive returns on our capital while we continue to build up our pipeline for future agency business. In our GFC agency business, we had another solid quarter originating at $1.1 billion of loans in the third quarter, and our pipeline remained strong. Despite the significant recent rise in the tenure, we are poised to complete the year roughly in line with our 2022 originations numbers, which is a tremendous accomplishment in light of the fact that the agencies are down 20% to 25% production year over year. We've done a great job in continuing to gain market share and in converting our balance sheet loans into agency product, which has always been one of our key strategies and a significant differentiator from our peers. 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 $30 billion fee-based servicing portfolio, which grew another 2% in the third quarter and 11% year over year, generates approximately $119 million a year in reoccurring cash flow. We also generate significant earnings on our escrow and cash balances, which acts as a natural hedge against interest rates. In fact, we are now earning almost 5% and around $2.9 billion of balances of roughly $140 million annually, which combined with our service and income annuity totaled approximately $260 million of annual gross cash earnings, or $1.25 a share. This is in addition to the strong gain-on-sale margins we generate for our origination platform, and again, it's something that is a completely unique platform, providing a significant strategic advantage over our peers. We remain very committed to our single-family rental business as we are one of the only remaining lenders in the space, allowing us to aggressively grow the platform. We have a strong third quarter with approximately $140 million of funding and about $430 million of new commitments signed up, and we also have a very large pipeline. We love this business as it offers us three turns on our capital through construction, bridge, and permanent lending opportunities. and generate strong levered returns in the short term while providing significant long-term benefits by further diversifying our income streams and allowing us to conveniently build up our franchise. In summary, we have another great quarter and we believe our unique business model clearly demonstrates our ability to generate strong earnings and dividends in all cycles. We understand very well the challenges that lie ahead and we are very well positioned to manage through this cycle. Our earnings significantly exceed our dividend run rate. We 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 are well capitalized with significant liquidity, which has put us in a unique position to be able to manage through the downturn and take advantage of accretive opportunities that will exist in this environment. And again, with our best-in-class asset management capabilities and seasoned executive team, we are confident that we'll continue to be one of the top performing companies in our space. I will now turn the call over to Paul to take you through the financial results.

