Arbor Realty Trust

Please stand by, your program is about to begin. Good morning, ladies and gentlemen, and welcome to the second quarter 2024 Arbor Realty Trust earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone. If you want to remove yourself from the queue, please press star 2. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to your speaker today, Paul Alenio, Chief Financial Officer. Please go ahead.

Thank you, Angela. Good morning, everyone, and welcome to the quarterly earnings call for Auto Royalty Trust. This morning we'll discuss the results for the quarter ended June 30th, 2024. 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 Auburn's expectations in these forward-looking statements are detailed in our SEC reports. Listen as a caution not to place undue reliance on these forward-looking statements, which speak only as of today. Auburn takes no obligation to publicly update or revise these forward-looking statements to reflect events or circumstances after today or the occurrences of unanticipated events. I'll now turn the call to Auburn'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 have another strong quarter as we continue to effectively navigate through this extremely challenging environment. As we discussed in the past, we started preparing for this cycle well over two years ago. and a plan to appropriately position the company to navigate through and succeed for our investors in this challenging market is being executed in line with our expectations. We have a diversified business model with many countless cyclical income streams, are focused on the right asset class with the appropriate liability structures, and are well capitalized, which has allowed us to continue to outperform our peers in every major financial metric. Last quarter, we posted some compelling charts on our website demonstrating this outperformance. We updated these slides again this quarter, and we encourage you to review them as they clearly demonstrate that our total shareholder return, dividend growth, and book value appreciation over the last five years are outperforming everyone else in our peer group. In fact, most of our peers have cut their dividends substantially have experienced significant book value erosion and have generated a negative total shareholder return over the last five years. Clearly, this is not the position we are in, and we have continued to demonstrate over a long period of time that we are a consistent outperformer and a leader in this space. As we have communicated, We expected the first two quarters of this year to be the most challenging part of the cycle, and we have also guided to this period of peak stress affecting the third and fourth quarters as well if rates remain higher for longer. Even in the most stressful part of the cycle, we continue to post very strong operating results, which we'll discuss more in detail on today's call. We are aware of certain erroneous information in the marketplace which has been driven by short reports and is inaccurate. While our performance in this quarter speaks for itself, we would be remiss if we didn't point out certain factual inaccuracies as well as ill-informed and or inaccurate statements that are causing the most concern. there has been a swath of misinformation regarding one transaction in particular called the Westchase portfolio. For example, misinformation started that the transaction should have been reported in the first quarter when, in fact, the transaction closed in the second quarter and was appropriately and timely reflected in the company's financials. We believe that the merits of this deal were the ultimate interest of the shareholders. Specifically, we had a $100 million bridge loan collateralized by a portfolio of properties in Houston, Texas, in which the borrower defaulted. We immediately exercised our right to foreclose on these assets as we believed that there was a value above the debt. We simultaneously sold it to a new entity, which was capitalized with $15 million of fresh equity and a $95 million bridge loan at SOFA plus 300 basic points that we provided. Of the $15 million of capital that was invested in the transaction, $6.25 million, or 40%, was funded by the Austin Walker Fund, which is a private minority-owned real estate fund focusing on affordable housing that we have a 49% non-controlling limited partnership interest in. The rest of the capital came from two independent separate investors, one of which is a borrower that we have a longstanding relationship, which has a tremendous amount of expertise in renovating these type of assets and maximizing their value. We believe the stabilized value of these assets to be around $128 million, which is well above the capital stack of this deal, and the deal has now been recapitalized with the appropriate reserves, giving us confidence that the new ownership group will be able to hit the targeted business plan over the next few years. Let's Chase is an outstanding transaction that fits what we want, which is lend to affordable housing communities. We believe this transaction is a very effective workout with sound economics and consistent with our values, yet the short sellers have levied what we believe are baseless criticisms about this transaction. Again, we are extremely pleased with the results of this transaction and the benefit it presents for our stakeholders. We continue to do an effective job in managing through our loan book, and this transaction represents management's capabilities in taking back an asset and replacing it with new sponsorship and having it appropriately capitalized. Second, certain misinformation has been spread about the redemption of one of our CLOs. We have been a top issuer of CLOs for over 20 years, never once losing a single dollar of principal for our investors, even through the historic financial crisis. We are experts in managing these vehicles and have issued and repaid many vehicles, returning all invested capital to our bondholders. We called the CLO on June 17th in the ordinary course of business, and in doing so, we turned the principal investments of each bondholder in full for outsized returns on our capital and maximized returns to our shareholders. Additionally, the Shaw reports have also stated that we did not give proper notice to our bondholders prior to the redemption, but timely filed the appropriate SEC forms out for the redemption, and that we committed securities fraud. The rules are very clear. We are required to give notice to our bondholders 10 days prior to the redemption, which we did formally through the trustee on May 31st, and we are required to file an SEC form on the redemption 45 days after the quarter in which the redemption occurred, which is, in this case, not until August 14th. We have collapsed and redeemed over a dozen CLOs in the past 10 years and each time giving the proper amount of notice and filing all SEC required documents in a timely manner. Third, we have been criticized for how we have been managing our loan book in this distressed environment. when, in fact, the company has done a very effective job in maximizing return to our shareholders, which, again, are evidenced in the numbers that we have reported. This quarter, we successfully modified another $730 million of loans, with $23 million of fresh capital being injected into these deals from the sponsors. This includes cash to purchase new interest rate caps, fund interest and renovation reserves, bring past due interest current and pay down loan balances where appropriate. We also continue to