Arbor Realty Trust

Good morning, ladies and gentlemen, and welcome to the fourth quarter and full year 2023 Arbor Realty Trust Earnings Conference Call. All participants are in a listen-only mode. After this year's presentation, there will be a question and answer session, and 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, and if you should need operator assistance, please press star 0. I would now like to turn your call over to your speaker today, Paul Elanio, Chief Financial Officer. Please go ahead.

Okay. Thank you, Savannah. And good morning, everyone. Welcome to the quarterly earnings call for Arbor Realty Trust. This morning we'll discuss the results for the quarter and year-ended December 31, 2023. With me on the call today is Ivan Kaufman, our President and Chief Executive Officer. Before we begin, I need to inform you that statements made in this earnings call may be deemed forward-looking statements. that are subject to risk and uncertainties, including information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. These statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. Factors that could cause actual results to differ materially from Arbor's expectations in these follow-looking statements are detailed in our FCC 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 as of 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 and closed out an exceptional 2023. In fact, 2023 was one of our best years as a public company, despite an extremely challenging environment. We managed to increase our dividend twice while maintaining one of the lowest payout dividend ratios in the industry. and generated a total shareholder return of 28 percent, outperforming our peers. Additionally, and very significantly, we're able to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from everyone in the space. In fact, as Paul will discuss in more detail later, we generated gap earnings in excess of our dividend in 2023, despite recording approximately 90 million in reserves. And our distributable earnings were also well in excess of our dividend, providing one of the best dividend coverages ratios in the industry. We were also very effective in refinancing loans off our balance sheet for our capital aid agency business. We generated $3 billion of multifamily runoff in 2023 and recaptured 56% or $1.7 billion of those loans in new agency product. Our agency platform gives us a tremendous strategic advantage, allowing us to continue to deliver our balance sheet and generate significant long-dated income streams, which is a key part of our business strategy. We have been a significant player in the agency business for almost 20 years and now have been a top 10 Fannie Mae dust lender for 17 years in a row, coming in at number six for 2023. And it's extremely important to emphasize that our agency business generates over 40% of our net revenues, the vast majority of which occur before we even open our doors every day. This is completely unique to our platform, and it's something we feel is now fully reflected in our evaluation. On our last call, we gave guidance that the fourth quarter of last year and the first quarter and second quarter of this year would be the most challenging part of the cycle. We are in a period of peak stress and expect the next two quarters to be challenging, if not more challenging than the fourth quarter. As a result of this environment, we're experiencing elevated delinquencies. One of the many reasons this is occurring is certain borrowers are taking the position that they will default first and negotiate second, which is not a strategy that works well with us. Second, borrowers need to bring capital to the table to right-size their deals, and raising capital is a lengthy process in today's climate. Therefore, you will see defaults rise initially until able to raise additional capital, and then deals will often be recapped. We feel we have done a very good job to date in collecting payments and have been highly effective in refinancing deals for our agency businesses, as well as getting borrowers to recapitalize their deals and purchase interest rate caps where appropriate. In fact, we had $2.5 billion of loans with interest rate caps that were expiring over the last four months. of which $1.7 billion executed new rate caps or put cash up in lieu of caps, and we continue to work on getting new caps executed every day. We also have longstanding relationships with many quality sponsors that we've been working with to step in and take over assets that are underperforming and assume our debt and recap these transactions. As we are constantly receiving reverse inquiries from the market to purchase our assets as well, Our goal is to maximize shareholder value, and very often it's not just the value of the collateral, but the recourse provisions that we evaluate in determining how to approach each individual circumstance. The short-term nature of having a delinquent loan will not impact our decision-making process to achieve a correct economic result on a transaction. With that said, we've received a lot of public criticism in what we consider to be an extremely successful transition of assets to new ownership through the legal process or even through cases consensually. This is a very difficult and complicated work, and as I said earlier, we expect to be extremely busy in the first two quarters of this year managing through the most challenging part of this dislocation. Additionally, we continue to focus heavily on maintaining a very strong liquidity position. We currently have over $1.1 billion of cash between $1 billion in corporate cash and $600 million of cash in our CLOs that results in an additional cash equivalent of approximately $150 million. And having this level of liquidity is crucial in this environment. as it provides us the flexibility needed to manage through the rest of the downturn and take advantage of opportunities that will exist in the market to generate superior returns on our capital. We have also done an excellent job in reducing our exposure to short-term bank debt and have no significant pending maturities to deal with on any of our warehousing facilities. We are down to approximately $2.8 billion in outstanding with our commercial banks from a peak of nearly $4.2 billion and we have over 70% of us secured indebtedness in non-mark-to-market, non-recourse, low-cost CLO vehicles. As previously discussed, these vehicles provide a tremendous strategic advantage at times of distress and dislocation, like the environment we are in today, due to the nature of their non-mark-to-market, non-recourse elements. In addition, they contribute significantly to providing a low-cost alternative to warehouse banks, which in times like this have fluctuating pricing and leverage point parameters. Turning now to the fourth quarter performance, as Paul will discuss in more detail, our quarterly financial results were once again remarkable. We produced distributable earnings of 54 cents per share excluding a one-time realized gain on an office property that we had previously reserved for. The results were well in excess of our current dividend, representing a payout ratio of around 80%. We are very pleased with the substantial cushion we have created between our earnings and dividends, which will serve us well through the balance of this dislocation. We believe our diverse business model uniquely positions us as one of the only companies in the space with the ability to continue to provide a sustainable dividend. And just as importantly, in a time of tremendous stress, we've managed to maintain our book value while recording reserves for potential future losses, which clearly differentiates us from our peers. In our balance sheet lending business, we continue to focus on working through our loan book and 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 fourth quarter, we were able to, again, be highly effective with this strategy, producing another $800 million of balance sheet runoff. $465 million, or 58%, of which was recaptured at new agency loan originations. As a result, we recouped over $100 million of capital and continue to build up our cash position, which again currently sits at around $1.1 billion. With today's current interest rates, we will continue to chip away at converting loans to the agencies, but if the 10-year goes below 4% again, it will become more meaningful, and every quarter of a point drop in rates from here will be even more impactful. As we touched upon last quarter, we also believe we are well positioned to step back into the lending market and go on our accretive opportunities to continue to grow our platform. We feel now is the appropriate time to originate some of the highest quality loans with attractive returns, allowing us to grow our balance sheet and build our pipeline of future agency deals. In our GFC agency business, we had another great quarter and an exceptional 2023 despite elevated interest rates. We originated $1.3 billion in the fourth quarter and $4.8 billion for the full year, representing a 7% increase over our 2022 numbers. This is a tremendous accomplishment in light of the fact that the agencies were down 25% to 30% in production year over year. We've done an excellent job in gaining market share and converting our balance sheet loans the agency product, which has always been one of our key strategies and a significant differentiator from our peers. We also originated $300 million of 5 to 10-year fixed-rate GSE agency alternative products to our private label business, bringing our total agency volume to $5.1 billion for 2023. Traditionally, January is a much slower month with the agencies, which resulted in us originating $250 million of loans. The February numbers are looking much stronger, and we have a large pipeline setting us up for what we believe will be another very solid year in agency originations for 2024. And again, this agency business offers a premium value as it requires limited capital and generates significant long-dated predictable income stream and produces significant annual cash flow. To this point, our $31 billion fee-based servicing loan portfolio, which grew another 4% in the fourth quarter, and 11% year-over-year generates approximately $121 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 5% on around $3 billion in balances, so roughly $150 million annually, which combined with our servicing income annuity totals approximately $270 million of annual gross earnings, or $1.30 a share. This is in addition to the strong gain on sale margins we generate from our originations platform, providing us a strategic advantage over our peers. In our single-family rental business, we had a very strong fourth quarter and a full year 2023 as we continue to dominate the space and have become a lender of choice in the premium markets we traffic in. We had $200 million of fundings and another $470 million of commitments signed up in the fourth quarter and closed out 2023. with $1.2 billion of new commitments. We also have a large pipeline and remain committed to this business as it offers us three terms on our capital through construction, bridge, and permanent lending opportunities and generates strong levered returns in the short term while providing significant long-term benefits by further diversifying our income streams. We're also very excited about the opportunities we think we can garner from our newly added construction lending business as we believe we can generate 10% to 12% unlevered returns on our capital and eventually leverage this business and produce mid-to-high-teens returns. We continue to build up a pipeline of potential deals and now have roughly $44 million under application, another $400 million in NOIs, and a significant number of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us three turns on our capital through construction, bridge, and permanent agency lending opportunities. Lastly, I would like to spend some time talking about the short reports that have been written on our company. We want our loyal investors' space to understand that these reports are written in a way that is purposely designed to drive down the company's stock price to achieve the desired goal of profit from a short position. As such, the facts, assumptions, predicated future events and marking conditions, as well as conclusions in these reports, are exaggerated, laced with incomplete and inaccurate data, and slanted only to provide a negative view on Arbor, and again, truly for personal gain. And while we will not get into a back-and-forth on the information in these reports... or have detailed discussions on any specific loans, what we will point out is that the short reports state that our CLO delinquencies were 16.5% in December and 26.6% in January, when in reality the rates are 1.3% for December and 5.6% for January and as of today. More importantly, the 30-day delinquency numbers are 0.9% for December and 1.2% for January as of today, which are the numbers the industry focuses on. This is a perfect example of using certain select data as of a point in time that does not contain the full picture or represent the industry's focus, only to inject fear into the market for personal gain. We urge our long-term shareholders to ignore these one-sided, self-motivated reports and focused only on our results and public disclosures and the fact that we've consistently outperformed our peers. It is also very important to emphasize that a significant portion of Arborist Lending is multifamily focused, specifically in the workforce housing part of the market. As we all know, Fannie Mae and Freddie Mac have had a specific mandate to address the workforce slash affordable housing needs which is a major issue in the United States, making Arbor a great partner. This product requires a high level of management, tremendous expertise, which we have been very effective at for decades. Because this product may not have the same curb appeal as other multifamily product types, we are being criticized for a core part of our business that we have been extremely effective at, and will continue to fulfill a very important mandate for the federal agencies, as well as the social needs for society. Again, we thank you for your continued support, and now I will turn the call over to Paul to take you through our financial results.