Thank you, Ivan. As Ivan mentioned, we had another very strong quarter producing distributable earnings of $112 million, or $0.55 per share. These results translated into industry-high ROEs again of approximately 18% for the third quarter, resulting in a dividend-to-earnings pair ratio of around 78%. Our quarter results were slightly higher than our internal projections, largely due to increased earnings on our cash and escrow balances from higher interest rates, combined with stronger gain on sale income from slightly higher agency sole loan volumes than we anticipated. As Ivan mentioned, we do expect to continue to experience some level of stress as we manage through this very challenging environment. As a result, we recorded an additional $15 million in CECL reserves in our balance sheet loan book during the quarter. Additionally, we did see a slight net increase in delinquencies in the third quarter of approximately $28 million. We experienced $98 million of new delinquent loans and resolved a $70 million delinquent loan from last quarter through a successful restructuring. As Ivan said earlier, we are in the most challenging part of the cycle, and new issues arise each day. We are very pleased with the level of success we've had to date and believe we are well positioned to manage through this downturn, given our multifamily-focused, 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 reiterate that despite booking approximately $70 million in CECL reserves across our platform over the last nine months, we still grew our book value per share almost 2% to $12.73 a share at 9.30 from $12.53 a share at 12.31, 2022. And we are one of the only companies in our space that have seen significant book value appreciation over the last three years. In our GSE agency business, we had a strong third quarter with $1.1 billion in originations and $1.2 billion in loan sales. The margins on these loan sales came in at 1.48% this quarter compared to 1.67% last quarter, largely due to significantly more FHA loan sales in the second quarter. We are very pleased with the margins we've been able to generate over the first nine months of the year, which are well ahead of last year's pace. We also recorded $14.1 million of mortgage servicing rights income related to $1.2 billion of committed loans in the third quarter, representing an average MSR rate of around 1.16% compared to 1.46% last quarter, mainly due to a higher percentage of Freddie Mac loan originations combined with a greater mix of larger loans in the third quarter, both of which contain lower servicing fees. Our fee-based servicing portfolio grew another 2% in the third quarter to approximately $30 billion at September 30th, with a weighted average servicing fee of 40 basis points and an estimated remaining life of 8.3 years. This portfolio will continue to generate a predictable annuity of income going forward of around $119 million gross annually. In the third quarter, we also received $1 million in prepayment fees as compared to $3 million last quarter. And given the current rate environment, we are estimating that prepayment fees will likely remain nominal at around $1 million a quarter going forward. In our balance sheet lending operation, our $13.1 billion investment portfolio had an all-in yield of 9.12% at September 30th compared to 9.07% at June 30th. mainly due to increases in the benchmark interest rates, which was largely offset by an increase in non-performing loans in the third quarter. The average balance in our core investments was $13.4 billion this quarter as compared to $13.6 billion last quarter due to long-off exceeding originations in the second and third quarter. The average yield in these assets increased slightly to 9.25% from 9.19% last quarter, mainly due to increases in the benchmark index rates, which was largely offset by an increase in non-performing loans. The total on our core assets was approximately $11.9 billion at September 30th, with an all-in debt cost of approximately 7.41%, which was up from a debt cost of around 7.25% at June 30th, mainly due to the increase in the benchmark rates. The average balance in our debt facilities was approximately $12 billion for the third quarter, compared to $12.5 billion last quarter. The average cost of funds in our debt facilities was 7.37% for the third quarter, compared to 7.11% for the second quarter, again, primarily due to the increase in benchmark index rates. Our overall net interest spreads in our core assets decreased to 1.88% this quarter, compared to 2.08 last quarter, and our overall spot manager spreads were 1.71% at September 30th and 1.82% at June 30th. Lastly, we believe it's important to continue 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. We have several diverse and counter-cyclical income streams that 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, 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 non-market, non-recourse CLO debt outstanding with pricing that is well below the current market. We are 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 our 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.

Mike? Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, please press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. And we will take our first question from Steve Delaney with JMP Securities.

Taking the question. Congrats on another solid quarter, guys. The number that jumped out in the report to me was the $500 million in cash sitting in the CLOs. My thought there is, and you did put $240 million to work in new structured loans, I noted, in the third quarter. So I guess the question is, first, the $240 million, were they done within the CLOs or outside of the CLOs? And What are your thoughts about how can you reduce or do you plan to reduce that $500 million meaningfully over the next couple of quarters? Thank you.

We've done a really good job in managing our cash balances and our CLOs and keeping them low. But what we're seeing is a lot of payoffs coming at the end of the month. So when they come at the end of the month, it takes time to redeploy that money. It used to come more evenly over a period of time. So that's kind of what we're seeing. So there's probably a large number of payoffs. We are constantly looking at our inventory and moving stuff out of our bank lines into it and keeping that cash balance as low as possible. But it's a process. It's not always perfect.

Yeah, Steve, it's Paul. Ivan's 100% correct. We did have some late, late runoff in the third quarter. To answer the rest of your questions, of the 240 we funded during the quarter, 140, as we said in our commentary, were fundings of prior commitments on our SFR business. So that all gets funded through our warehouse lines, and that business has been tremendously accretive for us. We're generating almost a 17% levered return on that business for the quarter. Of the other $100 million that was funded, $92 million were bridge loans, and $8 million were meds and PE behind our agency businesses. So the MES and PE is obviously not financed and it's 13% yield on your money. And the other 92, I think 62 of it went into one of our CLOs and the other one's on a bank line. So that's kind of the breakout of how we financed our business. But as Ivan said, we've got... you know, $6.2 billion of replenishable CLOs at $170 over. We've got a nice amount of cash in those vehicles to reinvest. And, you know, as loans run off, you know, it's a process of moving it around and being efficient. But we've got a lot of dry powder to be able to execute very well going forward.