make progress on approximately $1 billion of loans that are past due by either modifying these loans, foreclosing and taking them into REO, or bringing in new sponsorship either consensually or simultaneously with the foreclosure. In addition, we've been extremely successful quarter given the recent decline in interest rates by generating $630 million of payoffs with $490 million of these loans being refinanced into fixed rate agency deals. And as I've said in the past, if interest rates go below 4%, obviously as they've done in the last week or so, we expect that this will become more meaningful to our business. Despite these facts, Arbor has been subject to repeated attacks in the reports generated by short sellers, and we expect these attacks will continue. The best response to these attacks, and which we believe are unfair and unjustified, are our financial results and our earnings call here today. It has also been widely reported that in the wake of these attacks over an 18-month period, Arbor has received requests for information from government agencies, including the Department of Justice. Arbor consistently has cooperated and will continue to cooperate with any such requests. Likewise, it is our policy not to comment on any such inquiries. That said, I would like to provide more detail about some additional results that have resulted from our execution of strategies to manage the business through an environment that poses market-wide challenges. One of the items I touched on earlier is how important having adequate liquidity and appropriate debt instruments are to your success in these types of markets. As a result, we have focused heavily on maintaining a strong liquidity position. Currently, we have approximately $700 million of liquidity between around $700 million in corporate cash and $200 million of cash in our CLOs that results in an additional cash equivalent of approximately $50 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 to take advantage of opportunities that will exist in this market to generate superior returns on our capital. We also continue to do an excellent job in deleveraging our balance sheet and reducing our exposure to short-term bank debt. We are down to approximately $2.8 billion in outstanding commercial banks from a peak of approximately $4.2 billion, and we have 67% of our secured embeddedness in non-mark-to-market, non-recourse, low-cost CLO vehicles. CLO vehicles are a major part of our business strategy as they provide us with a tremendous strategic advantage in times of distress and dislocation 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 warehousing banks, which in times like this have fluctuating pricing and leverage point parameters. In fact, one of the significant drivers of our income streams are low-cost CLO vehicles, as well as fixed-rate debt and equity instruments that make up a big part of our capital structure. We are very strategic in our approach to capitalizing our business with a substantial amount of low-cost, long-term, long-dated funding sources, which has allowed us to continue to generate outsized returns on our capital. Another major component of our unique business model is our significant agency platform. which offers a premium value as it requires limited capital and generates significant, long-dated, predictable income streams and produces considerable annual cash flow. In the second quarter, we had a strong origination at $1.1 billion despite elevated rates for most of the quarter. The recent drop in the 10-year and the 5-year combined with tighter spreads has allowed us to continue to build a strong pipeline of future agency deals, giving us confidence in our ability to grow our agency volumes going forward. We've also done a great job in converting our balance sheet loans into agency products, which has always been one of our key strategic and a significant differentiator from our peers. And it's also very important to emphasize that a significant portion of our business is in the workforce housing part of the marketplace. As we all know, Fannie and Freddie have a very specific mandate to address the workforce affordable housing needs, which is a major issue in the United States, making Arbor a great partner that continues to fulfill a very important mandate for the federal agencies as well as the social needs for society. Our fee-based servicing portfolio, which grew another 3% this quarter and 12% year-over-year to $32.3 billion, generates approximately $124 million a year in reoccurring cash flow. We also generate significant earnings on our escrow and cash balances, which act as a natural hedge against interest rates. In fact, we are earning 5% on around $2.4 billion of balances, or roughly $120 million annually, which combined with our service and income annuity, totals $245 million of annual gross cash earnings, or $1.20 a share. This is in addition to the strong gain-on-sale margins we generate from our origination platform. And it's extremely important to emphasize that an agency business generates 45% of our net revenues, the vast majority of which occurs before we even open our doors each day. This is completely unique to our platform. In our single-family rental business, we continue to be the leader of choice in the premier market we traffic in. We have another strong quarter with $185 million of fundings and another $280 million of combined signed-up commitments. We have a large pipeline and remain committed to this business, and it offers us returns 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 seeing steady progress in our newly added construction lending business. This is a business we believe can produce very accretive returns on our capital by generating 10% to 12% unlevered returns initially and eventually mid to high routines returns on our capital once we leverage this business. We continue to see a nice increase in our portfolio of potential deals with roughly $250 million under application another $250 million in LOIs outstanding, and $850 million of additional deals we are currently screening. We believe this product is very appropriate for our platform as it offers us free turns on our capital through construction, bridge, and permanent agency lending opportunities. in summary we had another very productive quarter and are working exceptionally hard to manage through the teeth of this dislocation we feel we have done an excellent job in working through our loan book and getting borrowers to recap their deals with fresh equity as well as bringing in quality sponsors to manage underperforming assets and working through our non-performing loans we understand very well the challenges that lie ahead and feel we are well-positioned. We have a diversified business model. We are invested in the right asset class with very stable liability structures. We're also well-capitalized and have the best-in-class asset management function and seasoned executive team, giving us confidence and ability to navigate through this distressed environment. And despite the misinformation circulated in the marketplace about our business strategies, we continue to reiterate that we stand by our financials and our disclosures, and we have always conducted our business operations and practices in the best interest of our shareholders. I will now turn the call over to Paul to take you through the financial results. Okay, thank you, Ivan. We had another strong quarter producing distributable earnings of $91.6 million, or $0.45 per share, which translated into ROEs of approximately 14% for the second