Okay, thank you, Ivan. As Ivan mentioned, we had another very strong quarter, producing distributable earnings of $104 million, or 51 cents per share. and 54 cents per share, excluding a $7 million one-time realized loss in a lost property that we had previously reserved for. These results translated into industry-high ROEs, again, of approximately 17% for the fourth quarter and 18% for the full year of 2023. Equally as important, we closed out 2023 with GAAP EPS of $1.75 a share, which was in excess of our dividend, despite booking approximately $90 million of reserves for potential future losses. And, of course, with distributable earnings of $2.25 a share that easily beat our dividend run rate, we provided a very strong dividend-to-earnings coverage ratio for our investors. Our fourth quarter results were positively affected by a $5 million distribution from our Lexford investment, which was recorded in income from equity affiliates. We also had higher gain on sale income as our agency bonds are typically stronger in the fourth quarter, and we continue to benefit from strong earnings on our escrow and cash balances from elevated interest rates. As Ivan mentioned, we do expect to continue to experience stress as we manage through the most challenging part of the cycle. As a result, we continue to build our reserves, recording an additional $23 million in CECL reserves on our balance sheet loan book during the quarter, which was slightly offset by a $3 million recovery we had from a payoff of a non-performing loan that we had fully reserved for previously. As to be expected in this market, we also experienced a net increase in our delinquencies in the fourth quarter of approximately $115 million, and as discussed earlier, we are expecting that we will experience additional delinquencies over the next few quarters. Very important to emphasize that despite booking approximately $90 million in CECL reserves across our platform in 2023, $74 million of which was in our balance sheet business, we still grew our book value 2% to $12.80 a share from $12.50 a share last year. And we are one of the only companies in our space that has significant book value appreciation over the last three years, with roughly 30% growth from around $10 a share to nearly $13 a share. In our agency business, we had a very strong fourth quarter with $1.4 billion in originations and $1.3 billion in loan sales. The margin on these loan sales came in at 1.32% this quarter compared to 1.46% last quarter, mainly due to some larger deals in the fourth quarter. We were incredibly pleased with the margins we generated in 2023 of 1.48%, which exceeded 2022's pace of 1.34% by 10%. We also recorded $21.1 million of mortgage servicing rights income related to $1.4 billion of committed loans in the fourth quarter, representing an average MSR rate of around 1.55% compared to 1.16% last quarter, mainly due to a higher percentage of Fannie Mae loan commitments in the fourth quarter, which contain higher servicing fees. Our fee-based servicing portfolio also grew another 3.5% in the fourth quarter and 11% year-over-year to approximately $31 billion at December 31st, with a weighted average servicing fee of 39 basis points and an estimated remaining life of eight years. This portfolio will continue to generate a predictable annuity of income going forward of around $121 million gross annually. And this income stream combined with our earnings on our escrows and gain on sale margins represented over 40% of our 2023 net revenues. And our balance sheet lending operation Our $12.6 billion investment portfolio had an all-in yield of 8.98% at December 31st compared to 9.12% at September 30th due to a combination of an increase in non-performing loans and loans that had not made their full payments as of December 31st that we did not fully accrue for. The average balance in our core investments was $13 billion this quarter compared to $13.44 billion last quarter due to runoff exceeding originations in the third and fourth quarters. The average yield on these assets increased slightly to 9.31% from 9.28% last quarter due to a slight increase in SOFR, which was offset by an increase in non-performing loans in the fourth quarter. Total debt on our core assets decreased again to approximately $11.6 billion at December 31st from $11.9 billion at September 30th. The Olin cost of debt was relatively flat at 7.45% at 1231 versus 7.41% at 930. The average balance on our debt facilities was approximately $11.8 billion for the fourth quarter compared to $12 billion last quarter, and the average cost of funds on our debt facilities was 7.48% for the fourth quarter compared to 7.37% for the third quarter, primarily due to increases in the benchmark index rates. Our overall net interest spreads in our core assets decreased to 1.83% this quarter compared to 1.91% last quarter. And our overall spot net interest spreads were down to 1.53% at December 31st from 1.71% at September 30th, again, due to an increase in delinquencies and non-accrual loans during the quarter. And as I mentioned earlier, we are expecting to experience additional delinquencies over the next few quarters, which could further reduce these margins. Lastly, as we continue to shrink our balance sheet loan book by moving loans to our agency business, we have delevered our business 18% in 2023 to a leverage ratio of 3.3 to 1 from around 4.0 to 1 last year. Equally as important, our leverage consists of over 70% non-recourse, non-mark-to-market CLO debt with average pricing of 170 over, which is well below the current market, providing strong leveraged returns on our capital. That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions you may have this time. Operator?