Got it. That leads into my follow-up. Ivan, you know, which in terms of the new loan demand on the structured side, Are you seeing long-term Arbor borrowers, people that you guys have had relationships for 10, 20 years, stepping up and looking to take on new projects, new multifamily projects in this environment? Or is everything you're looking at really just refining existing projects? Thank you.

We've done some purchase activity, especially on the agency side. And I think that you still don't have the price discovery in the market and the buyers and sellers meeting of the eyes to have active transactions. So I don't think it's a very active part of the market. You are seeing some refis in the market. And, you know, you're seeing existing bridge loans from time to time get refied, perhaps some cash or restructured deals. But You know, we've been real cautious. We've been spending more of our time on the built-to-rent, but we feel the opportunities are a little greater. And now, as I mentioned, we just launched a construction lending business, which we think is great. All the banks are kind of out of the market. All this concern about, you know, new deliveries, we think our timing is outstanding because the lending we're going to be doing now, you know, the deliveries are going to be in about 36 to 48 months from now, but we think the absorption here, and a lack of opportunities will create a good opportunity, and our yields will be outsized, and that's kind of where we're putting the use of our capital. Thank you both for the comments.

Thanks, Steve. And we have our next question from Steven Laws with Raymond James. Hi, good morning. Congrats on a solid quarter in a very difficult environment.

You know, Ivan, I wanted to start, you know, can we talk about, you know, you mentioned the next two to three quarters being most challenging, and you said something similar last quarter. You know, when you look at the fourth quarter 21 origination volume, you know, pretty big quarter, you know, two-year loans would be hitting original maturity dates next quarter. So, you know, can you talk about, you know, how many of those have caps that might expire, you know, given outlook increase since the last quarter, you know, how does that impact, you know, your expected stress, your think you may see in the next couple of months given where rates are? And maybe at a more detailed level, how many of those borrowers do you think are on track with their business plan? How many need more time versus how many have a real cap rate issue around the rate move?

Most of our loans are three-year loans with extensions, not two-year loans. Just a correction on that comment. It's an ongoing process. We don't wait until the expiration of a rate cap or we don't wait for loans. People have come to us. We're very proactive. I think the biggest risks other than the rate cap, which is a true risk, and that's just an economic issue because the cost of a new rate cap is a stated dollar amount. For us, the real concern is performance and, you know, making sure that the assets are being managed. A lot of the Bridge assets required execution to get to their business plan. There was a lot of upside in the rents and unit turns and getting them to market. And I think if anything is what we see in the industry is the lack of execution, which creates, you know, which creates an economic risk for the borrowers and not getting to their numbers. So we're putting a lot of time and attention to really managing these assets, staying on top of the borrowers, working with them to change management companies and recapitalize their deals well ahead of time. So it's an ongoing process. It's not get to the cliff and deal with it then.

Makes sense. Appreciate the correction on the original maturity term. Um, Paul, as a follow-up on the financing side, a couple of lines I think in the queue mentioned that they're currently being discussed for extensions. Can you talk about how those conversations roll with counterparties? Do you expect those lines to be extended with no change of terms? As you think about CLO buyouts, did you buy any loans out? And if so, what is the typical liquidity need to move a loan out of a CLO onto a bank line?

Sure. So, we have some data for you, Steve. Thanks for the question. During the quarter, we have about $6.5 billion of committed warehouse lines, about 15 different relationships, and $4 billion of that was extended during the quarter. If you go look at our queue, we had some maturities coming due. We were very successful in extending pretty much all of them. I think there's one line left that we expect to have done by the end of the month, so no issues there. But the conversations have been pretty similar across the board. We've not seen much of a move, if any, on existing product that's being financed in the vehicle. So we've been able to hold the line and keep that pricing pretty consistent. What we're seeing is more of a conversation about new product and what the pricing would look like on new product. But for the most part, we've done a great job of having very deep relationships with our banks, very longstanding relationships. getting those lines to roll with no significant material changes to the terms that we have outstanding so that's been really really helpful the second part of your question was around remind me again it was

low buyouts and liquidity to move.