quarter. As Ivan mentioned, we successfully modified 28 loans in the second quarter, totaling $733 million. On approximately $398 million of these loans, we required borrowers to invest additional capital to recap their deals, with us providing some form of temporary rate relief through a pay-in-the-cool feature. The pay rates were modified on average to approximately 7.18%, with 2.14% of the residual interest due being deferred until maturity. $155 million of these loans were delinked last quarter and are now current in accordance with their modified terms. Our total delinquencies were $1.05 billion at June 30th compared to $954 million at March 31st. These delinquencies are made up of two buckets, loans that are greater than 60 days past due and loans that are less than 60 days past due that we are not recording interest income on unless we believe the cash will be received. The 60-plus-day delinquent loans, or non-performing loans, were approximately $667 million this quarter compared to $465 million last quarter due to approximately $264 million of loans progressing from less than 60 days delinquent to greater than 60 days past due, a $9 million loan that went non-performing this quarter, which was partially offset by $62 million of loans being modified in the second quarter that are now performing. The second bucket, consisting of loans that are less than 60 days past due, came down to $368 million this quarter from $489 million last quarter, mostly due to $264 million of loans that progressed to non-performing and $138 million of loans being modified or that paid off during the quarter, which was partially offset by approximately $281 million of new loans this quarter that we did not accrue interest on. And while we expect to continue to make progress in resolving these delinquencies, at the same time, we do anticipate that there will be some new delinquencies in this environment. We're currently working through a number of these loans that we expect to resolve by taking back the properties and then working to improve these REO assets to create more of a current income stream. this could take 60 to 120 days which will likely result in a low order mark for net interest income over the next couple of quarters until we have worked through this portfolio this is what we expected and is consistent with our previous guidance that this would be the period of peak stress and the bottom of the cycle we also continue to build our cecil reserves giving the difficult market backdrop record an additional 29 million on our balance sheet loan book in the second quarter $7.5 million were specific reserves we took on assets this quarter with a balance in additional general reserves. The increase in general reserves from previous quarters was mainly due to changes in the assumptions in our models on real estate values given the challenging environment. We feel it is very important to emphasize that despite booking approximately $145 million in CECL reserves across our platform in the last 18 months, $117 million of which was in our balance sheet business, we still were able to maintain our book value. This performance is well above our peers, the vast majority of which have experienced significant book value erosion in this market. Additionally, we're one of the only companies in our space that has seen significant book value appreciation over the last five years with 30% growth during that time period versus our peers whose book values have declined an average of approximately 20% in that timeframe. As discussed, as Ivan discussed earlier, we're pleased with the success we are having in working through our balance sheet loan book and in resolving our delinquencies. As we've stated many times, we have several recourse provisions in our loan documents that lend value to the resolution process. last quarter we realized a 1.6 million dollar loss an 11.3 million dollar loan that paid off at a discount we immediately pursued one of our recourse provisions and are pleased to report that we received a 900 000 settlement payment in the second quarter related to this loan we also had a very successful resolution on a legacy reo office property that we foreclosed on back in the fourth quarter of 2021 To a lengthy marketing process, we were able to sell this asset above our carrying value, resulting in a second quarter gain of $3.8 million. In our agency business, we had a strong second quarter with $1.1 billion originations and loan sales. The margins on our loan sales was flat at 1.54% for both the first and second quarters. We also recorded $14.5 million in mortgage servicing rights income related to $1.1 billion of committed loans in the second quarter, representing an average MSR rate of around 1.32%, which was also flat compared to last quarter. Our fee-based servicing portfolio also grew to approximately $32.3 billion on June 30th, with a weighted average servicing fee of 38 basis points and an estimated remaining life of 7.5 years. this portfolio will continue to generate a predictable annuity income going forward of around 124 million dollars gross annually and this income stream combined with our earnings on escrows and gain on sale margins represented 45 percent of our net revenues for the quarter In our balance sheet lending operation, our $11.9 billion investment portfolio had an all-in yield of 8.60% at June 30th compared to 8.81% at March 31st due to a combination of an increase in non-performing loans and some new loans that we did not make their full payment that we did not accrue interest on, which was partially offset by modifications in the second quarter on some of our previously delinquent loans. The average balance in our core investments was $12.2 billion this quarter compared to $12.5 billion last quarter due to runoff exceeding originations in the first and second quarter. The average yield on these assets decreased to 9% from 9.44% last quarter due to substantially more modifications in the first quarter resulting in the collection of a significant amount of back interest owed combined with an increase in non-performing loans and some new non-approval loans in the second quarter. Total debt on our core assets decreased to approximately $10.3 billion June 30th from $11.1 billion at March 31st, mostly due to the unwind of CLO 15 and the paydown of other CLO debt with cash in those vehicles in the second quarter. The only cost of debt was up to approximately 7.53% at 6.30 versus 7.44% at 3.31. The average balance on our debt facilities was approximately $10.8 billion for the first quarter compared to $11.4 billion last quarter. The average cost of funds on our debt facility was up slightly, 7.54% for the second quarter compared to 7.50% for the first quarter. Our overall net interest spreads in our core assets decreased to 1.46% this quarter compared to 1.94% last quarter, again, from a significant amount of back interest collected in the first quarter from modifications. And our overall spot net interest spreads were down to 1.07% on June 30th, but 1.37% on March 31st, mostly due to an increase in non-performing and non-accrued loans during the quarter. Lastly, as we continue to shrink our balance sheet loan book, we have delevered our business 25% over the last 18 months to a leverage ratio of 3 to 1 from a peak of around 4 to 1. Equally as important, our leverage consists of around 67% non-recourse, non-mark-to-market CLO debt with pricing that is below the current market, providing strong levered 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 guys may have at this time. Angela?