Thank you. And as a reminder, please press star 1 on your telephone. To withdraw your question, please press star 2. So others can hear you clearly, we ask that you please pick up your handset for best sound quality. Our first question will come from Steve Delaney with Citizens JMP.

Good morning, everybody. Thank you. Good morning, Ivan and Paul. Start off, if I may, with a quick question for Paul. Thanks for the details on the MPLs up to 16 assets from 12. Foreclosures is something we haven't It's certainly part of your toolkit, but not something we've seen a lot. Should we expect over the next several quarters as you attempt to maximize your outcome that we will see more actual, you actually taking over properties and do you have, you confident you have the internal ability to operate those projects and resolve them without the current borrower? Thanks, Paul.

So let me take that first, Steve.

Yeah, sure.

We have options to either go through the legal process, foreclosure, to do them consensually. It's always better to do things consensually if you can, but sometimes the legal process is an alternative, and certainly in certain jurisdictions it's very easy to do so. With respect to us taking over the management of the assets, we do have the capability, but that's not what's taking place. In fact, the demand from our borrowers to step into some of these assets is so strong that we've had to set up an internal process to limit the number of actual borrowers that we have because we're getting inundated with requests. So we've set up an internal process that when we do have a stressed asset or a stressed borrower, a borrower we don't think is going to be able to bring the asset to the finish line. to bring in a new borrower. And whether it be through a consensual process or through the legal process, we have somebody lined up willing to step in. And that's how we've done it. So maybe six or nine months ago when there was a lot of fear in the market of where were values going to go and the lack of liquidity, it was much harder to get somebody to the table. Clearly, to get people to the table is very easy. And as you can see, people are raising money. distressed funds, and there's plenty of capital, plenty of liquidity to step in. So we have that capability, and we've set up the process.

Excellent. Paul, anything you want to add there?

No, I think Ivan definitely took you through everything that we work through internally.

So, yeah, it just sounds like the opportunistic private capital and your relationships in the industry that you're going to have opportunities to resolve either working with the existing borrower or bringing in a new player that we probably won't see a lot of dead. foreclosure REO properties on your balance sheet where, you know, trying to figure out a plan. Sounds like you've got the plans in place very actively.

I mean, generally not. Generally, by the time we foreclose, the thing has been, you know, pre-baked and pre-done in that sense. And you really get to see, you know, assets that haven't had the right management. That's why it's so important to us when an asset isn't performing well, to not just, you know, kick the can down the road because the asset will deteriorate, but to really accelerate either a change in management or a change in ownership.

Yes. As Ivan said, we don't have a lot of REO in our book, as you know. We did this quarter, and we did put it in our commentaries. We did have an office asset that we had written down alone. We took back that asset this quarter. It is in REO. And we brought in a very sophisticated partner who has a lot of experience in converting that building to condo. And so we're working through that process over the next couple of years. So that's an exception where we will take an asset back in REO. It's just not a big part of our business, as Ivan said, but you will see that in our filings when we file our case.

Okay, thanks. So, Ivan, on your point, this is kind of strategic, and I am speaking directly to some of the short reports. I think early on, maybe there was a Houston asset, someone used the term slumlord to describe your portfolio. You're three bytes out of the Apple strategy that you've used forever. Do you have any concern that the overall quality of your loans or borrowers, and I don't mean a large percentage, but do you think you have some assets, loans in your portfolio that are not of sufficient quality to be refinanced with permanent financing into Freddie Mac and Fannie Mae? That's it for me. Thanks.

Well, clearly our agenda is when we do a bridge loan, it's for the sole purpose of creating an agency loan.

Yes.