Sure. So as you know, from time to time when loans have issues, we do exercise our right to buy loans out of the vehicles, restructure them, either put them back into another vehicle or put them into our warehouse lines. And that's a fluid process that happens each quarter. This quarter, I think we ended up buying 140 million of loans out of our vehicles but one of those was um was a loan that i mentioned in my commentary that we restructured a 70 million dollar defaulted loan last quarter that was restructured so that was pulled out restructured and then financed on one of our warehouse lines so net we probably had about you know call it 80 million of buyouts during the quarter and It changes every quarter. It depends on performance. Last quarter, we had 50. So it's just a fluid process from how loans perform and how you operate your vehicles. Fantastic. Thanks for the comments this morning.

And our next question comes from Jay McCandless with Wedbush.

Hey, good morning. Thanks for taking our questions. The first question I had, if rates... Say if these levels are even higher into 24 and 25, could you talk about what you think could potentially happen with the loan book? Yeah, I mean, rates are clearly at a very elevated level. And, you know, it's put a lot of stress on people being able to exit into the fixed rate market. You know, when rates were in the threes, it was already stressful. And bars, and we were encouraging bars to convert. You know, the short-term rates have gone up a little bit, but they're maintaining at these levels. Clearly, it's an elevated stress level. We're thinking they're going to stay at these levels for the next three quarters and are planning accordingly. They make no mistake about it. That's the stress in the system. You know, people, you know, when they have their business plan, they exit to a fixed rate, and it was anticipated in their minds that, you know, the tenure would be around $350,000. Now it's sitting close to five, so their opportunity to exit is much more difficult. So they've got to bring more capital to the table or bring more capital to the table to carry their assets. That's as simple as it is, and that's just pressing the system. Are rate caps even available in this market? And if so, what type of cost are people having to incur to extend or create a new rate cap? Rate caps are always available. At least they have been. They continue to be. And the costs vary. I think people have to bring roughly three points to the table to buy a rate cap in order to bring their debt service down to a level that this would make it a break even. So they have to make capital calls to figure out ways to bring that capital to the table. So that's the cost to balance their loans. It's roughly three points. And then if I may, one more. With the new construction lending opportunity you were discussing, are these loans going to be on actual new construction, or are you going to be looking at maybe some transitional assets to bring on where banks are walking away from deals? So maybe just kind of what type of product are you envisioning for this new construction lending vehicle? It's pure ground-up, multifamily, primary markets. primary sponsors, when we have the opportunity to do the construction lending, turn it into a bridge loan and get the end loan. That's what it is. The banks are out of that market. There are some local and regional banks. The advance rates, which used to be in the 75%, 80% range, are in the 50% to 65% range. And the guarantees on the deals are very good. So we think it's a great opportunity, a great market, a great way to play our capital and where the short-term rates are. our unlevered returns are very, very good, and our levered returns are outstanding. Okay. Any sense around what type of nominal rate for some of these projects right now? I mean, our borrowing rates will be between, you know, I would say average between $450 and $600 over. That's kind of where all the silver. So your unlevered returns are, You know, 11, you know, my estimation, 11, 12.5% on leather without fees and without, you know, the benefit of adding multiple products to what we're doing. Okay, great. Thank you for all the color. Appreciate it.

And just a reminder, if you would like to ask a question, that is star 1 on your telephone keypad. And our next question comes from Jade Romani with KVW.

Thank you very much. I was definitely impressed by the very moderate increase in, I would say, the category of substandard and doubtful accounts, very slight uptick. But overall, I wanted to ask, do you have a sense for what percentage of the balance sheet loans have been modified in recent quarters, problems dealt with? And what percentage, in your view, is remaining to go through some kind of modification?