Thank you. As a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Steve Delaney with Citizens JMP. Please go ahead.

Thank you. Good morning, Ivan and Paul. Congratulations on a solid performance in this difficult market. One of the things we noticed, obviously, you're very active on modifying loans, the 60-day or less bucket. We did note that that number of loans and the dollar amount declined significantly. You know the figures, but in the quarter two Q, fewer loans to modify than in the first Q. Looking at the modifications, which I guess so far this year, 67 modifications, $2.5 billion of loans. Looking at taking back data and then looking at the MPLs, which increased slightly in the second quarter, the 24 loans and $676 million. The question is this in terms of your process. Is it still, once you classify a loan as an NPL, are you still actively working to, could you modify that loan and get it back in a current state? Or once they go to NPL, is there a much higher probability that it might end up in REO? Thanks.

actually let me give you a little overall view of of of the process you know we're talking about an overall number of about a billion dollars give or take you know give or take and uh we believe we're pretty much in in the peak you know part of of the cycle uh with the most stress and as you know uh the billion dollars has a negative effect on our financial performance, which is factored in because we're not accounting for the income on that. So, you know, it's really incumbent on us to give you a good view of how that billion dollars is going to flow through the system. I'm pretty involved in this stuff, so, you know, we look at it this way. Of the billion dollars we estimate, About 30% of it will go REO. That's the toughest part of it. Those are the ones that are not consensual. They take a bit of time. And, you know, they're non-income producing for us for that period of time. And it can take anywhere from, you know, three months to a year, depending on the jurisdiction. And then us getting into those assets and bringing them up to speed and then getting them cash flow and selling them. So that's the stickiest part. There's about another 10% or 15% of that that we're working with the existing sponsors to bring in new sponsorship. And we believe that over a period of three to six months, that those assets will have new buyers in them. And we estimate that, you know, just to be conservative, it'll throw off about a 6% return once that's done. In that billion dollars, we estimate it's going to be about 20% of payoffs just because the assets are being sold. It's just a normal process. and then the other 40% are in the process of being modded. Mods take time, and a big part of what we do is we proceed to foreclosure when a loan is not paying, and that path to a foreclosure usually leads to a very effective process of getting modded. So we would estimate that that's the part that gets moved through the system the quickest, and generally the average time is probably 90 days, and then it returns to an interest-earning asset, and we use about a 7% rate on that. We're in the thick of it. It's about $1 billion. We expect to get it through the system. There'll be some new ones coming in, but that's what we're expecting. Clearly, this drop in interest rates is extremely favorable for the company and its business model, as it will stimulate more multifamily sales, and people will be able to buy these assets with more affordable financing.

Well, what I heard you say there, Ivan, is that because something is currently classified as an NPL, there is still a possibility that those loans could be modified. Did I hear you correct?

Yeah, I'm thinking about 40% of them based on what I see in the portfolio. I'm pretty intimate with the asset management group and the progress they're making. You know, it takes time for a lot of these borrowers to find a capital and get these things brought up to speed. So that would be the approximate number I would be using to get them modified.

And the 30% to REO. Paul, on the balance sheet, can you tell us what's in REO currently? And I assume you have that in other assets. We couldn't find it.

We do, Steve. Thank you. We absolutely do. It is in other assets. REO is $78 million right now on our books. It's sitting in other assets. We did sell, I said, a South Carolina office property that we had on our books for $10 million. It was $88 million last quarter. It's $78 million this quarter. And of that $78 million, just to give you a little color, the two biggest ticket items is a $41 million New York City office property we took back in 4Q of 23 that we disclosed. And that's a building that we brought in new sponsorship and are converting it to a condo, and that'll take some time. And then the other big pieces, we have about a $30 million multifamily deal in Texas that we took back in the fourth quarter of 22 that we're working through. And then there's some little odds and ends. But it's a small number, but as Ivan said, we are expecting, as we work for this billion dollars, that a decent amount more could go REO, and that number will grow, right, Ivan? That's what we're talking about. Yeah, that's the guidance that I gave you, about 30%. Yeah.

Thank you both for your comments. Thanks, Steve.

Our next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Just to follow up, a minor point on the REO, about how many assets is that? Is the average loan size consistent with kind of the $20 million for the portfolio? Or how do you see that, I guess, $300 million of potential REOs from a property count standpoint?

We'll take a look at the list. I would take a guess, but Paul can be more accurate. It's probably an average loan size of around $30 million. Yeah, we have some chunkier stuff we're looking at, Stephen, that is in the $50 million, maybe even $100 million, but that's not a lot of what we do. Then we have some $10 million and $15 million and $20 million. It's hard to really project where these are all going to end up, but I would say that we're thinking it's probably in the $30 million to $40 million average range.