You know, you have to have a quality sponsor and you have to have a quality asset. So, you know, our idea, of course, is that every sponsor that we take on is going to perform correctly. Not all sponsors do that, and a lot of times they'll be a sponsor who – you know, couldn't hit his business plan or who had other problems or isn't what we thought. And they don't qualify. And that's just the way it goes. Nobody's perfect. We're not perfect. With respect to the assets, if you're improving an asset, you got to improve that asset and you got to get it up to industry standards and agency standards. If it doesn't, it won't meet that agency eligible. So If we have a $16 billion portfolio, not all 16 is going to make that mark. I mean, I think if 75%, 80% of them get to agency status and convert, that's pretty good. In other cases, when they don't do that, the assets will be sold or put into new ownership who will get that asset up to spec. So that's kind of the way we look at the world. It's not a perfect situation where every asset that we take in ends up meeting our execution.

But you have other options to resolve it, it sounds like.

We have other options. And bringing in new ownership, very often they can get the assets up to speed and get them repaired and get them fixed and made it. We've had many assets where under one form of ownership that couldn't get there, you bring another form of ownership that gets there very, very quickly. In fact, one of the assets that we transitioned in Atlanta, We had poor ownership, and I think within nine months, the asset's almost ready to go agency, whereas with the other ownership, we had no chance between the owner and the way he was operating. It only took nine months to turn the asset around.

Thank you both for your comments this morning. Thanks, Steve.

Our next question will come from Jay McCandless with Wedbush. Please go ahead.

Hey, good morning. Thank you for taking my questions. So provisioning was a little less than what we were expecting this quarter, but it sounds like things may get a little rockier heading into the beginning of 24. Could you maybe talk a little bit more about why some borrowers feel it's better to default than negotiate first? That seems to be a little backwards given the environment that we're in right now.

I can speak from experience. I deal with it a lot. I'm pretty involved in the asset management side with the asset management group. I think they're being counseled that if you default, the lenders will be more easy to work with. They don't want defaults on their books. That's number one. And that may work with other lenders. It doesn't work with us. We're not afraid of defaults. Defaults don't intimidate us, and they may intimidate other lenders. That's number one. Number two, for whatever reason, and I'm not sure why, initially people don't think that the recourse provisions on their loan are applicable. And when they get notification of what they're triggering, they really wake up very, very quickly. I don't believe other lenders... in the prior years had the structural enhancements that we at Arbor do have on our loans. They do now. They've learned. But we've always had the structural enhancements on our loans, which include, in many cases, interest reserve replenishment, recourse obligations on rebalance, and caps. And very, very significantly, the majority of our default interest on our loans are 24%. So, you know, I think it puts us in a different light. Maybe when they have loans with other lenders, lenders act differently than we do. But this is our course of conduct. If a borrower has a problem, we advise them, let us know what your issue is. We're happy to figure out how to try and come up with a solution in a proper way. And that's always the best tact. And then we'll give you time to figure out how to recap and work with you. But we did definitely see a spike of a mentality of default and here are the keys and it's your problem. And, you know, immediately we let them know of their obligations and we will bring, you know, that mentality and correct that mentality.

Great. Thank you, Ivan. The other question that I had – When we look at multifamily rents, especially in Texas and Florida, we've started to see some of the cities are holding up, but some of the cities are starting to see year-over-year rent declines. I guess, could you maybe talk about what type of geographic risk we should be monitoring right now and how you're feeling about that part of the country in terms of potential delinquencies and workouts you're going to have to address there?

I think we're through the worst of it, and I think in my prior calls I talked a little bit about the economic vacancy that exists specifically in certain areas. And I think there's a large economic vacancy which has been created from COVID, a backlog and a cost mentality with some of the renters that they can be in an apartment, not pay rent, and not get evicted. I also think that there was a period of time from COVID that people got rent subsidies, and those rent subsidies ran out, and that also accelerated a lot of the delinquencies. The courts are starting to be a little easy to work with. Tenants are being evicted at a much more rapid pace, and I think that you'll see the economic vacancy start to diminish without a doubt. I do want to differentiate between the product type that we have, which is a lot of workforce housing, which I think there's a huge shortage, versus the Class A market, which I think is suffering from different headwinds. I think if you look at the deliveries in 2023 of new construction and then the deliveries in 2024, I think you'll see continued headwinds for Class A. I think for I think for the workforce housing, there is a shortage. We all know there's a shortage. I think when the court system starts being more efficient, I think that the economic numbers will look a little better. I also think there's another shadow issue, which we've talked about internally. I mean, basically you have 8 or 9 million people who have come across the border who are living in hotels. These people have to go live somewhere. They can't live in hotels forever. We think they, once they start to begin to get their work permits and start to work, I think that that'll have a positive impact on the vacancy factors in workforce housing.

That's great. Thank you, Ivan. Appreciate it. Thank you, Jay.

Our next question will come from Jay Vermani with KBW. Please go ahead.

Thank you very much. The delinquency statistics you gave are much lower than the info available from the CLOs. And I wanted to ask, you know, what the main discrepancy is there that you see. Just so we're clear, the numbers you gave, are those the 30-day plus delinquency rates? Is that what you want us to focus on? Yes. If you could just clarify that.

Sure, Jay. It's Paul. So, yes. So, the delinquency numbers that are reported with the CLOs, as we said in our commentary, were 16.5% in total delinquencies for December and 26.6% in total delinquencies for January. Those numbers, total delinquency numbers, are down to 1.3, as we said in our commentary today. So, we've resolved a lot of those loans, okay, and they're down to for the January numbers, I have them right here, you know, they're down to 5.6%. However, those are total delinquency numbers. The industry normally looks at anything 30 plus, and really more importantly, 60 plus. So what we're telling you is those total delinquency numbers that were reported on those days are down significantly from when those numbers were reported. And even more importantly, the 30 plus day delinquent numbers, okay, were 6.3% on December. So of that 16.5% of total delinquencies, 6.3 were 30 days plus. And that number is down to 0.9 today. Okay. So that's what we're telling you. And 60-day delinquencies are down to 0.8. So very, very nominal. On January, same type of thesis. The 26.6 in total delinquencies is down to 5.6 today, as people have made their payments. The 30-day delinquencies on that day, 30-plus-day delinquencies, were 9.1%, and that's down to 1.2% today. And the 60-day delinquencies are 0.8. So the way the industry looks, CMBS and all the other industries look at delinquencies, They look at 30 plus and 60 plus. All we're telling you is the numbers that you're seeing in those reports are total delinquencies, most of which you can gather by the numbers we're giving you are less than 30 days and are subsequently cured. That's what we're trying to give you the information on.