I don't have those numbers. I don't have those numbers ahead of me, but I will tell you this has been a process that began two years ago. You know, we got out ahead of it. We started managing loans that, you know, we thought would be requiring adjustments and changes. It's an ongoing process. We resolve a few. We modify a few. We get a few new ones to come in. I see this trend continuing over the next three to four quarters in this elevated interest rate environment. So, you know, whether it ticks up a little bit, it should tick up a little bit, but it's been pretty consistent.

Yeah, hey, Jay, it's Paul. I mean, it's been fairly nominal. We've been pleasantly surprised of the last few quarters. As Ivan said, we're expecting continued stress, and we think over the next two quarters we'll continue to have those conversations with borrowers. But during the quarter, we only had one material modification. which we disclosed, which was that $70 million loan I mentioned in my commentary that was a defaulted loan last quarter that we were able to restructure and get to a performing loan. That was the only material modification we had in the quarter. So as a percentage, that's a pretty low percentage. we've been fairly fortunate that those numbers have been quite low over the last few quarters. Nothing comes to mind that was a significant modification other than that item over the last few quarters, but that obviously could change in the next few quarters.

And cumulatively reviewing CLO surveillance performance, it does seem that the percentage would be in the 15 to 20% range over, you know, not just the last two quarters, but maybe say 18 months. Does that number strike you as too high or reasonable?

I think that number is high. I'd have to look back. I mean, we did, as I said, buy out.

I think what you're referring to is loans that may be more credit risk under the terms and provisions of it, not loans that are being modified. Two different categories and two different comps.

Yeah, there's a difference.

Okay. Turning to cash flow performance, you know, I understand that when we look at the cash flow statement, there's timing of loan originations for Fannie and Freddie and then the loan sales, which take place, you know, 30 to 60 days after that. So adjusting for that, were there any items that drove negative working capital? There is a category called – other li other assets and liabilities that work in capital account and i think in the quarter was negative 200 million which doesn't usually occur wanted to see if you could provide any color on that yeah i'll have to look at what item you're talking about a lot of things get netted into the cash flow um

You know, I'll take a look at the details, Jaden. I can call you after because there's a lot of things meted in there. But the cash flows were, I think, pretty stable compared to last quarter. But I'll get back to you on that item. Okay.

But just overall, your feeling about cash flow performance is that it remains strong and steady? Is that how you would characterize it?

Yeah, that's how we look at it. I mean, distributed earnings were $0.55. I mean, that's the best representation of cash flow, right? It's the item, the metric we use to – cover our dividend, right? So we look at it with a tremendous coverage ratio, 55 versus 43, but we've not seen significant decline in cash flow. Obviously, we have a few more non-performing loans, so that puts your cash flow a little bit. But again, we're ramping up our SFR business. We're putting out some MES and PE. We've not seen a significant decline in that cash flow number yet.

Thank you very much.

And we have our next question from Rick Shane with JPMorgan.

Thanks, guys, for taking my questions this morning. First, can we talk a little bit about the $70 million restructuring? What is the advance rate that you received on the facilities that you pledged it to? And was any of the MES that was funded during the quarter associated with that restructuring?

Paul, before you answer that question, I want to give you a little perspective on that loan because it kind of touches upon some of the questions that were asked, and I think it's a good case study. That was a very, very good asset in a very good market that required a certain execution of business plan. The borrower 100% failed on his execution, 100% couldn't execute. whether he was distracted by other issues. We have no idea. We were able to bring in another operator. And within this short period of time, he's already transitioned this asset because he knows the market, knows the asset quality, and has done a remarkable job. So that's kind of the overview of that transaction. Great asset, great opportunity, bad management. bad execution replaced with a good operator and a recapitalization. Paul, you can go now give the specifics.