Great. And then, Ivan, I want to go back to something you commented on, you know, around interest rates. And you said, you know, we go below four, certainly beneficial. And I think since the last time we spoke, the long end of the curve is down almost 100 basis points, or fairly close. You know, can you talk about maybe how, and I know the most recent move has only been a couple of weeks, but can you talk about how that maybe has changed behavior from sponsors? You know, do you think

uh they're more likely to protect assets cheaper to buy new caps and then how do you think it impacts agency volumes as you as you move forward well let me let me address the cap issue the cap issue has been an extremely expensive proposition for a lot of these sponsors you know assuming for the last few years they've had to pile in another six to eight points of capital to buy caps We believe the curve is going to change and the cost of caps is going to go down, which believes they're paying a little bit. That's on that side. But the real meaningful issue is the drop in the five-year and the 10-year. I mean, you could effectively, you know, borrow close to 5% off the five-year. Up until now, you know, people were paying close to 6%, 6.5%. But spreads have tightened, rates have come down. So if you have a borrower currently paying on a floating rate basis, you know, close to 9%, he can then go ahead and pay 5%. so that's a great option for that particular borrow even if they put a little more capital into it and they can secure you know long-term financing and really put themselves from a negative cash position into a positive cash position assuming you have an asset you know that's six and six and six six and a half cap rate all of a sudden you've created positive cash flow from negative cash flow And that's becoming very meaningful. The real key for people is are they managing their assets well? Are they stabilized? Because in order to get fixed-rate financing, you need 90-plus occupancy, somewhere in that range. So to the extent people have their assets stabilized, then that becomes a great option for them, and we'll relieve the pain of carrying those assets, which has been extremely painful. Make no mistake about it. When you go into borrow a loan and you're paying 4.5% and 5%, and the next thing you're paying 9%, and it's for a prolonged period of time, you have a lot of capital needs. So I think we're at a great inflection point right now for many of these borrowers if their assets are stabilized. that they can look through the fixed rate market and reposition their assets and not have negative trade.

Great. Appreciate those comments, Ivan. And one last one, if I may, on portfolio seasoning. Origination volume was very strong in 21 and the first half of 22, really lightened up a lot in the second half of 22. If you think about the seasoning of those loans, is it fair to say that you've covered the $1 billion of NPLs, but should we continue to see start to decline. I know there'll be more and some will move, but are we past the peak of kind of identifying the problem loans as you think about your portfolio?

Well, I think that we've given pretty good guidance that the first and second quarter would be peak stress and if rates remain higher for longer, it would leak into the third and fourth quarter. I believe that with this rate move down, I think you'll see the market change a little bit. So, you know, perhaps the third quarter, you know, maybe, you know, a little bit tough, but we're seeing a little bit of easing. And if rates remain in this level, I believe there'll be a lot of liquidity returning to the multifamily sector and a lot of trades being done. So I'm hopeful and optimistic that, you know, perhaps the second quarter was the peak, a little leakage into the third. But we're definitely seeing the light at the end of the tunnel.

Well, that's great to hear and nice job managing your assets in a difficult market and look forward to next quarter. Thank you. Thanks, Steve.

Our next question comes from Rick Shane with J.P. Morgan.

Hey, guys. Thanks for taking my questions this morning. A couple different things. um just from a bookkeeping uh perspective uh cash balances uh within the structure of business declined by about 50 i assume some of the decline in the restricted caches is from uh calling the uh clo but can you just help us understand what's going on there yeah sure i mean the reason we did call our clo was because we were sitting on excess cash balances and it was inefficient

So, you know, that's expensive to be sitting on cash balances, which are not being deployed. So on the normal course of business, when we have those excess cash balances and can't use them, that's why we call a vehicle. And the efficiency of these vehicles is to keep the cash balances as low as possible so it achieves exactly what we want it. Yeah, and to add to that, Rick, that is a big piece of it. The other piece of it is some of these vehicles, as you know, are out of replenishment period, so they're naturally de-levering as loans are running off, so the restricted cash is paying down debt, and that's part of the component as well. And then the third component is that we did pay off $90 million of unsecured debt in April, as you were aware, with cash. So those are kind of the three big components that got you a decrease in cash for the quarter.

Okay. Thank you. Second topic. You talked about modifying $730 million of loans in the second quarter. We've gone through the disclosure in the last queue related to mods. And I'm going to be honest, I don't fully understand all of the implications. Can we just walk through clearly the implications of the mods that this quarter in terms of what it means for the difference in cash that you will receive and the difference in interest accrual so if you didn't modify the loans what would you have expected to receive how much are you giving up in cash over the next year or two and what is the difference in the accrual rate so we understand the implications from an income perspective

Let me try to attempt to answer that. It's a little more complicated than that. Our queue will be out early next week, we hope, so you'll get more details on that disclosure. But the way I think I look at it, and Donald will completely answer your question, is we did mod a a billion nine or two billion loans last quarter i think a billion one had paying approval features and so what we did was we what management does is we look at every single loan we modify and we go through it on a loan by loan basis to determine how strongly we feel the value in the mod has put us in a position we'll still be able to recover the accrued interest If we don't feel in that position, we won't accrue the accrued interest. If we do, we accrue it. For the most part, we accrue it. There are exceptions. There are loans that we decide not to accrue the accrued rate after the mod if we think it's still a challenging asset. Having said that, in the first quarter, our mods... generated about 3 million of accrued interest that hit our P&L that wasn't cash. In the second quarter, those first quarter mods were now 6 million of accrued interest that didn't hit cash because it was for a full quarter. And the second quarter mods were 2 million in the second quarter of accrued interest. So, our pick interest as we'll call it, for 1Q mods was about $3 million in the first quarter. In the second quarter, the 1Q mods were $6 million, and the 2Q mods were $2 million for a total of eight. So, that number will obviously grow because the second quarter numbers, the mods will be fully affected in the third and fourth quarter, and then if we mod any new loans. I don't know if that's answering your question, but that's the numbers for the first and second quarter mods of how those accrual rates that we accrued affected interest income but not cash?