And what was the 60-day as of 12-31? As of 12-31, the 60-day delinquent number

was 0.8, and it's still at 0.8, because those are some of our non-performing lows.

And the 30-day is now 1.2% down from 9.1%. The 30-plus, the 30-plus day, 1.2% for January, down from 9.1%. So in terms of moving it down by that, I mean, this looks dramatic that there was that level of delinquency. First of all, I mean, that level of delinquency is surprising to me, understanding that some borrowers may just pay late because, you know, different loans pay in the 15th versus at the end of the month. But that's a high delinquency rate, but it's down sharply. What is the main means of getting it down sharply?

Ivan, you want to talk to that?

you know on a lot of loans there's no grace period people pay late they collect rents late you know it's not a number that we you know give a lot of credibility to what we give credibility is 30 plus days you know bars are struggling these are you know more difficult times and you know if there's a shortfall between the rents that come in and and where the capital is. They've got to raise the capital. They've got to put it in. But keep in mind, there's really no grace period on these loans, so they're due at a certain point in time. If they're late on their payments, they're late on their payments. What we focus on, as Paul reiterated, is really the 30-plus days. So I would say it's definitely more challenging times, but our focus is on the 30-plus days, and we work hard to make sure that the borrowers stay within that 30 days.

The other thing I'll point out, Jay, just quickly, it's just a little bit more granular. We're not looking to change the way things are reported with the CLOs, but we are one of the only lenders left in the space that have replenishment vehicles with cash in those vehicles. So as we said in our commentary, we have $600 million of cash still ready to be deployed in those vehicles. The way these numbers are calculated for those reports, is based on the delinquencies over your total investable assets. But we can make the argument that that $600 million of cash is a performing asset and will be invested into a qualified performing asset. So if you up the denominator by using the cash as well, just not the loans, the numbers drop by a point and a half. I'm just telling you that they're ways these things are reported, ways we look at it, but more importantly, the 30-plus delinquencies are where we focus and the industry focuses, and those numbers are significantly lower than those total delinquencies.

You mentioned peak stress is in the next two quarters. A couple things. That 30-day number, that's what you want us to focus on. It's 1.2%. Where do you expect that to peak, or where do you expect the cumulative delinquency will be?

We're not going to project on that, but what we will say is that we expect this quarter and next quarter to have continued stress. I want to add one more commentary, is that If rates stay at these levels a little bit longer, we could have stress drip into the third quarter as well. There's a little bit of an outlook that rates would begin to decline at a certain level, which would de-stress the environment. We think if rates continue to rise a little bit, as they are in this area, we may have continued stress drip into the third quarter.

Okay, I appreciate that. I was actually going to ask that. And then finally, just to clear some other notions, rent-regulated New York multifamily, it's its own troubled asset class. First of all, could you give your views on that? Are there any opportunities you see emerging there? And if you could quantify any arbor exposure, which I believe is minimal.

Yeah, I'm glad you brought that up because Clearly, Signature, New York Community Bank are loaded up with all these rent-controlled and rent-stabilized. And the impact on valuation on those banks have been dramatic. I think everybody's followed the sale of the Signature portfolio and the haircut that the rent-controlled and rent-stabilized. I think it was somewhere in the 58-cent level. That's really had a dramatic impact on that asset class. We as a lender were not a very active participant in that space. We were not active because they were being acquired at a very low cap rate with the concept that they would be able to kick out these tenants and bring them to market and rehab them. The numbers going in didn't make sense. nor did we really like the concept of kicking out rent-controlled or unstabilized tenants. We thought that was inappropriate. And therefore, we had very, very little exposure to that asset class. We think that in the long run, a lot of that housing will be re-spit out at discounts and come back to the markets. But we do not as a firm have any significant exposure to the rent control and rent stabilized on the one hand. On the other hand, there will be opportunities on the lending side at the right valuations with the right operators in that asset class. And that will return in our view. And it will return once the assets get re-spit out to the market at the right valuations with good operators. We do have some really good operators internally that we do business with. will be very effective in those asset classes at the right basis and the right lending parameters.

Thank you very much. Thanks, Sid.

And our next question will come from Lee Cooperman with Omega Family Office. Please go ahead.

Thank you. Let me just say this. Nobody's giving you a shout out. I've been investing in the company for well over a decade, and I speak with you periodically. And I got to tell you, a year ago, You told me you were very pessimistic about the outlook and you were getting very defensively postured, which was a brilliant call. And three years ago, you started moving the company into multifamily. And everybody's now looking at multifamily like they're looking at office. It makes no sense to me. You get all these immigrants coming over the border. They have to live somewhere, and they're employed. And it seemed to me that you're in a good sector. So that's an observation. I just want to give you a shout-out. My question is follows. I have a lot of money with a guy that's done a sensational job for me in doing real estate lending. And I've noticed many times when he has a foreclosure, he makes a profit. So I assume if the assets are well underwritten, you may even be a beneficiary of foreclosures. Do you feel comfortable that the book value of $1,280 or $1,215, whatever it is, is accurate. And how do you feel about the quality of your underwriting given the environment? I congratulate you on being very correct in your assessment of the environment. Thank you.