Yeah, sure. So exactly what Ivan said, right? Great asset, just sponsor was not... getting the asset to plan like we thought he would, was behind on his payment last quarter, had gone delinquent two months, and then we have the three months this quarter, which is five months. We restructured the deal in that we were able to get a payment of three months in back interest so we could get $1.4 million recovery this quarter in interest. We structured a deal in which the property was sold to a third-party borrower. A third party, a new borrower, assumed our debt. And as part of the assumption of our debt, we modified our loan to a three-year loan. The first 18 months, the interest rate is 6% fixed, and then after that 18 months, it reverts back to its original SOFR plus 340. And as Ivan mentioned, a quality sponsor that has committed $10.5 million to the project, $2.5 million was funded day one as an interest reserve, and the other $8 million is a project. capital improvements that are going to be made into the the asset over the next 15 months and if those are not made or if they've come up short uh the borrower needs to post a rental reserve of the lesser of two and a half million and the difference between the eight million dollar capital improvements and what he spent and it's also important to note that um you know he's guaranteed those eight million dollars of capital improvements so that's a that's a perfect example of what we're capable of we took a borrower who wasn't executing his plan We brought in a new borrower who's committed significant capital to the asset. It's going to improve the asset, get it to stabilize value quicker. It took a slight reduction in interest rates to 18 months, but then it goes back to its original rate, and that's kind of the whole structure.

Got it. And that is all now carried apart. Did you provide any MES associated with that?

We did not. provide MES on that loan and we did not have a reserve on that loan because the loan, we like the asset a lot and we think we're money good. We did end up restructuring that loan, putting it into one of our facilities and getting a pretty standard advance rate, but we did not provide MES against that loan.

Thank you. That's helpful. Second question, there were $347 million of extensions in the quarter. curious if you can just sort of give us, and I realize it's going to be idiosyncratic over a wide array of loans, but if you can give us some perspective on what extensions look like, what you are able to get in terms of paydowns and what you're requiring in terms of rate caps, and finally, what you're doing with coupons on those.

Sure. So I can give a little color. Ivan will probably be able to give the rest from the market. But most of all those extensions were as-of-right extensions, which is what borrowers have if they're making their payments and they're doing the things they should be doing. They have an as-of-right extension, so there's not really much we do differently. They're entitled to that extension. They've executed their plan, and that extension is part of their terms. I think there was one loan in which the extension was granted, and as a concession to grant an extension, we ended up having a pay down on the loan of $2 million and increasing the actual interest rate for like a three- or six-month extension. But almost all of the extensions we did during the quarter were as-of-right extensions. Ivan, I don't know if you want to give a little color on that.

Yeah, listen, if it's as-of-right, there's not much to talk about. But if it's not as of right, we usually seek a level of consideration to warrant that extension to put the asset and our loaner in a better position. So each one is individually analyzed to see how we can improve our position on a particular asset.

Does as of right require getting a rate cap extension as well?

It depends. If that's part of it, then it has a right. If it's not, then it's not.

Got it. Okay. And then not to answer Jade's question, but I think it ties into something that we didn't fully understand in terms of the cash flows. There was commentary in the – 10Q related to a $211.7 million related party transaction on servicing? Is that?

Yeah, that's the answer. I just looked it up, and I was going to respond to Jade. So this is timing, and this is what we talked about early in the commentary. Even Steve Delaney asked the question. We had very, very late runoff in the quarter, which sometimes happens, doesn't always happen. When that runoff occurs, it runs off in our servicing shop, which is off balance sheet. And so we have to create, you know, a due from related party because that money is moved a day later. So if loans are paying off at the end of the month on 930, the money is sitting in our off balance sheet servicer, but it's removed out of our portfolio and it's a receivable that comes in the next day. So that cash flow change that you see of $200 million is all to do with the change in the related party line to do from related party line, which is totally timing. And all that money came in on October 1st.

Got it. Okay. And then last question. Stock is now trading pretty much at book value. You guys have issued $185 million this year, repurchased $35 million. What are the parameters, as we think about this, what is the premium you should be trading at book to approach the ATM, and what is the discount where you would consider repurchasing? And I'm assuming that at really close to par, you're doing either.