Oh, no, it's a very thoughtful question to – response to a question I wasn't sure objectively that you would be able to answer, and so I was a little bit circumspect about asking that, so thank you. It's very helpful. Last question, implicitly the mods – $23 million of additional capital on $730 million of mods. That's about a 315 basis point contribution of capital. Ivan, I'd love to understand that in the context of your comment an answer or two ago about CAP's running 6% to 8% for your borrowers. I'm just curious how we sort of square those two numbers.

Okay. At 6% to 8% over a two- to three-year period, each year a cap cost can be anywhere between one and a half to three, depending on the loan. So, in context, we're looking at more of an annual than a cumulative on that number. But Paul can give you a good number in terms of the mods and how they work for the second quarter. Sure, I can. So, of the 733 million of loans we modded and 23 million of capital was committed to be injected, 6 million of that capital went to buy rate caps. And they're at all different strike prices. Rick, some are out of the money strikes, some are way in the money strikes, and I think the average strike was about 3.7%. And then the rest, we had one loan that paid down the principal balance by $2 million. We had past due interest of about $2 million that was collected. And then the rest were to fund rental reserves, interest reserves, and OPEX reserves. Those are kind of how it breaks out, if that helps you.

It does. Very thoughtful answers. I appreciate the time. I would throw in one last request. There are a lot of numbers that get thrown around on these calls. You guys are unique amongst the companies that we follow in not providing a slide deck. on the calls. And I think given the complexity of what, Paul, you've described, it would be really helpful if people could see the numbers and you could be walking through slides on the call. So I'm just going to throw that out there, but I appreciate the time, guys.

Sure. Thanks, Rick. We appreciate it. We always want to be more transparent and have the best disclosures. We try to be, when the queue gets filed, there'll be a lot of good information there. And then we'll always take into consideration whether we think we can put in a better form for readers. And thank you for that comment. Great. Thanks, guys.

The next question comes from Jade Romani with KBW.

Thank you very much. Can you please give the second quarter or six-month year-to-date cash flow from operations numbers?

Yeah, it's in the 10Q. Well, if you don't have the 10Q, obviously it's not filed yet. So I'll give it to you.

One second, Shade.

The cash flow from operations number is $335 million, but you have to back out the changes in the originations and sales of help-to-sale assets, which is a $220 swing. Then you've got $90 million in changes in operating assets. Call it $335 million as cash flow from operations for the six months. and then you have a 220 positive swing on originations less proceeds from sales and 100 million dollar negative swing in the change in operating assets and liabilities okay that's great um the npls of around one billion dollars do you have any numbers in mind as to where that total balance peaks I'd say we're within range of the peak right now. I mean, maybe you can go up a little bit more, but we're kind of in the peak period of time. You know, we're pretty optimistic about the number I've given you on the mods because we're pretty close to a conclusion on those mods. So I think that's a good number to ballpark. Yeah, it's a tough one to predict, as you know. I mean, I think Ivan's right. It's gone up a little bit since the first quarter, not significantly, $9.54 to $1.05 billion. We do expect a few more delinquencies. Hopefully, we're at the peak. But we do have our eyes on a bunch of loans that are delinquent that we're going to successfully mod. So hopefully that number will not peak higher. And then we're going to have some of those loans come out and be REO, right? They'll just be on a different line, Adam, but they'll still be not performing until we work through them. So it's a tough answer, but I think Ivan's right. I think we feel like it shouldn't be significantly different. I mean, what I would do is, you know, the sticky part is the REO because it takes time

to get your hands on the asset and then once you get your hands on the asset you got to stabilize that asset that's the sticky part the rest is somewhat transitional and when you look at the npl and uh taking you know learning what's been going on this cycle do they have anything in common in terms of maybe one issue that's been driving it do you think the main issue is really the borrower's basis then having paid you know too much too low a cap rate for the assets Or do you think, on the other hand, perhaps it's the sponsorship, maybe leverage ratio, or the third category is property underperformance?

It's a whole slew of activities. And, you know, clearly when interest rates go up as dramatically as they did when everybody is within a low interest rate market forever, that's probably the single biggest driver. I've said in many calls before, the impact of COVID had a very significant impact because people were not able to move out tenants for many, many years. We've had in some of these properties, you know, 10% to 15%, even 20% economic occupancy where tenants are living for three, four years without paying rent. That was a big factor. That's an unanticipated factor. A third factor, which we spoke about as well, is the increase in insurance costs. I mean, they doubled, tripled, and quadrupled. They're coming down a little bit now. The insurance costs, the economic, you can't predict those. So that created a lot of headwinds. I think when people go into a buying frenzy in the top market, they focus on buying and not on management. And, you know, that's something that, you know, we certainly learned a lot from because, you know, there's one thing to be an effective capital raiser and buyer of an asset. There's another thing to be an effective manager. So management draws a lot of hills, and one of the things that's extremely important to us when we're modifying a loan is that if we don't think the asset's being managed appropriately, either we won't modify it and we'll take it through REO or we'll insist and make sure they bring in new management. Management also is a major part.