Thanks, Lee. First of all, the multifamily market is still a great asset class, a phenomenal asset class. And in 2009 and 2010, when we were 35% multi and we did all the other asset classes, we came to a quick conclusion that even though there were defaults and even though there were losses, all the significant losses came on the other asset classes. And eventually, multifamily with the right management returns, and every high is generally followed by another high, just as long as you have good management. And we made a decision as a firm that we wanted to be predominantly multifamily, and we're glad we did. I'm not sure how and why they're comparing Multi-family office, losses on office could be extraordinarily significant. And sure, there are corridors of office in cities that are strong, but they're not the dominant part of the market. And when you lose on an office, you lose big. Multi, your losses are not that dramatic on a relative basis. With respect to the foreclosure process, do we win, do we lose, do we lose, do we win? The fact is we win on some, we lose on a little. What we think we're going to lose, we put up reserves. Our reserves have been pretty accurate in the history of the firm. We're very comfortable with the reserves. We're very comfortable with our book value. And we'll continue to put up reserves as we feel it's appropriate. So there are many times that we'll head towards a foreclosure and say, okay, There's a gain here. Many times we'll head towards a foreclosure, and we have a reserve, and we're probably reserved. So far, we've done a great job. There are a lot of borrowers, and it's funny. Somebody asked me, you know, why do borrowers default first? I mean, we've had a few defaults recently where the borrowers defaulted, and the assets are worth significantly more than the debt. And we're like, we're not even going to talk to you guys, right? You're going to pay us 24%. We're going to foreclose. And by the way, We're going to get a default judgment against you, too. Don't forget about that. We've got four, five, six borrowers with guarantees on loan. And if I'm short, we're going after those borrowers. And I promise you, we're hiring staff just to pursue the judgments. And we're going to collect all our money. So nothing's perfect. We feel really comfortable with our book value. We feel really comfortable with our process. Make no mistake about it. This is not easy work. It's hard work. and it takes a lot of management and a lot of discipline. But we will achieve the best economic result, and we're doing a pretty good job, and I can applaud my asset management staff and the company as a whole for the amount of work they're putting in and the results they're getting.

I'm just curious if you can comment on this. I just got an email from Peter Buckvar, and the headline on the email is, Mopi Family Construction is Collapsing. I've been a great believer that excess returns brings within new competition, and inadequate returns drives out competition. So are we heading, is this headline reasonable from what you're seeing? Is multifamily construction, you know, turning down quite a bit in response to the increased supply?

Too many deliveries. Too many deliveries. I think there's 670,000 units being delivered in 2024. There were like 370. You have way too many deliveries. The costs were high due to COVID, so the costs were way out of line. You know, if you listen to the economic reports, these units should be being filled up hand over fist. I don't believe that the employment is where people say they are. Otherwise, we wouldn't be having this absorption issue. But there is an absorption issue without a question from what we see. We're not very active in that side of the market. As we say, we're workforce housing, and there's a shortage of workforce housing. You can't produce the housing at the cost basis on which we're lending. And I believe the workforce housing, even as it goes through this period of difficulty, will emerge in a very strong manner.

Well, I congratulate you again on your very intelligent call about a year ago and the way you've positioned the company. Thank you. I appreciate it. Thanks, Lee.

Our next question will come from Rick Shane with JPMorgan. Please go ahead.

Thanks for taking my questions this morning, guys. Ivan, you talked and, Paul, you referenced the delinquency data. I believe that's related to the CLO, which I estimate represents about two-thirds of the assets. If we look at, if that's the correct term, description, if we look at the overall portfolio, can you provide the delinquency statistics for the total portfolio, not just the CLO? Okay. So, Rick, you're correct. What I was referring to was on the CLOs because I thought that was the question that people were asking from the short reports. What we do have now, we don't have it out yet, and when we file our K, it will be there, is we have the 60-day plus delinquencies, which is my non-performing loans. But there are some loans that I mentioned in my commentary that were 30 or inside of 30 days delinquent that we conservatively just chose not to accrue at year end. I don't have that number with me now, but that number will be in our filings. And so you can take those numbers and extrapolate it to the overall portfolio to get the delinquency rate if that's what you're looking to do. Got it. So is there a difference between the 60-day delinquencies in the CLO that you cited and the 60-day delinquencies? I'm going to call it the managed portfolio because that's how we would think about it. Is there a difference there? Now, so the non-performing loans that are disclosed and are filing today of $262 million are all loans, whether they're in the CLO or not, that are over 60 days delinquent. So there's the crossover. What we gave you today was numbers on what's 30-plus day delinquent in our CLOs. What we don't have is the 30-plus delinquent in the total portfolio, although it's not substantially different because, as you said, most of the loans are in the vehicles. Yeah. And can you talk about buyouts from the CLOs, both in the fourth quarter and quarter to date? Because I suspect there'll be some questions about whether or not the CLO, the decline in delinquencies in the CLO is related to buyouts.

Sure. Well, you have those numbers, so why don't you give some color?

Sure. I'll give the numbers, and then Ivan will give the color. So for the quarter, it was fairly light. We only bought out one loan for $38 million out of the CLOs in the fourth quarter. We did buy $90 million of loans out of the vehicles in February. But for the year, just to give you some color, Rick, we bought out $453 million of loans out of our vehicles for all of 2023. $95 million of those loans subsequently paid off before the end of the year. $290 million of those loans we modified and restructured and got relevered on. And another $69 million we're holding on our balance sheet without leverage, but on a bulk of those loans, we're very close to a satisfactory resolution for a sale in the market. So that's kind of the data points of how, you know, what the numbers are. And on the $90 million that we bought out in February, we're very, very close to finishing a mod on two of those loans and actually re-levering those loans again. So that's the data, and then I'll let Ivan talk about the strategy and how we look at things.

Yeah, I mean, it's an active part of our business. It's active in terms of how we manage our assets. The amount that Paul mentioned is not a tremendous amount, and it's kind of transitional. You can either take a loan out, foreclose on them, people can sell them, they can bring in new ownership. It's a whole myriad of different circumstances. And generally, you know, the process goes anywhere from, you know, 30 to 90 days. We generally get leverage on those assets when we do them. And then there are just some that, you know, need to be sold and go to the market to be sold. So it's a constant process.

Got it. And when we think about that $90 million that was repurchased in February, and you can hear me typing in the background trying to figure this out, how impactful was that on the Delta and the DQ rate? Those loans, I believe, were already in my non-performing bucket at year end. So when the $262 million we disclosed, those are two loans that were already non-performing that we bought out of the CLO, if that's what you're asking. No, I'm trying to figure out, you cited a decline in the delinquency rate, but if you bought out $90 million that were presumably delinquent and you're discussing the CLO, not the managed portfolio, that comes out of the numerator in terms of that delinquency rate. That's what I'm trying to understand. It'll be in the overall number, which will be... It will, but it'll be in February, not in the January numbers we gave you.

It doesn't disappear, Rick. It's not like it falls off the chart. It's part of the total number.