We can't answer that in a vacuum. There are too many factors. It all depends on our liquidity position, the obligation, since we have to fund the opportunities that we have in front of us, where the market dislocation is. So each circumstance presents us a different opportunity. Certainly buying back our stock at the right value is a great opportunity for us. If we have liquidity, it's something that would be extraordinarily attractive. We always feel our best investment is within our own sphere. On the other hand, we always want to grow our franchise and grow our business. And if there are really great lending opportunities to grow our franchise, we keep our eye on that as well. So it's a balancing act based on a variety of factors.

Got it. Now, the balance sheet has continued to shrink this year. I think assets are down about 6%. You've issued equity into that. If the balance sheet continues to run off, would you continue to issue equity, or is this something that will sort of stall until you have objectives of growing the balance sheet again?

Well, let's keep in mind that we booked a lot of SFR business, and that SFR business funds over time.

So when we're booking business, we have a capital obligation, and we try and match our capital obligations and keep our cash, you know, very, very constant in this kind of environment. So we're really sensitized to the opportunities and the capital needs and keeping our cash balances at a very high level during this economic cycle. So that's one of the things we pay a lot of attention to. You know, clearly when a book was high and we were able to, you know, raise capital and then increase the amount of lending we did on the SFR side, we thought that was a really good match to generate, you know, 16% and 18% returns. and we'll manage that and monitor that accordingly.

Got it. Okay, that's very helpful. And last question, I promise. It ties into what you just said. There is a $56.9 million MES commitment. I am curious what the CECL reserve levels are for unfunded commitments on MES.

Yeah, it's a model that we run. I don't have that at my fingertips, Rick. I mean, the models are run. Obviously, subordinated paper gets a higher CISO reserve than obviously first lien, senior bridge stuff. We do have roughly right now we're sitting with about $73 million in general CISO on our balance sheet. I don't have it in front of me. It may actually be disclosed. I'm not sure. But we can get you that on how much is related to MES and what's related to unfunded commitments. It factors into the model. It certainly factors in at a higher loss level because of the subordinate position. That's it.

Terrific. Hey, guys, thank you for taking all my questions. You're welcome.

And we have our next question from Kristen Love with Piper Sandler.

Thanks. Good morning, everyone. I appreciate you taking my questions. Just looking at the non-performers in the quarter, you added five loans there, but only $16 million. Just to get a little bit more detail there, are those smaller loans or is that due

to resolve the net delinquency you mentioned?

And just any additional info and detail on the new non-performers and credit generally would be helpful. Thanks.

Sure.

So we added actually six new non-performing loans during the quarter for a total of about $98 million in total UPV. So they range anywhere from $10 million to $30 million are the assets. And then we resolved the $79 million dollar asset that I took Rick through on the change in the terms. So the net change was $28 million during the quarter. The assets are not particularly different than the type of assets we've done. They're all multifamily, all bridge, they're throughout the country, and the LTVs on these assets range anywhere from high 60s to 90, and then the one we have a 100 because we took a reserve against it of a million and a half, but really nothing different than the type of assets we've had in the past.

Okay, great. That's helpful. And then just if we're in a higher for longer scenario, which you alluded to, I think Ivan, you said that it's great to be somewhat stable over three quarters. How do you expect that to impact the structured loan book and originations? I think as expected, bridge continues to soften a bit, but you have been seeing some nice solid activity in SFR. So curious on your thoughts on forward originations and this rate backdrop in both of those areas.

If rates drop, you know, our agency business will explode. There's a lot of our balance sheet is really well positioned to be you know, to be transferred into fixed long-term fixed rate. So, you know, that's where the opportunities will come in the growth of the agency business. With respect to the floating rate business, when there's price capitulation, you know, people want to buy assets that need improvement, or short-term in nature, you'll see that business pick up. So, a drop in rates will create great opportunities. And, you know, we don't expect that to happen until perhaps the third quarter or maybe even the fourth.