that's excellent thank you um my last question would just be on the gses you know we've seen a lot of um stories around them being pretty cautious right now you know not just the meridian issue which started back in maybe the third quarter of last year but there have been others appraisers you know local small regional title companies you know what exactly do you think is going on with the gses are they cracking down are they tightening

uh their underwriting standards or are those just sort of a select few cases i think in every cycle you always have certain things that happen and in this cycle with all the volume uh there's certain things that occur and clearly the agencies have changed their uh their attitudes towards brokers and meridian is just a broker But brokers have played a major role and were very dominant in garnering a lot of volume. And in garnering a volume, obviously, they control a lot of the source documents. And the industry has changed. Fannie and Freddie have learned that if there are brokers in between that are not direct with them, they can't control the source documents, so they've changed the guidelines. I think that was a long time coming. You have to understand that since 2010, basically, we've been on a tremendous run, and a lot of deals have been hidden. This is the first time there's a prolonged downturn, and now you can see some of the, you know, It's some of the things that were done in the industry that finally caught up. So I think that's going to be a healthy change that the lenders have to deal directly with the borrowers. And that's a very healthy change. Appraisers have always been a sore point within this industry. We rely so much on appraisals. I believe that a big part of AI and a big part of technology will have a significant impact on improving the valuation process. And appraisers are sometimes aligned, sometimes not aligned. It's like any other process. It's human. Within the human process, there are always errors or corruption. And I think it happened to them. Not abnormal. It's part of life. Every part of life is corruption. So they got hit with a little bit, not a lot, very small relative to the overall thing. And I think when they find a bad actor, it's called to light. They eliminate the bad actor. But I think the whole appraisal process, which everybody's relied on valuations extensively, I think with technology that's going to be a much better process going forward.

Thank you very much.

The next question comes from Jay McCandless with Wedbush.

Hey, good morning. Thanks for taking my question. Congrats again on EAB covering the dividend. that spread continues to narrow. Could you maybe talk to us about how comfortable you are with the current dividend level? And especially if economic conditions worsened from here?

Sure. Hey, Jay, it's Paul. Thank you for the question. I think it was clear in my prepared remarks that our spreads have come in given the fact that we've got a billion dollars of loans not paying. I think one of the things we really need to stress is that because our business model is so diversified and because we have so many different income streams, the agency business being one specific one, our SFR business being another, that we continue to ramp up and get a 15 yield on our money. We have the ability to do things others don't. We're not afraid to take back an asset and not afraid to work it through, even if it means it's going to be non-interest earning for a little bit. I've guided you guys to a little bit of a low-water mark in the third and fourth quarter. So it's possible our numbers in the third and fourth quarter could approach that number or be slightly below it. It'll depend on how successful we are in getting back interest and getting those loans back online. But what also will affect it is the drop in the 10-year. If the drop in the 10-year continues, and our agency business starts to explode, that'll obviously offset any negative drag we have on non-performing loans. So it's a tough one. I'd say it's getting tighter. It will continue to get tighter. It may even dip around there or below for a quarter or two, but we're not concerned. Because we know that we're going to take this billion dollars of assets and some good portion of it's going to turn into interest earning at some point. And on top of that, our agency business is going to continue to generate sizable returns. And as Ivan said, we are working on a bunch of assets now that we think are going to pay off. and we're going to take that capital on loans that we're earning zero, and we're going to deploy it back into our system, even at 10%, 12%, 13%, whatever it is we come up with on an unlevered basis, which will be accretive. So it will be a little bit of a timing issue in that the third and fourth quarter may get tight, and we've talked about that, but long-term we're very, very comfortable with the protection.

Okay, great. Thanks for my question.

The next question comes from Chris Bedlove from Piper Sandler.

Thanks. Good morning. Appreciate you taking my question. Just asking the GSD question from earlier just a little bit differently. Can you discuss recent activity with Freddie and Fannie? Because we did see Fannie originations come down meaningfully in the first quarter, but they bounced back nicely in the second. So I'm curious if there were any changes there on tightening standards in the first versus the second quarter, and then just what you expect going forward from the agencies.

I think it kind of mirrors a lot of the conversation we've had, and it's very much tied to interest rates. I think that the agency's volumes is going to increase considerably as rates drop. There are a lot of people who have been sitting on the sidelines waiting to refinance their loans when they got to a certain rate range. We're in prime time rate range today with today's drop, rates that have dropped, and I think the agency's volumes are going to really, really increase considerably. You have to also keep in mind that there hasn't been that much in multifamily sales activity, very, very low. I think that'll pick up and that'll feed the agencies as well. So I think I'm very optimistic that the agency's volumes will really benefit off of this and will increase and will grow. And then we'll go back to the same old problem of all the agencies are backed up and are taking longer. We're not that far away from that. We've experienced that. So I think that the agencies are going to have a very, very, very strong period of time relative to the last couple of quarters. Yeah, I think to add some color to that, Chris, when we did $360 million of volume in our agency business in July, so that number was actually just around the target we did for the second quarter. But we think, and as Ivan said, we think given the recent move in rates, some people are going to move off the dime here, and I think we're going to see an increase to that volume in August and September. That's our view.

Great. Thank you. I appreciate the July number there as well. And then just one more from me. Can you just talk a little bit how you expect the first couple of rate cuts, assuming they do happen, at the end of the year and into 2025 could impact you? And could it be a net negative to your net interest income over the near term in the structured business, but of course, benefit originations and agency, as you mentioned? Just Just curious on how you think about the impact there, especially in NII. I'm doing lower yields, lower cost of funds, but I'm unsure how much it would improve the borrower profile just with a couple of rate cuts. Thanks.

I think we have to look at the rate cuts also in conjunction with what we've been talking about with the 5 and 10-year coming down. I think if there are rate cuts, two things will happen. It'll put the book in a better position because people can buy rate caps cheaper. I also think there'll be more transaction activity and people will go with the floating rate loans on some of these underperforming assets. So I think a book of floating rate loans will increase as well. So I think there'll be more volume on that side. I think offset of some revenue drop, I think you'll see the agency business pick up considerably. And I also think it'll stimulate some of the modifications and bring some of those modifications more online and create a lot of income-producing opportunities on that side to offset some declines in revenue. I think net-net, the rate drops are beneficial for the company. That's the way I would look at it from my chair. I agree with Ivan. The timing may be something that's hard to predict. You're right. If rates drop, your net interest income squeezes, but you've got $1 billion of loans not paying. Obviously, the health of the portfolio business will pick up. But it's just a matter of the timing, and that's the stuff that's hard to tell. You may have a little bit of a dip in managers' income right away, and then it builds back up with your agencies. But long-term, and as Ivan said, globally, that's a positive for us. Yeah, and I want to also point out what we've talked about for a long time on the calls is that we put a big investment in our single-family SFR business, a construction lending business. That's a business that funds up over time. We have these commitments, and those commitments and the equity deployed will go up, and that should be a mid- to high-teens return. So that will offset some of the runoff in the portfolio now, and that was clearly by design on our part.

Great. Thank you. I appreciate you taking my questions. Thanks, Chris.

The next question comes from Lee Cooperman with Omega Family Office.

Finally, uh, so let me how you doing? Uh, let me first. I'm not a pimp for you guys, but I just want to say I congratulate you on your performance a year and a half ago. You told me how negative you were about the environment and you couldn't be more right. I detect a real frustration your part in the beginning part of this call and dealing with the shorts. These are unmerciful and in this case, unformed people. Basically, and I just will tell you, he laughs, laughs, laughs best. And so, you know, you're performing. They don't understand the uniqueness of the company and how you position the company. And let me tell you, you've been very right, and I congratulate you and I thank you as a large shareholder. Let me ask you a question since you've been more right than me about the environment. Do you think we're heading into a recession, number one? Number two, in terms of the book value, I'm out on vacation, so I'm dialing in. on a cell phone, what is that book value at the end of the quarter? And are you a buyer of your stock in the low, in the, you know, 10, 11, 12 area? If I got down there?

Yeah, so you and I have had a lot of conversations over the last year or two, and, you know, I've told you my view on unemployment and the economy, and obviously I've been more right than wrong, and my view towards interest rates, and we're exactly where I said we'd be, and we're exactly where I said we'd be almost to the exact timing, and what I've said on the calls repeatedly is, The first and second quarter being the most difficult. I get a good barometer for really the unemployment more on the, you know, workforce type of people. And I get a good read and I do a lot of intel. So I think that the economy is soft. And I also get a good idea from building costs and trades. And it's like a 20% differential in the period of post-COVID. People were paying 10% to 20% premiums to build their projects. Now they're getting a 10% discount. So you almost have a 20% to 30% differential from the peak in construction costs. People are hiring clues more easily and readily. Subcontractors are out there bidding and wanting jobs. So I think you've seen a tremendous change. So I think we are in a bit of a recession, and I think that you have another big factor here. You have the shadow of unemployment being impacted by the 10-plus million immigrants who have been led into this country, and they're going to be starting to work. They're only letting about 10,000 to 20,000 a month working. So that's a big impact on unemployment. So I do think that we're in a period of time where we'll be a little bit recessionary, and I think rates will remain in this range, and short-term rates should come down, which is all good for our business. And as far as Lee, it's Paul. Our book value is $1,246 at the end of 630, and to your question about buybacks, we certainly have around $140 million of capacity left in our buyback plan, and Ivan and I will always assess you know, where we think it's appropriate based on our capital. And clearly at levels that you talked about, we'd like to be, we'd be active because it'd be very equative to want to look value and also to our earnings.

Right, Adam? Yes.

I know it's been very frustrating to you. These short guys are unmerciful. They come out with inaccurate accusations on a Friday afternoon when you're in your quiet period and you can't respond.

it's just terrible with the damage you're doing to the public shareholders so we're all lucky to have you guys in our corner because you've done a terrific job and i appreciate it thank you thank you man thank you lee and you know as you know we're in a heavily regulated environment uh they're unregulated and you know we we we do get frustrated blackout periods and then we prepare very heavily for these earnings calls where it's our day in court And as I said on my call, the numbers speak for themselves, and the company's performance, even in these very stressful times, we are performing extraordinarily well. And when you compare us to our peers, it's not even the same group. We've posted those charts to do a comparison. So we'll continue to work hard, be thorough, navigate these times, and appreciate you as a shareholder and all our shareholders who have a lot of confidence in us. So thanks to you and Mark. It's very meaningful to us and to our management staff. We've been working extraordinarily hard just to get back to break-even. As an entrepreneur, I always work to grow companies. And, you know, it's not the most rewarding thing in the world to work to get back to break even. But, you know, life is life, and that's part of our job. And we're working hard, and we've done a good job. And I think the quarter speaks for itself. And thank you again, Lee, for your comments.

It's my pleasure. They're well-deserved. Congratulations. Thanks.

Thanks, Lee.

This does conclude today's question and answer period. I will now turn the program back over to our presenters for any additional or closing remarks.

All right. Thank you, everybody, for listening today and for the long call and for your patience. And thank you for your participation in the call. Everybody have a great weekend and enjoy the rest of this hour.

This does conclude today's program. Thank you for your participation. You may disconnect at anytime.