Got it. And then last question for me. So when we look at the reserves... And we look at the specific reserves. There's a $70 million reserve related to a very old loan, 2008, I believe. The specific reserves are, I believe, in the $120 million range. I'm going to get this a little bit wrong, but I think the general reserve is now about 57 or 58 basis points.

Should we expect that to increase given your outlook over the next two to three quarters?

So here's how it works. You're exactly right. We have 120 million of specific reserves. Seventy-eight million of that is actually on a very old legacy land development deal out in California. We've talked about it in the past and haven't put a reserve on, additional reserve on that deal in a while. The rest of the reserves are throughout the asset classes, mostly multifamily. We do have 75 million in general reserves on our books. Seventy-three of those are for multifamily. As far as outlook, It's really hard to talk about the reserves because CECL requires you, obviously, to build the reserve when you think you're having stress, which we do. However, having said that, we do think the next couple of quarters will be increasingly challenging. And as Ivan said, if rates stay elevated for longer, that could leak into the third quarter. And we will continue to look as we work through our deals. and determine whether we need additional reserves. While I can't predict what the model is going to show, intuitively, I believe reserves will stay elevated for the next couple of quarters. That's what I think. Hey, guys. Thank you for taking my questions this morning. You're welcome.

And our next question will come from Steven Laws with Raymond James. Please go ahead.

Thanks. Good morning. And very nice quarter in a very difficult environment. I know you're working through a lot, like all multifamily lenders are here. You know, I really want to circle back to a couple of your comments. You know, I think, you know, one of the big misconceptions, I think, that I hear from people is, you know, the assumption that all delinquencies lead to a loss. You know, can you talk a little more about your process, you know, how the modifications and extensions work, you know, your gives and takes, Are you providing MES? How much MES do you guys provide? Are they finding that elsewhere? And, you know, and again, about the new equity sponsor stepping in, you kind of mentioned that, that there's a lot of liquidity around multifamily. But can you maybe talk a little bit about of the delinquencies? Like, you know, how do you think about collateral values? How do you think about which loans are subject to potential losses and which ones, you know, are just going to go through a process where they're worked out and come out as a performing loan with a new sponsor?

Well, I will say it's an art, not a science. And there's no specific one that is the same. You have different sponsors with different capabilities, different assets, different basis, different ability to get capital. And you have assets that need more capital, less capital. And we approach each one independently. I mean, I will tell you that at one of our bars who didn't want to make his payment, and we're deep, deep in the money. And, you know, we have five sponsors who want to take over that asset, and we're going to collect penalty interest all the way through foreclosure, transition that asset with new ownership, get a reduction in loan amount, get a nice performing loan, and then produce, you know, you know, four agency loans in the next nine months when the asset gets re-stabilized. That's a great situation. We have some of those. We have other ones where perhaps we have to give some concessions to attract more capital and be a good partner because we'll do our business with the client and it's a fruitful relationship in the long run and we're willing to work with them. And you have certain circumstances where we have And I said that's well in the money with a crappy borrower who's going to hold us up and we're going to have to fight through it and make it a non-accrual loan while he's stealing the rents from us for a six or nine month period of time. And then we're just non-accrued alone and fight the fight and get to where we want to go. So there's no particular circumstance that's the same. And, you know, it's a detailed amount of work with a tremendous amount of focus. We have sponsors who have personal guarantees on loans where the asset's underwater, but their guarantees are worth hundreds of millions of dollars, right? And we approach that one in a way where, okay, you've got to either pay down a loan, feed the loan, fix the loan, bring in a new partner, recapitalize the loan. You sign on the guarantees, we lent you a little more than we would have based on your guarantees. So, you know, You better work with us. Otherwise, we're going to collect our money one way or the other. And by the way, when we collect our money, you're going to be paying a 24% interest rate, which you're not going to want. So, you know, every single one of these circumstances is different. I'm very intimate with a lot of it. We have the best asset management team in the nation. They're motivated. They're working hard. We've integrated our own teams. I want to add one more thing. Our originators who originated these loans They're in it working it through as well. It's not like they originated alone. They're walking away. They're part of the asset management process. So this is a fully integrated approach from top to bottom to achieve the best economic result that we can on each and every loan.

Appreciate the color on that. And I wanted to touch base or follow up on that. with regards to buying loans out of the CLOs and just overall liquidity. One thing I noticed is you guys did not use the ATM in the fourth quarter like you did in Q3. Maybe I'm over-reading that, but you were in the mid-teens, comfortably above books. That kind of gives me a signal you feel pretty good about your liquidity and capital to not hit your ATM during the quarter. Can you talk about know how you see your liquidity uh managing through over the next six months and then just generally when you do buy out a loan from clos say the 90 million in february you know what is the impact liquidity to move that to a bank line which which has a lower advance rate than a clo um you know how does that process impact liquidity i think that's a great question because you know moving

Buying loans out of CLOs for the benefit of being able to rework them or create the best economic result is certainly very important to us. When we do buy them out, we're able to typically re-leverage them. Usually, it's a 10 or 20-point haircut difference. We've got to come up with another 10 or 20 points in equity. That's how we look at it. We have capacity with our banking relationships. And it's mostly transitional. It's not like they sit out there forever. They sit out there for maybe three months, six months, nine months, not much longer. And very often when we buy them out, they're restructured, recapitalized, and then they're even re-levered back at the original leverage rate or very close to it. So we're fairly comfortable with our banking partners. It's deemed good business to get good rates of returns at a very low advance rate. And it's not as though we're buying them out and they're going to be with us for 10 years. There's usually a timeline and a solution. But, you know, we forecasted in our cash projections buying out a certain amount, the amount of their traditional leverage, and what the total outstanding will be at a certain time. So we're pretty comfortable forecasting ahead what our cash needs are for buying out. But buying loans out of CLO are very important to maximize economic value. And we do that, and we do it within the rules of the CLO, and we do it very effectively.