Okay. And then I guess just following up on that and looking at the agency business, Kenya right now is about 480. In order for you to kind of see a meaningful pickup in agency originations, how do you think about that when you're looking at the 10-year?

It'll pick up at each level. 450, you'll see an increase. Four and a quarter, you'll see a bigger increase. Four, you'll see an increase. Sub-four will explode. So as the 10-year drops, the agency business will ratchet up.

And the deeper it goes, the more exponential it will be. I appreciate all the time. That's it for me. Thanks.

And we now have our next question from Stephen Laws with Raymond James.

Hi, Ivan.

Just wanted to ask a quick follow-up.

You know, we've touched a lot on harbor-specific stuff, but can you maybe

Give us your views, more macro, on the fundamental side of multifamily, kind of around new supply in the near term, maybe a lack of supply in the medium term, slowing rent growth near term related to that. And then on the expense side, anything around property taxes or insurance-related costs, given the type of multifamily assets you guys play in and the regions you're in. Thank you.

I think new construction, the absorption is slower. We all see that.

Rent growth is slowed. Expenses are a little higher than everybody thought.

In your primary markets, you're looking at, you know, flat rent growth to expense. So that's the way we've looked at it for quite some time now. But the markets, you know, With new deliveries, Class A, the absorption of concessions are higher than expected. And it's going to take a little bit to absorb. Given the housing market where it is, people aren't really buying houses.

So, you know, I think that the demand for rentals will continue to be fairly strong.

And we have our next question from Jade Romani with KBW.

Thank you very much.

The stock had been up in response to the results but is now down 2%. Just a big picture question, what do you think is most misunderstood by the market as it relates to whether it be the book value or the credit risk or the earnings outlook?

Listen, we can't speak to that. All we can speak is that the whole sector is down.

We've outperformed the sector in terms of the company's performance. It's a herd mentality.

There's a large concern in the sector, and the sector is down. We're just going to continue to perform, do our thing, outperform our peers. And I think it's patience. It's hard for me to speak to the investor mentality. We just run our company, have consistent performance, and sometimes you get grouped in, and sometimes there are just headwinds. lot of headwinds in the market.

And on the NPL side, maybe this gets to the point, it's 138 million today, 1% of loans. What do you think the peak number of that will be?

It's not something we forecast, or we'll talk to Paul. Do you have any comment on that?

I don't. I mean, as we've said in our commentary, Jay is, you know, new issues arise every day.

We knock them down and we get new ones. I can't tell you where that number goes.

I think we've done a great job of managing it to date and putting our efforts where it needs to be, but don't have a crystal ball on, you know, what happens to the market and where that number goes. But the first two quarters have been okay.

And on the cash flow number, the cash flow performance number, you talked in response to Rick's question about the other liabilities and the Duke firm-related party line item.

So that line item resolved October 1. That was very strong in the court. Is that how we look at that? Yeah.

That's right. It's just timing. We had a bunch of loans pay off late. At the end of the month, 930, 929, and those loans, the cash is not remitted to us until October 1st. It takes a day or two to get it out of our serving shop once they process it. So, yeah, that's why that number is down so much in the cash flow. But, again, it's timing.

That was in five. It was a late runoff.

That would imply about $140 million of cash from operations in the quarter, and the dividend costs you $95 million, including the preferred. So cash flow is continuing to be in excess of the dividend.

That's correct. All right. Thanks a lot.

And we have reached our allotted time for our Q&A session today. I will now turn the call back over to Ivan Coffin for any closing remarks.

Yeah, we're done with our questions.

Well, we certainly appreciate everyone's support. We think our results have been outstanding and above our peers and we continue to grind forward and we continue to have confidence in our ability to manage through the downturn. Hope everybody has a great weekend.

Thank you.

This does conclude today's teleconference.

Thank you for your participation. You may now disconnect.