And, Stephen, I'll just add on the liquidity side, you know, excellent question and good point. I mean, one of the things we've been focused on, as Ivan said in our models, is maintaining a strong liquidity position as we can. And we have a lot of dexterity, as Ivan said, in buying loans out and, you know, having our warehouse lenders be able to re-lever those deals, you know, at a slight discount in the leverage. But we've also been operating our business right now with when rates tick down in the 10-year, we're being very opportunistic in bringing loans over from the balance sheet. And as you've seen in the last few quarters, our runoff has greatly exceeded our new originations. And in doing that, we're recouping a lot of the capital we had invested in. If we can continue, it does two things, right? When rates tick down, we've got loans ready to be transitioned over to the agencies and we get our capital back. And then we end up generating a long-dated income stream and compounded by the fact that When the rates are down, the agency business just generally picks up as it is. That all helps our cash flow. So that's how we feel comfortable that our cash is the right position. And as you said, it's a billion-one, which is a really nice position to be in, and it's something we constantly monitor. And having that dexterity to move loans out of the vehicles and into our warehouse lines really helps us be able to maintain that cash position. Yeah, I appreciate that. The runoff was certainly a positive number, and the rest of the liquidity, I think, actually ticked off a little, eventually. One last small one on the MES loans. Do you guys do MES or MES investments, people finding that capital elsewhere, if it's something they're looking to add?

We like the MES and PREF business, not only on helping borrowers reposition some of their balance sheet loans into agency loans, but originating new agency loans as well. So we're one of the few lenders who are very active with the agencies on doing that kind of lending. We expect it to be a growing part of our business and budget accordingly. It's very stable returns. and it's a great risk-adjusted return. We like that business. We've always been active in that business, and we think it's a great opportunity going forward.

We're locking in that fixed-rate spread for five to ten years, too, which we really like. Yeah. Yeah. And then I think you mentioned the CLO buyouts for Q4 in February. Were there any in January, or was that February a year-to-date number? I think that's Jan and Feb, but I think both of those that I mentioned, the $90 million actually happened in the beginning of Feb, but that's the total number to date for the quarter is $90 million right now. Awesome. Thanks again, and I know it's a lot of hard work, and I'll let you get back to it. Talk soon.

Thanks, Steve.

And our next question will come from Crispin Love with Piper Sandler. Please go ahead.

Thanks. Thanks. Good morning. I appreciate you taking my questions. First, on the servicing book, how much of the servicing book are in programs with GSE risk retention, such as the Fannie Duff program? And how have those loans been performing credit quality-wise? Any delinquency stats or expected losses to share there?

Sure. So $21.3 billion of the $30.9 or $31 billion is in the Fannie Mae Duss world. So that's probably about 80% of the book is Fannie Mae Duss, which, as you said, has the risk share. Delinquencies have been fairly stable. We did see a little bit of an uptick this quarter. We have $187 million of loans on the agency side that are delinquent. We had, I think, 12 million of specific reserves against those, and those are in the foreclosure process. We booked another 3 million of specific reserves this quarter, as you may have seen from the press release on the agency business. Freddie Mac delinquencies were flat quarter over quarter. We did not see any real increase. So a little bump up in agency on the Fannie Mae side. But from a context standpoint, traditionally and through the history of the agencies, and we've been at this more than 20 years, loss levels on the agency business are very, very minuscule, as you know, compared to the rest of the world. So we're not expecting this number to be anything significant anytime soon, and it'll be what it'll be, but it'll never be real material.

Okay. Thanks, Paul. That makes sense. And then can you share your current LTVs and DSCRs in the CLOs and the total portfolio? Yeah.

I don't have the information on the CLOs. We don't break it out that way for our disclosures. We do have the LTV, which you'll see in our 10-K when it's filed. It's about 78% on our book, our total book, and that's balance sheet. And Remember, we're consolidating everything, so we look at everything as one where it's financed as just a different animal. So our whole book of $12.6 billion has a 78% LTV right now on an as-is basis, some higher, some lower, obviously, depending on certainly the SFR business is a much lower LTV right now, given the nature of that business. But that's the blended number. I don't have the DSCR figures here. because, again, the DSCR figures you need to factor in, you know, your interest reserves, your caps, and all those things. But that's not something I think I have in front of me.

Okay. And then just one last question from me. Kind of later in the year, there was a bunch of articles about potential fraud and the broker Meridian. Can you size any exposure that you have there to Meridian and any ramifications you would expect from that?

Yeah, we really can't speak to that. And, you know, clearly what we can't speak to is that the industry is changing and that the broker interaction for agency lending is being modified dramatically. Brokers were very involved with borrowers, you know, creating source documents and then forwarding them to lenders. That obviously resulted in a problem, and the agencies are now changing how source documents and the broker rolls and disclosures. Quite frankly, we never fully understood on an agency product why people would go to a broker, pay a fee to get to us when they come directly to us and get the same result. So We think that there's going to be a real benefit in our franchise for bars to come directly to us rather than for a broker. We think that the agency business should be a very big beneficiary of that change.

Okay. Thanks, Ivan. I appreciate you both taking my questions. Thanks, Chris.

And our final question will be a follow-up from Lee Cooperman with Omega Family Office. Please go ahead.

Thank you. I would just observe, Ivan, that welcome to the world of short sellers. There's 64 million shares short, and these guys are smart, and they play a very vicious game. They put out information at times that is false, and you've got to deal with it. Now, I'm reminded of the expression, when the going gets tough, the tough get going. You're a very tough guy, and I don't think that they realize who they're dealing with. But I wish you good luck, and you'll be very activated.

Thank you, Lee. This is already four quarters. They've been four quarters wrong. It's created an enormous amount of stress on the organization, tremendous cost because the amount of extra work that has to be done has been very stressful. But, you know, we will continue to work hard and provide numbers. Okay. Thank you, Lee. Appreciate it.

Thanks, everybody. Ivan, you want closing remarks?

Sure. It was a long call. We had a lot of data to go through. Clearly, you know, it's been a sustained period of elevated interest rates and elevated distress. As I've mentioned previously, the fourth quarter was going to be a difficult quarter. The first and second quarter will continue to be similar to the first quarter, maybe slightly more stressful. If rates remain somewhat elevated, as they are right now, the stress can drip into the third quarter. Pay close attention to where the 10-year floats to and where short-term rates go because that will have a significant impact on the relief of stress in the system. But we really appreciate everybody's commitment to the company. and the time on this call, and we look forward to next time on this call. Everybody have a great weekend. Take care. Bye-bye.

And thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect.